Golub Capital BDC (GBDC) Q2 2026 Earnings Call - Spreads Widen, Fair Value Write-Downs Hit NAV, But Credit Quality Holds Firm

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Hello everyone, welcome to GBDC’s earnings call for the fiscal quarter ending March 31, 2026. Before we begin, I’d 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 SEC filings. For materials we intend to refer to on today’s earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com, and click on the Events and Presentations link.

Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I’m pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, thanks for joining us today. I’m joined today by Tim Topicz, our Chief Operating Officer, Rob Touchare, Senior Managing Director and Officer of GBDC, and Christopher Ericson, our CFO. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended March 31, 2026, we posted an earnings presentation on our website. We’ll be referring to that presentation during the call today. We’re gonna change from our usual format today. I’m gonna start with headlines and some commentary on what I think is happening in private credit, Tim, Rob, and Chris are gonna walk you through our operating and financial performance in detail.

Following that, we’ll open the line for questions. Let me start with headlines. GBDC had a small loss for the quarter, about 1% of NAV, and that was primarily because of mark-to-market fair value write-downs. Adjusted NII per share for the quarter was $0.34. That corresponds to an annualized adjusted NII return on equity of 9.5%. Non-accruals remain low in both absolute terms and relative to BDC industry peers. Performance ratings for GBDC’s borrowers not only remained strong, they actually improved modestly quarter-over-quarter. Let’s drill down on that first headline. I said the loss this quarter was primarily from fair value markdowns. To remind longtime BDC investors and to educate new ones, GAAP for a BDC’s loan investments isn’t the same as GAAP for loans made by banks.

When a bank makes a $100 loan, the asset stays on the bank’s balance sheet at $100 regardless of what happens to market interest rates. There’s a separate impairment reserve that the bank can use to buffer potential credit losses. Bank accounting doesn’t account for changes in spreads. BDC accounting does account for changes in spreads. We mark our loans to fair value every accounting period. When spreads widen, we write down our loans even when they’re paying interest on time and even when we expect them to pay off at par. This last quarter saw meaningful spread widening, and that caused us to write down fair values even on our well-performing credits. Now, whenever we have a quarter with this kind of meaningful spread widening, you’ll hear us talk about how there’s a big difference between temporary losses and permanent losses.

Realized credit losses are permanent. They don’t come back. If we can avoid realized credit losses, the mark-to-market adjustments, they reverse over time as borrowers move toward payoff or as their credit attributes improve or as market spreads narrow. The good news is that we currently think that most of this quarter’s fair value write-down will reverse in future quarters. Tim’s gonna walk you through why in a few minutes. I wanna talk before handing the mic over about the bigger picture here. The spread widening that we saw this last quarter, it’s part of a larger macro picture. I wanna spend a few minutes talking about the forces that are causing changes in the private credit landscape, the impact of those forces, and where I think we’re likely to go from here. In the last several earnings calls, we’ve talked about headwinds facing direct lending.

We’ve talked about how base rates have declined by about one and a half percentage points since 2022. We’ve talked about how spreads have narrowed over the same period. Spreads have come down by more than 1 percentage point. Between base rates and spread reductions, that’s two and a half to 3 percentage points of return headwinds. We’ve also talked about elevated credit stress and how that’s been reflected in higher default rates, more frequent restructurings, and utilization of PIK amendments. In the last quarter, we can say we can add a new headwind: concerns about AI and software. These 4 headwinds, lower base rates, lower spreads, elevated credit stress, AI fears, they’ve had a big impact.

We’ve seen lower returns across the public BDC sector, with average returns on equity falling from about 9% in 2023 and 2024 to between 4% and 5% last year. We’ve seen a big increase in dispersion too. The dispersion of performance between top quartile managers and bottom quartile managers has always been large in the BDC space, but it’s been particularly large in the last year, with top managers’ performance going down a little and bottom manager performance going down a lot. The third impact, shareholders have spoken. We’ve seen a sell-off in publicly traded BDCs, which now trade at large discounts. We’ve seen a spike in redemption requests in non-traded BDCs. All of these impacts have contributed to a final impact. I characterize that final impact as a shift in wind direction.

We’ve moved from a market that for years was becoming more borrower-friendly to one that’s now becoming more lender-friendly. This trend is new, we’re already seeing wider spreads and more attractive deal terms. What does this mean? Where are we headed from here? I’m usually very cautious about making predictions. You’ve heard me talk many times about how challenging the prediction business has been since COVID. I’m going to offer the following thoughts about where I think the market’s headed based on what I see today. My first prediction is actually a repeat from last quarter. I think we’re in a darwinian moment for private credit. Firms that have sustainable competitive advantages, that have strong performance from a credit standpoint, that have well-diversified long-term capital bases, they’re gonna adapt and take share.

Firms with not-so-good credit performance or with an overreliance on retail products, they’re gonna struggle. Private equity sponsors are very soon gonna know which credit firms can provide them with consistent, steady access to compelling financing solutions and which credit firms can’t. All this is gonna lead to a pattern we called out last year, a growing separation between what we call winners and whiners. Second prediction. I expect this period of credit stress to continue for a while. We’re not through this credit cycle yet. We at Golub Capital try very hard to identify and escalate problems early, so we tend to be ahead of the market in recognizing and dealing with credit issues.

My observation, based on what I’m seeing in industry data and to a lesser extent in our portfolio, is that there remains a subset of companies that are not adapting well to current economic conditions that are ultimately going to need to restructure, and that hasn’t happened yet. A third prediction. I think market conditions are gonna become even more lender-friendly, especially if M&A continues to rebound. Capital has left and in some respects, via continuing redemptions, continues to leave direct lending. Supply and demand is going to drive wider spreads. These wider spreads are gonna create short-term losses from the fair value adjustments that we talked about earlier. The same wider spreads are also going to create medium and long-term benefits from higher earnings on new loans and from reversal of prior period fair value markdowns.

We’re confident that Golub Capital and GBDC are gonna be among the winners. We’re very optimistic about our medium to long-term ability to produce premium returns for our investors, consistent with our nearly 16-year track record with GBDC since it went public. Now I’m gonna pass the call over to Tim, Rob, and Chris to discuss operating performance in the quarter in more detail, then I’ll be back at the end for questions. Tim.

Tim Topicz, Chief Operating Officer, Golub Capital BDC (GBDC): Thanks, David. Let’s start on slide 3 and discuss the drivers of GBDC’s $0.34 per share of adjusted NII and -$0.18 per share of adjusted earnings. First driver. Overall credit performance remains solid. Approximately 89% of GBDC’s investment portfolio at fair value remains in our highest performing internal rating categories. Investments on non-accrual status remained very low at just 1.4% of the total investment portfolio at fair value. This level is well below the average of GBDC’s listed BDC peers. Second driver. GBDC’s investment income yield of 9.7% annualized was down 30 basis points sequentially. The decrease was primarily driven by the full quarter impact of lower SOFR following the interest rate cuts of late 2025. Third driver.

GBDC’s borrowing costs declined by 20 basis points to 5.2% annualized, one of the lowest borrowing costs in the listed BDC peer group. The decline was similarly driven by the impact of lower SOFR, an offset that highlights one of the advantages of GBDC’s predominantly floating rate debt capital structure. Fourth driver. GBDC’s earnings continued to benefit from a gold standard fee structure and one of the lowest operating expense loads in the listed BDC peer group. Finally, as David previewed, credit spread widening drove the majority of the $0.52 per share of net realized and non-realized losses, resulting in an $0.18 per share loss in the quarter. Regarding balance sheet changes and distributions in the quarter, NAV per share declined to $14.35 per share.

We ended the quarter with net debt to equity of 1.24 times, consistent with prior quarters and within our targeted range of 0.85 to 1.25. While average leverage throughout the quarter was 1.21 times, a modest decrease from prior quarters. Total distributions paid in the quarter were $0.33 per share. Our board of directors declared a $0.33 per share distribution for the third fiscal quarter of 2026. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. The company repurchased 2.2 million shares in the quarter at a weighted average price of $12.43 per share on approximately 16% discount to December 31, 2025 net asset value.

In addition, the Golub Capital Rabbi Trust purchased approximately $19 million, or 1.5 million shares of GBDC during the quarter for the purposes of awarding incentive compensation. Turning to Slide 7, you can see how the earnings drivers I just mentioned translated into GBDC’s March 31, 2026 net asset value per share of $14.35. Adjusted NII of $0.34 fully covered the $0.33 per share base distribution that was paid out during the quarter. Adjusted net realized and unrealized losses were $0.52 per share and $0.02 per share of net asset value accretion from share repurchases. Taken together, these results drove a net asset value per share decrease to $14.35. Now let’s unpack the $0.51 per share of unrealized losses on Slide 8. It’s important for investors to note that unrealized losses are not all created equal.

When they are credit related, they often don’t come back. When borrowers perform, the unrealized losses reverse over time as loans mature or spreads tighten. A key question to ask when interpreting GBDC’s results is, how much of the unrealized loss in the March 31 quarter is likely to prove temporary? While there’s no way to be sure except in hindsight, we find it informative to look at how much unrealized loss is embedded in borrowers that are performing in line or better than expectations at underwriting. In our experience, such unrealized losses are likely to reverse over time. Our preliminary analysis suggests the vast majority of unrealized losses were attributed to borrowers that are performing at least as well as we expected at the time of underwriting. You’ll recall that GBDC’s internal performance ratings categorize borrowers on this basis.

For example, borrowers with ratings 4 or 5 are performing in line or better than expectations at underwriting, and we expect them to continue to perform as expected. Approximately 70% of the $0.51 per share of net unrealized losses this quarter, or $0.35 per share, came from borrowers rated 4 or 5. Because the borrowers are performing well, our view is that the fair value adjustments taken in the quarter were primarily driven by market spreads and are likely to reverse over time. Put differently, if GBDC were a bank and we didn’t have to make fair value adjustments based on market spreads, the quarter would have been profitable. That said, we’re not taking expected reversal of unrealized losses for granted. We are keenly focused on avoiding permanent credit impairment and minimizing realized credit losses. Longtime GBDC investors are familiar with our playbook.

Careful underwriting, proactive portfolio monitoring, early detection of potential vulnerabilities, and early intervention to address those vulnerabilities. The remaining 30% of net unrealized losses, or $0.16 per share, came from borrowers rated 3 or lower. These markdowns reflect the impact of a mix of market spreads and further credit deterioration in known troubled credits. In fact, the majority of the $0.16 per share of unrealized losses were related to borrowers on non-accrual status as of March 31, 2026, or previously restructured portfolio companies. I will now turn the call over to Rob Tuchér to walk through our portfolio in more detail.

Rob Tuchér, Senior Managing Director and Officer, Golub Capital BDC (GBDC): Thanks, Tim. I will now highlight our 2nd fiscal quarter investment activity and provide some additional context on portfolio performance. Turning to slide 9. In the 1st calendar quarter of 2026 at the Golub Capital level, our team originated over $3.3 billion of new investment commitments. GBDC participated in these new originations on a limited basis, with $17.7 million in new investment commitments in the quarter, given slow repayments and our desire to focus on accretive share repurchases. We remain highly selective and conservative in our underwriting, closing on just 1.9% of deals reviewed in the quarter at a weighted average loan-to-value of approximately 42%. We leaned in on existing sponsor relationships and portfolio company incumbencies for approximately 69% of our origination volume, and we made loans to 10 new borrowers.

We continue to leverage our scale to lead deals, acting as the sole or lead lender on 94% of our transactions in the quarter. We focused on the core middle market, defined as borrowers with between $10 million and $100 million of annual EBITDA, which we believe continues to offer better risk-adjusted return potential than the larger end of the market. The median portfolio company EBITDA for our originations for this quarter was $76 million. About 57% of our new origination volume in the second fiscal quarter supported M&A driven transactions such as LBOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Of GBDC’s $18 million in new investment commitments in the quarter, 98% were in senior secured debt investments.

New investments carried a total weighted average rate of 8.8%, which included a 4.9% weighted average spread. Turning to slide 11. As of March 31, 2026, GBDC’s $8.3 billion portfolio remains well-diversified across 420 different borrowers. The number of portfolio companies in GBDC’s portfolio has increased nearly 26% over the past three years, further enhancing our diversification. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average, and our top 10 investments comprise just 13% of the overall portfolio, which represents a concentration level that is less than half of the average of our listed BDC peers. GBDC’s portfolio is also well diversified by industry subsector, with 52 individual subsectors represented.

Software portfolio companies represent approximately 26% of GBDC’s portfolio at fair value. Before moving on to credit quality, I’d like to expand on our software portfolio in light of recent investor interest in the potential for AI disruption. Before I go into detail, I want to remind everyone of what informs our view. In short, we’re specialists in software investing at Golub Capital. We have been investing in software companies for a long time, more than 20 years. We’ve completed over 1,000 software deals representing an excess of $90 billion in commitments over that period. We’re also good at it. Over those 20 years, we’ve had an annualized default rate of just 0.05% or 5 basis points. We’ve also got a great team, including 25 dedicated investment professionals with over 230 years of combined experience through multiple credit and technology cycles.

We’ve got a well-developed underwriting approach. It starts with a long-held view that the most creditworthy software companies are dominant players in a niche market. These winners typically provide enterprise critical platforms with sticky and embedded workflows, long implementation cycles, and high switching costs. In 2023, we began including a systematic framework for assessing AI risk at the borrower level for all new software deals and across our software portfolio. This framework assesses potential AI risk at both the product and end market levels. We continue to believe that AI risk is not the same across all software companies and subsectors, and therefore needs to be evaluated at the borrower level on a case-by-case basis. Finally, 95% of our software investments are in first lien senior secured loans with significant equity cushion behind them.

In many instances, we are lending at a 35% loan-to-value, which means that enterprise value of the borrower would have to decline by 65% before a senior debt position even begins to be impaired. As we look at slide 12, you can see that within our existing software portfolio, which represents approximately 26% of GBDC’s portfolio, 95% of the software investments are in internal performance ratings categories 4 and 5, our highest rated categories. The performance ratings of our software portfolio compares favorably to the overall GBDC portfolio. During the quarter, we re-underwrote our software portfolio and established a new metric, degree of AI disruption risk. Our analysis has led us to conclude that only 8% of the software portfolio is subject to an elevated level of AI disruption risk.

We plan to continue to monitor AI disruption risk over the coming quarters and plan to report back on our findings. On slide 13, you can see that non-accruals increased slightly quarter-over-quarter to 140 basis points of total investments at fair value, but remain at very low levels in absolute terms and relative to the broader listed BDC sector. During the quarter, the number of non-accrual investments increased to 19, with the addition of 5 portfolio company investments. The financial health of our portfolio companies generally remained strong. Our portfolio’s average interest coverage ratio of 1.8 times increased quarter-over-quarter. The portfolio’s average leverage level also showed strength, declining about 0.25 turns of debt to EBITDA from year-end 2024. Additionally, healthy enterprise values continue to underpin our loan positions as loan-to-value ratios remain stable at approximately 45%.

Slide 14 shows the trend in internal performance ratings for the entirety of GBDC’s portfolio. As Tim noted earlier, nearly 90% of the total investment portfolio remained in our top 2 internal performance ratings categories. Investments rated 3, signaling a borrower may have the potential to or is expected to be performing below expectations, decreased quarter-over-quarter to 8.7%. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 2.2% of the portfolio at fair value. I’m going to turn it over to Chris now to take us through our financial results in more detail.

Christopher Ericson, Chief Financial Officer, Golub Capital BDC (GBDC): Thanks, Rob. I’ll now cover GBDC’s performance and liability profile for the second fiscal quarter of 2026. First, on performance. The economic analysis on slide 15 highlights the drivers of GBDC’s net investment spread of 4.5%. Let’s walk through this slide in detail. We start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC’s investment income yield fell approximately 30 basis points sequentially to 9.7% annualized, largely reflecting the full quarter impact of the rate cuts from the fourth calendar quarter of 2025. Our cost of debt, the teal line, decreased approximately 20 basis points to 5.2%, reflecting our approximately 80% floating rate debt funding structure. Net-net, GBDC’s weighted average net investment spread, the gold line, declined slightly.

Moving to the balance sheet on slide 18. We ended the quarter with over $8.3 billion of total portfolio investments at fair value, $4.7 billion of outstanding debt, and $3.7 billion of total net assets. Net debt to equity leverage was 1.24 times at quarter end, relatively flat compared to the prior quarter, reflecting the impact of lower average investments outstanding during the quarter, but offset by the impact of fair value markdowns and share repurchase activity. Turning to GBDC’s liquidity on slide 21. Overall, our liquidity position remains strong and we ended the quarter with approximately $1.4 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unsecured revolver provided by our advisor. Our debt funding structure highlighted on slide 22 remains highly diversified and flexible.

Our weighted average borrowing cost of 5.2% annualized remain low and what we believe to be one of the lowest in our listed BDC peer group and is underpinned by a differentiated investment grade ratings profile.

Rob Tuchér, Senior Managing Director and Officer, Golub Capital BDC (GBDC): Consistent with our asset liability matching principle, 80% of GBDC’s total debt funding is floating rate or swapped to a floating rate, which positions us well to continue to modulate the impact of lower interest rates on investment income through offsetting lower interest expense on our borrowings. 51% of our debt funding is in the form of unsecured notes across a well-laddered maturity profile. Our next unsecured note maturity is in August 2026. We continue to evaluate new issue pricing levels in the unsecured debt market. Importantly, we have the requisite liquidity available under our revolving credit facility and balance sheet flexibility to mitigate refinancing risk associated with these maturing bonds. With that, operator, could you please open the line for questions?

Operator: Thank you. Thank you. Your first question comes from Kenneth Lee with RBC Capital Markets. Your line is open.

Kenneth Lee, Analyst, RBC Capital Markets: Hey, good morning. Thanks for taking my question. Just one on the software loan side of the portfolio. You talked about the new AI risk framework, and I think it was about 8% of investments being at risk there. Wondering if you could just talk a little bit more about some of the characteristics that underlie some of those investments, commonalities there, and what sorts of mitigation could you see being performed over time on those types of investments. Thanks.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Sure. Thanks, Ken. I’ll start, and Rob, maybe you can add to what I’m gonna say when I’m done. For some context, we started investing in software at a time when almost no other lenders did. The idea of being a lender to this space at a time that’s contrarian is, for us, not uncomfortable. In some ways, all of the noise that you’re hearing right now about risks in software is good for us because we understand the difference between good software credits and bad software credits and it means less competition. What we’re seeing in the marketplace right now is many peer lenders who had started to get into software lending in the last few years wanna be able to report to their shareholders how they’re reducing their software exposure.

They’re literally not participating in marketplace opportunities for new loans. That’s just some context for you. The exercise that Rob talked about involved looking at our portfolio from the standpoint of degree of AI disruption risk. He correctly said that 8% of the roughly 25% of our portfolio that’s in software, so it’s roughly 2% of our overall portfolio, is in a category of elevated AI risk. That doesn’t mean we think we’re gonna lose money on these loans. They could be low leverage. They could be near maturity. There are a lot of other factors that go into whether we’re gonna see elevated risk of credit loss in these loans.

This is a very important rating system from the standpoint of both evaluating new loans and helping us figure out from a monitoring perspective what should be our goals with those borrowers. For example, it would be reasonable to conclude that if we see elevated risk of AI disruption, we’re going to want to reduce exposure, or we’re going to want to get paid for the exposure that we’re taking. We may want to increase pricing. We may want to increase equity cushions. We may want to take other steps that reduce risk. What kinds of companies fall in this category? The most significant elements of the category are companies that are involved in providing tools that enable others who are writing code to do so more effectively.

This has historically been a significant category of software companies. It’s not a category that we’ve historically been attracted to, but we do have a couple of exposures that fall in this category. I’d say that’s the largest component of the group. Rob, if you wanna add more color, please do.

Rob Tuchér, Senior Managing Director and Officer, Golub Capital BDC (GBDC): Yeah. Thanks, David. Building on what David is talking about in terms of, you know, the different attributes, as I mentioned in my remarks, we look at it at two levels. One would be on the product side, the second would be at the end user level. If you look at the handful of businesses that are falling into what we would categorize as potential for higher AI disruption risk, David mentioned one category of products, which is development tools. The other would be, you know, something that is more reliant on content creation. A business such as Pluralsight, which we’re all well aware of. On the end market side, you’d have businesses that serve end markets that maybe are not seeing headcount reductions today but could see them in the future.

For example, contact center or call center, type businesses are ones that we’d be monitoring, you know, more closely. Again, this is really a forward-looking metric given that the performance of the portfolio has remained really strong. I think from our perspective, as I mentioned, we’re gonna continue to monitor for AI disruption risk and roll this analysis forward and report back on our results in the coming quarters.

Kenneth Lee, Analyst, RBC Capital Markets: Great. Very helpful there. Just one follow-up, if I may, just on capital allocation. Saw that you repurchased some stock in the quarter. Looking out, is the preference to lean more towards repurchases versus new investments? Thanks.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): I think we’re gonna continue to evaluate the best ways in which to allocate our capital. It’s hard to answer your question in an absolute sense. We’ve got to look at the opportunities in front of us, and that includes share repurchases. That includes new investment opportunities. That includes, you know, working within our target leverage framework. There are many factors that go into that.

Kenneth Lee, Analyst, RBC Capital Markets: Great. Very helpful there. Thanks again.

Operator: Your next question comes from Ethan Kaye with Lucid Capital Markets. Your line is open.

Ethan Kaye, Analyst, Lucid Capital Markets: Hey, guys. Thanks for taking the question. Kenneth covered a couple of my questions, but just maybe one for David. You know, in your introductory remarks, you kind of mentioned, based on some industry data you’re seeing, there’s perhaps a subset of companies across the industry that, you know, portfolio companies across the industry, borrowers that are really not adapting well to these economic conditions. I guess just kind of curious, like, what’s your diagnosis as to why these companies either have not adapted or, you know, have not been able to adapt? You know, is it capital structure related? Is it something related to the fundamental business, you know, the sector they’re in? Just any kind of through lines you can draw, you know, regarding those companies would be helpful.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Sure. First off, let’s talk about some of the indicia that we’re seeing of elevated credit stress. You can see it in Fitch default data. You can see it in the degree of busyness of restructuring advisors and restructuring lawyers. You can see it in the quantum of PIK amendments that are coming through. You can see it in the broadly syndicated market, in the proportion of the market that’s trading below 85. There are a whole variety of data points that I think are visible that illustrate that we’re in a period of some elevated credit stress. In some prior periods like this, that elevated credit stress has been concentrated in a single industry. You know, think about the fiber telecom crisis of the early 2000s.

We don’t really see that right now. It’s not all in one industry. There are, though, some red threads that are common themes. One, you know, common theme people talk about, the K-shaped recovery, are companies that are focused on the lower-end consumer. The lower-end consumer is stretched right now. You can see it in subprime auto data, subprime credit card data. You know, with the recent increases in gas prices, my expectation is that’s gonna get worse. A second red thread is companies that are beneficiaries of moving, of people selling their house and moving to a new house.

The rate of moving is very low right now because of people locked in by low interest rate mortgages that they put in place before interest rates went up. You know, if you’re in the furniture business or the home decor business or the HVAC business, these are all linked to a significant degree to moves. You know, those have been under some pressure. You know, a third red thread is some scenarios where we’ve seen changes in consumer behavior. You know, during COVID, there was a very significant increase in interest in purchasing in virtually all outdoor sports: hiking, fishing, hunting, boating, bicycling. Many of those areas have seen decreased spending levels in the period since, and it didn’t kind of go back to previous normal.

It’s gone lower than previous normal. Those are some examples. There are some that I’d say are more specific to the private equity ecosystem. There are some companies that were overleveraged, bought at very high multiples and overleveraged in the peak LBO boom of 2021 and early 2022. In some cases, those companies weren’t designed from a capital structure standpoint to be able to tolerate +5% on interest rates. I don’t think it’s a 1 factor, Ethan. I think there are a bunch of different themes that you see in the market today. I think that’s one of the reasons that this credit cycle is unusually elongated.

It’s not like there’s just one industry that needs to go through a restructuring process. There are a large number of companies in a variety of industries that need to do so.

Ethan Kaye, Analyst, Lucid Capital Markets: Got it. Thanks for that analysis.

Operator: Once again, if you would like to ask a question, it is star one on your telephone keypad. Your next question comes from Robert Dodd with Raymond James. Your line is open.

Robert Dodd, Analyst, Raymond James: Hi. Hi, guys. I don’t wanna go back and to software, but I’m gonna anyway. Can you give us any color on kind of growth dynamics? I mean, I think like net revenue retention, if it’s recurring revenue or same-store sales concepts. I mean, when I look at the Altman data that you publish, which is obviously, I think, a platform-wide set of data, there has been a noticeable slowdown in software growth. I mean, it’s still growing over the last several quarters.

I mean, how relevant is that to the assets that are in the BDC, and can you give any color on kinda like any metrics about how they’re doing versus, you know, again, the Altman numbers paint a certain picture.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Thank you, Robert. For those who are not familiar with what Robert is alluding to, we publish a quarterly index called the Golub Capital Altman Index, and it looks at the growth in both revenues and EBITDA for the first two months of each quarter. We are able to show those numbers by some industry sectors where we have a sufficient number of companies to make the numbers meaningful. Robert is correct that if you look at the data over the last, I would say, half dozen quarters, the good news is we are continuing to see growth across the U.S. economy generally and across the software sector, both growth in revenues and growth in earnings. We are seeing a slowdown in growth in revenues and earnings. Interestingly, that slowdown is not just in software.

That slowdown is broad-based. It’s across industries. Among the stronger industry segments that we’ve seen is software. There isn’t a selectivity, Robert, where the software companies that are included in the index are meaningfully different from the software companies that are in the GBDC portfolio. Wherever we have data, we’re showing the data. I think what the data says is that the software industry remains healthy, that you’re not seeing, as of now, you’re not seeing AI eat the software industry. You are seeing across the entirety of the U.S. economy, you are seeing a bit of a slowdown in growth.

Robert Dodd, Analyst, Raymond James: Got it. Thank you. Moving on to kind of the outlook for origination. You know, a kind of market summary, somewhat slower Q1. Beginning in Q2 has started to see a pickup, but not a rocket ship exactly. What’s your view on how you think, I mean, all the things were pent up, PE exits, et cetera. Those still all still stands, but it doesn’t mean they happen this year. I mean, what’s your view on kind of how that could trend? We’ve gone through a period of volatility. Sometimes that takes a period to recover from. Spreads are wider, et cetera.

I mean, what’s kind of your view on how, and it is a crystal ball moment, how the rest of the year could play out in terms of activity and general market trends?

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Yeah. We haven’t yet talked today about what an elephant in the room, which is the oil markets and the situation in the Straits of Hormuz. I think that’s a very large factor in respect of your question. Predicting the future of M&A trends almost requires an assumption about the Straits. In one scenario, we get near-term resolution, oil prices come down. There’s reasonable predictability about energy prices going forward. I think that scenario points to significant momentum and recovery in M&A. The alternative scenario, which is continued uncertainty, not lack of clarity, higher oil prices, you know, increasing shortages in parts of the world of, you know, jet fuel and fertilizer and petrochemicals.

I think that scenario points to an extended period of relatively impaired M&A activity, because uncertainty is not the friend of deals. You can have bad news and still have deals, but uncertainty is very challenging for deals. I’m not sure, Robert, as to which of those two paths we’re gonna see. I’m hopeful that we’ll see some resolution, and that we’ll be in the first of those two scenarios. I don’t think anybody can be certain right now which of those is gonna transpire.

Robert Dodd, Analyst, Raymond James: Got it. Thank you. It’s a pretty speculative question, so I appreciate it. Bye.

Operator: Your next question comes from Derek Hewitt with Bank of America. Your line is open.

Derek Hewitt, Analyst, Bank of America: Good morning, everyone. Could you talk about the sustainability of the dividend following the reset last year? Dividend coverage is lower versus kind of.

That’s kind of a pro forma number last quarter. Relative to where it is today, especially when we’re in an environment where you have the uncertainty in the Middle East, plus you have credit normalization, that could be a drag on earnings in the coming quarters.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Great question. You provide context again. We did a dividend reset recently, and it was challenging to figure out what the right level is because of uncertainty about base rates, uncertainty about spreads, uncertainty about credit. There are many different factors that impact earnings power. I think where we came out was a good place. I think if you look at our NII per share this last quarter, it’s an illustration of the earnings power of the company today. I think we talked in the call about several different paths to increasing that earnings power, including higher spreads and including, you know, gains, realized and unrealized gains.

This is something we’re gonna need to continue to watch and study and make sure that we continue to put our dividend in the right place as a floating rate loan fund. We need to be responsive to market.

Derek Hewitt, Analyst, Bank of America: Okay. Thank you. I might have missed this in the opening comments, but could you provide a little bit more color on what caused the increase in PIK? Of the total, like what percentage of PIK was just like your typical PIK by design versus amendment PIK?

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): I don’t think we disclosed that in our comments today. To be honest, I don’t remember what exactly is in the Q on that. I’m gonna ask to come back to you after we’ve reviewed what we’ve disclosed, and we can share that with you.

Derek Hewitt, Analyst, Bank of America: Okay, fair enough. All right. Thank you.

Tim Topicz, Chief Operating Officer, Golub Capital BDC (GBDC): David, Derek, it’s Tim. I might just jump in there and just say, generally speaking, the vast majority of our PIK interest is associated with borrowers that we’ve structured a PIK toggle into the credit agreement at the time of underwriting, as opposed to PIK amendments to support portfolio companies from a community perspective. That’s the vast majority. We did see an uptick in PIK interest income for the quarter versus the prior quarter. That was largely driven by one portfolio company that elected to toggle more PIK interest in this quarter than it did in the prior quarter. Hopefully that gives you more context.

Derek Hewitt, Analyst, Bank of America: Yes. Thank you. Appreciate the color.

Operator: Your next question comes from Paul Johnson with KBW. Your line is open.

Paul Johnson, Analyst, KBW: Hey, good afternoon. Thanks for taking my questions. Just going back to software, one or two questions there. I’m just curious, you know, how do you, I guess, approach any sort of software restructuring or discussions around the topic with the software company in this environment? I’m just thinking most of those companies probably would prefer to avoid any sort of, you know, insolvency or any sort of indication of, you know, a potential restructuring, certainly any sort of bankruptcy, you know, for, you know, any sort of concerns around obviously retaining of clients. I would imagine maybe you would be getting involved there a little bit earlier on than normal you would.

I’m curious, you know, kind of is it just more of a recurring check-in with most of these companies, or do you look to take potentially be a little bit more aggressive in taking action, you know, sooner in the current environment?

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Again, I’ll start with some comments on that, and then I’m going to ask Rob, who’s been leading our software underwriting efforts for years, to comment as well. Our approach is always the same. You want to identify problems early. Like when you identify problems early, there are more options that we as lenders, as sponsors, that management teams can undertake to resolve them. We’re big believers in not sweeping things under the rug and instead in escalating issues and having discussions about them early. That’s true in software. That’s true in other areas as well. You know, in software, we also maintain very close dialogue with both our sponsor clients and our management teams.

Again, we view ourselves as having two sets of partners when it comes to portfolio companies, both the sponsor and the management team. And sometimes one is more important, sometimes the other is more important. You know, this is not an asset class where you make a loan, put the document in the drawer and pray. That’s not an effective strategy for running a direct lending program. Our approach is the polar opposite of that. We really work very hard to engage with our sponsor clients and our portfolio companies to help them during both good times and in bad times. Rob?

Tim Topicz, Chief Operating Officer, Golub Capital BDC (GBDC): Yeah, I don’t have much to add. I would agree that we have a pretty methodical portfolio management process that.

Rob Tuchér, Senior Managing Director and Officer, Golub Capital BDC (GBDC): Spans all 4 of our industry verticals. I don’t think there’s much of a difference in terms of our process or approach. I think the other point that I think is important in these situations is that although it’s always a balancing act, given the fact that 95% of our software portfolio is in first lien senior secured loans and well diversified, I think that when we come into these discussions, we feel pretty good about, you know, where we sit in the capital structure and our position. I think that helps when we’re having these discussions, you know, with sponsors, if there is an ask on an amendment or there’s some degree of underperformance.

Paul Johnson, Analyst, KBW: Got it. Appreciate it. That’s all very helpful. One just higher level question. I mean, in terms of just market activity, where is that kind of gravitated to in this environment? I mean, is the market still available in terms of kind of a large buyouts, you know, the more of a large unitranche, $1 billion-plus type of financing acquisitions in the market? Or is it at this point a little bit more adverse to the larger transaction size, and you’re seeing potentially more activity kind of further down the market? That’s all for me. Thanks.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): I think we’re seeing activity across the size range, I don’t think it’s restricted to just small or just big. I, you know, I think that in terms of putting together a, a larger group of lenders interested in a particular transaction, it’s harder in software right now. In some respects, it’s harder for very large deals because some of the bite sizes of some players in the market who are interested in the large market, those bite sizes have come down in the context of slower subscriptions and redemptions in the non-traded space.

Paul Johnson, Analyst, KBW: Got it. Then I guess one more further. Just one more on that point, if you don’t mind me putting one more in here. Have you seen that the pressure from redemptions and the stuff that you just mentioned, I mean, has that impacted the market in any way from some of your more kind of usual competitors, as you mentioned here, commitment sizes or, you know, pricing dynamics?

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Look, I think we all live in a world of supply and demand. There’s a lower degree of capital that’s looking for new investments right now. That may be the biggest factor contributing to what I referred to in my prepared remarks as this shift in wind direction that’s caused the market to go from blowing toward more borrower friendly to now where it’s blowing more lender friendly.

Operator: This concludes the question and answer session. I’ll turn the call to David Golub for closing remarks.

David Golub, Chief Executive Officer, Golub Capital BDC (GBDC): Thank you. Just wanted to thank everybody for listening this morning and for your questions. As always, if there’s a topic that you’re interested in that we did not cover or did not cover in the depth you want, please feel free to reach out. Look forward to talking to you all next quarter.

Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect.