HISTORY:   The Company  was initially established as Goldman Sachs Liberty Harbor Capital, LLC, a single member Delaware limited liability company, on September 26, 2012 and commenced operations on November 15, 2012 with Goldman Sachs Group, Inc. as its sole member. On March 29, 2013, the Company elected to be regulated as a business development company. Effective April 1, 2013, the Company converted to a Delaware corporation . As a result, at the IPO GSBD had two and a half years of operations as a non-traded BDC, with an institutional shareholder base. The Company went public with the ticker GSBD in March 2015, raising $120mn by selling 6 million shares at $20.The IPO was priced at a slight premium to the Net Asset Value which closed at March 31, 2015 at $19.43. Investment assets were valued at $909mn, debt at $224mn, and equity at $688mn. Total portfolio companies numbered 33. The initial distribution was pegged at $0.45 per quarter.  At the time of the IPO, GSBD had already launched a Joint Venture called the Senior Credit Fund, LLC with assets of $181mn and 14 portfolio companies. In its first public 10-Q, GSBD reported accumulated Realized and Unrealized Losses of $17mn, but no loans on non-accrual.

On May 24, 2017, GSBD undertook its first secondary stock offering since going public, issuing 3,250,000 shares plus giving the underwriters the option to issue another 487,500. The price was $22.50, substantially above the prior NAV of $18.26, and 14.4x the IQ 2017 Net Investment Income Per Share annualized.

.BUSINESS MODEL: The strategy of GSBD is to invest almost exclusively in loans to upper middle market companies, both on its balance sheet and in the JV. Loans are mostly directly originated by the Goldman Sachs Private Credit Group, reported to have over two dozen investment professionals. 0.45 for 8 quarters in a row since going public.

MANAGEMENT: The BDC is externally advised by Goldman Sachs Asset Management L.P. The advisor charges a 1.5%  Base Management Fee quarterly in arrears on gross assets, less cash. There is also an Incentive Fee of 20%, subject to a 7.5% threshold However, the Incentive Fee is subject to a cap based on twelve quarter rolling total returns, which includes Realized and Unrealized Gains. For a full discussion of the cap see any quarterly filing. There is also a fee on any realized capital gains in excess of Realized and Unrealized losses, but is unlikely to apply given the BDC’s debt-focused strategy. The BDC pays all its own expenses and any costs incurred by the advisor, which typically amounts to 0.5% of total assets annually.

CAPITAL AND DISTRIBUTION POLICY: GSBD has funded the growth of its portfolio principally with additional debt, and by under-distributing Net Investment Income to shareholders and retaining the funds. The BDC targets “debt to equity” of “o.5x to 0.75x”.  All the debt is in the form of a secured Revolver, based on a borrowing base formula, and priced at a favorable rate: 2.55% all-in. In the IVQ of 2016, GSBD expanded its financing sources by issuing $115mn in Unsecured Notes at a yield of 4.5%. That should cause an increase in interest expense in the short term. GSBD’s recurring income (Net Investment Income) return on equity is 8.5%.

CORPORATE GOVERNANCE:

BDC PERFORMANCE: On average the loans in GSBD’s portfolio yield just over 10.0%, but the JV-which is highly leveraged-yields nearly 15%. Since the IPO, total assets have grown by about 25% through the end of 2016. Investments on balance sheet et have increased from under $900mn to close to $1.1bn. The JV, too, has been expanded with additional capital contributions. Total companies in the two portfolios have increased to 39 and 32 respectively, across a diversified range of industries. Energy exposure, though, has been minor. Credit-wise, the BDC has had only a few problematic borrowers, and total Realized and Unrealized Losses have reached  $77mn by 9-20-2016, a $60mn increase, or about 1.4% of capital at par a quarter. Currently one portfolio loan is on non-accrual.

Thanks to a decent yield, a below average Management Fee and occasionally lower Incentive Fee, the proportion of investment income being earned by shareholders is higher than the BDC average, with nearly two-thirds of investment income dropping to the recurring earnings line.  However, Realized and Unrealized Losses have diminished those returns by about 40% in 2016 YTD. Nonetheless, the BDC has maintained an unchanged distribution at $0.45 for 8 quarters in a row since going public.

STOCK PERFORMANCE: GSBD’s stock has traded at or above Net Asset Value in its short history. Shortly after going public the stock price rose as high as $25.19 in the summer of 2015, but slumped to $17.91 a month later. That was a discount to NAV. However, the stock revived and traded in a band between $19 and $21 for months, but slumping again with the general credit sell-off in early 2016, when a new all-time low was reached of  $17.41. Since then,though, GSBD has been trending upward, reaching a high of $23.79 early in January 2017.  Many observers are surprised Goldman has not used the opportunity to raise additional equity capital at a premium, as the stock has been above Net Asset Value for nearly a year.

 

 

BDC ANALYST

IQ 2017:

Page 4: “Accumulated undistributed net investment income” continues to accumulate on balance sheet. (See DIVIDEND POLICY). Up to $27.225mn from $25.624mn at IVQ 2016 and $19.255mn end of IQ 2016 (see page 6). . Added about $0.04 to NAV, which otherwise would have been $18.22.

Page 5: Contribution Margin (Net Investment Income as % of Total Investment Income) still above average at 55%, but down from 68% a year prior, due mostly to higher Incentive Fees, and higher interest expense.

Page 7: PIK income still modest at $1.594mn, or under 5% of Investment Income, but up from $0.104mn a year before. See also page 15.

Page 15: Prepayment premiums were high in IQ 2017 vs IQ 2-16 at $1.331mn vs $0.260mn.

Page 17: Policy of retaining earnings causing Excise Tax to be higher. Accrued $0.365mn at IQ 2017, up from $0.213mn IQ 2016.

Page 24: Senior Credit Fund assets increasing fast to $522.3mn from $479.5mn at IVQ 2016. Number of borrowers 38 versus 37 the prior quarter.

Page 33: Interest cost increased substantially due to rise in average yield to 3.26% from 2.65% at IVQ 2016.

Page 33: Asset coverage ration dropped to 2.31 from 2.32 in IVQ 2016 despite higher assets at JV.

Page 37: Financial Highlights shows NAV Per Share has dropped from $18.67 at end of IQ 2016 to $18.26 IQ 2017. Both down from $18.97 IVQ 2015.

Page 37: Ratio of Net Investment Income to Average Net Assets above average at 11.04%, but down from 12.58% a year before.

Page 42: Portfolio yield dropped in a quarter from 10.6% to 10.5% at cost. Biggest drop is in Second Lien to 9.8% from 10.5%. Senior Credit Fund yield dropped to 14.2% from 14.5%.

Page 42: Median EBITDA of 43 portfolio companies remains at $25mn, or Middle Market.

Page 44: Over half $113mn in new loans were either Second Lien or Last Out/First Lien, and $13mn more in Fund. However, average yield on new commitments was 9.5%, down from 10% a year earlier. Yield of paid down investments was 12.5% in IQ 2017.

Page 46: Notwithstanding small Realized Loss in period, and Unrealized Depreciation of ($3.22mn), Incentive Fees increased over IQ 2016.

Page 47: $100mn commitment to Senior Credit Fund at $91mn, up from $78mn IVQ 2016.

Page 48: Median EBITDA of Senior Credit Fund borrowers: $63mn. Upper Middle Market.

Page 51: Debt To Equity in Senior Credit Fund: 1.92 to 1.00. Asset Coverage 151% vs 231% for GSBD.

Page 57: Both GSBD and Cal Regents each added $3.35mn to Senior Credit Fund.