Golub Capital BDC, Inc. (GBDC) Earnings Call Transcript & Summary

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended June 30, 2026. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. This is David Golub, and I'm joined by Tim Topicz, our Chief Operating Officer; Rob Tuchscherer, Senior Managing Director and Officer of GBDC; and Chris Ericson, our Chief Financial Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies, companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended June 30, and we posted an earnings presentation on our website. We'll be referring to this presentation during today's call. I'm going to start with headlines and a brief summary of performance for the quarter. Then Tim, Rob and Chris are going to walk you through our operating and financial performance in more detail. Finally, I'll wrap up with some observations on current market conditions and our outlook, and we'll take questions. So the headline for the quarter is this. GBDC's performance was much better than last quarter, not as good as we'd like and better than it looks. So that's a lot. That's a 3-parter. So let me take a few moments to unpack each of the 3 parts of that headline. First, GBDC's performance was much better than last quarter. That's pretty clear from the data. Adjusted net income per share was $0.22. That compares to an $0.18 per share loss last quarter, and it translates into an annualized adjusted ROE of 6.2%. The key driver of the improvement quarter-over-quarter was a decrease in adjusted net realized and unrealized losses. Such losses went from $0.52 per share last quarter to $0.12 per share this quarter. At the same time, adjusted NII per share remained solid and consistent with last quarter at $0.34 per share, which translates into an adjusted NII ROE of 9.5%. Finally, GBDC paid a $0.33 per share distribution. Now for those of you who are familiar with GBDC, you can see from the data I just described why the quarter was not as good as we'd like. GBDC has delivered a 9.4% net IRR on NAV since our IPO in 2010. If we compare that to GBDC's annualized adjusted ROE for the quarter of 6.2%, it's clearly a few points below GBDC's 16-year plus average. Now you've heard us talk for several quarters about how we're in a credit cycle, how we're in a period that's marked by sustained elevated credit stress. We've also talked, including on last quarter's call about our view that what we're seeing fits a pattern. It's a pattern that when things shift from a borrower-friendly environment to a more lender-friendly one, we tend to see a period of bumpiness in results. So I'm not entirely surprised to see a degree of bumpiness in GBDC's results for the quarter. And my expectation is that we're going to see a large degree of bumpiness across the BDC industry as results come in. That all said, some quarters feel worse than the numbers and some quarters feel better than the numbers. This quarter feels to me better than the numbers. Why do I think that? Well, GBDC's net realized and unrealized losses for the quarter, the $0.12 per share of loss, they arose primarily from a small number of junior debt and equity positions and not from the core debt portfolio. We saw a lot of stability in the core debt portfolio. This is important because our experience is that the kinds of write-downs that we had, they're typically one-offs. Put differently, I'm encouraged by the health and resilience of the vast majority of GBDC's portfolio. I'll have more to say about that in my outlook in my closing remarks. For now, I'm going to let Tim, Rob and Chris go into the quarter in more detail. Tim?

Thanks, David. Let's start on Slide 3 and walk through the drivers of GBDC's earnings in the quarter. I'll start with the drivers of our $0.34 per share of adjusted net investment income and then unpack credit gains and losses that contributed to $0.22 per share of adjusted earnings. Let me start with the drivers of net investment income. There were 3 in the quarter. Number one, improving investment income yield; number two, stable borrowing costs; and number three, prudent expense management. Let's go through each of these in turn. First, on investment income yield, it was 9.9% annualized, which increased modestly quarter-over-quarter. It was supported by a stable weighted average spread in the portfolio, consistent base rates throughout the quarter and to a lesser extent, a modest amount of accelerated fee recognition and discount accretion tied to a handful of payoffs. And number two, borrowing costs held steady at 5.3% annualized, one of the lowest borrowing costs in the listed BDC peer group and a real competitive advantage for GBDC and its investors. And then number three, operating expenses remained low. GBDC continues to benefit from its gold standard fee structure. There's nothing new to call out here. It's just continued efficiency. Now let's unpack the drivers of GBDC's $0.22 per share of adjusted earnings. Overall, credit performance remains solid. Approximately 87% of our portfolio at fair value remains in our highest performing internal rating categories. And investments on nonaccrual status remained low at just 1.9% of the portfolio at fair value. That's a level well below the average of our listed BDC peers. We did, however, recognize $0.12 per share of adjusted net realized and unrealized losses in the quarter. Here's how that breaks down. Approximately $0.08 per share of unrealized losses from markdowns on junior debt and equity investments in 2 portfolio companies that were taken to nonaccrual status or were on a nonaccrual status in the quarter. Those losses were somewhat offset by unrealized gains due to a small degree of reversal of last quarter's spread-driven unrealized losses. We recognized approximately $0.04 per share of net realized losses. This was driven primarily from the successful restructuring of RWA and Holdco in [indiscernible] in the quarter. Importantly, the realized losses resulting from these restructurings were more than fully offset by the reversal of unrealized losses in the same investments. And then lastly, and on a positive note, we recognized $4 million of net realized gains on the exit of equity investments in a couple of portfolio companies. As a reminder, GBDC will in certain instances, co-invest in the equity of high-performing borrowers and the liquidation of these equity investments, which historically has typically happened at a gain, is one of the factors that have contributed to GBDC's top quartile credit performance since IPO. Now regarding balance sheet changes and distributions in the quarter. NAV per share declined slightly to $14.25 per share. We wrapped up the quarter with net debt to equity of 1.23x. That was down slightly from the prior quarter, while average leverage throughout the quarter was also 1.23x. Total distributions paid in the quarter were $0.33 per share, and our Board of Directors declared a $0.33 per share distribution for the fourth fiscal quarter of 2026. We also kept up our opportunistic share repurchase program during the quarter. The company bought back 1.1 million shares at a weighted average price of $12.90 per share or an approximate 10% discount to our March 31, 2026, net asset value. In addition, the Golub Capital Rabbi Trust purchased approximately $31 million or 2.4 million shares of GBDC during the quarter for incentive compensation purposes. This brought purchases of GBDC shares by the trust to $70 million over the last 12 months. Golub Capital affiliates now hold about 8% of GBDC shares outstanding. That's an indication of a high degree of alignment between Golub Capital and GBDC investors. Now turning to Slide 7. Here, we've laid out the NAV per share bridge quarter-over-quarter. And you can see how the earnings drivers that I just walked through translate into GBDC's June 30, 2026, net asset value per share of $14.25. Adjusted NII per share of $0.34 fully covered the $0.33 per share distribution that was paid out during the quarter. Adjusted net realized and unrealized losses were $0.12 per share and share repurchases added $0.01 per share of NAV accretion. Put it all together, and you get a net asset value that moved down modestly from $14.35 to $14.25 in the quarter. So that's the earnings summary for the quarter. With that, let me hand things over to Rob to take us through our investing activity and portfolio in more detail. Rob?

Thanks, Tim. I will now highlight our third fiscal quarter investment activity and provide some additional context on portfolio performance. Turning to Slide 8. In the second calendar quarter of 2026, at the Golub Capital level, our team originated nearly $3 billion of new investment commitments. GBDC participated in these new originations on a limited basis with $13 million in new investment commitments in the quarter, given slow repayments and our desire to focus on accretive share repurchases. We remained highly selective and conservative in our underwriting, closing on just 1.5% of deals reviewed in the quarter at a weighted average loan-to-value of approximately 45% Existing sponsor relationships and portfolio company incumbencies accounted for approximately 54% of our origination volume, and we made loans to 9 new borrowers. Further, GBDC continued to participate in add-on investment commitments to existing portfolio companies via transactions in the secondary market. Leveraging the capabilities of our capital markets desk, we acquired incremental interest in existing loans to high-quality borrowers at discounts to fair value, which we believe will prove accretive to GBDC's returns over time. We continue to leverage our scale to lead deals, acting as the sole or lead lender on 99% of our transactions in the quarter. About 78% of our new origination volume in the third fiscal quarter supported M&A-driven transactions such as LVOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Of GBDC's $13 million in new investment commitments in the quarter, 94% were in senior secured debt investments. New investments carried a total weighted average rate of 8.9%, which included a 5.2% weighted average spread. Turning to Slide 10. As of June 30, 2026, GBDC's $8.2 billion portfolio remains well diversified across 424 different borrowers. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represent less than 0.2% of the overall portfolio on average, and our top 10 investments comprise just 13% of the overall portfolio, which represents a concentration level that is less than half of the average of our listed BDC peers. GBDC's portfolio is also diversified by industry subsector with 51 individual subsectors represented. Investments in software portfolio companies continue to represent our single largest industry subsector exposure at 26%. I mentioned on last quarter's earnings call that we plan to report back on additional work we were performing to assess the impact of AI on our software holdings. You will recall that we are experts in software lending, having completed more than 1,000 software loans representing over $90 billion in principal over the last 20 years, with a default rate averaging about 5 basis points per year. I'm pleased to report that we completed a full re-underwrite of our current software portfolio this last quarter. I'm going to outline the key takeaways. However, there will be more detail on an update to our quarterly investor presentation, which we plan to publish later this month. Our credit by credit re-underwrite was multifactored. It included evaluating revenue model, product criticality, data moats, regulatory complexity and switching costs. In addition to our internal assessment, we engaged a leading third-party consulting firm at the expense of the manager, not the fund, to perform an independent AI risk assessment. The third-party consultant analyzed potential product displacement and end-user workflow risks. They also assess the ability for companies with higher potential product displacement and end-user workflow risks to adapt in this new environment. The results of our internal AI risk analysis showed that less than 10% of our software portfolio was subject to elevated AI disruption risk. The third party consultants AI risk assessment concluded that fewer than 3% were at elevated risk. We believe our software-related risk is very manageable, and we believe there will be opportunities for Golub Capital in the software space, in part because many other lenders are leaving the sector or reducing exposures. On Slide 11, you can see that nonaccruals increased slightly quarter-over-quarter to 1.9% of total investments at fair value, but remain at very low levels in absolute terms and relative to the broader listed BDC sector. During the quarter, the number of nonaccrual investments increased from 19 to 20 as the addition of 4 investments were partially offset by the removal of 3 portfolio companies. Our focus, as always, with underperforming borrowers is to use our deep bench of experienced investment professionals and the playbook that we've developed over several decades to minimize realized losses. Slide 12 shows the trend in internal performance ratings for the entire GBDC portfolio. As Tim noted earlier, approximately 87% of the total investment portfolio remained in our top 2 internal performance rating categories. and investments rated 3, which signal a borrower may have the potential to or is expected to be performing below expectations, was 10.6%, modestly above historical averages. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 2.8% of the portfolio at fair value. Now I'm going to turn it over to Chris to take us through our financial results in more detail.

Thanks, Rob. I will now cover GBDC's financial performance and liability profile for the third fiscal quarter of 2026. First, turning to performance. Slide 13 highlights the key drivers of GBDC's net investment spread, which increased modestly quarter-over-quarter to 4.6% on an annualized basis. Let's walk through the key components in detail. Starting with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield increased approximately 20 basis points sequentially to 9.9% annualized, the result of stable weighted average reference rates and spreads across the portfolio while benefiting from some accelerated discount accretion and fees from loan payoffs in the quarter. Our cost of debt, the teal line, increased modestly -- approximately 10 basis points to 5.3%. Net-net, GBDC's weighted average net investment spread, the gold line, increased modestly quarter-over-quarter to 4.6% annualized. Moving to the balance sheet on Slide 16. We ended the quarter with approximately $8.2 billion of total portfolio investments at fair value, $4.6 billion of outstanding debt and $3.7 billion of total net assets. Net debt-to-equity leverage for the quarter ended at 1.23x, down 0.01x from the prior quarter, reflecting the impact of lower average investments outstanding in the quarter. Turning to GBDC's liquidity on Slide 19. Overall, our liquidity position remains strong, and we ended the quarter with approximately $2 billion of liquidity from unrestricted cash and undrawn commitments on our corporate revolver and the unsecured revolver provided by our adviser. This provides more than 1.3x coverage of our unfunded investment commitments and the upcoming maturities of our 2026 and 2027 notes. Supporting the strength of our balance sheet, in May 2026, we issued $500 million in 5-year unsecured notes, which we swapped to SOFR plus 218 basis points. Subsequent to quarter end, we successfully amended certain terms and extended the maturity of our syndicated corporate revolver to July 2031 in partnership with our 18 bank partners. Total commitments under the revolver remained at approximately $2 billion with an accordion provision allowing for an increase in total facility size of up to $3 billion. Among other restated terms, we successfully negotiated the removal of the 10 basis point term SOFR credit spread adjustment and maintained a drawn spread of term SOFR plus 1.525% to 1.775%, subject to borrowing base levels. GBDC continues to have what we believe is one of the most competitively priced revolvers across our listed BDC peers. Our debt funding structure highlighted on Slide 20 remains highly diversified across multiple financing markets. Our weighted average borrowing costs of 5.3% annualized remains one of the lowest in our listed BDC peer group and is underpinned by a differentiated investment-grade ratings profile. Consistent with our asset liability matching principle, approximately 80% of GBDC's total debt funding is floating rate or swapped to a floating rate and 64% of our debt funding is in the form of unsecured notes across a well-laddered maturity profile. Following the July maturity extension of GBDC's corporate revolver, the weighted average maturity on our outstanding debt at June 30 was 4.8 years, well in excess of the weighted average maturity on accruing debt investments of 3.1 years, reflecting a prudent approach to asset and liability matching. Now I'll hand it back over to David for closing remarks.

Thanks, Chris. Last quarter, we introduced 2 themes. And in my view, both of these themes continue to play out in this quarter's results. First, we said that we thought the direct lending market had shifted direction, and we still do. After a long period of trending more borrower friendly since the beginning of this year, we think the market has been growing more lender friendly. It's happening slowly in part because of light M&A volumes. Deal activity picked up in Q2 relative to Q1, but it remained well below what we consider a normal level. And spreads on new deals are generally up 25 to 50 basis points in the context of this wind direction shift. The second theme we introduced was we said we anticipated a continued period of elevated credit stress. Our expectation was that sustained elevated credit stress that this would continue to be an industry-wide headwind throughout calendar Q2. And this has also proved right. We can see it in the data, including the recently released Fitch default report. We think it's also going to be reflected in lower industry returns on equity and higher dispersion in performance between managers as this quarter's earnings season continues. Our expectation is that in this environment, Golub Capital is going to once again outperform. This stems in part from our strategy. We focus on first lien loans to resilient businesses in resilient industries, and we have limited exposure to junior debt. That helps in this kind of environment. But it's also about our strong underwriting and monitoring. We think we're particularly strong at early identification of problem credits and mitigating the credit losses on those problem credits in part because of that early attention. Overall, I continue to believe we're in a Darwinian moment for private credit. I said that earlier this year, and I continue to believe it. I think that firms with sustainable competitive advantages with strong performance and with well-diversified long-term capital bases, they're going to adapt and take share. And firms with less good credit performance or with over reliance on certain kinds of capital like retail products, they're going to struggle. Private equity sponsors in this context are soon going to know which private credit firms they can count on to provide consistent, steady access to compelling financing solutions and which private credit firms can't do that. And I think all of this is going to continue a pattern that I started to talk about last year. It's the growing separation between the winners and the winers. With that, operator, can you please open the line for questions?

[Operator Instructions] Your first question comes from the line of Finian O'Shea with Wells Fargo.

David, on capital allocation, appreciating the posture of focus on delevering and buybacks. Can you hit on how much of that stemmed from sort of the other variable, which is the quality and price of new investment opportunity? And if that -- if that sort of preference is expected to continue here as you've delevered a little bit? Or should you expect to go more conservative as, say, the new investment opportunity isn't great and there are still some credit headwinds in the industry?

We always need to think through the trade-offs between buying back shares, making new investments, having leverage be in our target range. And all of those are goals that we have that we want to achieve and there's some trade-offs between them. So you quite correctly pointed out that in this last quarter where we saw relatively slow payoffs, we made the decision to slow down on new investing activity in order to achieve our goals with respect to repurchases and with respect to a bit of deleveraging. I think the payoffs are going to increase, and that's going to give us a lot more flexibility to be able to play more in new investing activity and simultaneously continue to achieve our leverage goals and our repurchase goals. But we're going to have to continue to monitor all of these different options and weigh the pros and cons against each other because I think these are at core alternative uses of capital. I think it's very important for you, Fin, and I know you focused on this before others have as well to focus on the emphasis we put on repurchase of shares. When BDC shares are trading at a discount, they're trading at a discount to what managers are saying fair value is. I think that's a really important fact to bear in mind as you think about why some of them do repurchase their shares and some don't.

Agree. Very helpful. Just a follow-up on credit pressure. We're seeing a bit more last couple of quarters, including this quarter on the home services area, you have a little bit of that. Seeing if you could outline anything thematically going on there, if it's sort of a repeat of like the health care roll-up issues or something in the K-shaped economy or whatnot?

I think you're right that we're seeing a pattern, and I describe the pattern maybe less about being home services than about being businesses that are impacted by slower degrees of home sales. So it's been there's been some good writings on this. So we've seen that we are in a period since 2022 when mortgage rates have gone up. So if you are a homeowner and a holder of a pre-2022 mortgage, you're reluctant to give up that mortgage because your replacement mortgage will be much more expensive, even if you want to move. So that has cut down the amount of moving activity. And I think one of the reasons why some home services businesses have seen slack demand is related to this move volume being below normal. I don't think that can persist forever. I think this is a self-curing problem, but I don't think it's going to be cured tomorrow either. So you're going to see some continued pressure in that space on businesses that are reliant on -- or that are influenced by the amount of moving activity.

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

Just one on the -- in terms of the deal activities in terms of the deals you saw in the quarter. And you mentioned a brief pickup in some of the spreads on new investments. Wonder if you could just further flesh that out. What are you seeing in terms of terms, in terms of docs versus what you saw in the March quarter?

Sure. So I think most folks in our industry expected 2026 to see much stronger M&A volumes than we saw in 2025. And as the year turned, as we got into January and February, that did not happen. In fact, we saw reductions, not increases in M&A in Q1. In Q2, we saw a little bit of recovery, Ken, but we're still operating in a very modulated, very constrained M&A environment for private equity-backed M&A. If you look at the overall stats, it can be a little confusing because industry M&A volumes are very influenced by some very large strategic deals. But if you look at the private equity ecosystem, M&A has been low. As a consequence of that, I think there's been more competition and more attention around the deals that are getting done. And that's mitigated to a degree, the spread widening and the improvement in terms that we would otherwise have seen in private credit in Q2. We still saw some. I mentioned in the prepared remarks about a 25 basis point to 50 basis point improvement in pricing, and there's also been some improvements in terms and in leverage levels. So the overall situation is actually a bit better than just that spread increase. But I think we're going to see more. I think we're going to see more when M&A starts to recover more clearly. And I think over the course of the coming quarters, we'll see both an improvement an increase in M&A activity and a further improvement in the terms and conditions available for new loans for private credit players.

Got you. Very helpful there. And just one follow-up, if I may. Within the software loan portfolio there, the sequential pickup in the bottom 3 risk grades. Wonder if you could just talk about any common themes there? Anything notable driving some of the movement there?

Yes. I mean let's go back to a conversation that we had at the very beginning of the year, Ken. I was asked, so all this AI stuff, you've got some competitors who are saying it's a big nothing. And I said very pointedly, it is not a big nothing. There is a very significant change in the cost of coding as a result of AI. And there are going to be winners and losers in the industry that arise because of this very, very, very significant change that was not fully anticipated. I think what I also said at the time was I think we're well positioned for this. We are experts in software lending. We've been doing it for a very long time, very successfully. And we've been thinking about AI in the context of our lending activity. All that's true. I'm also going to say we're not perfect. And Rob Tuchscherer talked about how in our re-underwriting and in our -- looking at our portfolio with an outside consultant, we identified that we had a subset, a small subset but identifiable subset of our software loans where the companies are susceptible to some issues related to AI. I think we're seeing that. I think we're beginning to see that. I think that's going to become a continuing theme, not just for us, but for everybody in the industry. Software is going to separate into winners and losers. I think our portfolio is very manageable, but there were a couple of instances in the portfolio where we're distinguishing some losers or some potentially challenged companies in our portfolio and reflecting that in valuations.

Your next question comes from the line of Paul Johnson with KBW.

Just with the trends we've seen across the sector, I mean, credit has been normalizing, you're talking about here on the call, a little bit of migration within your portfolio as well. I guess, how good of a grasp do you think that you have in terms of kind of outlining the tail within the portfolio? I mean, at this point, do you think that, that the tail within the portfolio is pretty much known or it's still growing at this point? I mean it's relatively kind of early on in this normalization process. I'm just curious kind of where you think the industry is at in terms of the tail that we've seen increasing across the space and then also, I guess, within GBDC's portfolio.