Strong prepayments help boost GSBD’s increased net investment income

The firm has said it will continue to up its leverage levels if it sees ‘attractive’ first lien loans.

Goldman Sachs BDC’s net investment income jumped in the third quarter, thanks to elevated prepayments, the New York-based business development company’s management said on its third-quarter earnings call on Friday.

The vehicle, managed by the eponymous investment bank, posted an NII of $21.57 million for the three months ending 30 September, up from $20.16 million for the second quarter and $18.95 million for the third quarter of last year. However, chief executive Brendan McGovern noted that this income stream can be erratic.

“First, while prepayment fees were quite strong this quarter, we have observed a lower level of transaction activity thus far in the fourth quarter,” McGovern said, “underscoring the inherently unpredictable nature of prepayment income.”

GSBD committed $205.6 million in the third quarter, of which 88.7 percent were first lien senior secured loans, 11 percent were second lien senior secured and 0.3 percent was unsecured debt. The majority of repayments were first lien last-out unitranche.

The investment portfolio consisted of 56.28 percent first lien senior secured loans, 33.25 were second lien senior secured loans, 0.48 percent was subordinated debt, 2.96 percent were equity securities and 7.02 percent were classified as ‘other’ as of 30 September, according to LPC BDC Collateral.

In the third quarter, GSBD’s leverage increased, with a debt-to-equity ratio of 0.79x, up from 0.7x at the end of the second quarter. BDC management said investors and analysts should expect to see an increase in leverage if the firm continues to see attractive investments at the top of the capital structure.

“We would expect our leverage ratio to continue to gradually increase if we continue to find attractive first lien senior loans,” McGovern said, “however, if this does not come to pass or our asset mix is otherwise unchanged, then our leverage profile is unlikely to significantly change.”

The firm received approval over the summer from its shareholders to up its borrowing capacity to a maximum of 2:1 debt-to-equity ratio, the new limit for BDCs following passage of the Small Business Credit Availability Act by the US Congress.

Management noted it would not alter its investment strategy as a result. In the third quarter, the firm negotiated an amendment to the lenders on its senior secured revolving credit facility to allow GSBD to incur extra debt.

The firm’s net asset value per share increased to $18.13 as of 30 September from $18.08 at the end of the second quarter.