Welcome to GBDC's August 10th, 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 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 filings with the SEC. For materials the company intends to refer to on today's earnings conference call, please visit the investor resources tab on the homepage of the company's website, www.g-o-l-u-b-c-a-p-i-t-a-l-b-d-c.c-o-m, and click on the events presentations link.
GBDC's earnings release is also available on the company's website in the investor resources section. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.
Thanks, operator. Hello, everybody, and thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer, Gregory Robbins, Senior Managing Director, and Jon Simmons, Managing Director. Yesterday afternoon, we issued our earnings press release for the quarter ended June 30th, and we posted an earnings presentation on our website. We'll be referring to that presentation throughout the call today. For those of you who are new to GBDC, I want to briefly describe our investment strategy. Our investment strategy is, and since inception it's 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 June 30th is that GBDC's results were very strong. GBDC had solid net investment income, continued strong credit performance, and robust new deal activity.
We'll be discussing each of these topics in greater detail as we go through today's presentation. Gregory's going to start by providing a brief overview of GBDC's performance for the June 30th quarter, and then he'll hand it off to Jon and Ross for a more detailed review of those results. I'll then provide some closing commentary, and then we'll open the line for questions. With that, let's take a closer look at GBDC's results for the quarter and the key drivers of those results. Gregory?
Thank you, David. Turning to slide four for the quarter ended June 30th. GBDC's adjusted NII per share was $0.29, adjusted EPS was $0.49, and ending NAV per share was $15.06. The key drivers of those strong results are summarized on slide six. Two key themes I want to highlight. First, our portfolio continued to perform well. The Golub Capital Middle Market Report, or GCMMR, for June 30th, which we published about a month ago, reflected this strength. The GCMMR normally looks at year over year revenue growth of Golub capital. Our approach for June 30th was a bit different. We didn't think year-over-year comparisons were particularly informative, as they would be comparing the lockdown economy of April and May 2020 to the booming economy of April and May 2021.
We thought it would be more informative to compare 2021 to the pre-COVID economy of April and May 2019. The results are striking. The median EBITDA growth from 2019 to 2021 exceeded 30%. Strong earnings growth across GBDC's portfolio was reflected in the four positive credit quality trends listed on the right-hand side of the slide. We'll go into them in more detail shortly. Second, middle market new deal activity was strong. The quarter ended June 30th was a new record for Golub Capital origination volume. You may recall that the quarter ended December 31st, 2020, was a record breaker at the time. Well, we beat that record by 30% in the June quarter.
While the impact on GBDC's portfolio growth was muted by elevated repayments in the June quarter, we think the key takeaway is that GBDC is delivering strong originations amidst a robust M&A environment by leveraging the competitive advantages of the Golub Capital platform. Let's now drill down on the four positive credit quality trends listed on the right-hand side of the slide, starting with our internal performance ratings. Slide seven summarizes the positive trends in the internal performance ratings of GBDC's portfolio in the post-COVID period. Two key trends continued through the quarter ended June 30th. First, portfolio companies performing materially below expectations in categories one and two remained very few in number. Those two categories constituted only 1.1% of the portfolio at fair value at quarter end. We've also seen continued upward migration in credit quality, a steady increase in categories four and five.
Those are loans performing at or better than our expectations at underwriting. A corresponding decrease in category three. Those are loans that are performing or expected to perform below expectations. Specifically, in the quarter ended June 30th, categories four and five increased from 86.9% of the portfolio as of 3/31 to 89.4% of the portfolio as of June 30th, an improvement of 13.4 percentage points year-over-year. Category three decreased from 12% of the portfolio as of 3/31 to 9.5% of the portfolio as of 6/30. The proportion of the portfolio rated three as of 6/30 was right in line with our pre-COVID normal of around 10%, as you can see from the fiscal year-end 2018 and 2019 data at the far left of the slide. A second key indicator of continued credit improvement is the fact that non-accruals remained very low.
Just 1% of investments at fair value at quarter end. The non-accrual rate was unchanged quarter-over-quarter, but about 50% lower year-over-year. We'll come back to this point in our usual discussion on GBDC's financial results. Slide eight shows two other indicators of improving credit quality, net realized gains and net unrealized gains. This slide provides a bridge from GBDC's $14.86 NAV per share as of 3/31/2023 to its increased $15.06 NAV per share as of 6/30/2023. Let's walk through the bridge. Adjusted NII per share was $0.29, in line with our quarterly dividend. No net realized losses were recorded during the quarter. In fact, there were $0.03 per share of net realized gains. Net unrealized gains were $0.21 per share, excluding the purchase premium adjustment, reflecting the continued reversal of unrealized losses incurred in the March 2020 quarter.
In fact, on a price basis, 90% of the unrealized losses recorded in the quarter ended March 31, 2020 have been recovered as of June 30, 2021. Slide nine shows that the continued strength and quality of GBDC's portfolio enabled us to further optimize the company's debt capital structure post quarter end. On August 3, 2021, GBDC completed its third unsecured bond offering. The $350 million issuance of new unsecured notes mature in February 2027 and have a fixed interest rate of 2.05%, the lowest coupon ever achieved by a BDC at the time. Pro forma for the August offering, unsecured debt represents approximately 50% of GBDC's debt capital stack. You can see from the chart on the right-hand side of the slide that GBDC is expected to have no contractual debt maturities until 2024, and the vast majority of GBDC's funding matures in 2025 or later.
In short, we believe GBDC's balance sheet is stronger and more flexible than ever. Let's now take a closer look at our results for the quarter ended June 30th. For that, let me hand the call over to Jon Simmons to walk you through the results in more detail. Jon?
Thanks, Gregory. Slide 11 summarizes our results for the quarter ended June 30th. You can see in the column on the right that adjusted NII per share was in line with our quarterly dividend, and that our credit results remained strong as GBDC generated $0.20 a share of adjusted net realized and unrealized gains. As a result, our net asset value per share at June 30th, 2021 increased to $15.06. On August 6th, our board declared a quarterly distribution of $0.29 a share, payable on September 29th, 2021 to stockholders of record as of September 8th, 2021. Turning to slide 12, new investment commitments totaled $614.7 million for the quarter ended June 30th. After factoring in total exits and sales of investments of $583.5 million, as well as unrealized appreciation and other portfolio activity, total investments at fair value increased by 1% or $44.3 million during the quarter.
As Gregory noted, originations this quarter were strong while repayments were also elevated. As of June 30th, 2021, we had $45.4 million of undrawn revolver commitments and $171.9 million of undrawn delayed draw term loan commitments. These unfunded commitments are relatively small in the context of GBDC's large balance sheet and strong liquidity position. As shown on the bottom of the table, the weighted average rate on new investments and spread over LIBOR on new floating rate investments each increased slightly quarter-over-quarter. Slide 13 shows that GBDC's portfolio mix by investment type remained consistent quarter-over-quarter, with one-stop loans continuing to represent 80% of the portfolio. Slide 14 shows that GBDC's portfolio remained highly diversified by obligor, with an average investment size of less than 40 basis points.
As of June 30th, 96% of our investment portfolio remained in first lien senior secured floating rate loans and defensively positioned in what we believe to be resilient industries. Turning to slide 15, this graph summarizes portfolio yields and net investment spreads for the quarter. Focusing first on the light blue line, this line represents the income yield or the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and the GCIC purchase price premium. The income yield decreased by 10 basis points to 7.4% for the quarter ended June 30th, 2021.
The investment income yield, or the dark blue line, which includes the amortization of fees and discounts, also decreased by 10 basis points to 7.9% during the quarter. Our weighted average cost of debt, or the aqua blue line, decreased by 20 basis points to 2.8%, primarily due to the early redemption of $165 million in higher-priced SBIC debentures in the prior quarter. Our net investment spread, the green line, which is the difference between the investment income yield and the weighted average cost of debt, increased by 10 basis points to 5.1%. With that, I'll hand the call over to Ross to continue the discussion of our quarterly results. Ross?
Thanks, Jon. Looking to the next two slides, non-accrual investments as a percentage of total debt investments at cost and fair value remained low and consistent quarter-over-quarter at 1.4% and 1%, respectively, as of June 30th. During the quarter, the number of non-accrual investments remained unchanged at six portfolio company investments. As Gregory discussed in his opening commentary, as a result of continued strong portfolio company performance, the percentage of investments rated three on our internal performance rating scale decreased to 9.5% of the portfolio at fair value as of June 30th. As a reminder, independent valuation firms value at least 25% of our investments each quarter. Slides 18 and 19 provide further details on our balance sheet and income statement as of and for the three months ended June 30th.
Turning to slide 20, the graph on the top summarizes our quarterly returns on equity over the past five years, and the graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same time period. Turning to slide 21, this graph illustrates our long history of strong shareholder returns since our IPO. As illustrated, investors in GBDC's 2010 IPO have achieved a 10% IRR on NAV since inception. Slide 22 summarizes liquidity and investment capacity as of June 30th, which remains strong with over $800 million of capital available through cash, restricted cash, and availability in our various credit facilities. We also highlight our continued progress in optimizing the right-hand side of the balance sheet. Three key highlights here.
First, on April 13th, 2021, we amended our revolving credit facility with Morgan Stanley to, among other things, extend the reinvestment period to April 12th, 2024 from May 3rd, 2021, extend the maturity date to April 12th, 2026 from May 1, 2024, and reduce the interest rate on borrowings to one-month LIBOR + 2.05% from one-month LIBOR +2.45%. Second, on July 16th, we issued a notice of redemption to redeem all of the $189 million of notes issued under the 2020 debt securitization, which are priced at three-month LIBOR + 2.44%. This redemption is expected to occur on August 26th, 2021. Third, as Gregory mentioned earlier, on August 3rd, we issued $350 million of unsecured notes which bear a fixed interest rate of 2.05% and mature on February 15, 2027, bringing unsecured debt up to approximately 50% of GBDC's total funding mix.
Slide 23 summarizes the terms of our debt capital as of June 30th. Lastly, slide 24 summarizes our recent distributions to stockholders. Most recently, our board declared a quarterly distribution of $0.29 per share, payable on September 29th, 2021, to stockholders of record as of September 8th, 2021. With that, I'll turn it over to David for his closing remarks. David?
Thanks, Ross. To sum up, GBDC had a very strong quarter. Adjusted NII matched our dividend. Realized and unrealized gains were substantial. Robust new origination enabled the portfolio to grow despite unusually high payoffs. Let me talk about our outlook, then I'll take your questions. The headline's the same as last quarter. We're cautiously optimistic. I'll start with why we're cautious. We've been concerned about COVID variants for some time. You've heard us talk about this in our last two earnings calls. As much as we'd all like to put this tragic pandemic behind us, it seems we're far from done, with hundreds of millions of COVID cases around the globe, 85% of people worldwide not yet fully vaccinated, and the possibility of more mutations. That said, there are also reasons for optimism.
We believe GBDC is prepared for this environment that we're in right now and has a set of powerful tailwinds. I'll focus on three. We've spoken about them before, but they bear repeating. The first tailwind is GBDC's strong portfolio performance. We've highlighted throughout today's presentation the positive credit trends since March 31, 2020. Our pre-COVID underwriting has proved to be strong. Realized and unrealized gains and losses for the 18 months from January 1, 2020 through June 30th of 2021 have netted to a loss of only $7 million, or 0.16% of the portfolio at cost. That's an annualized loss rate of less than 11 basis points. As Gregory described, the portfolio today has very low non-accruals and minimal category one and two loans. It's apparent we're not going to be distracted by needing to play defense on a troubled portfolio.
A second tailwind is the attractive opportunity set before us. Two of the last three quarters set new records for Golub Capital origination. All signs are pointing to robust middle market M&A activity in the H2 of the year. While it's too early to tell if we'll set another record before year-end, we think Golub Capital's capturing more than our fair share of attractive deals. The competitive advantages of leading lenders have grown stronger through this COVID period. Advantages like scale and sponsor relationships, incumbencies, breadth of solutions, industry expertise, and reputation for reliability. We believe GBDC has a compelling opportunity to grow its portfolio in this environment without compromising on credit quality. Finally, a third tailwind. The third tailwind is that GBDC has ample liquidity and flexibility to capture opportunities.
We've achieved our goal of substantially increasing the proportion of unsecured debt in GBDC's funding mix while keeping our cost of debt very low. Unsecured debt is now about 50% of our debt stack, and we believe GBDC has among the lowest unsecured funding costs of any BDC. GBDC's debt stack is well-diversified, long-term, low cost, and highly flexible. We're currently operating at the low end of our target leverage range of 0.85x to 1.15x debt to equity, and we think we have room to operate closer to the high end of that range in the coming quarters, which would help drive even stronger earnings power for the company. Thank you. Operator, please open the line for questions.
At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. To withdraw your question, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Finian O'Shea with Wells Fargo Securities.
Hi, good afternoon. First question, David, on the comments you were just touching on the market opportunity and your market share, which remains very strong. Can you go specifically into the comeback of these larger private one, $2 billion transactions? Last time around before COVID, you were the obvious ring leader in these, especially on a senior basis. This time around, there's a couple more big players in those as I'm sure you're familiar with. How do you feel that your market share and competitiveness in terms of underwriting is holding up? Then as a second part there, how much of a challenge is that? Do you think that paper is much better than the core middle market paper, or is it less of a challenge to the Golub platform?
Sure. Thanks, Fin. Thanks for your question. By way of context, we at Golub Capital, we underwrite loans that range in size from $10 million or $20 million at the low end up to multiple billions. As you pointed out, Finn, we've been a market share leader in what we call mega one-stops, which are $500 million and up one-stops since those really began to be on the scene in 2019. Mega one-stops remain a relatively small portion of the overall mix of what we do. The predominance of what we do is financing companies that generate between $20 million and $50 million of EBITDA. Those are not companies where a mega one-stop would be appropriate. In the last quarter, we closed 95 separate loans representing a bit more than the $9 billion in total commitments.
If you just do the math on that, you can quickly calculate that our average loan size is in the approximately $90 million range. Over the course of the last couple of years, we've seen, and as you pointed out, Fin, we've been a pioneer in expanding the role of private debt in larger sized transactions. I've said previously that there are a couple of key drivers of that phenomenon. One is that sponsors increasingly are looking at buy and build transactions. Transactions where they're building a company over time through acquisitions as a means of creating a company of great scale and of great promise. They're not just doing financial engineering anymore. They're looking at creating great companies in large measure through acquisition strategies. The broadly syndicated loan market is not an extremely efficient way of financing a company that's doing serial acquisitions.
What many sponsors have found is that using a one-stop and a series of either delayed draw term loans or serial expansions of that one-stop can be a more effective way of financing their portfolio company that's doing serial acquisitions. Until relatively recently, that large scalable one-stop was not on the menu. It wasn't one of the choices that a sponsor could choose from if they were looking at financing a company that had loan needs in excess of $500 million. That's now changed. As you point out, in the last six months or so, we've seen transactions as high as $3 billion being pursued by private market, by direct lenders. We're not alone in this. We're still among the market leaders, but there are a number of very large players who are also capable of playing in this arena.
My view is that the mega one-stop product is a great option for sponsors. It is not always a great opportunity for direct lenders. We here, just as we are in smaller loans, we need to be very selective. We need to make sure that we're backing really good companies, that the terms and conditions of the loans, that the pricing of the loans are attractive relative to other options that we have. We're always going to be evaluating the relative attractiveness of different niches within direct lending that we operate in. We're purposely going to be moving around as we see the best opportunities arise in one area, one industry sector, one geography versus others. I think that's what we've been doing over the course of recent months.
That's helpful. Thank you. Just a follow-on on the equity co-invest that looks like it put out a fair amount this quarter. I get least versus historical and given you're able to earn your dividend at such a low rate of leverage, one might say that you have the ability to swing the bat much more often on equity co-invest. Any thoughts on the above there?
We've been pretty consistent in our percentage of the portfolio that's in equity co-investments. If you look at page 13 of our investor presentation, it's been in the 2%-3% range for an extended period of time. I think that you can reasonably expect that we're going to continue to grow the portfolio, that we're going to move our debt-to-equity ratio from where we are now, which is at the low end of our range, more toward the middle or higher end of our range. I don't anticipate a meaningful change at this point in the mix that we're going to see. Of course, that's always subject to change based on market conditions. That's my expectation now. Thanks, Finn. Phyllis, we can go to the next question.
Your next question comes from the line of Paul Johnson with KBW.
Good afternoon, guys. Thanks for taking my questions. I know you guys were just slightly below the low end of your hurdle rate this quarter and therefore did not earn the incentive fee. I'm just curious, are you okay with, I guess, operating around that area kind of right at or even below the low end of your hurdle? Is the goal to essentially generate an ROE that's maybe above that 8%? I'm just trying to get your thoughts around the hurdle rate.
Yeah. I think this quarter was a bit of an anomaly because the degree of repayments was as high as it was. My expectation, as I mentioned, is that we're going to see growth in the size of the portfolio. That in turn will grow net investment income and will give us more pre-incentive fee net investment income. I think when we look backwards, we'll see this quarter as a bit of an anomaly in the respect that you're mentioning. I think it's good for shareholders if we can operate in or above the catch-up as opposed to below the catch-up, provided we can do so without taking too much credit risk. Right now, I think we can do that.
Great. Thank you. Thanks, David. That's very helpful. Then just one on your software lending portfolio. It's I think 26% or so, I think from the slide deck of your portfolio. I'm just maybe trying to get your thoughts on how you guys view that market today, how you guys view that sort of competitive landscape. Obviously, we've seen a lot of growth and popularity of that type of lending. Is there anything that you guys see differently today, maybe versus several quarters ago? What are you looking out for in the new deals that you evaluate there today?
Sure. Again, let me just provide some context. We've been leaders in software lending to sponsor-backed companies for more than a decade. I think we have a larger portfolio and more transactions under our belt in this sector than any of our competitive brethren. It's an area where we have very strong sponsor relationships, very strong incumbencies because of the portfolio that we've built, and very strong expertise. We have a group within our underwriting team that specializes in software lending. We think we're very good at it. Our results over time in software have been outstanding. We think that it's a robust area for future opportunity. I think your statement's fair that we're seeing somewhat more competition in the software area than we did years back.
The flip side is also true that the private equity ecosystem, the component of that ecosystem that's software companies, continues to grow. We continue to find very attractive opportunities in the software space. We really haven't changed our approach in any meaningful way. We continue to be focused on really high-quality companies with missing critical software tools that have been well-integrated and are difficult to rip out of their clients with high recurring revenue streams and high renewal rates. The same sorts of underwriting criteria that we started out investing in the industry with more than 10 years ago.
Gotcha. Thanks for that. My last question was just, again, your thoughts around the market for one-stop unitranche loans versus maybe the senior loan, first lien, traditional first lien, second lien structure. What we've kind of seen, the returns have compressed over time, obviously, in the unitranche market. I'm wondering, it doesn't seem to show up in your new investment mix, but do you evaluate those two markets any differently today in terms of just the value proposition of one-stop loans versus the first lien traditional structure?
Every time we're looking at a new transaction, we're thinking about what the right way to play in it is and what the right answer is for the transaction. We'll proceed with a first lien solution if we think that it's compelling from a risk-reward standpoint and right for the transaction. Alternatively, we'll proceed with a one-stop solution if we think the risk-reward is compelling and it's right for the transaction. It's a multifaceted test that we use to assess what's the right solution to be emphasizing in our discussions with sponsors. At the end of the day, obviously, the sponsors make that choice. We don't make the choice as to what financial structure to put in place. We do have choices about where we play and where we don't play.
Right now, I would tell you that we continue to find a lot of attractive one-stop opportunities. To your point, we're seeing a lot of steadiness in our income yield and in our weighted average net investment spread. I think you are seeing meaningful compression in junior debt spreads. Second lien spreads, in particular, have come down. I think perhaps that's putting some pressure on, if you think about a one-stop as being an instrument that's priced as a hybrid that could be seen as putting some pressure on one-stop spreads as well. I think the data suggests more steadiness, more continuity than change there.
Great. Thanks for that. Those are all my questions.
Your next question comes from the line of Ray Cheeseman with Anfield Capital.
Thank you for taking my questions. David, as we approach the end of the year and get closer to LIBOR going poof and going away, do you perceive there to be any challenges in rolling all of the clients over to I think they're now talking about SOFR term as the preferred way they're going to steer everybody. Is everybody ready for that? Do you perceive there'll be any impact on any income lines in your P&L?
Thanks for the question about LIBOR and SOFR. I think you may know I serve on the board of the LSTA, the main industry trade association. It's been very involved in this LIBOR transition and in ensuring from an industry standpoint that the industry's ready. We at Golub Capital have also dedicated significant resources to make sure we're ready. I think it's going to be a meaningful amount of work whether this transition happens at the end of this year or later. I think that's still an open question. I'm confident that whenever the timing is, we'll be ready, and we'll have the resources in place to do the work with our borrowers to make sure that whatever changes are required and loan agreements are made. This is going to be a very significant lift. I say that from a work standpoint, not from a risk standpoint.
I think from a risk standpoint, it's quite under control.
Super. Glad to hear. Based upon the experience that you've had, at the beginning you were saying that the number of loans outperforming expectations, category four and five, has increased at a very good speed coming up out of the lethargy period a year ago. When your portfolio performs above expectations, should we expect to see a higher churn of higher repayments than otherwise? Because obviously they've got higher profit levels.
Sure. Let me clarify one thing. Category four is performing at or above, and category four is performing above. The statement that I hopefully made before, I'm not sure exactly how we phrased this, is that the proportion of our portfolio that's performing in categories four and five, meaning they're performing at or above expectations, has grown significantly. If you flip to page 17 of our presentation deck, you'll see those two categories are just under 90% of our loans as of June 30th, 2021. That's back in the range of the pre-COVID numbers. I think you're onto an important point, which is more relevant for category five loans than for category four loans. I think Category 5 loans do have a tendency to be refinanced or repaid more quickly than loans in other categories.
I think that has been part of the story of the more rapid than expected repayment rate that we saw in this last quarter. I don't think that's the main factor. I think the main factor is the very rapid pace of M&A that we've seen in the middle market generally. I think you make an interesting point, which is that the category five loans do tend to refinance more quickly than one, two, three, and four loans.
It's always the truth. You lose the good ones, right?
Yep. Nature of credit.
Last is kind of an open-ended question. You've done unbelievably well at steering the company through a credit thunderstorm. You've lowered the cost of your funding. What are we looking for in the next couple of quarters to move the whole organization back from, I'm just going to use the base number for shareholders, $0.29- $0.32?