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Goldman Sachs BDC: No Approval Yet To Sell Stock Below NAV

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NEWS

On July 18, 2018 Goldman Sachs BDC (GSBD) filed a Form 8-K, which is attached.

No press release was issued.

GSBD reported that a reconvened shareholder meeting that was scheduled for July 13, 2018 did not receive a quorum and no business was conducted.

The BDC had held an earlier meeting on June 15, 2018 which was adjourned till July 13  “in order to allow stockholders more time to vote.”

The sole subject being voted on is a proposal – approved by the Board – to allow GSBD – under certain circumstances – to issue common stock at a price below book value.

The 8-K did not indicate what further action GSBD might take following the repeated failure to gain a quorum.


ANALYSIS

Like many BDCs, GSBD regularly seeks annual shareholder approval to issue stock below NAV.

The BDC Reporter keeps a list of which BDCs have made the request of its shareholders and which have been approved and those declined.

Some BDCs do not bother to ask for this relief from their shareholders of one of the key BDC regulations : that new shares must be issued at a premium to par.

In this case, GSBD filed preliminary Proxy materials back in May 2018.

Historically, GSBD’s stock has traded at a premium to par.

The current premium is 24%.

The only secondary issuance the BDC has made since going public was made at a premium to book, without reliance on the shareholder approval.


VIEWS

Unsympathetic

We’ve never understood the seeming obsession certain BDCs have with getting shareholder approval to sell stock below NAV even when the odds of such an eventuality are low.

With the recent Board and shareholder approval of the lower asset coverage standard (150% assets to debt) one of the key arguments made to enjoin shareholders to agree has been diluted.

The new asset coverage minimum is well off the actual number and makes the supposed need to potentially issue equity to bolster the coverage ratio (by paying down debt with the proceeds) very unlikely in the one year time period involved.

Not Even A Last Resort

Moreover, there are very valid arguments that no BDC should ever issue shares below book given the numerous other options available to management.

Historically issues of shares below book have been highly dilutive and have done little to reinforce investor confidence or maintain BDC value.

We’re speaking here from real life experiences gleaned during the Great Recession and even afterwards.

One Way Street

The BDC Reporter also argues that any Investment Advisor who seeks pre-approval of such an action from shareholders should offer up some financial concessions in advance as well.

Those might include a pledge to co-invest in any below book issue to a stated percentage and/or the waiver or reduction of fees on new capital raised, etc.

After all – in all historic cases of BDCs needing to raise equity below book in an emergency – the underlying cause has been some combination of poor credit judgement and failed liability management.

GSBD – which in many other respects has “shareholder friendly” arrangements where compensation and support for the stock price are concerned – has not offered up any concession in this case.

(Just for the record – as the May 2018 Proy we’ve provided a link to above shows – Goldman Sachs Group owns an impressive 6.5mn shares of the BDC, or 16%. See page 3.

On the other hand – and despite the BDC’s above average stock performance since the IPO – the insiders (13 directors and officers of the Investment Advisor) – own an underwhelming 124,550 shares between them.

That 0.3% of all shares outstanding.

We’ll let readers decide for themselves what to make of all that).

Payee

There are real life impacts from GSBD’s relentless attempts to get shareholders to say Uncle.

Unfortunately, the cost of the Proxy and the constant mailings and calls to get shareholders to vote are borne by the BDC and not the Investment Advisor.

Admittedly, in the context of overall operating costs the expenses are relatively small.

Unreasonable

Nonetheless, the knee jerk annual request for this shareholder waiver does not seem sensible.

As mentioned in the analysis section, many BDCs do not even bother to make this request so GSBD cannot point to some sector-wide tradition.

Give Up ?

We’re hoping – for GSBD’s shareholders sake and that of its management which has other fish to fry right now – that this latest reversal will put an end to this quest for an almost unconditional blank cheque.

(We say “almost unconditional”  because GSBD’s proposal is that any below book issue will be no greater than 25% of the current shareholding).

We’ll update readers when GSBD communicates what – if anything – happens next.

Afterthought

Ironically, with GSBD’s stock price running up, and with shareholder approval to allow debt to equity to double to 2:1, we wouldn’t be surprised if the BDC did not sell additional stock in the next few months.

Of course, the shares would be sold at a premium to book and not involve reliance on shareholder approval.

That would position the BDC for monumental growth in the years ahead and would more than compensate the Investment Advisor for its reducing its management fee from 1.5% to 1.0%.

By the way, the BDC Reporter believes that’s a very positive and appropriate move.

Let’s Talk Fees

Yet…

We were not born yesterday and are aware that GSBD will continue to benefit handsomely via the unchanged Incentive Fee.

The way the numbers work with the recent change in compensation is that a good portion of the lower management fee simply drops into a higher incentive fee.

BDC managers are masters at the art of constructing compensation arrangements and why would a BDC managed by Goldman Sachs be any exception ?

A 1 and 20 fee arrangement is a move forward but the optimal pricing structure – in our humble opinion – would be 1 and 10.

Just sayin’.

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