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Goldman Sachs BDC: Shareholders Say Yes To Higher Leverage, Lower Fees

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NEWS

On June 15, 2018 Goldman Sachs BDC (GSBD) reported the results of its just completed shareholder meeting.

Two routine proposals (directors and auditor approval) were approved.

Also, the proposal to allow GSBD to be bound by the new lower asset coverage/higher leverage rules was approved alongside the permanent decrease in the Management Fee from 1.5% to 1.0%.

For further background on the GSBD proposal, see the BDC Reporter’s article of May 24, 2018.

Because of the absence of a quorum, a proposal to sell stock below NAV was adjourned till July 13, as the BDC seeks more votes.


ANALYSIS

GSBD is the only BDC so far to have offered shareholders a fee concession in return for the approval of the higher leverage allowed under the Small Business Credit Availability Act.

For background reading about the Act, see this article.

A few days ago, Carlyle’s TCG BDC (CGBD) received similar shareholder approval to increase leverage without any fee concession.

GSBD (and CGBD) – armed with shareholder approval – are now both governed by the lower asset coverage rule and can proceed to leverage up to new levels previously undreamed of.


VIEWS

At a historic time for the BDC sector because of the Act, this was a historic moment:

GSBD’s reduction in its Management Fee to 1.0% from 1.5% is setting a new standard.

The New Standard ?

BDC Boards and external managers usually justify managerial compensation based on reviews of what peers are charging.

In recent years the “standard” 2.0% Management Fee has dropped to 1.5% as new funds came to market.

(There are plenty of exceptions, but we are speaking generally).

Exceptions To The Rule

Typically, the only BDCs charging  a 1.0% Management Fee were those focused exclusively on lower risk-lower return senior loans.

Both PennantPark Floating Rate (PFLT) and Solar Senior Capital (SUNS) are the two notable names in this category, along with American Capital Senior Floating (ACSF), which only charges 0.8% of assets at cost (and no Incentive Fee !).

(The ACSF pricing has proved to be a bridge too far with Ares Management (ARES) choosing to liquidate the BDC rather than continue with such low compensation).

Range Bound

However, BDCs that invest in a mixture of medium to larger sized first and second lien loans which generate average yields of 9.0%-11.0% usually charge Management Fees that range between 1.375% and 1.750%.

With many BDCs poised to potentially double their leverage, vastly increase their asset sizes and greatly boost both Management and Incentive Fees, Boards and External Managers are going to have a hard time justifying to shareholders the current fee level.

(Notwithstanding what CGBD has been able to get approved).

Let’s Split This

The BDC Reporter has calculated – and reported to our readers – that pro-forma numbers show that HALF the incremental benefit of the extra leverage will inure to the benefit of the External Managers, if current Management Fees remain unchanged.

Also, the shareholders will be bearing substantial additional risk from all that extra debt, while the External Managers will not.

From The Inside Looking In

We – and shareholders across the BDC spectrum – will be interested to see how BDC Boards and managers  will tackle this subject.

With BDCs seemingly facing a certain huge increase in leverage almost across the Board in the next year, what is less certain is that shareholders will be offered any concessions on compensation.

Whose Friend ?

This is an industry where “shareholder friendly” is thrown along a lot by its managers (less so by the shareholders who are paying attention).

However, the proof the pudding will be in the eating.

Not Optimistic

Our guess ?

We’ll be seeing a lot of tap dancing and avoiding of this prickly subject by a majority of BDCs, especially those that have avoided relying on shareholder approval of the new leverage rule and will be joining the Higher Leverage Club in 2019.

Call us cynics, but we expect that most BDCs – with so much in way of incremental fees in play – will do almost anything to avoid matching GSBD’s new compensation.

Given that external managers have spent a great deal of time and (shareholders) money ensuring BDC Boards, corporate documents and decision making is heavily weighted in their favor (even sometimes when their actual investment in the BDCs are very modest), there is very little the owners can do.

We’ll be keeping a list and checking in regularly to discuss what progress – if any – has occurred.

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