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Golub Capital: Middle Market Borrower Trends

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On July 12, 2017, Golub Capital (GBDC) published the quarterly performance results of the “Golub Capital Altman Index” in a press release. BDC News Of The Day reviews the key data points and briefly analyzes the report to determine what value BDC investors might glean from the stated results:


Every quarter, GBDC aggregates the financial reports of 150 private company borrowers, as explained in the press release:

The Golub Capital Altman Index, which is produced by Golub Capital in collaboration with renowned credit expert Dr. Edward I. Altman, is the first and only index based on actual sales and earnings data for middle market companies. It measures median revenue and earnings performance from the data of more than 150 private U.S. companies in the loan portfolio of Golub Capital, a leading middle market lender. Reported shortly before public company quarterly earnings season, the index has served as a reliable indicator of the overall growth rates in revenue and earnings of public companies in market indexes such as the S&P 500 and S&P SmallCap 600, as well as quarterly Gross Domestic Product (“GDP”), according to statistical back-testing dating back to 2012, when data began to be tracked.

The top line results showed revenue growth of 8.9%, and Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of 2.3% on a year-over-year basis.

“This compares to an increase of 8.45% in revenue and a decline of 1.64% in earnings year-over-year in the first quarter of 2017”.

Here are the respective statements and findings of David Golub and “credit expert” Edward I Altman:

Lawrence E. Golub, CEO of Golub Capital said, “Middle market companies showed strong profit growth in the second quarter of 2017, after three quarters of modest year-over-year declines. Although a tight labor market continues to put pressure on margins, the improvement in earnings suggests that the middle market firms in our sample were more effective at cost control than in prior quarters. Across sectors, revenue growth was consistent with the healthy pace of growth in the first quarter of 2017. The Technology sector once again led revenue growth, benefiting from continued demand for productivity-enhancing technology. In aggregate, the Golub Capital Altman Index results for the second quarter of 2017 are consistent with a 2-3% rate of U.S. GDP growth.”

Dr. Altman said, “The rebound in the Consumer sector stands out. Consumer sector earnings increased by more than 6% year-over-year, after several lackluster quarters and an unusually negative first quarter of 2017. Businesses have had to adapt to increases in wages and other operating costs; challenges remain, but the improvement in second quarter earnings is a welcome sign of progress.”


With a broad origination platform, GBDC has the benefit of a bird’s eye view over financial trends in the middle market. However, the BDC Reporter would not go so far as to say the Golub-Altman Index is consistently representative of what is happening in the huge overall U.S. middle market. Anyway, just the term “middle market” is defined in many different ways by market participants. Here the definition is companies with EBITDA between $5mn and $75mn. Moreover, as the press release and other academic writings by Mr Altman admit, certain key sectors of the economy are under-represented or omitted. The 150 company components of the index would be better described as “private companies which Golub Capital regarded as good loan prospects”.

Correlation ?

The BDC Reporter does not know what to make of the claims by Mr Altman that the “index has served as a reliable indicator of the overall growth rates in revenue and earnings of public companies in market indexes such as the S&P 500 and S&P SmallCap 600, as well as quarterly Gross Domestic Product (“GDP”), according to statistical back-testing dating back to 2012, when data began to be tracked”. Anybody interested in parsing that ambitious claim should read the attached academic paper on the subject, dating back to 2015.

Higher Sales

Nonetheless, the BDC Reporter is impressed – and surprised – that the revenues of the 150 companies – measured in this way – are up as much as they are. Other such summaries mentioned by other market participants have mentioned lower sales growth rates.  With inflation low, this suggests “real” growth in the middle market, or at least in the GBDC version thereof.

EBITDA vs Earnings

We were less impressed by the press release equating EBITDA with “earnings” which could confuse some readers. We remain a sponsor of a private company like the ones in the Index and we’d be delighted if EBITDA was the bottom line. Unfortunately, it’s just a useful calculation somewhere down a company’s income statement and always begs as many questions as it answers. After all, EBITDA may be up 2.3%, but we’ve also had a great increase in LIBOR over the period and reportedly borrowers are leveraging themselves more than ever. EBITDA less interest expense may actually be lower than a year before.

The other problem with EBITDA is that we don’t know how much companies are having to spend on maintenance capital expenditures just to keep up with the competition, and even less about discretionary “capex” to grow. (The lines are blurry between the two at the best of times). That increase in EBITDA could easily have been swallowed up in higher capex and the afore mentioned interest expense. Taxes is yet another below EBITDA expense with its own narrative. In the last couple of years Congress has been offering up accelerated tax benefits to many companies. That’s good for reducing taxes now but means Taxable Income might be correspondingly higher in the future. Of course, it’s impossible from the data to work out what’s happening in that category either.

Not giving credit

Unfortunately, and even though Mr Altman is a credit expert, this data does not tell us anything about “credit conditions” in the market or even in the Golub universe. We will get some insights when GBDC reports its IIQ 2017 portfolio, but even that will only be a portion of the overall Golub picture.


The BDC Reporter does not wants to look a gift horse in the mouth. We appreciate any “Big Picture” report on what is happening in the middle market in which GBDC and most other BDCs operate. We are often digging around in the weeds trying to get an impression of what’s happening from the myriad Conference Call comments; publicly available information (of which there is more every day even for private companies); BDC portfolio summaries etc. This Index – in a couple of numbers – suggests the middle market is headed in a positive direction, at least on the top line. If the report is correct and this is consistent with a “2-3%” growth in GDP then the long business cycle expansion seems to be set to continue.

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