Khosrork/iStock via Getty Images The BDC sector has been rather resilient over the past 2 years, with many demonstrating increases to their net asset value and net investment income. While a rising tide lifts all ships, it pays to stick with those that have proven track records of strong shareholder returns.
This brings me to Golub Capital ( GBDC ), which is a well-respected name with a long tenure in the industry. In this article, I highlight what makes GBDC worth owning at the current price, so let’s get started. GBDC: 7.6% Yield, Get Paid To Own This Stalwart BDC
Golub Capital is an externally-managed BDC that’s been publicly traded since 2010. At present, it has a $5.1B investment portfolio that’s well-diversified across 301 investments in 39 different industries.
Its top 10 investments represent just 16% of the portfolio fair value, and the average investment represents less than 0.3% of the portfolio. As shown below, GBDC is primarily in growing industries, with Software, IT Services, and Healthcare-related industries representing 44% of its portfolio. GBDC Portfolio Mix (Investor Presentation) Moreover, GBDC carries an overall safe portfolio strategy, with 94% exposure to first lien loans, just 1% junior debt, and 5% equity for upside potential. The high exposure to first lien helps to ensure recoverability of principal in the event of a borrower default.
Importantly, GBDC’s NAV/share has solidly rebounded since 2020, and it’s worth noting that some of the dip in NAV during 2020 had to do with a rights offering, in which investors could have either bought additional shares at a discounted price or could have sold their rights. As shown below, GBDC’s NAV/share has increased over a 10-year period, and has held steady over the past 5. GBDC NAV/Share (YCharts) Also encouraging, GBDC has seen adjusted NII/share growth over the past year, from $0.29 at the end of 2020 to $0.31 at the end of last year. This provided coverage to its current quarterly dividend run-rate of $0.30, after being raised by a penny back in August of last year.
As shown below, GBDC has provided its IPO investors an impressive 10% IRR on NAV, with their investment value more than doubling based on NAV/share performance, the rights offering, and cumulative regular and special dividends. GBDC Investor Returns (Investor Presentation) Plus, investments on non-accrual appear to be manageable, representing just 0.9% of the portfolio fair value, down from 1.2% at the end of 2020. Portfolio health is also improving. As shown below, the number of risk-rated “3” investments decreased to 6.6% of the portfolio fair value as of Dec. 31, 2021 (Q1 FY2022), down from 8.1% at the end of FY 2021 (ended Sep. 30, 2021). GBDC Internal Ratings (Investor Presentation) Looking forward, GBDC appears to be well-positioned for an inflationary environment, with 100% of its debt investment portfolio being floating rate. It also maintains a safe debt profile, with a 110% leverage ratio, sitting well below the 200% regulatory limit. Management has also made a series of moves to strengthen its borrowing capacity at attractive interest rates, as noted below during the recent conference call :
We also highlight our continued progress in optimizing the right-hand side of our balance sheet. Two key highlights. First, on October 13th and 15th, respectively, we issued an additional $200 million of 2026 unsecured notes at a price resulting in a yield to maturity of 2.667% and an additional $100 million of 2024 unsecured notes at a price resulting in a yield to maturity of 1.809%.
Second, on November 19th, we amended our revolving credit facility with JPMorgan, primarily to increase the accordion feature, which now allows us to increase the facility up to $1.5 billion from $712.5 million. In addition, we entered into a series of agreements, most recently on December 17th, to increase the aggregate commitments outstanding under the JPMorgan facility to $1.1875 billion from $475 million as of September 30, 2021.
As shown below, GBDC continues to see a stable 5% investment spread despite a declining investment income yield, and this is due to weighted average cost of debt also trending downward. GBDC Portfolio Yield (Investor Presentation) Risks to GBDC include its external management structure, which could result in conflicts of interest. In addition, BDC portfolio companies tend to be more sensitive to economic downturns due to their smaller size. Lastly, rising cost of debt could eat into GBDC’s investment spread if it’s unable to achieve a higher investment yield.
Considering all the above, I see value in GBDC at the current price of $15.85 with […]
source Golub Capital: 7.6% Yield, Get Paid To Own This Stalwart BDC
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