Golub BDC earnings slightly down, assets inch up

The firm also reports that it’s focusing more on senior and one-stop loans, avoiding junior debt and emphasizing a time for more caution.  

Golub Capital’s BDC reported that its net investment income for the quarter ended December 31 2014 was $14.6 million, or $0.31 cents per share, compared to $14.9 million or $0.32 cents per share in the same quarter in 2013. The board of directors will issue a distribution to shareholders of $0.32 per share on March 27. The fair value of Golub BDC’s portfolio was $1.4 billion at the end of the year, compared to $1.35 billion at the end of the third quarter, according to Golub’s fourth quarter earnings release.

David Golub, chief executive of the BDC and president at the $10 billion mid-market lender, said that income declined slightly “primarily due to lower repayments, which in turn caused lower prepayment fees and lower fee amortization.” He also told analysts on the firm’s February 9 earnings call that the BDC has been doing more deals in the senior secured and one-stop (unitranche) space and plans to stay on that road and avoid junior debt. Of the $146.6 million in new investments in the quarter, 53 percent were senior secured loans, 43 percent were one-stops, 3 percent were made via the Senior Loan Fund and 1 percent was in equity co-investments.

Junior debt, including second lien and mezzanine loans, is not a good strategy for Golub right now, “We’re finding middle-market junior debt to be downright unattractive right now. Attachment points are too high, pricing is too low and structural protections, including covenants, are weak,” Golub said. “This is an area where we have not seen a meaningful degree of widening—spread widening or structure improvement—since September. We think this is a situation where there are too many players chasing too few middle market junior debt deals and consequently we’re sticking with our strategy of de-emphasizing junior debt at this time,” Golub said.

The firm also noted energy exposure has been a big question among clients, and while many other BDCs and publicly traded asset managers have reported losses on energy investments, Golub doesn’t have much exposure to the oil sector. The exposure to oil and gas is less than 1 percent and Golub has traditionally avoided investing in energy.

Most of its corporate loans have been in senior debt with returning private equity sponsors. “Right now we’re focused on senior and one-stop loans to resilient borrowers with low risk capital structures who are backed by relationship oriented private equity sponsors. In calendar year 2014, more than 80 percent of our new investments involved repeat private equity sponsor clients,” Golub said.

He also warned of a necessity for more caution when picking credits in the last quarter and going forward. “2014 came with a large number of surprises: the collapse of oil prices and the ruble, the return of the European debt crisis, the globalization of quantitative easing, Ebola, a very big move in US dollar and strengthening … We think the pace of these surprises is unlikely to ebb, that the ‘everybody is a genius’ part of the credit cycle is probably over and that now is a time where it makes sense to be careful out there. That’s certainly the strategy we’re pursuing,” Golub concluded.