Good day. Welcome to the Golub Capital BDC Incorporated September 30, 2013 Quarterly Earnings Conference Call. Before we begin, I would like to take this moment to remind our listeners that the remarks made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time-to-time in the Golub Capital BDC Incorporated’s filings with the Securities and Exchange Commission. For a slide presentation that we intend to refer to on the earnings conference call, please visit the Events and Presentations link on the homepage of our website, www.golubcapitalbdc.com and click on the Investor Presentation’s link to find the September 30, 2013 investor presentation. Golub Capital BDC earnings release is also available on the company’s website in the Investor Relations section. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

Thank you and good morning everyone. Thanks for joining us today. I am joined today by Ross Teune, our Chief Financial Officer and Gregory Robbins, the Managing Director here at Golub Capital. Earlier today, we issued our quarterly earnings press release for the quarter ended September 30 and we posted a supplemental earnings presentation on our website. Ross and I will refer to this presentation throughout the call today. I’d like to start by providing an overview of the September 30 results and then Ross is going to take you through the quarterly financial results in more detail. I will come back at the end and provide an update on our outlook for conditions in the middle market lending environment over the next couple of quarters in our priorities. With that, let’s get started. As highlighted on Slide 2 of the investor presentation, I am pleased to report we had a solid quarter. It wasn’t a great quarter, we can do better and I will talk about how, but it wasn’t a bad quarter either. For the three months ended September 30, we generated net investment income of $12.4 million or $0.31 per share as compared to $12 million or $0.32 per share for the quarter ended June 30. Net increase and net assets resulting from operations, what I refer to as EPS for the quarter, was $12.3 million versus $12.7 million in the prior quarter, $0.31 per share versus $0.34 per share in the prior quarter. During the quarter, we had a negligible amount of net realized and unrealized gain, it was $100,000 loss. That difference between net investment income and net income for the quarter was the result of selling one non-accrual investment and getting a payoff on one non-performing investment in both cases very close to our…

Thanks David. I will start on the balance sheet on Page 5. We ended the quarter with total investments of just over $1 billion, total cash and restricted cash of $54.7 million and total assets of $1.1 billion. Total debt at the end of the quarter was $412.1 million. This includes $203 million and floating rate debt issued through our securitization $179.5 million of fixed rate debentures and lastly $29.6 million of debt outstanding in our revolving credit facility. Total net assets at the end of the quarter were $658 million. This is up about $57 million primarily due to the common stock offering we completed back in mid-September. From a GAAP perspective our debt to equity ratio was 0.64 times calculated for our regulatory limit our debt to equity ratio was 0.37 times. Our debt to equity ratios declined for the quarter due to the equity offering we completed in September and as David mentioned remained below our longer term target of one to one from a GAAP perspective and about 0.6 to 0.7 times targeted from a regulatory leverage perspective. Flipping to the statement of operations on Page 6, total investment income for the quarter ended September 30 was $22.8 million, up $0.5 million or 2.5% from the prior quarter. This increase was lower than the growth rate in average total investments for the quarter due to continued spread compression, lower fee income from prepayment penalties and lower dividend income. On the expense side, total expenses of $10.4 million increased slightly by about $100,000 during the quarter as increases in management fee expense and interest expense were partially offset by a decrease in incentive fee expense. As David mentioned earlier, we had a net realized and unrealized loss on investments of about $100,000 during the quarter and total…

Thanks, Ross. In terms of our outlook for the market, not much has changed. We remained nervous. We see significant risk in the macro environment. We don’t see signs of a slowdown in our portfolio companies, but we are particularly nervous about Europe and Japan and potential impact on the U.S. economy. We also see some signs of increased competitive activity in the U.S. middle market. Our response has been consistent now for a number of quarters. It’s to remain selective and to focus on senior debt in one-stops with strong borrowers, with low risk capital structures and with relationship-oriented private equity sponsors. It’s definitely harder to find the kinds of loans that we like in this environment and so we are in a part of the credit cycle, where we think our core strengths and sourcing in an underwriting are particularly important. I am going to end there and open the floor for questions. As always, thank you for your time and your continued support.

(Operator Instructions) Our first question comes from the line of Greg Mason with KBW. Please go ahead sir.

Good morning, gentlemen. Thank you. David, could you talk about your target leverage of 1-to-1, that implies based on the current quarter ending you want to borrow about another $230 million, $240 million to get to that target 1-to-1 leverage. So I just wanted to talk about the credit facility expansion based on your borrowing base, could you utilize most of that and what are you thinking about in terms of new securitization funding for your on balance sheet liabilities which you have used in the past?

Well, first part of your question first, yes, you are correct. If you look at our current utilization of debt, we have $200 million to $300 million of incremental capacity to get to our target leverage level. And as Ross went through when he described the available liquidity that we have got right now, we have that available liquidity. At some point, as we grow our Wells Fargo facility, it will be appropriate for us to look at potentially swapping out the assets that are in that facility into some kind of new securitization. The factors that are going to impact are thinking on that relate principally to the advantages of securitization as a means of financing. And those advantages include potentially lower all-in cost and somewhat more flexibility. It is a form of financing that requires a degree of scale, Greg. So we would not probably look at another securitization until we could look at doing one in the range of $300 million to $400 million in size. But when we have the assets to be able to affect another securitization, it’s definitely something we are going to look at.

Great. And then as you made your first investments in the senior loan fund and you are starting to ramp that up, I know you have talked about ultimately that’s going to use some third-party leverage. Could you talk about is there a certain size that the assets have to get to in the SLS before you can start putting on third-party leverage in there, what size is that? And then kind of what amount of leverage and cost of that leverage as you guys are thinking about this going forward are you estimating in the SLS?

So let me see if I can make sure I hit on all aspects of the question you just asked. So yes, we are looking to increase the size of our equity investment in SLS and we would like to get that equity investment initially to a size of about $40 million. We would anticipate in the first phase of SLS using bank financing as opposed to a securitization to affect the leverage within SLS. That requires to your point, a degree of minimum scale both in dollar terms and in terms of number of obligors, so diversification. And as I mentioned in our last quarterly call, it’s going to take us a little while to get there. We anticipate putting on that debt facility either this quarter or next quarter and we would anticipate starting to use it at that point, but it’s going to take some time before we have SLS has the leverage level and scale that we would like it to be.

And do you think the ultimate target leverage in here is 1.5 times debt to equity, 2 times debt to equity, what should we be thinking about over the long-term?

For SLS?

Yes.

I think rough numbers and this is obviously subject to continuing discussion impacted by cost of leverage and portfolio characteristics, but rough numbers we are currently contemplating between 2-to-1 and 3-to-1.

Great.

(Operator Instructions) Our next question comes from the line of Mr. Jonathan Bock with Wells Fargo. Please go ahead sir.

Thank you for taking my question. David, real quick in an effort to mitigate spread compression I know you obviously have set up the senior loan fund, which is an attractive use of capital, have you given a thought to how or what type of assets could be funded? Certainly, the time lag for directly originated assets probably limits the ability to ramp earnings in a tighter spread environment right now. However, Golub has significant capabilities in both BSL and I was curious if you would consider perhaps a mix to where you would be able to fund that entity with some higher quality BSL loans and ramp the NOI a little bit quicker than if it were all just directly originated collateral?

Thanks Jon. So your question is could we and should we look at ramping SLS faster using some broadly syndicated collateral as well as our originated middle market collateral. And the answer is we are actively looking at that question. Right now, the broadly syndicated market seeing more spread compression than the middle market has. And so we need to make sure that we are comfortable with the risk reward structure and we need to make sure that the leverage that we have in place has a cost associated with it that is low enough to make it, so that we can generate good ROEs on the lower spread that BSL loans generate.

Okay. And then also could you just walk us through the reasoning behind the private bank facility bringing that on board I believe in October, just a means to diversify amongst the borrower, is that the end game?

Multiple reasons, that’s certainly one. And another one is that we seek to have attractive debt in place to cover unfunded loan obligations that we have put out, particularly revolvers. And we view the private bank facility as a particularly attractive way for us to provide debt financing to back stock our unfunded.

Okay, appreciate that. And then as we turn to the competitive environment, obviously you have mentioned that spreads have come down the idea though is where is that competition effectively coming from? Two, is it increased demand on part of banks and/or obviously high yield funds that are dipping in to the middle market, particularly those that are high-quality issuers of larger size or is it just the fact that there is still the same amount of demand yet the all-in supply due to the lack of refinancing or lack of new money deals has really led to the decrease in spread and really demand still remains the same?

I think it’s a combination of supply and demand trends. So the supply front as you alluded to Jon, we are continuing to see a diminished M&A activity relative to 2012. And what that means is there are fewer new leverage buy-outs, new middle market leverage buy-outs than we would ideally like to see. I think that’s going to get better in 2014. We are not projecting that it’s going to get dramatically better. But I think it’s going to get somewhat better in 2014 as we move further away from the fourth quarter of calendar 2012 by changes in tax laws drove an unusual level of middle market new M&A activity. The second factor is demand. And I don’t see a particularly meaningful change in demand from banks. It’s principally a change in demand from non-banks, but it’s from a lot of different kinds of non-banks. So we have seen broadly syndicated market very unusual increases in funds flows through new CLO activity and new primary fund fundings. And as some of that money is trickling down into the upper part of the middle market, we are seeing a lot of capital raising activity in both public and private funds focused on middle market lending. And again, I think we are seeing some impact from that as well. So I think understand that the spread compression environment it’s important to look at what’s happening on both the supply and on the demand side. And I think it’s also important to keep it in context. We – one of the things I have said repeatedly in these calls is that the middle market is insulated from but not immune to what’s happening in broader credit markets. And the same compression story that you are hearing us talk about in middle market land has been playing out to an even more dramatic degree and investment grade high yield and broadly syndicated loan markets.

Great. And one last question essentially you spoke of BDC brethren in some of your prepared remarks. There are a few brethren you have appeared to have overpromised and under delivered particularly as it relates to the dividend. And that has a number of particularly clients that are involved in the shares wondering as to what BDCs really are prepared for the effects of spread compression. Can you in your view walk us through your dividend policy, how you look at that dividend in this environment and more importantly how you view the stress tests of tighter spreads in terms of maintaining that dividend level now and in the future let’s say all else being equal?

Sure. So our – let’s start with dividend policy, our dividend policy, our dividend philosophy is we want to be distributing our income over time. We want to make few changes in our dividend policy and when we make changes our strong desire is to have the changes be upward and not downward. We think that the ultimate test of a dividend policy is NAV stability. If – sometimes in our industry we find an over focus on net investment income per share and an under focus on what I call earnings per share which comes after realized and unrealized gains and losses. Realized and unrealized gains and losses in our business are otherwise used – another name is often used for them in management meetings are called credit losses and its part of the business. And the idea that you can just not talk about those or exclude those or view those as always being special items is a lot of nonsense. It’s part of the business. And so we think the right way to look at earnings is on a bottom line basis and that’s reflected after dividends and NAV stability. If you look at our particular circumstances we have been generating enough net income both this calendar year, fiscal year and in each year since our IPO to cover our dividend. Our dividend rate right now reflects return on equity. It’s slightly over 8%. Our target return on equity these days is mostly higher than that but we are not looking to generate in this environment a 10% or higher return on equity we think that’s unrealistic. As you look at our income statement we have a very significant buffer. If we start to see our net income fall, one of the first things that will happen is that our expenses would fall and our expenses will fall because of a line on the income statement called incentive fees. Importantly we have a preferred in our incentive fee structure that’s set at 8%. So there is a very significant form of shareholder protection on ROE and very simple fact that if ROE starts to fall we start not getting paid. So if you ask me question slightly different from the one you asked which is do I feel that our dividend is resilient under the current circumstances, my answer is yes I do think it’s resilient. I think it’s resilient both because of our policy, our earnings, our philosophy, our credit, the credit characteristics of our portfolio and the structure of our incentive fee.

I appreciate that. And David, just a clerical point or Ross did you mention there was a $250,000 fee waiver this quarter, is that correct?

That’s correct.

And what was that related to?

We chose when we saw the results to voluntarily waive $250,000 of incentive fees. We thought it was correct thing to do.

Okay, thank you very much.

Our next question comes from the line of J.T. Rogers with Janney Capital Markets. Please go ahead.

Good morning, thanks for taking my question. First question on the SBIC how many deals are you seeing that fit into your two licenses?

It’s a great question. Sometimes people who aren’t familiar with SBICs think you can put any transaction into SBIC. And the answer is you can’t. There are very specific rules around the size of companies and characteristics of companies that are SBIC eligible. For some SBICs or for some BDCs that have SBIC subsidiaries that have small origination platforms that can be a problem because they can originate a number of transactions and have none of those transactions be SBIC eligible. We find that a meaningful percentage, but it’s a minority percentage of the transactions that we originate are SBIC eligible. I can’t tell you off the top of my head what that percentage is. It’s meaningfully less than 50% and maybe as low as 20% to 30%. But because of the size of our origination platform and the sheer number of new transactions that we do, we have not had great difficulty ramping up our SBICs reasonably rapidly. We are not all the way there yet, but you can see from Ross’ comments that of the Ross correct me if I get these numbers slightly wrong. Of the $225 million maximum of SBIC debentures that we could obtain we are already $180 million.

Correct.

Okay, great. And then just in terms of tapping into that remaining $45 million of availability, is there a push or is there a focus to get that ramped and get those debentures out there and locked in or are you just growing that vehicle as you see good deals come along?

We are certainly not applying the different underwriting standard in order to fill up the SBIC. We are – we have one set of underwriting standards. And we have the transactions that we choose to do are SBIC eligible. There is a high likelihood we are going to choose to put a bit – at least a portion of those transactions into one of the SBICs. But we don’t go out and target our originations in order to achieve SBIC eligibility nor do we apply some looser underwriting standard if a particular obligor is SBIC eligible. I think candidly that would be a bad recipe.

Sure, I think maybe the better way to ask that question is, is there a push to get that capital out, assuming you are obviously using the same underwriting standards, but are you looking to get the capital out there and then debentures locked in with rates as low as they are?

I mean, I would be surprised if we are sitting here a year from now and we haven’t fully deployed or come close to fully deploying our SBIC debentures. But we are not in a rush to deploy them we are going to do it as we see attractive deals that are SBIC eligible and subject to the other investments that are already in one of our two SBICs paying off. It’s a process and we are not going to rush it in order to get the debentures out there and locked in. We are not taking a position on interest rates. I am not sure enough for example that rates are going up in the next 12 months we wanted to be – we want to be locking those rates in. If we really held strongly on that we could buy a derivative to affect that and effectively hedge the SBIC debentures ahead of their issuance. We have done that from time to time in the past. We are not doing that right now.

Okay, great. Thanks for that detail. And then just switching gears real quickly for a bit, I am wondering if you can give some kind of idea as to what kind of costs we might see on third-party debt in the SLS, obviously that is just sort of a broad range of what you might expect. And then I was wondering if the weighted average yield on SLS investments discussed in the Ks is that reflective of the weighted average yield on the investments that you are making in that vehicle?

So two questions there. On the cost of the debt, we are still in the process of determining the most efficacious way of financing SLS, but if you ask me my current expectation, my current expectation is that the all-in cost of debt there will be sub 3%. And one of the questions about how much sub 3% gets to Jon Bock’s question about a proportion of the portfolio potentially being in broadly syndicated loans. In respect to the second part of your question, which relates to spreads, the answer is just a word, yes.

Okay, great. Thanks a lot. I appreciate you taking my questions.

Our pleasure.

Our next question comes from the line of (indiscernible), a Private Investor. Please go ahead.

Thank you for taking my questions. I have some questions on the numbers, but I want to forewarn you that I am going to also ask a question on Page 81 of your 10-Q. My first question is about the weighted average share count for fiscal Q4 only?

Yes, I can. I mean, if you want to call me separately, this is Ross, I mean, we can kind of go through the 10-K in more detail in terms of those types of questions if you think. You have very specific number questions like that I would strongly suggest that we arrange a private call we can go over it in all the detail you would like.

Okay, thank you very much.

Thank you. (Operator Instructions) Our next question comes from the line of (indiscernible). Please go ahead sir.

Good morning. It’s (indiscernible). I have questions on the credit risk in your portfolio. Could you give us some color on the cov-lite exposure in the syndicated loan portfolio and you have thoughts on it’s the impact on future loss rates? And also if you could sort of give us some color on has it made its way into the middle market space or do you see it sort of making its way into the middle market space either now or in the future?

Thank you. So first, just to define terms for those in the call who may not be familiar with what cov-lite means? Cov-lite is a shortening of covenant light. It refers to loans that still have covenants or they have very few, very loose covenants. I guess, from a marketing standpoint, cov-lites have lot better than no cov. And over the course that the last couple of years, cov-lite loans have taken over a larger and larger proportion of the broadly syndicated loan market, the broadly syndicated loan market is a market that finances larger companies than Golub Capital BDC does. We focus on loans to companies that have less than roughly $50 million of EBITDA. And the broadly syndicated market finances companies with $75 million to the several $100 million of EBITDA. So that’s the definition. Short answer to your question, we don’t have broadly syndicated exposure in the portfolio today. And so we don’t have any cov-lite broadly syndicated loans in the portfolio today. Cov-lite is not something that we have seen proliferate in the middle market. There have been less than one hand, I can think of three, well I don’t think of more than five transactions with sub $50 million EBITDA companies that have been structured as cov-lite transactions. We have not participated in those. I don’t see great pressure in the middle market today to adopt cov-lite or even low covenant type structures. Our structures haven’t really changed meaningfully over the last couple of years. So I don’t see any meaningful impact of what’s going on in the broadly syndicated loan market around cov-lite in GBDC’s portfolio. We could have a longer philosophical discussion about cov-lite and what their loan is more likely or less likely to be a problem just by its covenant structure. And I would be happy to follow-up with you on that privately but because it’s not really relevant to GBDC I don’t think it makes sense to go into in depth right now.

No that’s fine. Thank you very much.

We have no further questions on the phone lines.

Well, once again, I want to thank everyone on the call for joining us this morning and for your support. I want to renew an offer I make every call, which is if you have a question that comes up either later today or sometime when we don’t have a call like this scheduled, please feel free to reach out to Ross or to me. We value your partnership.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and please ask that you disconnect your lines.