Golub BDC says ‘Mr. Market’ may be too optimistic

The business development company made $114m in originations in Q4.

Golub Capital BDC showed strong net asset income and investment activity last quarter, even though the mid-market environment “has grown more challenging”, executives said on the earnings call Thursday.

David Golub, chief executive officer at the BDC, said on the call that Golub had weathered an increasingly difficult market that went from a lender-friendly environment to a borrower-friendly one last year.

He attributed this success to the firm’s long-term relationships with private equity sponsors and focus on buy-and-hold one-stop deals.

The BDC’s new originations totaled $113.6 million for the quarter that ended 31 December, with 70 percent of that total in one-stop deals, according to the call. The new commitments last quarter had a weighted average rate of 6.9 percent, down from 7.6 percent the previous quarter.

The company’s net asset value has remained relatively stable at $15.74 per share at the end of last year, which is only slightly down from $15.96 at 30 September. Golub attributed the dip to a special distribution of $0.25 a share the BDC paid last quarter.

The firm’s net investment income was $16.9 million, or $0.31 a share, for the quarter, compared to $17.2 million, or $0.32 a share, at September 30.

These numbers are slightly up from 31 December 2015, when the firm’s net investment income was $15 million, the BDC’s 2016 annual report shows.

Since the US election last November, there have been signs of an optimistic credit market, Golub said, like the strong returns in the broadly syndicated loan and high yield markets. He noted high consumer confidence and a relatively low unemployment rate as other positive indicators..

But he pointed out other less-than-encouraging signs for the mid-market this year.

“We got a situation where Mr. Market is optimistic, but I think the data argues for caution,” he said.

Companies in the BDC’s portfolio showed signs that a combination of low productivity growth and increasing wages were squeezing corporate profit margins last quarter, he said.

This could mean that more consumer spending and business investment will drive economic growth – and therefore credit flow – this year. But Golub added that this could also mean that the market is too optimistic and that it will show more negative trends, such as an increase in junior debt default rates.