The information contained in this section should be read in conjunction with our interim and unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us," "our" and "Golub Capital BDC" refer to
Golub Capital BDC, Inc.and its consolidated subsidiaries.
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to: •our future operating results; •our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of the coronavirus, or COVID-19, pandemic; •the effect of investments that we expect to make and the competition for those investments; •our contractual arrangements and relationships with third parties; •actual and potential conflicts of interest with
GC Advisors LLC, or GC Advisors, and other affiliates of Golub Capital LLC, or collectively, Golub Capital; •the dependence of our future success on the general economy and its effect on the industries in which we invest; •the ability of our portfolio companies to achieve their objectives; •the use of borrowed money to finance a portion of our investments and the effect of the COVID-19 pandemic on the availability of equity and debt capital and our use of borrowed funds to finance a portion of our investments; •the adequacy of our financing sources and working capital; •the timing of cash flows, if any, from the operations of our portfolio companies; •general economic and political trends and other external factors, including the COVID-19 pandemic; •changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets that could result in changes to the value of our assets, including changes from the impact of the COVID-19 pandemic; •the ability of GC Advisorsto locate suitable investments for us and to monitor and administer our investments; •the ability of GC Advisorsor its affiliates to attract and retain highly talented professionals; •the ability of GC Advisorsto continue to effectively manage our business due to the disruptions caused by the COVID-19 pandemic; •our ability to qualify and maintain our qualification as a regulated investment company, or RIC, and as a business development company; •general price and volume fluctuations in the stock markets; •the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, and the rules and regulations issued thereunder and any actions toward repeal thereof; and •the effect of changes to tax legislation and our tax position. Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words "may," "might," "will," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "anticipate," "predict," "potential," "plan" or similar words. The forward looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as "Risk Factors" in our annual report on Form 10-K for the year ended September 30, 2021. 134 -------------------------------------------------------------------------------- TABLE OF CONTENTS We have based the forward-looking statements included in this report on information available to us on the date of this report. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. You are advised to consult any additional disclosures that we make directly to you or through reports that we have filed or in the future file with the Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K. This quarterly report on Form 10-Q contains statistics and other data that have been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data. 135 -------------------------------------------------------------------------------- TABLE OF CONTENTS Overview We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, for U.S.federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a business development company and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.
Our shares are currently listed on the Nasdaq Global Select Market under the symbol “GBDC”.
Our investment objective is to generate current income and capital appreciation by investing primarily in one stop (a loan that combines characteristics of traditional first lien senior secured loans and second lien or subordinated loans and that are often referred to by other middle-market lenders as unitranche loans) and other senior secured loans of
U.S.middle-market companies. We also selectively invest in second lien and subordinated loans of, and warrants and minority equity securities in U.S.middle-market companies. We intend to achieve our investment objective by (1) accessing the established loan origination channels developed by Golub Capital, a leading lender to U.S.middle-market companies with over $45.0 billionin capital under management as of December 31, 2021, (2) selecting investments within our core middle-market company focus, (3) partnering with experienced private equity firms, or sponsors, in many cases with whom Golub Capitalhas invested alongside in the past, (4) implementing the disciplined underwriting standards of Golub Capitaland (5) drawing upon the aggregate experience and resources of Golub Capital.
Our investment activities are managed by
Under an investment advisory agreement, or the Investment Advisory Agreement, we have agreed to pay
GC Advisorsan annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. The Investment Advisory Agreement was approved by our board of directors in May 2021. Under an administration agreement, or the Administration Agreement, we are provided with certain administrative services by the Administrator, which is currently Golub Capital LLC. Under the Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement. We seek to create a portfolio that includes primarily one stop and other senior secured loans by primarily investing approximately $10.0 millionto $75.0 millionof capital, on average, in the securities of U.S.middle-market companies. We also selectively invest more than $75.0 millionin some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment. 136 -------------------------------------------------------------------------------- TABLE OF CONTENTS As of December 31, 2021and September 30, 2021, our portfolio at fair value was comprised of the following: As of December 31, 2021 As of September 30, 2021 Investments at Percentage of Investments at Percentage of Fair Value Total Fair Value Total Investment Type (In thousands) Investments (In thousands) Investments Senior secured $ 620,16812.0 % $ 784,80516.0 % One stop 4,235,533 82.3 3,882,314 79.3 % Second lien 43,339 0.9 41,857 0.9 % Subordinated debt 973 0.0 * 172 0.0 * Equity 246,753 4.8 185,738 3.8 % Total $ 5,146,766100.0 % $ 4,894,886100.0 % * Represents an amount less than 0.1%. One stop loans include loans to technology companies undergoing strong growth due to new services, increased adoption and/or entry into new markets. We refer to loans to these companies as late stage lending loans or recurring revenue loans. Other targeted characteristics of late stage lending businesses include strong customer revenue retention rates, a diversified customer base and backing from growth equity or venture capital firms. In some cases, the borrower's high revenue growth is supported by a high level of discretionary spending. As part of the underwriting of such loans and consistent with industry practice, we adjust our characterization of the earnings of such borrowers for a reduction or elimination of such discretionary expenses, if appropriate. As of December 31, 2021and September 30, 2021, one stop loans included $657.0 millionand $527.8 million, respectively, of late stage lending loans at fair value.
The following table shows the weighted average income yield and weighted average investment income yield of our earning portfolio company investments, which represented nearly 100% of our debt investments, as well as the total return based on our average net asset value, and the total return based on the change in the quoted market price of our stock and assuming distributions were reinvested in accordance with our dividend reinvestment plan, or DRIP, in each case for the three months ended
December 31, 2021, September 30, 2021and December 31, 2020:
For the three months ended
December 31, 2021 September 30, 2021 December 31, 2020 Weighted average income yield (1)* 7.1% 7.2% 7.4% Weighted average investment income yield (2)* 7.7% 7.7% 7.9% Total return based on average net asset value (3)* 9.7% 11.1% 15.5% Total return based on market value (4) (0.4)% 4.5% 9.0%
•Annualized for periods less than one year.
(1)Represents income from interest and fees, excluding amortization of capitalized fees, discounts and purchase premium (as described in Note 2 of the consolidated financial statements), divided by the average fair value of earning portfolio company investments, and does not represent a return to any investor in us. (2)Represents income from interest, fees and amortization of capitalized fees and discounts, excluding amortization of purchase premium (as described in Note 2 of the consolidated financial statements), divided by the average fair value of earning portfolio investments, and does not represent a return to any investor in us. (3)Total return based on average net asset value is calculated as (a) the net increase/(decrease) in net assets resulting from operations divided by (b) the daily average of total net assets. Total return does not include sales load. (4)Total return based on market value assumes distributions are reinvested in accordance with the DRIP. Total return does not include sales load. Revenues: We generate revenue in the form of interest and fee income on debt investments and capital gains and distributions, if any, on portfolio company investments that we originate or acquire. Our debt investments, whether in the form of senior secured, one stop, second lien or subordinated loans, typically have a term of three to seven years and bear interest at a fixed or floating rate. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates 137 -------------------------------------------------------------------------------- TABLE OF CONTENTS significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. In some cases, our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date. In addition, we generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans as fee income. For additional details on revenues, see "Critical Accounting Policies-Revenue Recognition." We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the amortized cost basis of the investment or derivative instrument, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments and derivative instruments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investment transactions in the Consolidated Statements of Operations.
Expenses: Our major operating expenses include the payment of fees to
•calculating our net asset value, or NAV (including the cost and expenses of any independent valuation firm); •fees and expenses incurred by
GC Advisorspayable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments, which fees and expenses include, among other items, due diligence reports, appraisal reports, any studies commissioned by GC Advisorsand travel and lodging expenses; •expenses related to unsuccessful portfolio acquisition efforts; •offerings of our common stock and other securities; •administration fees and expenses, if any, payable under the Administration Agreement (including payments based upon our allocable portion of the Administrator's overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief compliance officer, chief financial officer and their respective staffs); •fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments in portfolio companies, including costs associated with meeting financial sponsors; •transfer agent, dividend agent and custodial fees and expenses; •U.S. federal and state registration and franchise fees; •all costs of registration and listing our shares on any securities exchange; •U.S. federal, state and local taxes; •independent directors' fees and expenses; •costs of preparing and filing reports or other documents required by the SECor other regulators; •costs of any reports, proxy statements or other notices to stockholders, including printing costs; •costs associated with individual or group stockholders; •costs associated with compliance under the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act; •our allocable portion of any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; •direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; •proxy voting expenses; and •all other expenses incurred by us or the Administrator in connection with administering our business. 138 -------------------------------------------------------------------------------- TABLE OF CONTENTS We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. GC Advisors, as collateral manager for Golub Capital BDC CLO III LLC, or the 2018 Issuer, under a collateral management agreement, or the 2018 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.25% of the principal balance of the portfolio loans held by the 2018 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2018 Collateral Management Agreement, the term "collection period" refers to the period commencing on the third business day prior to the preceding payment date and ending on (but excluding) the third business day prior to such payment date. GC Advisors, as collateral manager for Golub Capital Investment Corporation CLO II LLC, or the GCIC 2018 Issuer, under a collateral management agreement, or the GCIC 2018 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.35% of the principal balance of the portfolio loans held by the GCIC 2018 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2018 GCIC Collateral Management Agreement, the term "collection period" generally refers to a quarterly period commencing on the day after the end of the prior collection period to the tenth business day prior to the payment date. Prior to the redemption of the 2020 Notes and the termination of the documents governing the 2020 Debt Securitization (as defined in Note 7 of our consolidated financial statements) on August 26, 2021, GC Advisorsserved as collateral manager for Golub Capital BDC CLO 4 LLC, or the 2020 Issuer, under a collateral management agreement, or the 2020 Collateral Management Agreement, and was entitled to receive an annual fee in an amount equal to 0.35% of the principal balance of the portfolio loans held by the 2020 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2020 Collateral Management Agreement, the term "collection period" generally referred to a quarterly period commencing on the day after the end of the prior collection period to the tenth business day prior to the payment date. Collateral management fees were paid directly by the 2020 Issuer and are paid directly by the 2018 Issuer and GCIC 2018 Issuer to GC Advisorsand are offset against the management fees payable under the Investment Advisory Agreement. The 2018 Issuer paid Morgan Stanley & Co. LLCstructuring and placement fees for its services in connection with the structuring of the 2018 Debt Securitization (as defined in Note 7 of our consolidated financial statements). Before we acquired the GCIC 2018 Issuer as part of our acquisition of GCIC (as defined in the "GCIC Acquisition" section below), the GCIC 2018 Issuer paid Wells Fargo Securities, LLCstructuring and placement fees for its services in connection with the initial structuring of the GCIC 2018 Debt Securitization (as defined in Note 7 of our consolidated financial statements). The 2020 Issuer paid Wells Fargo Securities, LLCstructuring and placement fees for its services in connection with the structuring of the 2020 Debt Securitization (as defined in Note 7 of our consolidated financial statements). Term debt securitizations are also known as collateralized loan obligations, or CLOs, and are a form of secured financing incurred by us, which are consolidated by us and subject to our overall asset coverage requirement. The 2018 Issuer and GCIC 2018 Issuer also agreed to pay ongoing administrative expenses to the trustee, collateral manager, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports, and providing required services in connection with the administration of the 2018 Debt Securitization and GCIC 2018 Debt Securitization and collectively the Debt Securitizations, as applicable. We believe that these administrative expenses approximate the amount of ongoing fees and expenses that we would be required to pay in connection with a traditional secured credit facility. Our common stockholders indirectly bear all of these expenses. 139 -------------------------------------------------------------------------------- TABLE OF CONTENTS GCIC Acquisition On September 16, 2019, we completed our acquisition of Golub Capital Investment Corporation, or GCIC, pursuant to that certain Agreement and Plan of Merger, as amended, or the Merger Agreement, dated November 27, 2018, by and among us, GCIC, Fifth Ave Subsidiary Inc., our wholly owned subsidiary, or Merger Sub, GC Advisors, and, for certain limited purposes, the Administrator. Pursuant to the Merger Agreement, Merger Sub was first merged with and into GCIC, or the Initial Merger, with GCIC as the surviving company and immediately following the Initial Merger, GCIC was then merged with and into us, the Initial Merger and subsequent merger referred to as the Merger, with us as the surviving company. In accordance with the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of GCIC's common stock was converted into the right to receive 0.865 shares of our common stock (with GCIC's stockholders receiving cash in lieu of fractional shares of our common stock). As a result of the Merger, we issued an aggregate of 71,779,964 shares of our common stock to former stockholders of GCIC. COVID-19 Pandemic The rapid spread of COVID-19, which was identified as a global pandemic by the World Health Organizationin 2020, resulted in governmental authorities imposing restrictions on travel and the temporary closure of many corporate offices, retail stores, restaurants, healthcare facilities, fitness clubs and manufacturing facilities and factories in affected jurisdictions. While several countries, as well as certain states in the United States, have lifted or reduced certain travel restrictions, business closures and other quarantine measures and recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United Statesand globally and could continue to lead to the re-introduction of such restrictions elsewhere. In early 2021, COVID-19 vaccines started to be administered to high-risk adults and essential workers across the United Statesand eligibility to receive the vaccine has since expanded to all adults and children of certain ages. Although we believe the number of vaccinated adults and children in the United Statesis promising for continued reductions of travel restrictions and other quarantine measures, we are unable to predict the duration of business and supply chain disruptions, the extent to which COVID-19 will continue to affect our portfolio companies' operating results or the impact COVID-19 may have on our results of operations and financial condition. We and GC Advisorscontinue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S.and international authorities, including federal, state and local public health authorities and future recommendations from such authorities may further impact our business operations and financial results. Due to the resurgence of COVID-19 and the threat of new variants of COVID-19, we remain cautious and concerned about the on-going impacts to the U.S.economy from COVID-19.
July 2017, the Financial Conduct Authority, or the FCA, announced its intention to cease sustaining the London Inter-Bank Offered Rate, or LIBOR, by the end of 2021. The FCA'sintention is that, after 2021, it will no longer be necessary for the FCAto persuade or compel banks to submit to LIBOR due to the development of alternative benchmark rates, which the FCAsuggested should be based on transactions and not on reference rates that do not have active underlying markets to support them. In April 2018, the New York Federal Reserve Bankbegan publishing its alternative rate, the Secured Overnight Financing Rate or SOFR. The Bank of Englandfollowed suit in April 2018by publishing its proposed alternative rate, the Sterling Overnight Index Average, or SONIA. On November 30, 2020, LIBOR's administrator, the ICE Benchmark Administration Limited, or the IBA, announced a consultation beginning in early December 2020on its intention to cease the publication of the one-week and two-month U.S.dollar LIBOR, or USD LIBOR, settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings, including one-month and three-month LIBOR, immediately following the LIBOR publication on June 30, 2023. On March 5, 2021, the FCAreleased an announcement confirming that such LIBOR settings would cease to be provided by any administrator or no longer be representative as of the dates specified in the IBA proposal, and confirmed that the FCAdoes not expect any LIBOR settings will become unrepresentative before such dates. The IBA closed the consultation for feedback at the end of January 2021. Concurrent with the IBA's proposal, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporationreleased a statement that (i) encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, (ii) indicated that new contracts entered into before December 31, 2021should either utilize a reference rate other than USD LIBOR or have robust fallback language that includes a clearly defined alternative 140 -------------------------------------------------------------------------------- TABLE OF CONTENTS reference rate after USD LIBOR's discontinuation and (iii) explained that extending the publication of certain USD LIBOR tenors until June 30, 2023would allow most legacy USD LIBOR contracts to mature before LIBOR experiences disruptions. As such, if LIBOR in its current form does not survive and a replacement rate is not widely agreed upon or if a replacement rate is significantly different from LIBOR, it could cause a disruption in the credit markets generally. Such a disruption could also negatively impact the market value and/or transferability of our portfolio company investments. Furthermore, disruptions related to loans and/or other debt financing securitizations (CLOs) in the marketplace could have a material adverse effect on the ability of GC Advisorsor its affiliates to enter into loans in the future in accordance with our investment strategy and have a material adverse effect on us. We could also be materially and adversely impacted to the extent GC Advisorsor its affiliates are unable to successfully implement an acceptable replacement rate in leverage utilized by us or if there is a prolonged period of mismatch on the interest rates payable on our leverage and our portfolio investments as a result of the continued publication of LIBOR. A mismatch on the interest rates payable by any leverage incurred by us and the interest rate payable on the portfolio company investments could result in a decrease in our net investment income and distributions we are able to pay to our stockholders. As of January 1, 2022, USD LIBOR is available in five settings (overnight, one-month, three-month, six-month and 12-month). The IBA has stated that it will cease to publish all remaining USD LIBOR settings immediately following their publication on June 30, 2023. As of January 1, 2022, all non-USD LIBOR reference rates in all settings ceased to be published. As of December 31, 2021, Golub Capitalhas amended all credit agreements to effectuate the transition to alternate reference rates for portfolio company debt investments priced via reference to non-USD LIBOR. In addition, Golub Capitalis amending credit agreements to include fallback language to transition the reference rate of portfolio company debt investments priced via reference to USD LIBOR to an alternate reference rate, such as forward-looking term SOFR, based on prevailing market practices. In anticipation of the discontinuation of LIBOR, we have assessed our current debt facilities for our exposure to LIBOR. The JPM Credit Facility (as defined in Note 7 of our consolidated financial statements) and MS Credit Facility II (as defined in Note 7 of our consolidated financial statements) have been amended to include fall-back language to incorporate SOFR as an alternative reference rate, as well as foreign alternative reference rates for foreign borrowings. The notes offered in the 2018 Debt Securitization and GCIC 2018 Debt Securitization (as defined in Note 7 of our consolidated financial statements) currently utilize a reference rate to three-month USD LIBOR. We may seek to amend or refinance the Debt Securitizations prior to June 30, 2023, the cessation date for three-month USD LIBOR. The 2024 Notes, 2026 Notes and 2027 Notes (as defined in Note 7 of our consolidated financial statements) accrue fixed-rate interest and will not be affected by the transition to LIBOR. We expect any new debt facilities that we enter into subsequent to December 31, 2021will reference a benchmark interest rate other than LIBOR, such as SOFR.
February 4, 2022, our board of directors declared a quarterly distribution of $0.30per share, which is payable on March 29, 2022to holders of record as of March 4, 2022.
Consolidated operating results
In addition to our analysis for the reporting period year-to-date versus the prior period year-to-date, we present our analysis for the reporting quarter versus the immediately preceding quarter, as we believe that this comparison will provide a more meaningful picture for analysis of our business, as our results are largely influenced by market changes, not seasonal business activity.
TABLE OF CONTENTS Consolidated operating results for the three months ended
December 31, 2021, September 30, 2021and December 31, 2020are as follows:
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