Welcome to Golub Capital BDC, Inc.’s September 30, 2018 Quarterly Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than the 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, Inc. filings with the Securities and Exchange Commission. For materials, the Company intends to refer to on today’s earnings conference call, please visit the Investor Resources tab on the homepage of the Company’s website, www.golubcapitalbdc.com, and click on the Events/Presentations link. Golub Capital BDC’s earnings release is also available on the Company’s website in the Investor Resources section. As a reminder, this call is being recorded for replay purposes. I will now turn the conference over to David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead, sir.

Thank you, Jenifer. Hello, everybody, and thanks for joining us today. I am joined by Ross Teune, our Chief Financial Officer; Greg Robbins, Managing Director and Jon Simmons, Director, here at Golub Capital. For those of you who are new to GBDC, our investment strategy is and since inception has been to focus on providing first lien senior secured loans to healthy, resilient, middle market companies backed by strong partnership-oriented private equity sponsors. Yesterday, we issued two press releases, an earnings press release for the quarter and fiscal year ended September 30th; and an announcement that GBDC has entered into a merger agreement with Golub Capital Investment Corporation or GCIC. We also posted an earnings presentation and a presentation about the merger on our website. We’re going to refer to both of those presentations throughout the call today. I’m going to start today’s discussion with the merger announcement and then we’re going to shift and Gregory Robbins is going to review the results for the quarter and the fiscal year, and we’ll end with Q&A on both topics. You’ve heard me say many times that at Golub Capital we strive to be boring. But, today’s an exception. I’m excited about and pleased to share details with you about GBDC’s agreement subject to stockholder approval to merge with GCIC. I’m going to refer in the next few moments to the overview of the proposed merger with Golub Capital Investment Corporation that’s posted on the website. Before I start, please note that additional information regarding the proposed merger and the participants in the facilitation of proxies in connection with matters requiring stockholder approval will be available in the joint proxy statement that GBDC and GCIC intend to file with the SEC alongside the prospectus of GBDC. Stockholders are urged to read the…

Thank you, David. For the discussion on GBDC’s earnings, I will refer to our separately posted quarterly earnings presentation from our website. The headline is that GBDC had another very solid year in fiscal 2018, despite a challenging borrower-friendly environment. Let me point out a few highlights on the year. First of all, we generated stable and consistent earnings in excess of our dividend, growing NAV per share over the course of the fiscal year by $0.02 to $16.10 and paying out an $0.08 per share special distribution. Our return on average equity averaged 8.5% for the four quarters ended September 30th. In aggregate, we had net realized and unrealized gains on investments. In other words, we had negative credit losses for the fiscal year. And lastly, portfolio risk ratings have remained stable, and non-accrual investments represented only 0.3% of total investments at fair value at 9/30. Let’s now focus on the fourth fiscal quarter of 2018. I’ll start with an overview, Ross will provide some more detail and David will come back at the end for closing remarks and Q&A. For the quarter ended September 30, 2018, net increase in net assets resulting from operations or net income was $15.9 million or $0.26 per share, as compared to $21.7 million or $0.36 per share for the quarter ended June 30th. Net investment income or as we call it, income before credit losses was $20.3 million for the quarter ended September 30th, or $0.34 per share as compared to $18.7 million or $0.31 per share for the quarter ended June 30th. Excluding an $800,000 reversal in the accrual for the capital gains incentive fee, net investment income was $19.5 million or $0.32 per share, as compared to $19.4 million or $0.33 per share for the quarter ended June 30th. Consistent…

Great. Thanks, Gregory. Turning to slide five, this slide highlights our total originations of $182.3 million and total exits and sales of investments of $168.3 million. Turning to slide six, this slide shows that our overall portfolio mix by investment type has remained consistent, quarter-over-quarter with one stop loans continuing to represent our largest investment category at 80%. Turning to slide seven, this slide illustrates that the portfolio remains well-diversified with an average investments size of $8.6 million. Our debt investment portfolio remains predominantly invested in floating rate loans and there have been no significant changes in the industry classification percentages over the past year. Turning to slide eight, the weighted average rate of 8.2% on new investments this quarter was up from 7.8% in the previous quarter due to an increase in the weighted average rate over LIBOR on new investments. The 40 basis-point increase in the weighted average rate on new investments was due to a few larger deals with high relative spreads and not a general market move towards higher rates. Due to few larger payoffs on existing loans with high relative rates, the weighted average rate on new investments that paid off increased to 9.2%. As a reminder, the weighted average interest rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate would be calculated using current LIBOR, the spread over LIBOR and the impact of any LIBOR floor. Shifting to the graph on the right-hand side, this graph summarizes investment portfolio spreads for the quarter. Looking first at the light blue line, this line represents the income yield or the amount earned on the investments including interest and fee income, but excluding the amortization of discounts and upfront origination fees. Due to…

Thanks, Ross. So, to sum up, GBDC had another solid year in 2018, giving the Company strong momentum for the next stage of its evolution, the proposed merger with GCIC. We believe the combined Company sustains the characteristics that have made GBDC successful and gives it a number of additional advantages, including accretion to GBDC’s NAV per share, greater flexibility to optimize GBDC’s liability profile, now that we have no-action relief, and further advantages of scale. As for our market outlook, we’re hoping that recent volatility in the equity market will translate into more favorable conditions in the credit market. Volatility is usually our friend, but we’re not counting on it. We’re planning on a continuation of the borrower-friendly conditions that have been persisting for the last 2.5 years. Either way, our strategy remains to focus on investments that leverage what we believe to be the advantages to the Golub Capital platform, sponsor relationships incumbencies, reliability, market-leading scale, industry expertise and breadth of financing solutions. With that, we’ve covered a lot today. I thank you for your patience and I thank you for your time and your partnership. Jennifer, if you can open the line for questions?

Certainly. Thank you. [Operator Instructions] Our first question comes from the line of Ryan Lynch with KBW. Please go ahead.

Good afternoon, guys, and congratulations on the announced merger. I can definitely see it as a lot of nice benefits for GBDC shareholders. But I did want to talk about one concern and get your commentary on it. And that concern is that the merger with GCIC is going to basically unlock that shareholder base of GCIC shareholders who have not had liquidity for many years, and they’re now going to receive liquidity via GBDC shares. And there’s some fear out there that that could create some selling pressure on GBDC. So, can you maybe speak to who composes the shareholder base of GCIC? Is it more institutions or retail? And how do you plan on minimizing that potential negative impact on GBDC’s stock price with potential selling pressure, post merger?

Sure. Thanks, Ryan, for your question. It’s a great question. So, let me talk a little bit about the first element of your question, which is what are the characteristics of the GCIC investor base? It is not a retail fund. We raised this fund by marketing it to institutional investors, the institutions who are involved are pension funds, endowments, foundations, insurance companies; and in general they’re institutional investors with a very long-term perspective. So, my expectation is that many of the GCIC investors will become long-term stockholders of GBDC. Some may consider selling some of their holdings over time. But, we also expect that because the transaction is going to approximately double the market cap of GBDC and enhance its liquidity that we may get some new stockholders, who have historically not been interested in investing in GBDC, because of its limited liquidity. In addition to that, I said earlier in the call that part of the transaction involves a Golub Capital entity that is going to purchase at least $40 million of GBDC shares after the merger. So, when I look at the combination of who we’ve got in the GCIC investor base and the purchasing of shares that the Golub Capital manager affiliate is going to be doing post the merger, it’s not an area of major concern for me.

Okay. That’s helpful color. And then, I guess also congratulations on the SEC no-action relief. On that point, I take it that you’re of the opinion that securitizations are the best form of debt capital going forward given the lower costs and increased flexibility. So, as you kind of look out your capital structure, maybe a couple of years down the road, should we expect the vast majority of that to be in securitization debt? And maybe leaving the bank facilities as more temporary financing, or what sort of role do you see the bank facilities playing in the future, as you start to build out securitizations?

So, another great question. Let me go back a little bit in context. So, just to refresh everybody’s recollection, GBDC’s been a long time user of securitizations as one of the forms of financing in the right hand side of its balance sheet. When risk retention rules were put into effect, GBDC was temporarily precluded from amending or issuing new securitizations because of an odd interplay between 40 Act rules and risk retention rules. We applied for no-action relief from the SEC, and it took us 2.5 years to get it. Interestingly, some parties, while we were seeking it, said, oh, you don’t need it. In the no-action relief that we received, there is actually an interesting sentence, which answers in which the staff of the SEC acknowledged that they agree with our interpretation that we needed it. Good news is, now we have it. And we plan to go back to our strategy of relying heavily on securitizations, not exclusively but heavily. If you look at GBDC’s funded debt mix today, as of September 30th, it was about 23% securitizations, about 32% SBIC debentures and about 44% bank facilities. If I were to describe target or perfect, it would still include all three of those categories, but the securitization piece would be meaningfully larger and the bank facilities piece would be call it 20%, 25%. And there’ll be times when it’s less than that, and there’ll be times when it’s little more than that. But, I’d say, as a generalization that one might look at a structure where bank facilities, at 20%, 25% are approximately target. Now, interestingly, after quarter-end, we completed the first post no-action letter securitization for GBDC $408 million securitization that Ross commented on. With that securitization, we will have shifted GBDC’s funded debt mix to be very substantially securitization led.

Okay. That’s helpful commentary. And then, I have kind of a two-part question, both related to the Senior Loan Fund. I see that GCIC has its own Senior Loan Fund. Is the expectation to collapse those into one fund or keep operating them independently? And then, separately, but likely related, is it fair to assume that in the current environment that we’re in today, given the current deal flow that you’re seeing for the Senior Loan Fund, is it reasonable to expect that really that those Senior Loan Funds could just keep winding down and really eventually wind off, especially given your guys’ action to not extend the reinvestment period on the GBDC’s Senior Loan Fund?

So, as I said before, we think that the market opportunity, the risk reward opportunity for traditional senior debt as a sort that we historically have put it in the Senior Loan Fund that it’s not that attractive right now. And consequently, we’ve been allowing these SLFs at both GBDC and at GCIC to shrink. I do think there is value in retaining them, because market conditions change. And in a different set of market conditions, having the ability to expand our SLF might be attractive. We’ve not made a decision about whether to combine or not combine the two SLFs post the merger, but I see a lot of advantages to combining them. It would ease administration and operating costs and financing related costs. So, I think that’s something we would look hard at post-merger.

Okay. Maybe, can I just have one follow-up on that? I mean, does the thought process of what to do as far as retaining those senior loan funds, in case the market ever changes, does that change at all if shareholders do approve the 2 to 1 leverage on your balance sheet and you can actually put higher leverage versus putting higher leverage in the senior loan funds off the balance sheet?

It’s definitely a consideration. I don’t want to get ahead of ourselves. We don’t have a merger and we don’t have shareholder approval on the leverage to us. But, I think your question is a valid question. Certainly, one of the advantages of senior loan fund is the capacity to use higher degrees of leverage without it having a meaningful impact on your regulatory debt to equity, and that whole issue becomes less meaningful in the context of having the ability to utilize the higher degree of leverage. But, I want to focus on a different element of this. When we talked about the possibility of seeking shareholder approval for using higher leverage, Ross said something really important. I want to make sure everybody heard it loud and clear. While we are seeking shareholder approval, we are not planning to use it. We have a target today of 1x GAAP debt to equity. And our intention with or without shareholder approval on the test is to continue to have a 1x GAAP debt to equity target.

Yes. Understood. That’s an important clarification and important point with the increased leverage. Those are all my questions. I really appreciate the time today.

Thanks, Ryan. Next?

Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Hi. Congrats on the quarter. And just one quick follow-up to the SLF. Obviously — I mean, you make it sound, David, like you haven’t decided yet on whether to combine them. Obviously, they both got fundamentally the same partner RGA directly or RGA through Aurora. So, I presume you’ve had some discussions already and in fact with view of the merger with — the acquisition of GCIC and the partnership there. So, I mean, can you add any more color than that or it hasn’t been decided but the same partner’s been involved in both of these for a while. So, I think it’s more likely [multiple speakers] little further down the road?

You’re 100% right, Robert that it’s the same partner. And if we decided that it makes sense to combine the two SLFs, I don’t think RGA would have any objections to our doing so. But to be very candid, we’ve had no discussions at this time with RGA about this. Telling RGA about the merger would have been sharing material nonpublic information and we did not. So, this is all — this is all separate, we’re planning to work through in the coming days.

Okay, got it. On the special dividend, obviously it's been a plan for the last several years to pay out the full amount or roughly the full amount of taxable income. I mean, is that going to continue to be your policy, basically avoiding excise tax, going forward, and if you have any thoughts of that, in the context of the GCIC acquisition?

That will continue to be our policy. That's our intention. We don't understand why it isn't everyone's policy. You have your choices of BDC manager to pay an excise tax or not pay an excise tax, and you can avoid paying the excise tax by making sure that you have paid out distributions equal to or almost equal to your taxable income. This is not a hard calculus. So, it's good for shareholders to avoid paying the excise tax. I anticipate we will continue with that same policy.

Got it. And one more if I can. On the combination, presuming -- I expect you to get shareholder approval, so presuming it goes through -- can you give us a little color on the accounting? Obviously, you're buying assets depending where the premium is et cetera at the close, but call it 107, so above principal par. So, would the accounting be to take kind of a lower effective yield on those assets? And then, if they were held to maturity, you just have a lower effective yield for the life of the asset or if they prepaid early, you'd have kind of an inversed accelerated amortization of a one-time reduction of the top-line. Can you give us any color on how that’s going to work?

Sure. It’s not intuitive. So, for accounting purposes, the merger will be accounted for as an acquisition. So, GBDC will be deemed to be acquiring GCIC, and we’ll use purchase accounting. So, per purchase accounting, the purchase price of 107 of GCIC’s NAV will be allocated to GCIC’s assets. We anticipate that the premium will largely be attributed to GCIC’s loan assets. So, you’ll see a nanosecond when GCIC’s loans will be written up. But a nanosecond later, because GBDC uses fair value accounting, those loan assets will be written down to fair value. Consequently, at the time of the merger, there will be an accounting related one-time purchase accounting charge, essentially equal to the premium that GBDC is paying. After that, GBDC’s accounting won’t be much impacted by the merger, GBDC’s EPS won’t be impacted on a go-forward basis by these -- this merger related purchase accounting charge. But it’s going to make the first period after the merger look funny.

Does your assessment of NAV accretion take that charge into account?

Yes.

[Operator Instructions] Next question comes from the line of Finian O’Shea with Wells Fargo Securities. Please proceed with your question. Finian O’Shea: Hey guys thanks for taking my question. Congratulations on the exciting quarter. Just noticing shifting to normal stuff, you seem to have a bit of negative originations, which was against the trend of many of your peers this quarter. Is this sort of a one-off aberrative-type time period? And for more context, do you expect this to come back, given potentially more attractive market, deal flow today?

So, couple of things on the quarter and origination in the quarter. I would say that from a gross origination standpoint, it was a reasonably normal quarter. It was unusual and that we had a higher degree of payoffs than usual. And from the standpoint of GBDC, it’s particularly high degree of shrinkage of the SLF. So, I’m not anticipating that the pattern you see this quarter is going to continue. And in fact, my expectation is that the portfolio will grow in coming quarters. Finian O’Shea: Okay, very well. And then, back to -- just another small question, on CLO usage for GBDC, as you said, it would expand. Do you anticipate that Golub with a larger CLO will still be mainly using the AAA financing?

Yes. I mean, we’re not planning, as I mentioned earlier, although, we’re seeking shareholder approval to lift the leverage limit, we’re not planning on utilizing a higher degree of leverage. So, there’s -- there will be very limited reason for GBDC to issue junior securitization liabilities.

Our next question comes from the line of Christopher Testa with National Securities Corporation. Please proceed with your question.

Hi. Good afternoon. Thank you for taking my questions, many have already been asked and answered. Just touching on the SLFs that are on your balance sheet as well as GCIC, to the extent that whether you end up merging them or not, will you also seek to convert the sub notes of the LLC equity interest in GCIC, much like you did with GBDC when the merger is complete?

So, your question is, will the capital structure of the SLFs be aligned with each other? Is that what you mean?

Yes, correct. Yes.

That’d be my expectation. So, again, we haven’t had these discussions yet with RGA and with our Board. But my expectation would be that it will make sense to combine the two SLFs, reduce the debt facilities to one from two, and align their capital structures.

Got it. And sticking with that theme, and I know you alluded to this earlier, David, to one of the earlier questions. But, as we start to see hung deals in the market and kind of some backups in spreads and there seems to be outflows in a lot of loan funds. Is it safe to say that there might be at least going forward, if these trends persist, greater and greater opportunity that might lead to net growth in the SLF and maybe even extending the period of reinvestment for the SLFs?

So, you’re getting to a great point. So, the point you’re making is market conditions changed, and maybe they’re changing even now as we speak, because there has been in recent weeks -- with the equity market volatility, there has been a pullback in broadly syndicated loan pricing. And that in turn is creating some change in terms that are being offered to the market on new broadly syndicated loans being brought to market. The traditional pattern for us middle market lenders is we watch the broadly syndicated market carefully, not because we are going to the HIP with the broadly syndicated market, but because the middle market tends to follow with a lag, the patterns that we see in the broadly syndicated market…

Right.

If we see a continuation of the choppiness and spread widening that we’re seeing in the broadly syndicated market and we see the typical pattern, which is those same phenomena shift to be present in the middle market in the coming months, then I can absolutely see a scenario in which it becomes attractive for us to look to ramp back up the SLFs. I think there are a lot of ifs in that statement, but your point is exactly the reason why I think it may make sense to keep the SLFs around.

Got it. Okay. And sticking with the last part of what you’ve said, if we assume that the broadly syndicated market continues to weaken in terms of price and you’re getting more favorable yields, is there any potential to drop down any syndicated loans within the SLFs?

It’s always possible for us to purchase some more broadly syndicated or upper middle market loans into the SLF. And I think we do want to be mindful as we have in the past of not introducing too much price volatility into GBDC’s earnings through a large concentration of broadly syndicated loans that are leveraged significantly. That’s not a strategy that we’d be interested in pursuing.

Right. Okay. That’s fair. And again, I know you answered the question on about targeting 20%, 25% of the revolvers with the remaining being in securitization as you move towards those substantially larger public fund with enhanced liquidity in the public stock. Is your thought process also potentially maybe looking at doing cheap, fixed rate financing, maybe through means of a convertible note or something where it seems that you guys would be able to price that extraordinarily cheap relative to a lot of your peers?

I think you -- we will definitely look at all available options in respect of debt financing, and that includes convertible notes; it includes unsecured notes; it includes bank facilities. If the SBA rules change and we can expand our participation in the SBA program, that would be on the table as well. To-date, as we’ve looked at convertible notes and unsecured notes, the cost of those kinds of liabilities has been meaningfully higher than the cost of securitization liabilities given our asset mix. And I think that’s not true for some other BDCs, whose asset mixes don't so easily lend themselves to securitizations.

Got it. Okay. That makes sense. And last one for me, just I know you had mentioned that you still want to stay at 1x debt to equity on a regulatory basis. Is that a hard stop or if we see severe dislocation in the market, would you be comfortable going above, but not substantially above, it's a 1.5 or maybe 1.1, 1.2 if the market is favorable enough from those conditions?

So, Chris, just to clarify one thing, what I said was, and what Ross said is that our target today is a one-to-one GAAP debt to equity ratio. So, we've been running less than that on a regulatory basis because the SBIC debentures don't count in the context of a regulatory test. I anticipate -- I mean, is it a cap, look, everything's got to be revisited in the context of changes in market conditions that are significant. But, I’d characterize our view on this, target is as we're -- things would have to change quite meaningfully for us to want to revisit that target.

Got it. Understood. Those are all my questions. I appreciate your time today.

[Operator Instructions] Our next question comes from the line of Greg Mason with Ares. Please proceed with your question.

Great. Good afternoon, David. Congratulations on the merger, we've been waiting for this. So, congratulations. Just wanted to talk quickly on the tax impact on the purchase premium and then write down. Does that create a tax loss carry-forward that you can use to offset potential excise taxes going forward?

Well, that would make too much sense, Greg. For tax purposes, this is a tax-free transaction and carryover basis applies in this case. The premium write-up and write-down is all GAAP and has nothing to do with tax.

Okay, great. And then on the new securitization, if I look at the new securitization versus the 2014 securitizations, spreads on the A class are up about 50 basis points; spreads on the C class are up about 100 basis points. I’m just curious kind of why you saw that spread increase. It feels like over the past four years, CLO spreads have been declining. Anything unusual for that spread to increase and kind of what’s your expectations as you issue more securitizations around that spread on the classes?

So, the spread differential that you're alluding to is a little bit apples and oranges. Because the new issue securitization that we just did has a normal reinvestment period. I think it's a four-year reinvestment period, has standard, typical new issue securitization. The one that has the very low interest rate on it, we were able to negotiate that very low interest rate because there essentially was no reinvestment period. It was called a static deal where if you get repayments, they go immediately toward repaying the debt securities that are issued. So, in any static securitization, the expected life of the securitization is much shorter. And as a consequence, you can typically negotiate cheaper financing. So, I’d characterize the financing that we got on the transaction that we just did as very attractive. It's about 40, 50 basis points inside of the all-in cost of financing through bank facilities and has other characteristics that in my judgment they get better.

Got it. That makes sense. And then, my last question, I was just kind of struck by the fact on the senior loan that you really aren't viewing those assets as attractive kind of true first lien assets; seems to fly in the face of kind of what everybody has been saying over the last 6 to 12 months that you've got to move up the capital stack, first lien is where the best risk adjusted returns are. It sounds like you don't quite see it that way. So, just curious if you can you give us some more color on why you don't think that top of the stack first liens are the best risk returns in the current environment?

Well, I think, we’ve been -- you can see our views and what we’ve done. We think that the most attractive risk reward is in one-stops. And we think one of the main reasons that that’s the case is that our competitive advantages are strongest in the one-stop arena. It’s very challengingly competitive market. Right now, we’ve been for 2.5 years in a borrower-friendly, in some respects a progressively more borrower-friendly environment. And in the traditional, lower leverage first lien securities first lien loans, the competition is particularly intense. So, we’ve been focusing on areas that we think are more attractive from a risk reward standpoint. Those have tended to be areas where our competitive advantages are particularly strong. That’s meant repeat obligors, repeat sponsors, one-stops, industries where we have particular domain expertise; it’s been a pretty consistent theme that I’ve been talking about for the last couple years.

And we are showing no further questions on the audio lines.

I wanted to take this opportunity to again thank everybody. This is an unusually long call, about an hour for us. I very much appreciate your patience. And I know a lot has dropped on you in the last 24 hours. So, should you have further questions about the quarter or about the merger, please feel free to reach out to Gregory Robbins, or to Ross or to myself. Look forward to talking to you next quarter.

Ladies and gentlemen, this does conclude today’s conference call. We thank you for your participation and ask that you kindly disconnect your lines.