Hi YXI friends,

Today, we are going to review Golub Capital, a top-5 BDC with 14 years of track record.

The activities in the Private Credit world have become more challenging for BDCs this year. This is because of 3 primary reasons:

1. Many borrowers are waiting for the rate cuts, reducing the supply of private credit. This makes the lenders more competitive with each other in terms of deal flows, reducing the spread they can charge.

2. Some companies start to feel the squeeze from higher rates, leading to potentially higher default rates. We might be in the early days of witnessing this.

3. Most of BDCs have floating rate investments while borrowing at fixed rates. This is great in a hiking cycle, but not so good in a cutting cycle.

The great majority of BDC’s short-term issues will come from one of these three themes. It is the reason why my rating for the entire sector at the moment is equal weight. Basically the question is: great dividends, will they last?

With the above in mind, let’s dive in to GBDC.

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Introducing Golub Capital BDC (GBDC)

With a portfolio of $7.9 billion at fair value, GBDC is the fifth largest BDCs, with a strong track record under the Golub brothers, Lawrence and David. Founder-led operations with their names on the door tend to be investor friendly, as they have a personal reputation to protect at all costs.

GBDC focuses on the middle market, first lien senior secured loans. Their specialty is the “One Stop Loan”.

A “One Stop Loan” is a type of senior secured loan facility that combines multiple types of debt instruments into a single loan. It simplifies the borrowing process by consolidating a company’s financing needs (e.g. revolving credit and term loans) into one agreement. Typically, they are senior secured with a floating rate over SOFR.

GBDC has a portfolio of 380 companies - the largest diversification in terms of numbers we’ve seen so far. 93% of GBDC’s investments are in First Lien (Traditional Senior Secured plus One Stop).

99% of the debt investments are floating rates. The weight average annual yield on accruing debt investments is current 12.3%. The non accrual rate is 1% of GBDC’s portfolio at fair value, or 1.6% at cost, consisting of 10 investments.

It is important to note that GBDC closed its merger with GBDC 3 in June. The merger boosted GBDC’s net assets by $2.6 billion.

2. Latest Quarter’s Growth Highlights

Total performance:

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