Goldman Sachs BDC, Inc. (GSBD) Q4 2018 Earnings Report, Transcript and Summary

Good morning. This is Ian, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Fourth Quarter 2018 Earnings Conference Call. [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, Ian. 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 beliefs 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 these forward-looking statements as a result of a number of factors, including those described from time to time in the Company's SEC filings. 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 home page 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 filed yesterday with the SEC. This conference call is being recorded today, March 1, 2019 for replay purposes. With that, I'll turn the call over to Brendan McGovern, CEO of Goldman Sachs BDC, Inc.

Great. Thanks, Katherine. Good morning, everyone, and thank you for joining us for our fourth quarter earnings conference call. As usual in terms of the agenda for the call, I'll start by providing overview of our fourth quarter results as well as key highlights for 2018. Jon Yoder who is joining us remotely from San Francisco will discuss our investment activity and portfolio metrics. And Jon Lamm, will discuss our financial results in greater detail. And finally, I'll conclude with some closing remarks before we open the line for Q&A. So with that net investment income per share was $0.56 in Q4 brining net investment income per share for the full year to $2.06 or an 11.4% return on common equity for 2018. Our net investment income covered our dividend by 124% during the quarter and 114% for the full year 2018. Importantly in each fiscal year since our inception in 2012, net investment income has exceeded the dividend reflecting our efforts to produce stable income that supports the distributions that our shareholders' value. To that end, our board declared a $0.45 per share dividend payable to shareholders of record as of March 29, 2019. I'd like to pause and briefly look back over 2018 and reflect on our execution. As you are aware, 2018 was highlighted by the passage of the small business credit availability act, which amended key provisions of the 40 Act and enabled BDCs to increase leverage among other things. We viewed this regulatory change positively as we believe it will commit the Company to pursue a broader range of assets including lower risk, lower yielding, first lien assets while at the same time potentially enhancing returns on equity. After obtaining your approval to permit the Company to pursue an increasing leverage, GSAM implemented a significant base management fee reduction from 1.5% on all assets to 1% on all assets. As a result of this change, we believe the Company’s cost structure is among the lowest in the industry, especially when factoring in the longstanding limiter in our incentive fee structure whereby realized and unrealized losses are netted against income for the purpose of calculating incentive fees. We are gratified that the market has recognized GSAM's differentiated approach and we believe that the comparatively lower cost of capital that has been awarded to the company positions it well to continue to deliver attractive risk adjusted returns. In fact, our increased balance sheet flexibility has already had a meaningful impact on the Company. During the course of 2018, we generally found that investment opportunities in first lien loans were more attractive than those in second lien loans. In the last three quarters of 2018, 83% of the Company's new originations were in first lien loans. We are pleased that the Company was able to pursue these investment opportunities and improve its asset mix and still deliver attractive levels of net investment income. Furthermore, the Company has made progress restructuring it’s Senior Credit Fund joint venture with Cal Regents. Recall that this partnership was set up to enable the Company to gain proprietary exposure to first lien loans and you leverage structure that did not count against the BDC regulatory debt limit. In light of the relaxed limitation on leverage, we believe the utility of this joint venture is diminished. And therefore we in our partner have agreed in principle to dissolve the vehicle. As a result, GSPD will simply take onto its balance sheet, it's half of the assets in the partnership and Cal Regents will retain it's half of the assets. Pro forma for this transaction, which we anticipate will close at or near the end of Q1 firstly, investments would account for 63% of GSPDs assets based on the company’s year-end static investment portfolio. In addition, single name asset diversification will improve as the number of portfolio exposures will increase from 72 to 99 assuming portfolio exposures constant at 12/31. We believe our efforts to move swiftly and decisively following the change in regulation have benefited the Company greatly. Our asset mix has shifted to lower yielding but less risky assets. While net investment income production has remained strong. Furthermore, we believe that by high-grading asset quality, increasing single name diversification and taking steps to simplify our corporate structure with the unwind of our JV partnership, the Company’s funding profile has improved. Going forward we believe access to attractive forms of financing will be a differentiator for BDCs but we remain focused on both the left and the right side of our balance sheet. In 2018, we increase the size of the company’s unsecured 4.5% convertible unsecured notes outstanding to 155 million. And more recently we increased the size of the company’s revolving credit facility to $795 million. We also received an investment grade rating from Fitch in 2018 and we are pleased that this rating was recently affirmed with a stable outlook. Overall 2018 was a very busy year for the Company. And as we look forward we continue to believe that the strong economic environment, particularly here in the U.S. provides a good backdrop to execute our winning strategy. Our overall portfolio company metrics, portfolio company performance has been solid. During the quarter, we did face certain investments in two portfolio companies, NTS Communications and Animal Supply Co on non-accrual status. I'd like to pause on each of these investments to give you transparency to help put these outlier results into context. NTS Communications is a telecom company operating in both CLEC and the fiber network, primarily in West Texas. Our total cash investment in the company including follow-on investments is $50 million. I am pleased to report that in December, 2018 NTS entered into a sale transaction pursuant to which we agreed to receive a cash payment of $56 million for our claim with a potential for that amount to increase under certain circumstances. Including the cash payments we have received light to-date the total cash proceeds on close of the transaction would be approximately $66 million representing a 7% IRR and a greater than 1.3 times multiple on our initial investment. Not withstanding this positive NPV outcome, we concluded that the appropriate accounting treatment was to turn off the income accrual as per our payoff agreement, the full amount of the accrued and picked interest would not be collectible pursuant to its contractual terms. The NTS sale transaction is subject to customary approvals including FCC review and we expect the deal to close during the second quarter ending June 30, 2019. Animal Supply is more fluid situation but there are recent developments that we would like to share. Animal Supply is a nationwide distributor of pet food and supplies. Our investment thesis centered on the Company’s leading industry position and positive industry tailwinds driven by long-term trends driving demand for pet food supplies. During 2018 the Company's performance and profitability declined. We determined that the best course of action was to deleverage the capital structure to better position the company to perform. As of last Friday, we successfully closed restructuring by swapping our debt for equity and providing additional working capital to enable the company to increase fill rates, revenue and EBITDA. We believe that with a clean balance sheet and a more focused management the Company is well positioned to benefit from stable industry trends and consolidation opportunities. We look forward to keeping you updated on Company’s progress. Following the successful Animal Supply restructuring and pro forma for the closing of the pending NTS transactions non-accrual investments represented 0.6% at both fair value and amortized cost. And finally subsequent to quarter-end our board of directors, we knew the Company’s stock repurchase plan for an additional year, which extends the plans to March 18, 2020. Under the plan, the Company may repurchase up to 25 million of its common stock if the market price is below the companies most recently announced NAV per share subject to certain limitations. With that, let me turn it over to Jon Yoder in San Francisco who will discuss our portfolio investment activity and results in the quarter in greater detail.

Great, thank you, Brendan. During the fourth quarter, deal activity in the middle market was relatively muted as a result of increased volatility in the broader credit and equity markets. While the private debt markets are distinct from broadly syndicated loan in high-yield bond markets volatility in the broader credit markets can slow down transaction volumes within our markets. However, we do believe that this disruption can positively impact private credit markets in a number of ways. First, volatility tends to result in credit spread widening, which is good when we're going out and making new loans. Second, when the public markets are disrupted, more borrowers are seeking capital from private lenders like us. This expands our investment universe and gives us increased bargaining power to drive better terms and structures for our investments. As we sit here on the first day of March, the public credit markets have largely recovered from the volatility seen at the end of last year. However, the episode is a good reminder of the value of the BDC structure and the stable capital base it provides to take advantage of opportunities when other investment fund structures are suffering redemptions and are forced to act defensibly. Turning to specific investments for the quarter, new investment commitments and fundings were $154.2 million and $130.2 million, respectively. Regarding placement in the capital structure, as Brendan previewed new originations this quarter were comprised of 79% first lien loans, 4% first lien last-out unitranche, 11% second lien loans, 3% in preferred and common stock and 4% in the Senior Credit Fund. These new investment commitments were across eight new portfolio companies and eight existing portfolio companies. Notwithstanding the metered activity I mentioned during the quarter, which had slowed sponsor activity. We remained active with our family and founder-owned relationships and of our eight new portfolio companies, two of these companies were sourced from a private wealth channel. Sales and repayment activity totaled $52.9 million driven primarily by the full repayments of investments in two portfolio companies, both of which were second lien investments. The weighted average yield of our total debt and income producing investments at cost was 10.9% at the end of the fourth quarter as compared to 11.3% at the end of the third quarter. Regarding portfolio composition, at the end of the year, total investments in our portfolio were $1.375 billion at fair value, comprised of 89.3% senior secured loans including 53% in first lien, 7.8% in first lien last-out unitranche and 28.5% in second lien debt, as well as 0.5% in unsecured debt, 3.2% in preferred and common stock and 7% in the Senior Credit Fund. We also had $96.8 million of unfunded commitments as of December 31, bringing total investments and commitments to $1,472.2 million. As Brendan mentioned earlier in the call, we're pleased with the progress that we've made in increasing the company's single name portfolio diversification. We increased the company's single name portfolio diversity by 9% quarter-over-quarter and 29% year-over-year. As of quarter-end, the company had 136 investments across 72 portfolio companies operating across 33 different industries. So turning to credit quality. The underlying performance of the majority of our portfolio companies was stable quarter-over-quarter. The weighted average net debt-to-EBITDA of the companies in our investment portfolio was 5.6x at quarter-end versus 5.3x at the end of the third quarter. This increase was primarily attributed to our investment in Animal Supply that Brendan described earlier. It also resulted from some new investment commitments on existing portfolio companies that we upsized during the quarter on the back of positive performance, which drove leverage modestly higher. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 2.2x which was unchanged from the prior quarter. The Senior Credit Fund continues to be the company's largest investment at 7% of the total investment portfolio. Over the trailing 12 months. The Senior Credit Fund produced an 11% return on our invested capital. During the quarter, the Senior Credit Fund had new originations of $11.5 million across three existing portfolio companies. Sales and repayments were $48.3 million resulting in a net funded portfolio reduction of $33 million during the quarter. The total size of the portfolio was $451.8 million at quarter-end. As of the end of the fourth quarter, the weighted average yield at costs on investments in the Senior Credit Fund was 7.7% is modestly higher from the prior quarter at 7.5%. First lien loans comprised 96.6% of the total investment portfolio within the Senior Credit Fund and all of our investments are floating rate. The Senior Credit Fund portfolio also remains well diversified with investments in 32 portfolio companies operating across 20 different industries. As Brendan mentioned earlier, we're planning to dissolve the Senior Credit Fund joint venture and we expect to receive half of all assets onto our balance sheet. As a result of this, the company's first lien debt exposure and single name portfolio diversification will meaningfully increase. I'll now turn the call over to Jonathan to walk through our financial results.

Thanks, Jon. We ended the fourth quarter of 2018 with total portfolio investments at fair value of $1,375 million, outstanding debt of $664 million and net assets of $710 million. Our net investment income per share was $0.56 as compared to $0.54 in the prior quarter. Earnings per share were negative $0.03 as compared to $0.47 in the prior quarter, primarily driven by markdowns on investments in the portfolio including Animal Supply as previously discussed. During the quarter, our average debt-to-equity ratio was 0.9x versus 0.7x in the prior quarter. We ended the fourth quarter with a debt-to-equity ratio of 0.94x versus 0.79x at the end of Q3. We were pleased with the gradual growth of our balance sheet this quarter into additional attractive income producing assets. As we have spoken about in prior quarter earnings conference calls, our utilization of higher balance sheet leverage will be dictated by underlying asset selection each quarter. Asset composition in turn will drive our leverage profile. This is a reflection of prudent risk management practices which we believe our core competency of Goldman Sachs. We will seek to maintain a meaningful cushion relative to the regulatory asset coverage requirement as we have done historically. Turning to the income statement. Our total investment income from the third quarter was $36 million, which was down from $38 million last quarter. The decrease quarter-over-quarter was primarily driven by the placement of certain investments on nonaccrual status and partially offset by higher interest income as a result of new income producing assets. Total expenses were $13 million for the fourth quarter as compared to $16 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 other debt expenses. NAV was down quarter-over-quarter as we ended Q4 with net asset value per share at $17.65 versus $18.13 in the prior quarter. The decline in NAV was largely driven by our investment in Animal Supply. Our supplemental earnings presentation provides a map bridge to walk you through the changes from the third quarter to the fourth quarter. The Company had $42.2 million in taxable accumulated undistributed net investment income at quarter-end, resulting from net investment income that has consistently exceeded our dividends. This equates to $1.05 per share on current shares outstanding. As Brendan mentioned earlier in the call financing is a critical component to our framework following the passage of the SBCA Act. As of December 31, 2018, the Company had $850 million of total debt commitments of secured and unsecured debt. This provides the company with total debt-to-equity capacity of up to 1.2x. In February 2019, we increased the size of our revolving credit facility to $795 million, up from $695 million thus providing the company with incremental debt capacity. The Company currently has an investment grade rating from Fitch. We seek to operate in a manner to retain the company's investment grade rating. Our current debt capacity provides the company with sufficient runway to gradually increase our balance sheet over time. That's said as part of our overall financing strategy, we continued to evaluate other sources of debt with a particular emphasis on continuing to diversify our sources of funding. With that, I will turn it back to Brendan.

Great. Thanks, Jonathan. Looking back, 2018 was a year of significant change for the BDC industry. We believe the actions taken to benefit from the changing regulatory backdrop have positioned the company well as we head into 2019. As always, we thank you for the privilege of managing your capital and we look forward to continuing to work hard on your behalf over the remainder of the year. With that, let's open up the line for questions. So go ahead, Ian.

[Operator Instructions] Our first question is from the line of Finian O'Shea from Wells Fargo Securities.

Hi guys. Good morning.

Hey Fin, how are you?

Hey guys, very well. I'll ask the first question on the SLF news. It seems like you guys deliberated this for maybe a couple of quarters and arrived at the conclusion that the utility is diminished. Kind of looking at the asset mix and leverage here, this will bring you up, I think about one to one. And essentially, all else equal the utility was better in the SLF, would given the fee rates. So the question is for risk-adjusted return, what do you then intend to do with your portfolio construct and that new, either 30% or less encumbered asset bucket to drive returns.

So there's a fair bit – in the question Fin, yes maybe just a quick discussion of the decision. As we talked about when we first put that Senior Credit Fund in place, obviously the regulatory backdrop was such that the BDCs were capped at a dollar – debt per dollar of equity. So we view it as an effective way to get exposure, leverage existing origination capabilities of the platform, lower yielding loans that would – the benefit of the off balance sheet leverage that doesn't count against the cap, could produce a nice return. Frankly, it's a little bit of an unnatural way to go about by doing that and trying to get that sort of exposure. So our overall standpoint here is there's really no need to go through the machinations of having that joint venture in place. We can simply do on balance sheet what used to be done within that vehicle. And there's a lot of benefits that derive to the company from doing that. There's diversity that we talked through. But frankly, I'd say the most important benefit, Fin, is clearly in a two to one world, financing is a much bigger contributor of alpha of returns. Having an optimal cost of financing is a huge component to being a good and stable company in this industry. And so from a lender standpoint, bringing the assets on balance sheets really does improve the funding profile of the business. Lenders would much rather look at whole loans on the balance sheet that they can look and feel and touch. Then we asked to leverage an equity investment and they leverage joint venture. So we think this is a dramatic improvement to our funding profile overall, I guess from a technical perspective, yes. This wasn't a vehicle that was not being charge fees now bring those on balance sheet, grosses up for fees. But as you know, Fin, we've really been a leader in the industry in that regard. We've taken a dramatic approach to what the fee structure should look like in the course of an investment portfolio focused on lower yielding assets. While most of the industry has only offered a discount in fees on dollars over the one to one cap. Our discount is from $1.01. And so holistically, if you look at what we're doing here, all that was through the lens of two to one and we think the company ends up in just a much more transparent and better place overall.

And Brendan, if I could just chime in there because I think the other piece, Fin that you asked that was a strategy question around what happens, how do we plan to use the 30% buckets going forward. I think Brendan kind of alluded to this, but under the old sort of leverage cap regime of one to one using that 30% bucket, obviously all BDCs were focused on what they could do to really drive kind of alpha with that 30% bucket. Obviously as were we with by utilizing the Senior Care Fund structure, as we pivot into the two to one world, it seems to us there's less – much less value in the 30% bucket in trying to get alpha from some sort of non-traditional investment strategy. But rather that help us really going to come as Brendan mentioned, by optimizing your balance sheets and making sure that you're getting the best sort of financing structures at the lowest rates and so on. So that's much more of our focus is making sure that the left hand side of our balance sheet supports really good financing on the right hand side of our balance sheet and drives good net interest margins that ultimately produce that returns. And then the final thing I would say just strategically is you've heard us say this before but we believe that the core competency of our team is in underwriting credit. And so we don't want to – we never have thought we would go utilize that 30% bucket for something noncore that's outside of our core competency. And just another good reason why we don't intend to use a 30% bucket for something that we don't feel our team is well suited and has a core competency.

Sure, that’s helpful. Maybe a dialogue and touch, perhaps not 30% “bad assets” but assuming this collapse will be to facilitate, I think as you kind of outlined a more favorable draw on the credit side. You'll then have assets supported by your equity and unsecured debt. And sort of the question is, will we see a bigger second lien composition or other forms of junior?

Brendan, I’m curious to start there too. I mean, I think that what we – the value, the reason why we sought the approval of shareholders to go to the two to one world was really more about flexibility. And so, obviously when you're constrained one to one, that limits the types of assets that you can do that still produce the income that supports the dividend levels that the investors look for in the BDC structure. And so by virtue of going to two to one, that obviously opens up our investment universe quite a bit more. And so I guess what I would say, Fin, is that yes, you're right. And as we talked quite a bit about on the call, we've definitely been very focused on first lien investments. I think that's a function mostly of what we're seeing is the attractive investment opportunities in the market today. That could reverse. It definitely could reverse. We could find ourselves at a point in time, again, if we dial back to 2009, 2010, 2011, junior capital looked really attractive. And if we find ourselves in an environment like that, again, we very well could pivot back into a more junior debt. But at the moment, given kind of what we're seeing in the marketplace, we're feeling much better about staying higher than capital structure and driving returns, utilizing is because I was saying, optimized financing structures. And that's what we intend to pursue for the time being, as long as the market opportunities continue to point this towards those first lien assets.

The only thing that I would add there and we've talked about this a fair bit, there will be absolutely unequivocally a correlation between the amount of leverage we're using and the asset mix that we have on balance sheet. So we have a risk management process internally. We will look to the volatility profile of our assets as a guide about how to lever the entirety of the portfolio. So in that world, that Jon described that could come to pass, where junior capital does become more interesting, you would naturally see overall leverage levels come down. And so that's just how we operate the business.

Thank you guys for the color.

Thanks Fin.

And our next question comes from the line of Leslie Vandegrift from Raymond James.

Hi. Good morning. Thank you for taking my question.

Hey Leslie.

Just the first one on the NAV change for the quarter, you mentioned in the prepared remarks that a good portion of that was Animal Supply. What portion of the overall NAV decline was just from overall market volatility that we saw in December?

I'll take a crack, Leslie. So certainly Animal Supply was the single biggest contributor, but you do see mark-to-market changes going through the numbers as well. So if you look in total, I'll talk in dollar terms. Maybe I’ll talk about it by a little bit, so forgive me, but roughly we mark the book down by $25 million about $13 million of that was Animal Supply. So the remainder – so roughly half is just other names where it was just more normal mark-to-market volatility. If you took that component alone, you're talking probably close to 1.5% on NAV.

Okay. And then so far in the first quarter we've seen a bit of a bounce in other BDCs that have already reported, have given a little bit of a range of what they thinks come back. Do you have a similar thought?

The observation of the market is certainly the same as you know, Leslie from a process perspective, valuation is something we do in a coordinated fashion amongst our organization, including with our controllers group, including with our board of directors. So certainly don't want to signal one way or another, any change. But to the extent there are – Q4 impacts that were mark-to-market. I think there are some things that you will see be marked up, should those conditions hold. But we prefer to talk about that in next.

Okay. All right. And then on Animal Supply, when you guys originally invested in this, I believe it was back in 2016, if I remember correctly. It was a smaller investment and was a couple supporting debt investment does eventually went into the Senior Credit Fund, I believe. Did that A, are those still there? So will you be getting your portion of those back with the dissolving of the fund on balance sheet. And B, just can you kind of walk me through the last few quarters, the increasing of the debt in Animal Supply by – what’s have an issue?

Sure. So you're correct in the initial investment. So there's a portion of investment in the first thing, part of that capital structure that was made through the Senior Credit Fund. And so that Animal Supply, first lien investment will be treated no differently than any other investment within the Senior Credit Fund. The BDC would take back it's half of that investment. Cal Regents would take back it's half of the investment as well. And so there'll be – everything we're doing with the restructuring of that JV, Animal Supply would be consistent with in terms of its treatment. That's how that's structured. In terms of the company the performance. I'm sure you'll appreciate. There's some confidentiality provisions that make it hard to have a completely fulsome conversation, but we'll do our best, Animal Supply, what the business does, Leslie, it's a distributor of pet products, pet food. So again, very stable underpinnings to that business. There are long-term secular trends around pet ownership, particularly here in the states that have given rise to a nice backdrop for that part of the business. The business was, I'll describe it as one of the last investments in an older vintage PE fund. And I would say over the course of, call it a past couple of quarters and especially more recently that PE manager was hoping to effectuate an outcome that didn't come to pass. And along the way I think suffice to say, distractions at the company perspective in light of those aspirations. And so as things started to unfold, we and the other junior lenders in the capital structure as described really just thought it was appropriate to put ourselves in a position of more influence in outcome, restructured the capital structure and swap our debt for equity. And we continue to be constructive around the overall market dynamics for this space. It's a really interesting industry, there's a lot of consolidation opportunities that we think can actually provide tremendous synergies in certain areas. So we're pleased we've gotten that restructuring done. We think it puts the company on a much better footing, much better liquidity footing to manage working capital, which is a hugely important issue in this space. If you've got working capital, you can meet your fill rates. If you meet your fill rates, you get revenue and EBITDA. That has been a problem. That should no longer be a problem here with the companies who are pleased to support the business in that regard. And we look forward to continue to give you guys updates as to how the company is performing as we head into 2019.

Okay, thank you. And just lastly here on NPS, you mentioned that right now it'd be about $56 million if you sold it today, if it was close today, the sale transactions for $56 million with some triggers to increase that possibly. I know you can't give me the exact numbers, but what kind of triggers are we talking about with that business?

Yes, triggers is probably not the word I would do Leslie. So basically there's an ordinary course sale of the business. There's a strategic company that was owned by a private equity sponsor that has entered into a purchase agreement with the business. As part of that, there's I would say a multi-tiered negotiation between certain lenders as well as the company in terms of the appropriate way to split the overall value, in light of that transaction. So we have agreed, we have entered into payoff letter pursuant to which the BDC would receive at least $56 million. That number could increase. The increase we're certainly not counting on it. What we've tried to do is incentivize the company to keep a lid on fees and expenses associated with the transaction. So we might be the beneficiary if we're successful in that regard, but we don't anticipate there being a multiple higher than that $56 million number. So the important part here is of course, we're never pleased to be describing a nonaccrual investments but I think there's a lot of important context to this particular deal. We put in 50 but we have bonafide very shortly to getting back 56. So more than our initial investment, we've already received $10 million over the course of investment from the company. So should this transaction move forward as we anticipate and there's nothing concerning about the nature of the transaction. They're just processes, the telecom business, the FCC has to approve the sale of the business. We'd get 66 versus our initial investment of 50. That's a 7% annualized IRR, that's a 1.3x money multiple. That being said, from restricted accounting perspective, really wouldn't be appropriate to accrue the income into our income statement. We've agreed in this payoff letter to get proceeds certain and so we determined not to accrue the income while we're waiting for the transaction to close. That's as simple as that.

Okay. Thank you for taking my question this morning.

Thank you.

And your next question comes from line of Christopher Testa from National Securities.

Hi, good morning. Thank you for taking my questions. Just wanted to discuss the pro forma nonaccrual numbers you gave. When you're bringing the SCF on balance sheet, does that also include a professional physical therapy – your pro rata part of that nonaccrual asset as well?

Yes. So we can come back with the exact answer there but pro-PT is a very small component of the Senior Credit Fund. So we will be taking back our half of pro-PT off the balance sheet. But that number I believe does include. Therefore we can come back and confirm that.

The pro forma number that we gave does not include the Senior Credit Fund coming on balance sheet, Chris, for the senior – pro forma for the Senior Credit Fund coming on balance sheet, the nonaccrual numbers are basically what we gave you.

Got it. Okay. No, that's fair. And just on Animal Supply as well, just curious what happened kind of over the course of the quarter because you guys kind of had a market cost and then it went down to 73. Could you just tell, to the extent you're able to disclose I know it’s a private company, but could you get into any more detail around what happened over the course of the quarter with that?

Yes. This is, we'd love to say that there is sort of certain sensitivities around, the nature of what the company was trying to accomplish, that we prefer not to take it into, wouldn't be appropriate given our confidentiality restrictions. That being said, I think fair to say, what we thought might come fast became fair, was likely not going to come to pass. And that coupled with some deterioration in performance is what gave rise to the mark during the period.

Got it. Okay. That's fair. And with the dissolution of the SCF and bringing that on balance sheet, I appreciated your comments in response to Fin’s questions. Just wondering, how much of this consideration was due to the inherent economic leverage of having this and going above one to one versus, it's just not being, the right structure for you guys in terms of the returns that was generating.

If you really peel it back there, there's not a tremendous amount of economic substance to the change here. So sitting here today before we've not affected this transaction, the BDC has in the SOI an equity investment in the joint venture. We schedule out every single investment and we give you details about how that vehicle is financed. Effectively, the impact of this is to dissolve that equity investments and bring on the balance sheet, the assets and the effectively we would then intend to leverage it on balance sheet. You can almost think of it as, as bringing on both our half of the assets and liabilities at the SCF. And so that's really the substance of what's taking place here.

The other point to note is in these joint venture structures, you have under the SEC exemptive relief for co-investment across the platform. You don't have the ability to cross allocate between a joint venture in any of your other vehicles. So there's an increased amount of flexibility by bringing those assets back on balance sheet and having them in accounts that those assets effectively be able to be cross allocated with other accounts and enables you to do different types of transactions long-term. So though the structure was a great structure that we had good returns on, this just provides that much greater flexibility.

If you're starting a business today that had the ability to lever two to one and you had a blank sheet of paper or what we're doing is exactly what you would do. In a one to one role the SCF made sense, but that's just – no longer applies.

Got It. Okay. Appreciate the detail. And I know you guys increased the credit facility and now, looking forward as you're going to be buying back the loans from the SCF, at least your half, are you finding that another convertible or unsecured that is more attractive at the current time?

Well, we've increased the size of our revolver in the near term, Chris, and that gives us certainly capacity to be able to bring the Senior Credit Fund assets onto the balance sheet. But as I mentioned in my prepared remarks, we're definitely continuing to look at opportunities to diversify our sources of funding. We definitely view, our investment grade rating as critical for the long-term, flexibility of the company and the balance sheet. And so while I'd say that near term, an unsecured offering is not a, is not necessarily probably attractive right now. Just given where the market is, that being said, we continue to evaluate that and we'll certainly talk to you about that as, as the quarter's proceeded.

The only I would access is if you look again, post two to one, the deck capacity of the company goes up, which means we had the potential when we're thinking about secured offerings to do a bigger tranche size, that should benefit us from an execution perspective. Over time, the convertible market is a unique one where $100 million or $150 million tranche is something that the market is okay with, you get it relatively small group of investors. The larger institutional investment grade market, if you want an index eligible CUSIP it's got to be a $300 million tranche. And I think when you think about our financing structure in general and the total balance sheet here, we're at a size and scale where that opportunity is available to us and then at the right time that can be something that we pursue.

Got it. Okay. One more if I may just the, your unitranche book has been shrinking and I know you guys had mentioned that first lien seems to be the better risk adjusted return here. Are you guys finding that a lot of your borrowers, specifically the sponsored ones, are valuing maybe more bifurcated structure or are you just shying away from unitranche given that a lot of the borrowers are using unitranche as an excuse to get lenders to go a very deep in the capital structure in terms of leverage?

Yes. Again, the bifurcated unitranche structure and strategy in a one-to-one world was effectively a way to embed some levers and if the investment is as well, a very small and nominal amount. So strategically it does become a little, a little bit less important. And I think as a result, the industry participants are probably turning to it a little bit less than they once were. It's an interesting structure. I'm sure at some point we'll do a handful of transactions there as well. But Jon Yoder described, right now, and I would say certainly in the last three quarters as we've looked at our origination cadence just true first lien attached $1, has been the better of the risk reward opportunities that we've seen.

Got It. That's all for me. Thanks for taking my questions today.

Our pleasure.

And our next question is from the line of Arren Cyganovich from Citi.

Hi, good morning. This is [indiscernible] dialing in today. Thank you so much for taking the question. Most of my questions have been asked, but maybe can you give an update on the credit and business performance of the other companies in the portfolio that are currently not placed on non-accrual status. And is there an a rating migration that we should be aware of?

So are there specific names? Are you talking about other previous non-accrual investments? Is that the focus of the discussion.

Yes.

Yes, so there are certainly no ratings, migrations that are noteworthy there. The biggest of those exposures is probably a Hunter Defense, which is an investment that has actually improved in performance. We would say quite significantly since we did restructure that investment as well. And I think when you look at the market value of the other previous non-accrual, it's relatively diminimus at this point.

Okay. And can you just talk about the general competitive dynamic and what's your loan origination outlook for 2019 versus 2018?

Sure. I’ll give a crack an Jon if you want to jump in please go ahead.

All I was going to say is, as I mentioned in the prepared remarks and the fourth quarter was kind of muted in terms of sponsor activity just because of I think, whenever you see volatility in the broader markets, it causes a lot of M&A activity to slow down as people try to recalibrate what our appropriate purchase price multiples to be paying. Obviously markets, broader markets, credit and equity have rallied and stabilized here in the first couple months of 2019. And I think what we're seeing is, is frankly quite robust activity. So far this year it's hard to, I mean, as we saw last year where I think nobody really predicted the bouts of volatility that came upon us starting in mid-November and going to the end of the year. It's very hard to know whether another one of those volatility bouts will strike us again this year. But as we sit here today with a good, strong, healthy backdrop, we're seeing quite robust, sort of transaction activity levels.

Great thanks for taking my question.

And your next question is line of Michael Ramirez from SunTrust.

Hey, good morning guys. Thanks for taking our questions.

Sure. How are you?

Good, good. So many of your public peers have characterized this environment remaining competitive in-line with your comments this morning. You mentioned deal activity was relative muted, but could you help us understand what percentage of deals that came across your debt did you close this quarter and sort of how does that compare to prior period, including those sourced from your partner wealth channel. And maybe additionally when you're passing on a deal, what are some characteristics are you trying to avoid and how has this changed from prior years?

Brendan, I have a few thoughts on that and then you probably have some as well. So in terms of your first question regarding, I think sort of look-to-book rates, are we still seeing that we are doing the same percentage of the overall deals that come across our desk? I would say that that's actually holding, relatively consistent. We look at literally hundreds and hundreds of transactions every year. And we do a very small number of actual deals, of new deals. I think last year by recollection in terms of new portfolio companies that we added was in the neighborhood of 25 or something like that. And that compares with I said many hundreds of deal opportunities. So, kind of low-single digit percentage of the deals that we see actually result in deals that we, that we close on. The fourth quarter, one of the things I think it really highlights is when you do have sponsor transaction volumes that kind of diminish as I was describing earlier, largely I think as a function of volatility in the markets, we have another sort of sourcing engine that we can pivot to or that we that can be active, which is our non-sponsor channel. And so in prior quarterly calls, you've described how those two channels can be a little bit counter cyclical to each other. When there is very robust private equity activity, what we tend to see is that sponsor, I'm sorry, non-sponsor owned businesses are looking to take advantage of that robust private equity activity to sell their businesses to private equity. In periods where private equity is less active we find that non-sponsored business seek their financing needs more from lenders and to grow their businesses or fulfill their capital needs. So it does have an inherent sort of counter cyclicality to the two sourcing mechanisms. And I think that's kind of what we saw a bit in the fourth quarter where we did add a couple of new companies that came through our private wealth non-sponsored sort of channel. But overall as I say, I'd say overall if you, if you look at our look-to-book ratio pretty stable. Your question around what causes us to pass on deals. I think, the most important factor that we're, that we think about, and this is probably been true throughout our history but certainly is very much in top of mind today. Is we really are looking for businesses that we think are quite durable and less exposed to economic cycles. We're highly cognizant to the fact that we're not macro economist and we're not here predicting that there's a recession, in the offing. But because we're not macro economists, it does make us want to stay a bit more focused on durable types of companies. And so I'd say probably the biggest reason why we pass on the companies is we find that there are exposures that we think won't, aren't ones we want to take through an economic cycle. There's all, of course there's always other types of issues you can run into with individual companies. You can, find out that they've got some sort of customer concentration or some other sort of risk that is syncretic or you could find that the market is just more aggressive than you want to be. Some people might be willing to add more leverage than we think is appropriate. Some people might be willing to do deals with, without covenants that we might not want do. So there can be those competitive reasons why you might not do a deal. But I think the number one reason why we pass on deals is because we're just not comfortable with the profile of the business and the durability of the business through a cycle.

Alright that's great color thank you. Thank you.

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

Great. Thanks Ian. Thank you all for joining us for this call and if you have any questions, please don't hesitate to follow-up with us directly and have a great day and a great weekend.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC Incorporated fourth quarter, 2018 earnings conference call. Thank you for your participation. You may now disconnect.