Welcome to the GBDC's March 31, 2021 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 statements of historical facts made during this call may constitute forward-looking statements, and are not guarantees of the 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 GBDC's filing with the SEC. For materials the company intends to refer to on today's earnings call, please visit the Investor Resource tab on the homepage of the company's website, www.golubcapitalbdc.com, and click on the Event/Presentation link. GBDC's earnings release is also available on the company's website in the Investor Resource section. As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to David Golub, Chief Executive Officer of Golub Capital BDC. Thank you, sir. Please go ahead.

Thank you, operator. Hello, everybody, and thanks for joining us today. I'm joined by Chief Financial Officer, Ross Teune; Senior Managing Director, Greg Robbins; and Managing Director, Jon Simmons. Yesterday, in the afternoon, we issued our earnings press release for the quarter ended March 31, and we posted an earnings presentation on our website. We're going to be referring to this presentation throughout the call today. For those of you who are new to GBDC, our investment strategy today is, and since inception, it has been, to focus on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. The headline for the quarter ended March 31 is that GBDC's results were strong. GBDC had both strong net investment income and continued strong credit performance. We'll discuss these topics in greater detail as we go through today's presentation. Gregory is going to start. He's going to provide a brief overview of GBDC's performance for the March 31 quarter, and then he's going to hand it off to Jon and Ross for a more detailed review of the quarter's results. I'll then come back at the end to provide some closing commentary, and I'll open the line for questions. With that, Gregory, let's take a closer look at GBDC's results for the quarter and the key drivers of those results.

Thank you, David. Turning to Slide 4, for the quarter ended March 31, GBDC's adjusted NII per share was $0.29, adjusted EPS was $0.55 and ending NAV per share was $14.86. The key drivers of those strong results are summarized on Slide 6. First, our portfolio companies generally continue to perform well. This won't come as a surprise if you happen to see the Golub Capital Middle Market Report for March 31, which we published about a month ago, based on actual financial data from Golub Capital's middle-market borrowers. The report for calendar Q1 showed the highest rate of year-over-year profit growth since we began tracking data in 2013. Strong earnings growth across GBDC's portfolio was reflected in the 4 positive credit quality trends listed on the right-hand side of the slide. We'll go into them in more detail shortly. Second, GBDC took advantage of attractive market conditions to continue to optimize its balance sheet. We executed a second unsecured bond issuance, building on the success of our inaugural offering last year. We also closed a new corporate revolver. These financings are consistent with the strategy you've heard us discuss before, low-cost, flexible financing with limited near-term maturities. Finally, middle-market new deal activity was solid. It wasn't a record origination quarter like the December quarter, but it was meaningfully improved from last year's June and September quarters. Let's drill down on the 4 positive credit quality trends listed on the right-hand side of the slide, starting with our internal performance ratings. Slide 7 summarizes the positive trends in the internal performance ratings of GBDC's portfolio in the post-COVID period. Specifically, since March 31, 2020, we've seen essentially no increase in the percentage of the portfolio performing materially below expectations in categories 1 and 2. Those 2 categories constituted only 1.1%…

Thanks, Gregory. Please turn to Slide 10 for a summary of our results for the quarter. You can see on the right-hand side of the slide that for the quarter ended March 31, 2021, each of adjusted NII per share, adjusted net realized and unrealized gain per share, and adjusted EPS were consistent with the prior quarter's strong results. As a result, our NAV per share at March 31, 2021, increased to $14.86. On May 7, 2021, our Board declared a quarterly distribution of $0.29 per share payable on June 29, 2021, to stockholders of record as of June 11, 2021. This distribution is consistent with our goal of having quarterly cash distributions of approximately 8% of NAV on an annualized basis. Turning to Slide 11, new investment commitments for the quarter ended March 31 totaled $234.7 million. After factoring in total exits and sales of investments of $347.5 million, as well as unrealized appreciation and other portfolio activity, total investments at fair value decreased by 2.5% or $112 million during the quarter. As Gregory noted, originations this quarter were quite strong, but so were repayments. As of March 31, 2021, we have $44.7 million of undrawn revolver commitments and $160.6 million of undrawn delayed draw term loan commitments. These unfunded commitments are relatively small in the context of our balance sheet and liquidity position. As shown at the bottom of the table, the weighted average spread over LIBOR on new floating rate investments of 5.5% declined closer to pre-COVID levels. Slide 12 shows that our portfolio mix by investment type has remained consistent quarter-over-quarter, with one-stop loans continuing to represent our largest investment category at 81% of the portfolio. Slide 13 shows that GBDC's portfolio remained highly diversified by obligor with an average investment size of less than 40…

Thanks, Jon. Flipping to the next 2 slides, nonaccrual investments as a percentage of total debt investments at cost and fair value remained low and decreased to 1.4% and 1%, respectively, as of March 31. During the quarter, the number of nonaccrual investments decreased to 6 portfolio company investments from 7 portfolio company investments as 1 portfolio company investment returned to accrual status. As Gregory discussed in his opening commentary, as a result of strong portfolio company performance, the percentage of investments rated 3 on our internal performance rating scale decreased to 12% of the portfolio at fair value as of March 31. As a reminder, independent valuation firms value at least 25% of our investments each quarter. Slides 17 and 18 provide further details on our balance sheet and income statement as of and for the 3 months ended March 31. Turning to Slide 19, the graph on the top summarizes our quarterly returns on equity over the past 5 years, and the graph on the bottom summarizes our quarterly distributions as well as our special distributions over that same time frame. Turning to Slide 20, this graph illustrates our long history of strong shareholder returns since our IPO. Slide 21 summarizes our liquidity and investment capacity as of March 31, which remains strong with over $800 million of capital available through cash, restricted cash and availability in our revolving credit facilities. We also highlight our continued progress during the quarter on optimizing the right-hand side of our balance sheet. Three key highlights. First, on February 11, we closed on a $475 million revolving credit facility with JPMorgan, which matures on February 11, 2026, and has an interest rate that ranges from 1-month LIBOR plus 1.75% to 1-month LIBOR plus 1.875%. Second, On February 24, we issued $400 million of unsecured notes, which bear a fixed interest rate of 2.5% and mature on August 24, 2026. With the completion of our second unsecured debt issuance, our percentage of unsecured debt as a percentage of total debt increased to 38% as of March 31. And finally, on February 23, we decreased the borrowing capacity under our revolving credit facility with Morgan Stanley to $75 million. After the end of the quarter, we further amended this revolving credit facility to, among other things, extend the reinvestment period through April 12, 2024, extend the maturity date to April 12, 2026, and reduce the interest rate on borrowings to 1-month LIBOR plus 2.05% from 1-month LIBOR plus 2.45%. Slide 22 summarizes the terms of our debt capital as of March 31. And last, on Slide 23, we summarize our recent distributions to stockholders. Most recently, our Board declared a quarterly distribution of $0.29 per share payable on June 29 to stockholders of record as of June 11. With that, I'll now turn it back to David for some closing remarks. David?

Thanks, Ross. So to sum up, GBDC had a strong quarter. Adjusted net investment income matched our dividend, realized credit losses were nil, and unrealized gains were substantial, continuing the reversal of unrealized losses that we incurred in the March 31, 2020 quarter. Let's talk about our outlook for the rest of this calendar year, and then we'll take your questions. At the risk of sounding out of character, the headline is that I'm cautiously optimistic. We believe GBDC has 4 powerful tailwinds going into the coming period. One tailwind is GBDC's strong portfolio performance. We've highlighted through today's presentation the positive credit trends that we've seen over the last quarter and the last 12 months. Our pre-COVID underwriting has proved strong, and as a consequence, we won't be distracted in the coming period by needing to play defense on a troubled portfolio. A second tailwind is the economy. Many of the sectors we like to lend to are booming, areas like software and health care and business services. Just look at the record profit growth that we reported in the Q1 Golub Capital Middle Market Report that Gregory referenced. Going forward, the economy is reopening, fiscal stimulus is taking effect, monetary policies remain accommodative. These factors all point to likely continued economic strength for the next several quarters. A third tailwind comes from the strength of the private equity ecosystem in which we operate. The private equity industry has over $1.7 trillion of dry powder. That's according to Preqin data. In the first quarter of 2021, the private equity industry had its strongest ever fundraising quarter. That's according to Private Equity International. So we believe there's a lot of pent-up demand for sponsor-driven middle-market M&A now that COVID uncertainty is abating. And we anticipate that the coming period's likely…

[Operator Instructions] And your first question comes from Fiona O'Shea (sic) [ Finian O'Shea ]with Wells Fargo Securities.

First question, David, on the outlook for origination. Historically, you've been -- the Golub platform has been very active in these very large tranche offerings, some exceeding $2 billion. Those seem to be coming back. But in our observation, contrary to former periods where we'd see them, today, the syndication market appears very high as well. Do you agree with that? Is this -- first, I guess, are these large market opportunities coming back? And second, are they gaining -- do they represent lenders competing more heavily with the syndicated market or the sponsor demand tilted in your favor? I'll stop there.

Thanks, Fin. Good to hear from you. So let me take a step back in answering that question because I think there are a number of trends that are running in different directions. First trend is the development of a large unitranche product that sponsors can use if they want it. I think there's definitely been a marked change over the last couple of years. We've been the leader, as you point out, in providing these large unit tranches. But it's not just us. And I think sponsors increasingly look at the possibility of financing their deals with the large unitranches. One of the options on the menu in a way that even as recently as 3 or 4 years ago wasn't the case. Now under what circumstances do sponsors prefer doing a large unitranche to doing a broadly syndicated first lien, second lien deal? That's a second question. And you're 100% right that when the broadly syndicated markets are hot, that it's possible sometimes to get a combination of pricing or leverage or terms or all 3 that are more attractive in the syndicated market than are possible to get in a private one stop. But even when markets are receptive like they are now, there are often transactions where a private one stop makes more sense, that maybe because the sponsor needs to move more quickly than the syndicated market will permit or needs to arrange a deal with more confidentiality, doesn't want to share information with a lot of market participants. Or it's a situation in which the company is going to be doing serial acquisitions, and we're growing -- scaling up the company, it's going to be easier using a one-stop capital structure as opposed to a more complicated multilayer capital structure. So my view is there's a secular trend toward increased market share for larger one-stops that, that's going to continue. There will be ups and downs in that secular trend that will be driven by -- where we -- what we're seeing in the M&A market and what we're seeing in the broadly syndicated market. I think right now, to your point, we're seeing a particularly robust syndicated market, and it's harder for private lenders to compete with than during periods when those markets are choppy. One thing I think we can all be certain of, which is that choppy markets will return at some point and one has to look at these trends over an extended period of time. Makes sense?

Yes. No, absolutely. It's very helpful. And I'll just do a follow on your economic commentary at the end on the item of inflation, potentially labor inflation. We are seeing, on the higher level, more viewpoints that suggest that, that's a potential concern. Do you see anything in your portfolio of companies that are more labor-intensive, perhaps, restaurants, so forth? Any indications of emerging pressure on that front?

I'm seeing trends in our portfolio that are reflective of what we're all reading about in the front pages of the financial press, which is that it's increasingly challenging in many areas of the country to hire. And I think that can be a good thing or a bad thing depending on how one looks at it. I think the good aspect of it is that it's leading to some higher wages in some areas, which, over the course of the last 2 decades, have seen stagnant wages, and that's probably a good thing. It's a bad thing if this becomes part of accelerating inflationary expectations, which then drives inflationary expectations into other areas. I think it's going to be very interesting to watch the Bureau of Labor Statistics data over the course of the coming months. And tomorrow actually is the next release. And one of the pieces of data I like to look at, I think is really interesting, is they release a month-over-month version of inflation in addition to their annual version. And if you look at the recent month-over-month data, it's been accelerating. And so I'm very interested to see whether we're going to see a continuation of that acceleration or whether we're going to see a stabilization.

Interesting. And we'll check that out tomorrow. Congrats on the quarter.

Thanks, Fin.

Your next question comes from Ryan Lynch with KBW.

I wanted to -- I had a couple of questions on kind of your thoughts during some of the -- during your underwriting process for a couple of different themes. So you guys are obviously a big lender in the software space. And it seems that, that annual recurring revenue lending is becoming much more and more prevalent. It seems like that's even accelerated kind of more during COVID and even now kind of as we're recovering coming out of COVID. So just can you talk about -- from a higher level, how do you think about lending based on ARR versus cash flow for some of these software names or other recurring revenue names?

Sure. So let me provide some context first, just for those who perhaps aren't so familiar with what we're talking about. Golub Capital has been a leader in providing financing to the sponsor-backed buyouts of software companies for many, many years, more than a decade. And about 8 years ago, in addition to lending to more mature software companies that are generating significant cash flows, we began lending to companies that were at an earlier stage. We refer to these as recurring revenue loans. And these are companies that have a proven Software-as-a-Service model. They've got a great product. They've got loyal customers. They've got significant recurring revenues that are growing rapidly. Their clients are renewing their business with them at high rates. But in part because these companies are growing rapidly and are investing a lot in sales and marketing, they're either not highly profitable. In some cases, they're not profitable at all. And so traditional credit metrics don't look the same with these companies as those same credit metrics look like with the more mature software companies. We were a pioneer in identifying this recurring revenue loan niche as being an attractive niche. We've been very active in it, Ryan, as you point out. Over the last 8 years, we've had virtually no losses in this space. It's been a very successful space for Golub Capital. As we look at those loans, the key underwriting criteria boil down to whether we believe there'd be a strategic buyer who would want to buy the company at a price that would be more than sufficient to get us out if the growth projections of the company were not fulfilled. If something happened that caused the company's business plan to increase revenues at a rapid rate not to be sustainable, we want to make sure there's an appropriate second way out for us so that we are not going to be subjected to a meaningful credit loss. This is tricky because you're talking about companies that are not highly profitable, that are earlier stage in their development. And I think it requires enormous amounts of expertise, underwriting expertise, industry expertise and underwriting skill. I think it's something we're very good at. I don't think that it's inappropriate. I think it is appropriate that there have been some commentators around saying that there's some people who are active in this space who maybe don't have the level of expertise to be as active as they currently seem to be. This is not the easiest to learn kind of lending that there is. This is tricky stuff.

That's really helpful color on kind of your overall thought process and your history in that area. Kind of on that same sort of topic though, obviously, there were certain businesses that were significantly impacted on the negative side for COVID. And those businesses, if they've survived, are probably going to have some pretty major tailwinds as the economy reopens. Conversely, in some of these software needs, potentially, a lot of the growth for adoption as the economy or a lot of these businesses have been digitalized and have been kind of work from home, so some of that growth or adoption might have been accelerated or pulled forward during COVID, and there might not be the same sort of tailwinds going forward. So how are you guys thinking about that and taking that into your underwriting process as you guys look at more deals in the software space kind of at this point in time with hopefully the economy reopening and some of those acceleration of some of those trends may be fading?

Yes. I guess I'm not a big believer in your premise. I think in many parts of the software -- look, every software company has got to be looked at individually. But what we've seen in many parts of our software universe is that there were COVID impacts. Not to say there wasn't still revenue growth. But the pace of revenue growth would have been higher if the sales force had been able to travel and meet in person with customers and push along the sales pipeline in the traditional way. So if your premise was right, I think we'd be seeing -- right now, we'd be seeing a notable decline in the growth rate of software companies generally. And if I harken back to the Golub Capital Middle Market Index Report that Gregory alluded to in our opening remarks, that's not what the numbers show. The numbers show continued very high revenue growth for software companies, and my bet is that, that's going to continue.

Okay. That's fair enough. Just one last one, if I can, kind of switching gears to your capital structure. First, congrats on the -- your second unsecured debt issuance. That was a very attractive rate. And kind of on that point, when you guys were initially talking about layering on some unsecured debt, I kind of got the impression, and obviously, correct me if I'm wrong, that you guys were going to maybe have 1/3 or so percent of your liability structure in unsecured notes. With this most recent rate of 2.5%, of course, that rate can always move depending on the market terms, and of course, you want to ladder out your maturities for that unsecured debt. Does that change though, that 2.5% rate, is that -- where you guys issued your last bond, does that change kind of the way you guys are thinking about layering on unsecured debt as a percentage of your liability structure?

It's a great question, Ryan. And I think we always think about the debt structure in the same way, which is it's a balancing of multiple goals. Your point, if I'm understanding you right, is 2.5%, that's really low, and it's particularly low by historical standards for unsecured debt. Would that drive us toward potentially increasing the proportion of unsecured in our stack. And the answer is, yes, subject to other goals, too, including, as you point out, laddering maturities, and also subject to our needing incremental capital. Right now, if you look at our right-hand side of the balance sheet, we've got an enormous amount of unused capacity with almost none of the JPMorgan line drawn. So we certainly want to be careful not to take on incremental unsecured that we don't need. But in the long run, if unsecured is as inexpensive as it is now, I think that does change the calculus for the proportion of the capital structure that it may make sense to have an unsecured.

And your next question comes from Robert Dodd with Raymond James.

Congratulations on the quarter, and the portfolio looks in really good shape. So on one of the comments you made, David, I mean, the liquid markets are hot. And there is a concern that I think you have, not so much about the spreads, they're going to do what they do, but the terms. If you were to -- the terms and structures, if you were to look at things that, say, coming into your pipeline today versus maybe were coming in, in January, has the expectation from the borrower or the hope maybe from the borrower shifted even over that time frame on the structure side, let's say, the pricing? I mean, are people just asking for more and more? And can we expect that the structural protections to maybe weaken a little bit as we go forward from here?

So I think of these trends more broadly, Robert, is are we in a borrower-friendly period or a lender-friendly period? And when you're in one or the other, things tend to keep moving in that direction until there's a turnabout. So since I would say June of 2020, we've been on a borrower-friendly trend. And I think over successive months and quarters since June of 2020, I would say yes to your question. I would say that there's been movement that's been in favor of borrowers. And that's been true in all 3 of pricing, meaning spreads; terms, meaning documentation terms and covenants; and levels of leverage. All 3. Now in liquid markets, those changes have been more pronounced, more significant than they've been in private markets. But I think we're seeing it in private markets as well. It all goes back to that same phrase I repeat like a mantra. We're insulated but not immune in the middle market from what's happening in broader credit markets.

Understood. And another one, if I can. So -- I mean, obviously, when you look -- the BSL market doesn't have delayed draw term loans, for example. It's one of the advantages of doing some of these mega tranches. But when -- the incumbent borrowers that you've got in your portfolios, are they -- is there any increase in reaching out hope, beginning the process of maybe adding or increasing DDTL opportunities if the M&A market looks pretty hot? Are the existing borrowers looking to maybe expand more into DDTL? And that was something obviously a year ago who was trying to reduce. But is that -- and if that's the case, I mean, does that add extra incumbency protection? Because, obviously, that's something potentially you can do but the BSL market probably isn't going to offer people.

So DDTLs are definitely a tool that some sponsors like to use, especially if they're doing buy-and-build strategies. And it is -- you're correct that it's easier to do it in private deals. It is possible to do it in a syndicated deal. There are syndicated deals that have DDTLs, but it is easier to do in private deals. And it's less expensive to do from an issuer standpoint in private deals. A very significant chunk of the business that we do with existing companies in our portfolio comes in the form of acquisition financing, and that often is DDTLs. Not always. Sometimes it's some incremental term loan and some DDTL at the same time. Sometimes it's only incremental term loan. But I think a point you were making is really important, which is in any of these scenarios, being the incumbent vendor, being the incumbent lead is hugely valuable because you're in the pole position. You're the go-to lender for incremental needs, absent there being some really compelling reason to do a global refinancing, which is distracting and expensive.

I would now like to turn the call back over to David Golub for closing remarks.

Thank you, Brenda. I appreciate everyone joining us today. Thanks for your questions. Thanks for listening. And as always, if you have any questions over the course of the coming quarter, please feel free to reach out. We look forward to talking to you again next quarter.

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.