Goldman Sachs BDC, Inc. (GSBD) Q2 2017 Earnings Report, Transcript and Summary

Good morning. This is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second Quarter 2017 Earnings Conference Call. Please note that our participants will be in a listen-only mode until the end of the call when we’ll open up the line for questions. [Operator Instructions] I will now turn the call over to Ms. Katherine Schneider, Head of Investor Relations at Goldman Sachs BDC. Katherine, you may begin your conference.

Thanks, Dennis. Good morning, everyone. Before we begin today’s call, I would like to remind our listeners that today’s remarks may include forward-looking statements. These statements represent the company’s belief regarding future events that, by their nature, are uncertain and outside of the company’s control. The company’s actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company’s SEC filing. This audio cast is copyright material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Yesterday, after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com, under the Investor Resources section. These documents should be reviewed in conjunction with the company’s Form 10-Q, which was filed yesterday with the SEC. This conference call today is being recorded August 4, 2017, for replay purposes. So with that, I’ll turn the call over to Brendan McGovern, Chief Executive Officer of Goldman Sachs BDC.

Great. Thank you, Katherine. Good morning, everyone, and thank you for joining us for our second quarter earnings conference call. In terms of the format for the call, I’ll start by providing an overview of our second quarter results as well as key highlights for the quarter. I’ll then turn the call over to Jon Yoder, to discuss our investment activity and portfolio metrics. Jonathan Lamm, our CFO, will discuss our financial results in greater detail. And finally, I’ll conclude with some closing remarks before opening up the line for Q&A. So with that, let’s begin. We are pleased to report a strong quarter for our shareholders. Net investment income per share was $0.64 in Q2 versus $0.49 per share in Q1, an increase of over 30%. Our net asset value per share was steady quarter-over-quarter, ending at $18.23, as compared to $18.26 for Q1. For the first half of 2017, our net investment income produced a 12.5% annualized yield on average net assets and covered our dividend by 126%. As we announced after close yesterday, our board declared a $0.45 per share dividend, payable to shareholders of record as of September 29. Our net investment income has exceeded our dividend every quarter for the past two years. During the quarter, we completed an equity offering of 3.7 million shares, resulting in net proceeds of $80 million for the company. This was the first equity offering for the company since the March 2015 IPO, reflecting our judicious approach to new capital formation. Prior to taking in new equity, we consider whether an offering will be accretive to our shareholders’ net asset value, inclusive of operating cost; whether we have an opportunity to deploy the capital into attractive investments; and what the impact of the offering would be on our leverage ratio, inclusive of anticipated investment activity. We are pleased that the Q2 offering hit the mark on all these fronts. Not only was the offering accretive, but also it provided the company with necessary capital to pursue our strategy. Note that despite the deleveraging effect of the equity offering and the elevated prepayments we experienced during the quarter, average debt-to-equity was 0.7x, which was unchanged sequentially from Q1, and at the high end of our 0.5x to 0.75x target range. This active balance sheet management helped to contribute to the strong net investment income experienced during the quarter, as we maintained our leverage profile. Furthermore, we exited the quarter at the low end of our target leverage range, and now have ample capital to continue to execute on our investment strategy. Moving on to investment performance and credit quality. Overall, credit quality was stable. The modest but steady growth of the U.S. economy continues to provide an attractive backdrop for our portfolio of primarily U.S. domiciled middle market companies. Year-to-date, our portfolio companies have grown revenue earnings at a healthy rate. In addition, we worked very hard this quarter to optimize the outcome of the investments we had on nonaccrual at the end of last quarter, mainly Iracore and Washington Inventory Systems or WIS. We discussed Iracore at some length earlier this year, on our prior quarter’s call. But to refresh your memory, we’re able to restructure that investment into an equity position and a performing term loan. Regarding WIS, we spent considerable time in Q2, evaluating opportunity to make a new investment in the company as part of a restructuring transaction. However, after careful consideration, we have decided that the most prudent course of action for our shareholders was to exit the position, even though that meant recognizing a realized loss. Accordingly, WIS is no longer part of the portfolio. One other investment to note is our loan to Bolttech Mannings, which we marked down by 10 points this quarter, resulting in a $4.2 million of unrealized loss. During the quarter, with the benefit of new capital provided by us and the active sponsor, the company showed progress on new initiatives, resulting in modest revenue gains. However, EBITDA margins remained under pressure, and well below historical averages. Bolttech continues to remain current on its cash interest and principal obligations, we don’t anticipate any change to that status in the near term. Going forward, we will continue to assess the accrual status of the investment on a quarterly basis, taking into consideration all the facts and circumstances of the situation, including expectations for timely collections of principal and interest. In totality at quarter end, our investments on nonaccrual represented just 0.2% and 0.7% of the total investments at fair value and costs respectively. With that, let me turn it over to Jon Yoder.

Thanks, Brendan. We continued to see relatively robust levels of transaction activity this quarter, as many business owners looked to sell and take advantage of comparatively high valuation multiples that are available on the market right now. This activity provided us both with the opportunity to deploy capital into new deals as well as the opportunity to earn fees and accelerated OID from prepayments. As Brendan mentioned, we are pleased with our origination activity during the second quarter. We had new investment commitments and fundings of $124 million, and $120.3 million respectively, including $2.1 million of net funding activity of previously unfunded commitments and an additional $3.4 million investment in the Senior Credit Fund. New investment commitments were across six new portfolio companies and two existing portfolio companies. Sales and repayment activity totaled $160.4 million, driven primarily by full repayments from three portfolio companies. The full repayments were from our $69 million first lien investment in Data Driven Delivery System, our $51 million second lien investment in DiversiTech, and our $25 million first lien last-out unitranche investment in Integrated Practice Solutions. Given the spread compression that has occurred in broadly syndicated loan markets since the beginning of the year, one question that we know is on many investors’ minds is whether the yields on loans originated today can meet the yields on loans originated in past years, without moving more junior in the capital structure or stretching on credit quality. So starting with yield. During the quarter, the yield on our new debt originations, including our additional investments in the Senior Credit Fund, was 10.1%, which is broadly in line with our existing portfolio, which began the quarter at 10.5%. Regarding placement in the capital structure, the percentage of new originations in traditional first lien loans this quarter was actually a little higher than the percentage of first lien loans that we had in our existing portfolio. And finally, while evaluating credit quality is of course a matter of judgment and opinion, we believe that the quality of the companies we added to our portfolio this quarter is very consistent with our historical standards. We attribute this success to a continued focus on the heart of the middle market, where we face less competition from broadly syndicated market participants. We also attribute it to strong relationships with highly successful sponsors, and a thoughtful approach to ensuring that our capital base does not outgrow our attractive set of opportunities. An additional point worth noting, is that one of our lowest yielding investment was repaid this quarter, namely our loan to Data Driven Delivery Systems. As a result, our yield on new originations was higher than the yield on debt investments that were sold or repaid during the quarter, and this is definitely a positive for the income potential of the company moving forward. As of June 30, total investments in our portfolio were $1,112,000,000 at fair value, comprised of 88.8% senior secured loans, including 32.7% in first lien, 27.6% in first lien last out unitranche, and 28.5% in second lien debt as well as 30 basis points in unsecured debt, 2.4% in preferred and common stock, and the 8.5% of our assets that are in the Senior Credit Fund. We also had $14.4 million of unfunded commitments as of June 30, bringing total investments and commitments to $1,126,000,000. We’re happy that the portfolio continues to be well-diversified, with investments in 45 portfolio companies operating across 27 different industries, with no major industry concentration. Turning to overall portfolio yield and credit quality during the quarter. The weighted average yield of our investment – of our total investment portfolio at cost was up modestly during the quarter, at 10.8% versus 10.5% in the prior quarter. This increase was mostly driven by a rise in LIBOR during the quarter, but also resulted from having a higher yield on new originations that are on sales or in repayments, as I mentioned earlier. The weighted average net debt to EBITDA of the companies in our portfolio at quarter end was 5x versus 4.6x the prior quarter. While the majority of our existing portfolio companies delevered quarter-over-quarter, this increase is attributable in part to the new origination activity, and in part to leveraging activity driven by a small number of names in the portfolio. The weighted average interest coverage of the companies in our investment portfolio at quarter end was relatively unchanged, at 2.6x versus 2.7x from the prior quarter. Now turning to the Senior Credit Fund. As Brendan mentioned in his earlier remarks, we’ve been very pleased with the continued growth and performance of this investment, where we have earned a 14% return on our invested capital over the trailing 12 months. We increased the size of the company’s investment in the Senior Credit Fund by 4% during the quarter, and by 22% year-to-date in 2017. Our investment in the Senior Credit Fund represents 8.5% of the company’s total investment portfolio, and is our largest single investment. During the quarter, we and our partner originated $65 million of investments for the fund. It was in three new companies and two existing portfolio companies, which brought the total size of the investment portfolio and commitments to $514.9 million. All of these new investments were in first lien senior secured floating rate loans with interest rate floors. The Senior Credit Fund had sales and repayments of $79.4 million, resulting in a modest net portfolio – a modest net portfolio decrease of $18.4 million during the quarter. We continue to take a highly disciplined approach to building and curating the Senior Credit Fund’s portfolio. And as a reminder, we look at both directly originated and syndicated opportunities for the Senior Credit Fund’s portfolio. In recent quarters, as syndicated markets have experienced spread compression, we have focused much more on directly originated transactions. As a result, we’ve been able to maintain yields on new investments that are consistent with the yields of the existing portfolio. During the six months ended June 30, the weighted average yield on new investments in the Senior Credit Fund was 7.1%, while the yield on investments repaid was 6.5%. The weighted average yield on the total investment portfolio has increased from 6.9% to 7.2% since year-end. This increase is, again, a function primarily of higher LIBOR and higher yields on new originations than repayments. Consistent with prior quarters, first lien loans continue to comprise 97% of the Senior Credit Fund. And again, the Senior Credit Fund remains well diversified with investments in 35 portfolio companies operating across 20 different industries. I’ll now turn the call over to Jonathan to walk through our financial results.

Thanks, Jon. Continuing with our balance sheet, we ended the second quarter of 2017 with total portfolio investments at fair value of $1,112,000,000, outstanding debt of $412 million and net assets of $731 million. As Brendan mentioned earlier in the call, we issued 3.7 million shares during the second quarter, which resulted in total net proceeds from the offering of $80 million. Our net investment income per share was $0.64 as compared to $0.49 in the prior quarter. Earnings per share was $0.12 as compared to $0.40 in the prior quarter. During the quarter, our average debt-to-equity ratio was 0.7x, which was consistent with the previous quarter. We ended the second quarter with a debt-to-equity ratio of 0.56x, down from 0.76x at the end of Q1, as a result of the equity offering and prepayment activity during the quarter. If any leverage ratio at quarter end was within our target leverage ratio of 0.5x to 0.75x, and provides us with runway to continue to deploy capital into new income-producing investments. Turning to the income statement. Our total investment income for the second quarter was $36 million, up from $32.2 million last quarter. The increase quarter-over-quarter was primarily driven by an increase in interest income, including prepayment-related income and an increase in other income. Total expenses before taxes were $11.6 million for the second quarter, as compared to $13.9 million in the prior quarter. Expenses were down quarter-over-quarter, primarily driven by a decrease in incentive fees, which was partially offset by an increase in interest and credit facility expenses. As we have discussed in prior quarters, incentive fees may vary quarter-to-quarter as we net our capital losses, whether realized or unrealized, against preincentive fee net investment income in the calculation. We believe this feature provides the proper alignment of incentive of – as the fee is based on total return. We ended the quarter with net asset value per share at $18.23, down $0.03 from the prior quarter, driven by realized and unrealized appreciation on certain investments, and partially offset by the accretion created from our offerings and net investment income that exceeded our dividend. Our supplemental earnings presentation provides a NAV bridge to walk you through these changes. Over the trailing two years, we have consistently outearned our dividend each quarter on a net investment income basis. As a result of this, the company had $33.3 million in accumulated undistributed net investment income at quarter end. This equates to $0.83 per share on current shares outstanding. We believe that this is a testament to the strong earnings power of our portfolio as well as to our incentive fee structure. With that, I will turn it back to Brendan.

Thanks, Jonathan. This quarter was highlighted by a strong net investment income production and a stable NAV. The strong prepayment-related income experienced this quarter is a solid reflection of our platform’s ability to originate proprietary loans with attractive structures that protect investors during periods of active refinancings. Furthermore, notwithstanding the competitive environment, we successfully deployed capital to loans with yields that exceeded the loans that yield on the loans that were repaid, which is a good outcome for our shareholders. As we look ahead, we find ourselves in a position of strength, with a strong capital base to pursue new investment opportunities. As always, we thank you for your continued support and trust in managing your capital. And now, Dennis, please open up the line for questions.

[Operator Instructions] And your first question is from the line of Jonathan Bock with Wells Fargo Securities. Please go ahead. Finian O’Shea: Hi, guys, Finian O’Shea on for Jonathan this morning, thanks for having us. Just a couple of questions, first, I was going to ask about prepayments, which were an excellent driver this quarter. In most BDCs you will see the portfolio marked as a premium to par, which would suggest impending call protection. However, understanding that on year-end you tend to structure more OID instead of call protection? On that aspect, we do see a lot of loans priced well above cost, so if you can give any color to us as to how much, sort of, spread compression this indicates versus pending repayments?

So Finian, maybe I’ll – it’s Brendan here, thanks for the call. I’ll take the first part, and I’ll turn it over to Jonathan Lamm to give some attribution. Just with respect to your opening comments, the loans that we’ve structured generally benefit from both OID as well as call protection. There’s obviously, I would say, a reasonable amount of variability in the call structures that ultimately do get executed and negotiated in those transactions. And obviously, whether or not you do experience those, that call protection is typically a function of the duration of the loan. So oftentimes, call production will roll down pursuant to a schedule. So you might get 103 in the first year, 102, 101 in subsequent years, sometimes it might start at 102. Sometimes you actually may get the benefit of a non-call period for some period of time as well. And so in addition to that, we’re typically able to also negotiate for significant fees that are capitalized as OID into the cost basis of the investment. So if you look at the story for this quarter, the prepayment-related income was a combination of both, some prepayment fees. So in other words, premiums to par that were realized, as well as the acceleration of the accretion of that amortization of the OID. We’re happy to walk through that in a bit more detail. But by and large, I think when you look at the company, when you look at the portfolio, we are often able to have opportunities to earn that accelerated income on both ends of that spectrum.

And to that end, Fin, this quarter close to 90% of the total prepayment related income was driven by accelerated accretion, with the remainder in prepayment income. Just as a comparative point last quarter, 2/3 of that prepayment-related income was driven by prepayment fees, and a little bit less so in accelerated accretion. So you’ll see that those numbers tend to move, but we have the ability and can earn over across both of those categories.

And one other thing I’d point out, Fin, is with respect to marks, I think that was part of your commentary as well. Even in situations where we do have call protection, it’s relatively unusual for us to mark loans significantly above par. There’s typically facts and circumstances that may drive that. So typically, if we’re aware of a call that has happened or is likely to happen, you’re likely to see a bump in the mark in excess of that. But we’re generally a bit more on the conservative side with respect to marking it at a premium-to-par in expectation of a call, based on some shorter duration opportunity. Finian O’Shea: Very well, that helps. And then just one more, National Spine and Pain – Pain and Spine Center, sorry. Noticed that GSBD received a slightly larger allocation than the middle market credit fund. And given that’s just starting, I imagine a lot of capital is available to be drawn in. How much was – is that the – were those amounts close or you’re slightly larger on the GSBD side, because of diversification limits on the MMCF, or was it...

Yes, just I think for the benefit of others who may not be aware of what you’re referring to. So we’ve talked about this on calls past, we have raised additional capital away from Goldman Sachs BDC in the form of two private BDCs. They’re both public filers, this is all public information that’s out there. We also did receive exemptive relief from the SEC, to coinvest across those three different vehicles. That was two years of discussions with the SEC and an outcome that we think is quite favorable to the shareholders of GS BDC. So for us, we’re in a very strong position from a capital perspective to face off to the market with a bigger pool of capital, and I think you see that driving through the originations this quarter. We’re able to allocate those loans across those two other pockets of capital as well. And generally speaking, as you might be aware, Finn, when you do get that relief from the SEC, there is a lot of focus on those allocations, the appropriateness of those allocations. For example, each of the independent boards of those BDCs look at and sign off on those allocations. So generally speaking, what we do is look at the total capital available in each of those vehicles, and we’ll do a pro rata allocation based on that capital within those vehicles. And so, again, all of this is public information. I think as we look at GS BDC, one very big benefit is, again, access to that scale pool of capital; it allows us to lead transactions on behalf of our three different vehicles; and at the same time, build a more diversified portfolio. And so again, when you look at originations this quarter, very well diversified. I think we had six new portfolio investments, portfolio companies, two follow-ons, if I’m getting those numbers correctly. So we’re actually quite pleased to be able to see those opportunities for BDC. Finian O’Shea: Thank you so much guys.

Thank you.

Your next question is from the line of Leslie Vandegrift with Raymond James. Please go ahead.

Hi, good morning and thank you for taking my questions.

Hey Leslie, how are you?

Well, thank you. Just an add-on to the question that Fin just asked when you were talking about the private funds. Obviously, you saw the national payments line, hope I didn’t revert it as well there, but with the private fund. But just on outlook for the rest of the year, how quickly are we looking at coinvestments there? And kind of what percentage of originations are we looking over the next two quarters to do there?

So again, and this all publically available information for those two other vehicles. So you can see the total capital in each of those vehicles, and so generally speaking, and looking forward, all the opportunities that come into the platform will be allocated across those three different vehicles. So the factors, that you specifically, for the BDC, obviously we’re endeavoring to maintain a leverage profile in order to produce a very strong net investment income, consistent with what we did this quarter. And so the capital that’s ultimately available in each of those vehicles might vary. But again, our goal and expectation and there’s a lot of oversight that I described, on these allocation proxies and procedures, is to be able to scale up the capital available to the entire platform, which benefits each of the vehicles which we’re allocating that risk to.

Oh, and since right now, the capital is available in all three funds, it seems, is there going to be a focus on ones that are coinvested in each, or are there some investments in your pipeline that you see that might be just appropriate for the public? And so it’ll be a split between them?

No, good question. I’m glad you asked. The way the order works is that any investment that comes in the platform that is suitable for those three different vehicles, so specifically the strategies are directly sourced, directly negotiated middle-market loans. There’s not really a discretion about where we can put them. We don’t just put it into one vehicle versus the other. Part of getting the eventual relief from the SEC is a function of agreeing to be quite thoughtful and considered in those allocations. And again, there’s tremendous oversight as I described, including ultimate sign-off by each of the directors – the Boards of Directors, the independent Boards of Directors, of those vehicles. And so when an opportunity comes into the platform, we look at the capital available to each of those three different vehicles, and we’ll allocate it appropriate based on that capital. And so as we described for the state of play for GS BDC, we were quite pleased that we were able to manage the capital of the company for the quarter. We also did an equity offering. We had very significant originations, as well as prepayments. But we were able to maintain a 0.7x debt-to-equity ratio, an average debt-to-equity ratio, over the course of the quarter, that was basically flat from the prior quarter. However, given the timing of repayments, which were mostly skewed towards the back end, we exited the quarter at 0.57x, which is still within our target leverage ratio, but it was at the low end of that ratio. And so – 0.56x, excuse me. And so we sit here today with ample capital in each of the three vehicles, so our expectation would be consistent with how we allocated deals this quarter in Q2. For Q3, each of the three vehicles would participate, based on their capitalization.

Okay, perfect. And then on prepayment activity, just in general, I know it was higher this quarter as well – and true for the entire space, pretty much. Have you seen a waiting – an expectation for overall prepayments for the second quarter? And is it more towards one end on some three year old vintage versus – we’ve seen some very early prepayments at other businesses. So I didn’t know if you guys had an outlook for your portfolio companies there?

So Leslie, it’s Jon. First of all, predicting prepayments is always a challenging business because some things you think will get prepaid don’t get prepaid, and the ones you don’t think, do. But that being said, we don’t – we’re not necessarily projecting particularly elevated prepayment levels in the coming – prefer, at least as far as we can see, which is call it a quarter or so, which isn’t to say we’ll have none. I’m sure we will have some. But I don’t think that we’re expecting a massive wave of prepayments over the next quarter or so. And in terms of what drives prepayments, you’re right, we’ve seen some activity where hold periods have been very short. I would characterize those situations for the most part as being ones where I think going into it, the participants knew that the likelihood was that it was going to be quite a short hold period, because there was a transaction that perhaps was getting done quickly and needed a quick commitment, but they knew that they would likely get refinanced out once things settled down. We don’t have names like that in our portfolio today, where we’re expecting a very short duration. So to the extent that we get prepayments, I would say it’s a – I would say that – I wouldn’t give you a prediction that it would necessarily be an older or a newer vintage, it could come from either. But again, not expecting a huge wave of prepayments necessarily.

The only thing I would add, Leslie. So this was the biggest prepayment quarter that we’ve had in the company’s relatively short, short history, so certainly an elevated period. I think the environment more broadly is contributing to that, there’s certainly a robust environment. Valuation multiples, broadly speaking, are high. I’d say, oftentimes an impetus for folks to sell that [because of] activity. And so we would expect that there to be a reasonable amount of repayments and prepayments in the current quarter. As Jon very aptly described, always hard to predict those with certainty. But again, our goal is to make sure that we can manage the balance sheet appropriately to ensure that we have the proper capitalization to produce the income that we have. We feel very good about our origination pipeline as well. And so sitting here today, we feel quite well positioned to execute in the context of the current market environment.

Okay, perfect. And then one last little modeling question. Spillover as of the end of June 30?

It was $0.83.

Perfect. Thank you. I appreciate it.

Your next question is from the line of Douglas Mewhirter with SunTrust. Please go ahead.

Good morning, guys. This is Michael Ramirez in for Doug.

Good morning.

Thanks for taking our questions today. Just a few. Let’s see here, regarding the pipeline for originations, do you feel comfortable with prospects? And can you please tell us what you anticipate for leverage by at least the remainder of the year?

Yes. So again, our origination pipeline we feel very good about. I mean, there certainly are, as I mentioned in our prepared remarks, it’s a very robust transaction environment, a lot of M&A transactions going on, particularly in the sponsored world. As Brendan mentioned in response to the last question, we feel good about the ability to continue to manage our balance sheet and keep within our target leverage ratio, given our outlook on where our pipeline and what our pipeline looks like relative to our expected repayments. It’s hard to pay a specific point of our leverage ratio and say we think it’s going to be this. But I would tell you, broadly, we’re comfortable with the idea that we will be able to stay within our target, at least in the near term here, where we can see.

Okay, great. And then, I guess we noticed the majority of originations, close to like 60%, were first lien, so are you guys becoming more conservative or is this what the market is really presenting to you?

There is no sort of, what I’ll say called top-down thesis that we want to be more in first lien or more in second lien, or anything like that. It’s much more the approach we’ve always taken, the approach we will continue to take is to evaluate every opportunity on its own merits, and try to pick the place within the capital structure where we see the best risk-adjusted returns. So there sometimes that means being in first lien, sometimes that means being in unitranche, sometimes that means being in second lien. And so I think you will continue to see that from us. You’re right, quarter-over-quarter sometimes we have a higher, more elevated first lien, sometimes we may have more elevated unitranche or second lien, but there is no top-down thesis. I think – our belief is we’re not economists that are trying to call points in the credit cycle or points in the macroeconomic cycle, we are fundamental credit investors that look at companies. We always assume that things are going to get worse, not better. And so starting with that base assumption, we look and see, well, in light of that, what is the best risk-adjusted reward in the capital stack, and that leads us to choose our point.

Okay, great. And then just lastly, you mentioned WIS, but could you help us better understand what’s behind your unrealized gains/losses line?

Sure. So WIS, we talked about this again, a bit in the prepared remarks, this was the thing that we had on nonaccrual status, as of quarter end last quarter. And so throughout Q2, we spent a lot of time in the quarter working to remediate the situation, optimize the situation. One of the things I alluded to, one thing that we worked on quite significantly was whether or not to make a follow-on investment in that company, in the context of restructuring events. And so ultimately, the decision was to not do that and rather to move off of the position. I think a few things that informed our judgment there, as we’ve talked about, the company did have some declining fundamental trends. It’s obviously exposed to the retail sector, which has been under pressure, I think, as folks are broadly aware of. And think the other consideration was that new investment would have been in the form of noninterest-bearing investments. So we reunderwrote the situation, we underwrote the opportunity, keeping in mind really what our mandate is, on behalf of our shareholders, who we think really enjoy the stable cash flow that we produce, and the dividend that we have. So ultimately, we chose to move off of the investment. And so the net – Jonathan, I don’t know if you want to do the numbers there.

On the unrealized losses in the quarter, in particular the names that drove that were Kawa, Bolttech and then Data Driven. As we mentioned, Data Driven was repaid in the quarter. So in that particular situation, you had the portfolio or the investment was marked up and you saw a reversal of the previous unrealized gains going into an unrealized loss category as we took in the accelerated accretion into investment income.

Okay, great. Thanks for taking our question.

Thank you.

Thank you.

[Operator Instructions] Your next question is from the line of Christopher Testa with National Securities. Please go ahead.

Good morning. Thanks for taking my questions. Just looking at the yields by cost are up quarter-over-quarter on the first and second lien, and kind of flat on unitranche, despite the heavy spread compression. I know you had mentioned, obviously, LIBOR going up is benefiting this, but are you also getting a tailwind from this from the exemptive relief and utilizing this and taking larger bite sizes, is that contributing? Just wondering, just some more color on what else is contributing to you getting kind of stable to growing yields in this environment?

I’ll take a stab at that. I mentioned a few things in the prepared remarks, but I definitely can expand on it. I think the key to be – in our view, the key to being able to, as best you can, to insulate yourself from spread compression is to make sure that your capital base doesn’t outgrow your opportunity set. And so what we’ve tried to do, and really since the inception of our platform and certainly since the inception of our BDCs, is to be thoughtful about how much capital we take on and in what format. So Brendan – there was some commentary earlier when we talked about the three private vehicles that we have, those vehicles are structured as funds that we can draw down capital over time. So again, we can draw down capital only if and when we find good, attractive opportunities and we’re not, sort of, forced to deploy capital into a compressing spread market, where there are fewer and fewer opportunities. So I think that’s the most important driver of our success, as I say, is matching our capital base to our opportunity set and making sure that the capital doesn’t outgrow that. And then in terms of your other questions, the other part of your question, I guess I would say is, I wouldn’t – while we feel good about the pipeline and we’re not predicting or expecting any material changes to the yields on our new originations, I think it’s also fair to say that, that can vary quarter-over-quarter because when you’re only doing five, six deals a quarter, obviously, one or two deals can drive your average in that quarter, the yield in that quarter, meaningfully one way or the another. So we’re looking at one quarter as always difficult in terms of driving trends and so I definitely would encourage you not to do that. But what I will say, and to repeat myself, is we do feel good about the pipeline and our ability to continue to generate yield consistent with what we’ve done historically.

Okay. That’s good color, I appreciate that. I know you’ve given some brief comments earlier, too, on the portfolio leverage being up to five turns from 4.6x quarter-over-quarter, just wondering if you could provide some more detail there, the new originations having more leverage. Potentially, you had mentioned some other leveraging from other portfolio companies, just wondering if you can go into some more detail there?

Sure, yes. So I think the starting point is that any time you make a new origination, in any environment, that should be if you’ve done your underwriting correctly, the high point in terms of the leverage on that particular borrower, right? You lend somebody 5x, and if you’ve done your underwriting correctly, that should come down immediately thereafter as the company either grows its EBITDA and/or is amortizing – paying down your loans through amortization or cash flow sweeps. So it’s a very natural thing that new companies are going to have higher leverage ratios than companies that are more seasoned in your portfolio. And so certainly, as we mentioned, this quarter we definitely had an elevated level of repayments and so losing some of the more seasoned companies can have an impact on again, the weighted average ratio across the portfolio. So I think that’s the most important thing to keep in mind. The second thing in terms of color I would add, is that I think it’s been noted by a number of participants, market participants, but we certainly are seeing it, the valuations of privately held middle market companies is quite robust and healthy right now. And we think that’s great because that’s our collateral, that’s the collateral on the backside. And so we view that as a very positive sign and, furthermore, what that means is that the loans to value, notwithstanding that on a portfolio basis the debt-to-EBITDA ratio was up a little bit, the loans-to-value we think are significantly down, given that healthy robust environment for our collateral.

Got it, that’s great color. And what is the – as of 6/30, the sponsor versus nonsponsor mix on the portfolio?

So in recent quarters, we definitely have seen a lot more activity in the sponsor space than the nonsponsored space. I would say that again, given that there are pretty robust and healthy valuations for private companies, we’re seeing nonsponsored businesses choose to sell earlier in their life cycle and to take on equity capital, which is coming cheaper today than certainly it has in certain periods in the past. So a lot of our new activity had been sponsor driven, it’s brought down the overall amount of our portfolio and nonsponsored to, call it, 6th or 7th of the total, something like that. So at the moment we’re a little bit more skewed to sponsored, but those spends can reverse at any time where we can – where the sponsor market becomes less attractive and nonsponsored companies turn to debt providers where they view that as a better cost capital.

How has the sourcing from the private wealth management channel matched up against your expectations?

Generally speaking, it’s matched up pretty well. As I just mentioned in the last quarter or two, our activity’s been sponsor driven. And again, I think that’s just because of the valuations. Oftentimes, we’re seeing companies at earlier stages in their life cycle getting valuation multiples put in front of them by sponsors looking to buy them. And they’re electing to take that versus taking on growth capital from us, so it’s been a little tougher in the last few quarters. That said, we’re still driving a lot of value from those relationships because our ability to know the owners and the management teams of those companies as they are going through sponsor-driven processes, gives us a big leg up as we seek to provide financing as part of that sponsor buyout of that company.

Great. Appreciate it taking my questions.

Your next question is from the line of Derek Hewett with Bank of America. Please go ahead.

Good morning. Most of my questions have been asked and answered, but any update on increasing the size of the capital allocated to the Senior Credit Fund since you’re near the $100 million original commitment at this point?

Sure, Derek. I can take that. You’ll actually see that we put in a short-term extension to continue to invest the capital that we have in the SCF. We give a schedule every quarter that relative to the $100 million that each of the partners has committed, how much of that has been put out? Bylines, we continue to have a good robust access to that capital, all of the repayment activity that we talked about pretty extensively here on this call, is probably even more pronounced in the syndicated market. We’ve actually been taking advantage of the direct-sourcing capabilities of the platform to do more direct deals within our SCF. So we continue to have good access to capital to continue to invest within that strategy, and ultimately our goal and expectation is to increase the capital commitment from our BDC and our partner. And we’re engaged in very constructive dialogue in that regard. So stay tuned for news on that front shortly.

Okay. And then this currently represents about 8% of the portfolio. Over the next couple of years, what is the ideal size for that investment strategy?

Jon already answered the question well early on, around portfolio construction. It’s the same response here, which is we don’t start, Derek, with a top-down approach and say, "Here’s where we want to allocate the capital." You obviously need to be dynamic and responsive to market conditions, and so I think looking out a couple of years is always challenging. That being said, this has obviously been – it is our biggest single investment. It’s been quite, quite successful. It has been extremely stable, from a value perspective. And the income has been quite strong. So in the current environment, our hope and expectation is to continue to grow it. And as described, we’re having constructive dialogue with our partner to get more capital to pursue that. Ultimately, the opportunity set that presents itself is hard to predict, but certainly this is of course a nonqualifying asset so we are constrained to the tune of 30%. But very significant growth from the current 8.5% of the assets that we’ve got today, to that 30% number. And we really don’t see sitting here today, any other non-qualifying investment strategies that we would expect to be pursuing or launching in the short term.

Okay, great. Thank you very much.

Thank you.

At this time there are no further questions, please continue with any closing remarks.

Well, thanks, everybody. We really appreciate your time and attention on a summer Friday. We really appreciate all the robust Q&A as well. If you do have follow-up questions, please feel free to reach out to Katherine Schneider with our Investor Relations team, we’ll be happy to follow-up with more detail. Thank you very much, and have a great day.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. second quarter 2017 earnings conference call. Thank you for your participation. You may now disconnect.