Filed Pursuant to Rule
497
File No. 333-193308
PROSPECTUS SUPPLEMENT
(to Prospectus dated March 14, 2014)
$75,000,000
GOLUB CAPITAL BDC, INC.
Common Stock
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. Our investment objective is to generate current income and capital appreciation by investing primarily in senior secured, one stop, second lien and subordinated loans of, and warrants and minority equity securities in, U.S. middle-market companies.
GC Advisors LLC serves as our investment adviser. Golub Capital LLC serves as our administrator. GC Advisors LLC and Golub Capital LLC are affiliated with Golub Capital (as defined herein), a leading lender to middle-market companies that has over $10.0 billion in capital under management.
We have entered into an equity distribution agreement, dated August 20, 2014, with UBS Securities LLC, which we refer to as the sales agent, relating to the shares of common stock offered by this prospectus supplement and the accompanying prospectus. The equity distribution agreement provides that we may offer and sell shares of our common stock having an aggregate offering price of up to $75.0 million from time to time through the sales agent. Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act, including sales made directly on the NASDAQ Global Select Market or similar securities exchanges or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices.
The sales agent will receive a commission from us equal to 2.0% of the gross sales price of any shares of our common stock sold through it under the equity distribution agreement. The sales agent is not required to sell any specific number or dollar amount of common stock, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the shares of our common stock offered by this prospectus supplement and the accompanying prospectus. See “Plan of Distribution” beginning on page S-38 of this prospectus supplement. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less commissions payable under the equity distribution agreement and discounts, if any, will not be less than the net asset value per share of our common stock at the time of such sale.
Our common stock is traded on the NASDAQ Global Select Market under the symbol “GBDC”. The last reported closing price for our common stock on August 19, 2014 was $16.85 per share. The net asset value of our common stock on June 30, 2014 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $15.44 per share.
Shares of closed-end investment companies, including business development companies, frequently trade at a discount to their net asset value. If our shares trade at a discount to our net asset value, it will likely increase the risk of loss for purchasers in this offering. Investing in our common stock involves a high degree of risk. Before buying any securities, you should read the discussion of the material risks of investing in our common stock, including the risk of leverage, in “Risk Factors” beginning on page 13 of the accompanying prospectus.
This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our common stock. Please read it before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or the SEC. We maintain a website at http://www.golubcapitalbdc.com and make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available on or through our website. You may also obtain such information, free of charge, and make shareholder inquiries by contacting us at 150 South Wacker Drive, Suite 800, Chicago, Illinois 60606, Attention: Investor Relations, or by calling us collect at (312) 205-5050. The SEC also maintains a website at http://www.sec.gov that contains such information.
We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which may be referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment.
Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
UBS Investment Bank
The date of this prospectus supplement is August 20, 2014.
ABOUT THIS PROSPECTUS SUPPLEMENT
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not, and the sales agent has not, authorized any other person to provide you with different information. We are not, and the sales agent is not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement is accurate only as of the date on the front cover of this prospectus supplement and that the information appearing in the accompanying prospectus is accurate only as of the date on its front cover. Our business, financial condition, results of operations, cash flows and prospects may have changed since that date. We will update these documents to reflect material changes only as required by law. We are offering to sell, and seeking offers to buy, securities only in jurisdictions where offers are permitted.
This document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement will control. You should read this prospectus supplement and the accompanying prospectus together with the additional information described under the headings, “Risk Factors” included in the accompanying prospectus and “Available Information” included in this prospectus supplement before investing in our common stock.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PROSPECTUS
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This summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read the more detailed information set forth under “Risk Factors” included in the accompanying prospectus and the other information included in this prospectus supplement and the accompanying prospectus carefully.
Except as otherwise indicated, the terms:
| · | “we,” “us,” “our” and “Golub Capital BDC” refer to Golub Capital BDC, Inc., a Delaware corporation, and its consolidated subsidiaries and, for the periods prior to consummation of the BDC Conversion (as defined below), Golub Capital BDC LLC, a Delaware limited liability company, or LLC, and its consolidated subsidiaries; |
| · | “Holdings” refers to Golub Capital BDC 2010-1 Holdings LLC, a Delaware LLC, our direct subsidiary, and “2010 Issuer” refers to Golub Capital BDC 2010-1 LLC, a Delaware LLC, a direct subsidiary of Holdings and our indirect subsidiary; |
| · | “2014 Issuer” refers to Golub Capital BDC CLO 2014 LLC, a Delaware LLC, our direct subsidiary; |
| · | “Funding” refers to Golub Capital BDC Funding, LLC, a Delaware LLC, our direct subsidiary; |
| · | “2010 Debt Securitization” refers to the $350.0 million term debt securitization that we completed on July 16, 2010, as amended on February 15, 2013, in which the 2010 Issuer issued an aggregate of $350.0 million of notes including $203.0 million of Class A 2010 Notes, which bear interest at a rate of three-month London Interbank Offered Rate, or LIBOR, plus 1.74%, $12.0 million of Class B 2010 Notes, which bear interest at a rate of three-month LIBOR plus 2.40%, and $135.0 million face amount of Subordinated 2010 Notes that do not bear interest; |
| · | “2014 Debt Securitization” refers to the $402.6 million term debt securitization that we completed on June 5, 2014, in which the 2014 Issuer issued an aggregate of $402.6 million of securities including $191.0 million of Class A-1 2014 Notes, which bear interest at a rate of three-month LIBOR plus 1.75%, $20.0 million of Class A-2 2014 Notes, which bear interest at a rate of three-month LIBOR plus 1.45% through December 4, 2015 and three-month LIBOR plus 1.95% thereafter, $35.0 million of Class B 2014 Notes, which bear interest at a rate of three-month LIBOR plus 2.50%, $37.5 million of Class C 2014 Notes, which bear interest at a rate of three-month LIBOR plus 3.50%, and $119.1 of LLC equity interests that do not bear interest; |
| · | “Credit Facility” refers to the senior secured revolving credit facility that Funding entered into on July 21, 2011 with Wells Fargo Securities, LLC, as administrative agent, and Wells Fargo Bank, N.A., as lender, as most recently amended on June 5, 2014, for up to $150.0 million that bears interest at a rate of one-month LIBOR plus 2.25% per annum through the reinvestment period, which ends on October 21, 2014, and bears interest at a rate of one-month LIBOR plus 2.75% for the period following the reinvestment period through the stated maturity date of October 22, 2018; |
| · | “Revolver Funding” refers to Golub Capital BDC Revolver Funding LLC, a Delaware LLC, our direct subsidiary; |
| · | “Revolver” refers to the $15.0 million revolving line of credit, which may be increased up to $30.0 million that Revolver Funding entered into with The PrivateBank and Trust Company, or PrivateBank, that bears interest, at the election of Revolver Funding, at a rate of either one-, two- or three-month LIBOR plus 3.50% per annum or PrivateBank’s prime rate plus 1.50% per annum through November 22, 2014 and either one-, two- or three-month LIBOR plus 2.50% per annum or PrivateBank’s prime rate plus 0.50% per annum for the period subsequent to November 22, 2014 and matures on November 22, 2019; |
| · | “SLF” refers to Senior Loan Fund LLC, an unconsolidated Delaware LLC, in which we co-invest with a non-affiliated third party, which is currently RGA Reinsurance Company, or RGA, primarily in senior secured loans of middle-market companies. SLF is capitalized as transactions are completed and all portfolio and investment decisions in respect of SLF must be approved by the SLF investment committee, which presently consists of two representatives of each of the members (with unanimous approval required from either (i) one representative of each of us and RGA or (ii) both representatives of each of us and RGA currently). As of June 30, 2014, we owned 87.5% of both the outstanding subordinated notes and LLC equity interests of SLF. As of June 30, 2014, SLF had subordinated note commitments from its members totaling $100.0 million and LLC equity interest subscriptions from its members totaling $25.0 million. We have committed to fund $87.5 million of subordinated notes and $21.9 million of LLC equity interest subscriptions to SLF; |
| · | “GC Advisors” refers to GC Advisors LLC, a Delaware LLC, our investment adviser; |
| · | “Administrator” refers to Golub Capital LLC, a Delaware LLC, an affiliate of GC Advisors and our administrator and, for periods prior to February 5, 2013, GC Service Company, LLC; and |
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| · | “Golub Capital” refers, collectively, to the activities and operations of Golub Capital Incorporated, Golub Capital LLC (formerly Golub Capital Management LLC), which entity employs all of Golub Capital’s investment professionals, GC Advisors and associated investment funds and their respective affiliates. |
On April 13, 2010, we converted from an LLC into a corporation. In this conversion, Golub Capital BDC, Inc. succeeded to the business of Golub Capital BDC LLC and its consolidated subsidiary, and the members of Golub Capital BDC LLC became stockholders of Golub Capital BDC, Inc. In this prospectus supplement, we refer to such transactions as the “BDC Conversion.” Prior to the BDC Conversion, Golub Capital BDC LLC held all of the outstanding LLC interests in our predecessor, Golub Capital Master Funding LLC, or GCMF.
Golub Capital BDC
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We were formed in November 2009 to continue and expand the business of our predecessor, GCMF, which commenced operations in July 2007, by making investments primarily in senior secured, one stop (a loan that combines characteristics of traditional first lien senior secured loans and second lien or subordinated loans), second lien and subordinated (a loan that ranks senior only to a borrower’s equity securities and ranks junior to all of such borrower’s other indebtedness in priority of payment) loans and warrants and minority equity securities of middle-market companies that are, in most cases, sponsored by private equity firms. In this prospectus, the term “middle-market” generally refers to companies having earnings before interest, taxes, depreciation and amortization, or EBITDA, of between $5.0 million and $50.0 million annually.
Our investment objective is to maximize the total return to our stockholders by generating current income and capital appreciation by investing primarily in senior secured, one stop, second lien and subordinated loans of, and warrants and minority equity securities in, U.S. middle-market companies. We intend to achieve our investment objective by (1) accessing the established loan origination channels developed by Golub Capital, a leading lender to middle-market companies with over $10.0 billion in capital under management as of June 30, 2014, (2) selecting investments within our core middle-market company focus, (3) partnering with experienced private equity firms, or sponsors, in many cases with whom we have invested alongside in the past, (4) implementing the disciplined underwriting standards of Golub Capital and (5) drawing upon the aggregate experience and resources of Golub Capital.
We seek to create a diverse portfolio that includes primarily senior secured, one stop, second lien and subordinated loans and warrants and minority equity securities by primarily investing approximately $5.0 million to $30.0 million of capital, on average, in the securities of U.S. middle-market companies. We may also selectively invest more than $30.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base.
We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which may be referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment.
As of June 30, 2014, our portfolio at fair value was comprised of 21.8% senior secured loans, 65.4% one stop loans, 6.6% second lien loans, 0.3% subordinated loans, 3.3% equity and 2.6% of investments in SLF. As of September 30, 2013, our portfolio at fair value was comprised of 28.9% senior secured loans, 54.1% one stop loans, 11.0% second lien loans, 2.2% subordinated loans, 3.3% equity and 0.5% of investments in SLF.
As of June 30, 2014 and September 30, 2013, we had debt and equity investments in 146 and 135 portfolio companies, respectively, and investments in subordinated notes and LLC equity interests in SLF. For the three and nine months ended June 30, 2014, our income producing assets, which represented nearly 100% of our total portfolio, had a weighted average annualized income yield (which is calculated as income from interest and fees excluding amortization of capitalized fees and discounts divided by the average fair value of earning investments) of 8.3% and 8.3%, respectively, and a weighted average annualized investment income yield (which is calculated as income from interest, fees and amortization of capitalized fees and discounts divided by average fair value of earning investments) of 8.9% and 8.9%, respectively. For the three and nine months ended June 30, 2013, our income producing assets, which represented nearly 100% of our total portfolio, had a weighted average annualized income yield of 9.2% and 9.4%, respectively, and a weighted average annualized investment income yield of 9.9% and 10.5%, respectively.
As of June 30, 2014, we and United Insurance of America, or United Insurance, owned 87.5% and 12.5%, respectively, of both the outstanding subordinated notes and LLC equity interests of SLF. As of June 30, 2014, SLF had subordinated note commitments from us and United Insurance totaling $100.0 million, of which approximately $33.8 million and $4.7 million in aggregate principal amount was funded at June 30, 2014 and September 30, 2013, respectively. As of June 30, 2014, SLF had LLC equity interest subscriptions from us and United Insurance totaling $25.0 million, of which approximately $4.8 million and $0.7 million in aggregate was called and contributed at June 30, 2014 and September 30, 2013, respectively. Our investment in SLF is not a qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of our total assets.
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Our Adviser
Our investment activities are managed by our investment adviser, GC Advisors. GC Advisors is responsible for sourcing potential investments, conducting research and due diligence on prospective investments and equity sponsors, analyzing investment opportunities, structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. GC Advisors was organized in September 2008 and is a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. Under an investment advisory agreement most recently approved by our board of directors in May 2014, or the Investment Advisory Agreement, with GC Advisors, we have agreed to pay GC Advisors an annual base management fee and an incentive fee based on our investment performance for its services. See “Management Agreements — Investment Advisory Agreement — Management Fee” in the accompanying prospectus for a discussion of the base management fee and incentive fee, including the cumulative income incentive fee and the income and capital gains incentive fee, payable by us to GC Advisors. On August 5, 2014, our board of directors approved, and we entered into, an amendment and restatement of the Investment Advisory Agreement, effective as of June 30, 2014, to provide that the Capital Gain Incentive Fee Base (as defined in “Fees and Expenses” below) is reduced by the amount of any unamortized deferred financing costs, if and to the extent that such costs exceed all unrealized capital appreciation on a cumulative basis. Unlike most closed-end funds whose fees are based on assets net of leverage, our base management fee is based on our average-adjusted gross assets (including assets purchased with borrowed funds and securitization-related assets, leverage, unrealized depreciation or appreciation on derivative instruments and cash collateral on deposit with custodian but adjusted to exclude cash and cash equivalents so that investors do not pay the base management fee on such assets) and, therefore, GC Advisors benefits when we incur debt or use leverage. For purposes of the Investment Advisory Agreement, cash equivalents means U.S. government securities and commercial paper instruments maturing within 270 days of purchase (which is different than the definition under U.S. Generally Accepted Accounting Principles, or GAAP, which defines cash equivalents as U.S. government securities and commercial paper instruments maturing within 90 days of purchase). Additionally, under the incentive fee structure, GC Advisors benefits when capital gains are recognized and, because it determines when a holding is sold, GC Advisors controls the timing of the recognition of capital gains. Our board of directors is charged with protecting our interests by monitoring how GC Advisors addresses these and other conflicts of interest associated with its management services and compensation. While not expected to review or approve each borrowing, our independent directors periodically review GC Advisors’ services and fees as well as its portfolio management decisions and portfolio performance. In connection with these reviews, our independent directors consider whether our fees and expenses (including those related to leverage) remain appropriate.
At a meeting of our board of directors held in May 2014, our board of directors unanimously voted to reapprove the Investment Advisory Agreement. In reaching a decision to approve the Investment Advisory Agreement, the board of directors reviewed a significant amount of information and considered, among other things:
| · | the nature, extent and quality of the advisory and other services provided to us by GC Advisors; |
| · | the investment performance of us and GC Advisors; |
| · | the fee structures of comparable externally managed business development companies that engage in similar investing activities; and |
| · | various other matters. |
Based on the information reviewed and the considerations detailed above, the board of directors, including all of the directors who are not “interested persons,” as that term is defined in the 1940 Act, of us or GC Advisors, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the Investment Advisory Agreement, as well as our administration agreement with the Administrator, or the Administration Agreement, as being in the best interests of our stockholders.
GC Advisors is an affiliate of Golub Capital and has entered into a staffing agreement, or the Staffing Agreement, with two Golub Capital affiliates, Golub Capital Incorporated and Golub Capital LLC. Under the Staffing Agreement, these companies make experienced investment professionals available to GC Advisors and provide access to the senior investment personnel of Golub Capital and its affiliates. The Staffing Agreement provides GC Advisors with access to investment opportunities, which we refer to in the aggregate as deal flow, generated by Golub Capital and its affiliates in the ordinary course of their businesses and commits the members of GC Advisors’ investment committee to serve in that capacity. As our investment adviser, GC Advisors is obligated to allocate investment opportunities among us and its other clients fairly and equitably over time in accordance with its allocation policy. See “Conflicts of Interest” below and “Related Party Transactions and Certain Relationships” in the accompanying prospectus. However, there can be no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time. GC Advisors seeks to capitalize on the significant deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of Golub Capital’s investment professionals.
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An affiliate of GC Advisors, the Administrator, provides the administrative services necessary for us to operate. See “Management Agreements — Administration Agreement” in the accompanying prospectus for a discussion of the fees and expenses (subject to the review and approval of our independent directors) we are required to reimburse to the Administrator.
About Golub Capital
Golub Capital, founded in 1994, is a leading lender to middle-market companies, with a long track record of investing in senior secured, one stop, second lien and subordinated loans. As of June 30, 2014, Golub Capital managed over $7.0 billion of invested or available capital for senior secured, one stop, second lien and subordinated loan investments in middle-market companies. Since its inception, Golub Capital has closed deals with over 150 middle-market sponsors and repeat transactions with over 100 sponsors.
Golub Capital’s middle-market lending group is managed by a four-member senior management team consisting of Lawrence E. Golub, David B. Golub, Andrew H. Steuerman and Gregory W. Cashman. As of June 30, 2014, Golub Capital’s more than 60 investment professionals had an average of over 12 years of investment experience and were supported by more than 115 administrative and back office personnel that focus on operations, finance, legal and compliance, accounting and reporting, marketing, information technology and office management.
Market Trends
We have identified the following trends that may affect our business:
Target Market. We believe that small and middle-market companies in the United States with annual revenues between $10.0 million and $2.5 billion represent a significant growth segment of the U.S. economy and often require substantial capital investments to grow. Middle-market companies have generated a significant number of investment opportunities for investment funds managed or advised by Golub Capital, and we believe that this market segment will continue to produce significant investment opportunities for us.
Specialized Lending Requirements. We believe that several factors render many U.S. financial institutions ill-suited to lend to U.S. middle-market companies. For example, based on the experience of our management team, lending to U.S. middle-market companies (1) is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of information for such companies, (2) requires due diligence and underwriting practices consistent with the demands and economic limitations of the middle market and (3) may also require more extensive ongoing monitoring by the lender.
Demand for Debt Capital. We believe there is a large pool of uninvested private equity capital for middle-market companies. We expect private equity firms will seek to leverage their investments by combining equity capital with senior secured loans and subordinated debt from other sources, such as us.
Competition from Bank Lenders. We believe that many traditional bank lenders to middle-market businesses have either exited or de-emphasized their service and product offerings in the middle market. These traditional lenders have instead focused on lending and providing other services to large corporate clients. We believe this has resulted in fewer key players and the reduced availability of debt capital to the companies we target.
Market Environment. We believe that as part of the path of economic recovery following the credit crisis, there has been increased competition for new middle-market investments due to some new non-bank finance companies that have entered the market and due to improving financial performance of middle-market companies. However, we believe that our scale and strong market position will continue to allow us to find investment opportunities with attractive risk-adjusted returns.
Competitive Strengths
Deep, Experienced Management Team. We are managed by GC Advisors, which, as of June 30, 2014, had access through the Staffing Agreement to the resources and expertise of Golub Capital’s more than 175 employees, led by our chairman, Lawrence E. Golub, and our chief executive officer, David B. Golub. As of June 30, 2014, the more than 60 investment professionals of Golub Capital had an average of over 12 years of investment experience and were supported by more than 115 administrative and back office personnel that focus on operations, finance, legal and compliance, accounting and reporting, marketing, information technology and office management. Golub Capital seeks to hire and retain high-quality investment professionals and reward those personnel based on investor returns. In 2013, Golub Capital was awarded Finance Monthly’s Global Awards 2013 “Credit Asset Manager of the Year” and DealMakers M&A Awards 2013 “Middle Market Lender of the Year.” In 2012, Golub Capital was awarded the Association for Corporate Growth (ACG) New York Champion’s Award for “Senior Lender Firm of the Year” and the M&A Advisor award for “Lender Firm of the Year.” These awards do not constitute an endorsement by such organizations of the securities being offered by this prospectus supplement.
Leading U.S. Debt Platform Provides Access to Proprietary Relationship-Based Deal Flow. GC Advisors gives us access to the deal flow of Golub Capital, one of the leading middle-market lenders in the United States. Golub Capital has been ranked a “Top 3” Traditional Middle Market Bookrunner every year from 2008 through the first quarter of 2014 by Thomson Reuters LPC for senior secured loans of up to $100.0 million for leveraged buyouts (based on number of deals completed). Since its inception, Golub Capital has closed deals with over 150 middle-market sponsors and repeat transactions with over 100 sponsors. We believe that Golub Capital receives relationship-based “early looks” and “last looks” at many investment opportunities in the U.S. middle-market market, allowing it to be highly selective in the transactions it pursues.
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Disciplined Investment and Underwriting Process. GC Advisors utilizes the established investment process of Golub Capital for reviewing lending opportunities, structuring transactions and monitoring investments. Using its disciplined approach to lending, GC Advisors seeks to minimize credit losses through effective underwriting, comprehensive due diligence investigations, structuring and the implementation of restrictive debt covenants.
Regimented Credit Monitoring. Following each investment, GC Advisors implements a regimented credit monitoring system. This careful approach, which involves ongoing review and analysis by teams of professionals, has enabled us to identify problems early and to assist borrowers before they face difficult liquidity constraints.
Concentrated Middle-Market Focus. Because of our focus on the middle-market, we understand the following general characteristics of middle-market lending:
| · | middle-market companies are generally less leveraged than large companies and, we believe, offer more attractive investment returns in the form of upfront fees, prepayment penalties and higher interest rates; |
| · | middle-market issuers are more likely to have simple capital structures; |
| · | carefully structured covenant packages enable middle-market lenders to take early action to remediate poor financial performance; and |
| · | middle-market lenders can undertake thorough due diligence investigations prior to investment. |
Operating and Regulatory Structure
Our investment activities are managed by GC Advisors and supervised by our board of directors, a majority of whom are independent of us, GC Advisors and its affiliates.
As a business development company, we are required to comply with certain regulatory requirements. For example, while we are permitted to finance investments using leverage, which may include the issuance of shares of preferred stock, or notes and other borrowings, our ability to use leverage is limited in significant respects. See “Regulation” in the accompanying prospectus. Any decision on our part to use leverage will depend upon our assessment of the attractiveness of available investment opportunities in relation to the costs and perceived risks of such leverage. GC Advisors makes recommendations to our board of directors with respect to leverage policies. Our board of directors determines our leverage policy, including approving in advance the incurrence of material indebtedness and the execution of material contracts, and directs GC Advisors to implement such policies. The use of leverage to finance investments creates certain risks and potential conflicts of interest. See “Risk Factors — Risks Relating to our Business and Structure — There are significant potential conflicts of interest that could affect our investment returns — Our management and incentive fee structure may create incentives for GC Advisors that are not fully aligned with the interests of our stockholders,” “— Risks Relating to our Business and Structure — Regulations governing our operation as a business development company affect our ability to, and the way in which we, raise additional capital. As a business development company, the necessity of raising additional capital exposes us to risks, including the typical risks associated with leverage” and “— Risks Relating to our Business and Structure — We intend to finance our investments with borrowed money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us” in the accompanying prospectus.
Also, as a business development company, we are generally prohibited from acquiring assets other than “qualifying assets” unless, after giving effect to any acquisition, at least 70% of our total assets are qualifying assets. Qualifying assets generally include securities of “eligible portfolio companies,” cash, cash equivalents, U.S. government securities and high-quality debt investments maturing in one year or less from the time of investment. Under the 1940 Act and the rules thereunder, “eligible portfolio companies” include (1) private domestic operating companies, (2) public domestic operating companies whose securities are not listed on a national securities exchange (e.g., the New York Stock Exchange, NYSE Amex Equities and The NASDAQ Stock Market) or registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and (3) public domestic operating companies having a market capitalization of less than $250.0 million. Public domestic operating companies whose securities are quoted on the over-the-counter bulletin board and through Pink Sheets LLC are not listed on a national securities exchange and therefore are eligible portfolio companies. See “Regulation” in the accompanying prospectus.
Conflicts of Interest
Subject to certain 1940 Act restrictions on co-investments with affiliates, GC Advisors offers us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other relevant factors. Such offers are subject to the exception that, in accordance with GC Advisors’ code of ethics and allocation policies, we might not participate in each individual opportunity but will, on an overall basis, be entitled to participate equitably with other entities sponsored or managed by GC Advisors and its affiliates.
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To the extent that we compete with entities sponsored or managed by GC Advisors or its affiliates for a particular investment opportunity, GC Advisors will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with (1) its internal conflict of interest and allocation policies, (2) the requirements of the Advisers Act and (3) certain restrictions under the 1940 Act regarding co-investments with affiliates. GC Advisors’ allocation policies are intended to ensure that, over time, we may generally share equitably in investment opportunities with other investment funds, accounts or other investment vehicles, together referred to as accounts, sponsored or managed by GC Advisors or its affiliates, particularly those involving a security with limited supply or involving differing classes of securities of the same issuer which may be suitable for us and such other accounts.
GC Advisors and its affiliates have other clients with similar or competing investment objectives, including several private funds that are pursuing an investment strategy similar to ours, some of which are continuing to seek new capital commitments. In serving these clients, GC Advisors may have obligations to other clients or investors in those entities. Our investment objective may overlap with such affiliated accounts. GC Advisors’ allocation procedures are designed to allocate investment opportunities among the accounts sponsored or managed by GC Advisors and its affiliates in a manner consistent with its obligations under the Advisers Act. If two or more accounts with similar investment strategies are actively investing, GC Advisors will seek to allocate investment opportunities among eligible accounts in a manner that is fair and equitable over time and consistent with its allocation policy. GC Advisors has put in place a conflict-resolution policy that addresses the co-investment restrictions set forth under the 1940 Act. See “Risk Factors — Risks Relating to our Business and Structure — There are significant potential conflicts of interest that could affect our investment returns — Conflicts related to obligations GC Advisors’ investment committee, GC Advisors or its affiliates have to other clients” in the accompanying prospectus.
GC Advisors seeks to ensure the equitable allocation of investment opportunities when we are able to invest alongside other accounts sponsored or managed by GC Advisors and its affiliates. When we invest alongside such other accounts, such investments are made consistent with GC Advisors’ allocation policy. Under this allocation policy, if an investment opportunity is appropriate for us and another similar eligible account, the opportunity will be allocated pro rata based on relative total capital of each of us and such other eligible accounts, subject to minimum and maximum investment size limits. In situations in which co-investment with other entities sponsored or managed by GC Advisors or its affiliates is not permitted or appropriate, such as when, in the absence of exemptive relief described below, we and such other entities would be making different investments in the same issuer, GC Advisors will need to decide whether we or such other entity or entities will proceed with the investment. GC Advisors will make these determinations based on its policies and procedures, which generally require that such opportunities be offered to eligible accounts on a basis that will be fair and equitable over time, including, for example, through random or rotational methods. We and GC Advisors have submitted an exemptive application to the SEC to permit greater flexibility to negotiate the terms of co-investments if our board of directors determines that it would be advantageous for us to co-invest with other accounts sponsored or managed by GC Advisors or its affiliates in a manner consistent with our investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. Our board of directors regularly reviews the allocation policy of Golub Capital and annually reviews the code of ethics of GC Advisors. See “Related Party Transactions and Certain Relationships” in the accompanying prospectus.
Additionally, under our incentive fee structure, GC Advisors benefits when we recognize capital gains and, because GC Advisors determines when a holding is sold, GC Advisors controls the timing of the recognition of such capital gains. See “Risk Factors — Risks Relating to our Business and Structure — There are significant potential conflicts of interest that could affect our investment returns — Our management and incentive fee structure may create incentives for GC Advisors that are not fully aligned with the interests of our stockholders” in the accompanying prospectus. In addition, because the base management fee that we pay to GC Advisors is based on our average adjusted gross assets, including those assets acquired through the use of leverage, GC Advisors has a financial incentive to incur leverage.
Recent Developments
Effective July 31, 2014, United Insurance sold its subordinated note and LLC equity interest investments in SLF to RGA at fair value. In connection with United Insurance’s sale of its interest in SLF to RGA, RGA entered into a subscription agreement for LLC equity interests in SLF in the same amount for which United Insurance had previously been subscribed. In addition, we entered into an amendment to the limited liability company agreement of SLF pursuant to which RGA was substituted for United Insurance as a member of SLF and the SLF investment committee was expanded to consist of two representatives of each of us and RGA (with unanimous approval required from (i) one representative of each of us and RGA or (ii) both representatives of each of us and RGA).
On August 5, 2014, our board of directors declared a quarterly distribution of $0.32 per share payable on September 26, 2014 to holders of record as of September 16, 2014.
On August 5, 2014, our board of directors approved, and we entered into, an amendment and restatement of the Investment Advisory Agreement, effective as of June 30, 2014, to provide that the Capital Gain Incentive Fee Base (as defined in “Fees and Expenses” below) is reduced by the amount of any unamortized deferred financing costs, if and to the extent that such costs exceed all unrealized capital appreciation on a cumulative basis.
| S-6 |
On August 5, 2014, our board of directors approved a share repurchase program which allows us to repurchase up to $50.0 million of our outstanding common stock on the open market at prices below our net asset value as reported in our then most recently published consolidated financial statements. The share repurchase program may be implemented at the discretion of management. The shares may be purchased from time to time at prevailing market prices, through open market transactions, including block transactions.
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Our principal executive offices are located at 150 South Wacker Drive, Suite 800, Chicago, Illinois 60606, and our telephone number is (312) 205-5050. Our corporate website is located at www.golubcapitalbdc.com. Information on our website is not incorporated into or a part of this prospectus supplement.
| S-7 |
| Common Stock Offered by Us | Shares of our common stock having an aggregate offering price of up to $75.0 million. | |
| Manner of Offering | “At the market” offering that may be made from time to time through UBS Securities LLC, as sales agent, using commercially reasonable efforts consistent with its sales and trading practices. See “Plan of Distribution.” | |
| Use of Proceeds | We intend to use the net proceeds from the sale of our common stock to invest in portfolio companies in accordance with our investment objective and strategies and for general corporate purposes. We expect that our new investments will consist primarily of senior secured, one stop, second lien and subordinated loans. We will also pay operating expenses, including management and administrative fees, and may pay other expenses such as due diligence expenses relating to potential new investments, from the net proceeds of this offering. A portion of the net proceeds may also be utilized to capitalize SLF. We may also use a portion of the net proceeds from this offering to repay amounts outstanding under our Credit Facility, which bore an annual interest rate of 2.43% (i.e., one-month LIBOR plus 2.25% per annum) on the outstanding balance of $33.5 million as of June 30, 2014 and matures on October 22, 2018. See “Use of Proceeds” in this prospectus supplement for more information. | |
| NASDAQ Global Select Market Symbol | “GBDC” | |
| Trading at a Discount | Shares of closed-end investment companies, including business development companies, frequently trade at a discount to their net asset value. We are not generally able to issue and sell our common stock at a price below our net asset value per share unless we have stockholder approval. The risk that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our shares will trade above, at or below net asset value. See “Risk Factors” in the accompanying prospectus. | |
| Dividend Reinvestment Plan | We have adopted a dividend reinvestment plan for our stockholders, which is an “opt out” dividend reinvestment plan. Under this plan, cash distributions to our stockholders are automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our dividend reinvestment plan. If a stockholder opts out, that stockholder receives cash dividends or other distributions. Stockholders who receive distributions in the form of shares of common stock generally are subject to the same U.S. federal, state and local tax consequences as stockholders who elect to receive their distributions in cash but do not receive any corresponding cash distributions with which to pay any applicable taxes. See “Dividend Reinvestment Plan” in the accompanying prospectus. | |
| Custodian and Transfer Agent | U.S. Bank National Association serves as our custodian, and American Stock Transfer & Trust Company, LLC serves as our transfer and dividend paying agent and registrar. See “Custodian, Transfer and Dividend Paying Agent and Registrar” in the accompanying prospectus. | |
| Risk Factors | An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. See “Risk Factors” beginning on page 13 of the accompanying prospectus to read about factors you should consider, including the risks of leverage, before investing in our common stock. |
| S-8 |
The following table is intended to assist you in understanding the costs and expenses that an investor in shares of our common stock will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. Actual costs and expenses incurred by investors in shares of our common stock may be greater than the percentage estimates in the table below. The following table excludes one-time fees payable to third parties not affiliated with GC Advisors that were incurred in connection with each of the 2010 Debt Securitization and the 2014 Debt Securitization, collectively the Debt Securitizations, but includes all of the applicable ongoing fees and expenses of the Debt Securitizations. Whenever this prospectus supplement contains a reference to fees or expenses paid by “us” or “Golub Capital BDC,” or that “we” will pay fees or expenses, our common stockholders will indirectly bear such fees or expenses.
| Stockholder transaction expenses: | ||||
| Sales load (as a percentage of offering price) | 2.00 | %(1) | ||
| Offering expenses (as a percentage of offering price) | 0.40 | %(2) | ||
| Dividend reinvestment plan expenses | 0.00 | %(3) | ||
| Total stockholder transaction expenses (as a percentage of offering price) | 2.40 | % | ||
| Annual expenses (as a percentage of net assets attributable to common stock): | ||||
| Management fees | 2.42 | %(4) | ||
| Incentive fees payable under the Investment Advisory Agreement (20%) | 0.88 | %(5) | ||
| Interest payments on borrowed funds | 2.85 | %(6) | ||
| Other expenses | 0.74 | %(7) | ||
| Acquired fund fees and expenses | 0.03 | %(8) | ||
| Total annual expenses | 6.92 | %(9) |
| (1) | Amount reflects the commission with respect to the shares of our common stock being sold in this offering, which we will pay to the sales agent in connection with sales of shares of our common stock effected by the sales agent in this offering. There is no guarantee that we will sell any shares of our common stock pursuant to this prospectus supplement and the accompanying prospectus. |
| (2) | Amount reflects estimated offering expenses of approximately $300,000 and assumes we sell $75,000,000 of common stock under the equity distribution agreement. |
| (3) | The expenses associated with the dividend reinvestment plan are included in “Other expenses.” See “Dividend Reinvestment Plan” in the accompanying prospectus. |
| (4) | Our management fee is calculated at an annual rate equal to 1.375% and is based on the average adjusted gross assets (including assets purchased with borrowed funds and securitization-related assets, leverage, unrealized depreciation or appreciation on derivative instruments and cash collateral on deposit with custodian but adjusted to exclude cash and cash equivalents so that investors do not pay the base management fee on such assets) at the end of the two most recently completed calendar quarters and is payable quarterly in arrears. See “Management Agreements — Investment Advisory Agreement — Management Fee” in the accompanying prospectus. The management fee referenced in the table above is based on actual amounts incurred during the three months ended June 30, 2014 by GC Advisors in its capacity as investment adviser to us and collateral manager to the 2010 Issuer and the 2014 Issuer, annualized for a full year. |
GC Advisors, as collateral manager for the 2010 Issuer under the collateral management agreement, or the 2010 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.35% of the principal balance of the portfolio loans held by the 2010 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. This fee, which is less than the management fee payable under the Investment Advisory Agreement, is paid directly by the 2010 Issuer to GC Advisors and offset against such management fee. Accordingly, the 1.375% management fee paid by us to GC Advisors under the Investment Advisory Agreement on all of our assets, including those indirectly held through the 2010 Issuer, is reduced, on a dollar-for-dollar basis, by an amount equal to such 0.35% fee paid to GC Advisors by the 2010 Issuer. Under the 2010 Collateral Management Agreement, the term “collection period” refers to a quarterly period running from the day after the end of the prior collection period to the fifth business day of the calendar month in which a payment date occurs. This fee may be waived by the collateral manager. The collateral management agreement does not include any incentive fee payable to GC Advisors.
GC Advisors, as collateral manager for the 2014 Issuer, under a collateral management agreement, or the 2014 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.25% of the principal balance of the portfolio loans held by the 2014 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. This fee, which is less than the management fee payable under the Investment Advisory Agreement, is paid directly by the 2014 Issuer to GC Advisors and offset against such management fee. Accordingly, the 1.375% management fee paid by us to GC Advisors under the Investment Advisory Agreement on all of our assets, including those indirectly held through the 2014 Issuer, is reduced, on a dollar-for-dollar basis, by an amount equal to such 0.25% fee paid to GC Advisors by the 2014 Issuer. Under the 2014 Collateral Management Agreement, the term “collection period” refers to a quarterly period running from the day after the end of the prior collection period to the tenth business day prior to the payment date. This fee may be waived by the collateral manager. The 2014 Collateral Management Agreement does not include any incentive fee payable to GC Advisors.
| S-9 |
For purposes of this table, the SEC requires that the “Management fees” percentage be calculated as a percentage of net assets attributable to common stock, rather than total assets, including assets that have been funded with borrowed monies because common stockholders bear all of this cost. If the base management fee portion of the “Management fees” percentage were calculated instead as a percentage of our total assets, our base management fee portion of the “Management fees” percentage would be approximately 1.20% of total assets. The base management fee in the table above is based on net assets of $726.8 million and leverage of $723.6 million as of June 30, 2014.
| (5) | The incentive fee referenced in the table above is based on actual amounts incurred during the three months ended June 30, 2014, annualized for a full year. We have structured the calculation of the incentive fee to include a fee limitation such that no incentive fee will be paid to GC Advisors for any quarter if, after such payment, the cumulative incentive fees paid to GC Advisors since the effective date of our election to become a business development company would be greater than 20.0% of our Cumulative Pre-Incentive Fee Net Income (as defined below). |
| We accomplish this limitation by subjecting each quarterly incentive fee payable under the Income and Capital Gain Incentive Fee Calculation (as defined below) to a cap, or the Incentive Fee Cap. The Incentive Fee Cap in any quarter is equal to the difference between (a) 20.0% of Cumulative Pre-Incentive Fee Net Income and (b) cumulative incentive fees of any kind paid to GC Advisors by Golub Capital BDC since April 13, 2010, the effective date of our election to become a business development company. To the extent the Incentive Fee Cap is zero or a negative value in any quarter, no incentive fee would be payable in that quarter. “Cumulative Pre-Incentive Fee Net Income” is equal to the sum of (a) Pre-Incentive Fee Net Investment Income (as defined below) for each period since April 13, 2010 and (b) cumulative aggregate realized capital gains, cumulative aggregate realized capital losses, cumulative aggregate unrealized capital depreciation and cumulative aggregate unrealized capital appreciation since April 13, 2010. |
| “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies, but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the calendar quarter (including the base management fee, taxes, any expenses payable under the Investment Advisory Agreement and an administration agreement, or the Administration Agreement, with the Administrator, any expenses of securitizations and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature such as market discount, debt instruments with payment-in-kind, or PIK, interest, preferred stock with PIK dividends and zero coupon securities, accrued income that we have not yet received in cash. |
| The income and capital gain incentive fee calculation, or the Income and Capital Gain Incentive Fee Calculation, has two parts. The income component is calculated quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. |
| Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the income component, it is possible that an incentive fee may be calculated under this formula with respect to a period in which we have incurred a loss. For example, if we receive Pre-Incentive Fee Net Investment Income in excess of the hurdle rate (as defined below) for a calendar quarter, the income component will result in a positive value and an incentive fee will be paid unless the payment of such incentive fee would cause us to pay incentive fees on a cumulative basis that exceed 20.0% of our Cumulative Pre-Incentive Fee Net Income. |
| Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 2.0% quarterly. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our Pre-Incentive Fee Net Investment Income and make it easier for GC Advisors to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our Pre-Incentive Fee Net Investment Income used to calculate this part of the incentive fee is also included in the amount of our total assets (excluding cash and cash equivalents but including assets purchased with borrowed funds and securitization-related assets, leverage, unrealized depreciation or appreciation on derivative instruments and cash collateral on deposit with custodian) used to calculate the 1.375% base management fee. |
| We calculate the income component of the Income and Capital Gain Incentive Fee Calculation with respect to our Pre-Incentive Fee Net Investment Income quarterly, in arrears, as follows: |
| · | zero in any calendar quarter in which the Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate; |
| S-10 |
| · | 100.0% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.5% in any calendar quarter. We refer to this portion of our Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than 2.5%) as the “catch-up” provision. The catch-up is meant to provide GC Advisors with 20.0% of the Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply if this net investment income exceeds 2.5% in any calendar quarter; and |
| · | 20.0% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.5% in any calendar quarter. |
| The sum of these calculations yields the income incentive fee. This amount is appropriately adjusted for any share issuances or repurchases during the quarter. |
| The second part of the Income and Capital Gain Incentive Fee Calculation, or the Capital Gain Incentive Fee, equals (a) 20.0% of our Capital Gain Incentive Fee Base (as defined below), if any, calculated in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), commencing with the calendar year ending December 31, 2010, less (b) the aggregate amount of any previously paid Capital Gain Incentive Fees. Our “Capital Gain Incentive Fee Base” equals (1) the sum of (A) our realized capital gains, if any, on a cumulative positive basis from April 13, 2010 through the end of each calendar year, (B) all realized capital losses on a cumulative basis and (C) all unrealized capital depreciation on a cumulative basis, less (2) our unamortized deferred financing costs as of the date of calculation, if and to the extent such costs exceed all unrealized capital appreciation on a cumulative basis. |
| · | The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (a) the net sales price of each investment in our portfolio when sold is less than (b) the accreted or amortized cost basis of such investment. |
| · | The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment. |
| · | The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the valuation of each investment in our portfolio as of the applicable Capital Gain Incentive Fee calculation date and (b) the accreted or amortized cost basis of such investment. |
| As described above, the incentive fee will not be paid at any time where after such payment the cumulative incentive fees paid to date would be greater than 20.0% of the Cumulative Pre-Incentive Net Income since April 13, 2010. We will accrue the Capital Gain Incentive Fee if, on a cumulative basis, the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation) is positive. The Capital Gain Incentive Fee is calculated on a cumulative basis from the date we elected to become a business development company through the end of each calendar year. For the year ended September 30, 2013 and for the three and nine months ended June 30, 2014, the Capital Gain Incentive Fee was zero. For a more detailed discussion of the calculation of the incentive fee, see “Management Agreements — Investment Advisory Agreement — Management Fee” in the accompanying prospectus. |
| (6) | Interest payments on borrowed funds represents our annualized interest expense as of June 30, 2014 and includes interest payable on the notes issued by each of the 2010 Issuer and the 2014 Issuer. For the three and nine months ended June 30, 2014, the effective annualized average interest rate on our total debt outstanding, which includes all interest and amortization of debt issuance costs on the 2010 Debt Securitization and 2014 Debt Securitization but excludes secured borrowings, was 3.57% and 3.24%, respectively. Debt issuance costs represent fees and other direct incremental costs incurred in connection with the Debt Securitizations. These fees include a structuring and placement fee paid to Wells Fargo Securities, LLC for its services in connection with the initial structuring and subsequent amendment of the 2010 Debt Securitization and the initial structuring of the 2014 Debt Securitization of $1.74 million, $0.75 million and $1.81 million, respectively, as well as legal fees, accounting fees, rating agency fees and all other costs associated with each of the Debt Securitizations. The interest payments on borrowed funds presented above excludes $0.4 million of accelerated capitalized debt issuance costs that resulted from the June 5, 2014 amendment to the Credit Facility. We do not currently anticipate issuing debt securities or preferred stock in the next 12 months. |
| (7) | Includes our overhead expenses, including payments under the Administration Agreement based on our allocable portion of overhead and other expenses incurred by the Administrator, and any acquired fund fees and expenses that are not required to be disclosed separately. See “Management Agreements — Administration Agreement.” “Other expenses” are based on actual amounts incurred during the three months ended June 30, 2014, annualized for a full year. “Other expenses” also includes the ongoing administrative expenses to the trustee, collateral manager, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports and providing required services in connection with the administration of each of the Debt Securitizations. The administrative expenses are paid by the 2010 Issuer on each payment date in two parts: (1) a component that is paid in a priority to other amounts distributed by the 2010 Issuer, subject to a cap equal to the sum of 0.04% per annum on the adjusted principal balance of the portfolio loans and other assets held by the 2010 Issuer on the last day of the collection period relating to such payment date, plus $150,000 per annum, and (2) a component that is paid in a subordinated position relative to other amounts distributed by the 2010 Issuer, equal to any amounts that exceed the aforementioned administrative expense cap. The administrative expenses are paid by the 2014 Issuer on each payment date in two parts: (1) a component that is paid in a priority to other amounts distributed by the 2014 Issuer, subject to a cap equal to the sum of 0.04% per annum on the adjusted principal balance of the portfolio loans and other assets held by the 2014 Issuer on the last day of the collection period relating to such payment date, plus $150,000 per annum, and (2) a component that is paid in a subordinated position relative to other amounts distributed by the 2014 Issuer, equal to any amounts that exceed the aforementioned administrative expense cap. |
| S-11 |
| (8) | Our stockholders indirectly bear the expenses of our investment in SLF. No management fee is charged by Golub Capital LLC in connection with the administrative services it provides to SLF. However, SLF does reimburse Golub Capital LLC for its costs related to providing accounting, bookkeeping, treasury, loan operations, reporting and administrative services for SLF. Future expenses for SLF may be substantially higher or lower because certain expenses may fluctuate over time. |
| (9) | All of our expenses, including all expenses of each of the Debt Securitizations, are disclosed in the appropriate line items under “Annual Expenses (as a percentage of net assets attributable to common stock).” “Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the “Total annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and after taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies. The reason for presenting expenses as a percentage of net assets attributable to common stockholders is that our common stockholders bear all of our fees and expenses. |
| Example |
| The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown. These amounts assume (1) a 2.00 % sales load (sales agent discounts and commissions), (2) offering expenses totaling 0.40% and (3) total net annual expenses of 6.04% of net assets attributable to common shares as set forth in the table above (other than performance-based incentive fees). Transaction expenses are not included in the following example. For purposes of this table, we have assumed leverage of $723.6 million, which was our actual leverage as of June 30, 2014. |
| 1 year | 3 years | 5 years | 10 years | |||||||||||||
| You would pay the following expenses on a $1,000 investment, assuming a 5% annual return | $ | 83 | $ | 199 | $ | 313 | $ | 587 | ||||||||
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the Investment Advisory Agreement, which, assuming a 5% annual return, would either not be payable or have an immaterial impact on the expense amounts shown above, is not included in the example. Under our Investment Advisory Agreement, no incentive fee would be payable if we have a 5% annual return. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. The example assumes that all dividends and other distributions are reinvested at net asset value. Under certain circumstances, reinvestment of dividends and other distributions under our dividend reinvestment plan may occur at a price per share that differs from net asset value. See “Dividend Reinvestment Plan” in the accompanying prospectus for more information.
| S-12 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus supplement and the accompanying prospectus constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus involve risks and uncertainties, including statements as to:
| · | our future operating results; |
| · | our business prospects and the prospects of our portfolio companies; |
| · | the effect of investments that we expect to make; |
| · | our contractual arrangements and relationships with third parties; |
| · | actual and potential conflicts of interest with GC Advisors and other affiliates of Golub Capital; |
| · | the dependence of our future success on the general economy and its effect on the industries in which we invest; |
| · | the ability of our portfolio companies to achieve their objectives; |
| · | the use of borrowed money to finance a portion of our investments; |
| · | the adequacy of our financing sources and working capital; |
| · | the timing of cash flows, if any, from the operations of our portfolio companies; |
| · | the ability of GC Advisors to locate suitable investments for us and to monitor and administer our investments; |
| · | the ability of GC Advisors or its affiliates to attract and retain highly talented professionals; |
| · | our ability to qualify and maintain our qualification as a RIC and as a business development company; |
| · | the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder; and |
| · | the effect of changes to tax legislation and our tax position. |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in the accompanying prospectus and elsewhere in this prospectus supplement and the accompanying prospectus.
We have based the forward-looking statements included in this prospectus supplement on information available to us on the date of this prospectus supplement, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K. This prospectus supplement and the accompanying prospectus contain statistics and other data that have been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data.
You should understand that, under Section 27A(b)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E(b)(2)(B) of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to forward-looking statements made in connection with any offering of securities pursuant to this prospectus supplement, the accompanying prospectus or in periodic reports we file under the Exchange Act.
| S-13 |
Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ Global Select Market or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. There is no guarantee that there will be any sales of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Actual sales, if any, of our common stock under this prospectus supplement and the accompanying prospectus may be less than as set forth in this paragraph depending on, among other things, the market price of our common stock at the time of any such sale. As a result, the actual net proceeds we receive may be more or less than the amount of net proceeds estimated in this prospectus supplement. However, the sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less commissions payable under the equity distribution agreement, will not be less than the net asset value per share of our common stock at the time of such sale. If we sell shares of our common stock with an aggregate offering price of $75.0 million, we anticipate that our net proceeds, after deducting sales agent’s commissions and estimated expenses payable by us, will be approximately $73.2 million.
We intend to use the net proceeds from the sale of our common stock to invest in portfolio companies in accordance with our investment objective and strategies and for general corporate purposes. We expect that our new investments will consist primarily of senior secured, one stop, second lien and subordinated loans. We will also pay operating expenses, including management and administrative fees, and may pay other expenses such as due diligence expenses relating to potential new investments, from the net proceeds of this offering. A portion of the net proceeds may be utilized to capitalize SLF. We may also use a portion of the net proceeds from this offering to repay amounts outstanding under our Credit Facility, which bore an annual interest rate of 2.43% ( i.e., one-month LIBOR plus 2.25% per annum) on the outstanding balance of $33.5 million as of June 30, 2014 and matures on October 22, 2018.
Until appropriate investment opportunities can be found, we may also invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less from the date of investment. These temporary investments may have lower yields than our other investments and, accordingly, may result in lower distributions, if any, during such period. Our ability to achieve our investment objective may be limited to the extent that the net proceeds from this offering, pending full investment, are held in lower yielding interest-bearing deposits or other short-term instruments. See “Regulation — Temporary Investments” in the accompanying prospectus for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.
| S-14 |
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Golub Capital BDC as of and for the fiscal years ended September 30, 2013, 2012, 2011, 2010 and 2009 are derived from our consolidated financial statements that have been audited by McGladrey LLP, an independent registered public accounting firm. For the fiscal year ended September 30, 2009, the financial data refers to the financial condition and results of operations of our predecessor, GCMF. Golub Capital BDC’s consolidated financial statements for the nine-month period ended June 30, 2014 and 2013 are unaudited. However, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation have been made. Interim results may be subject to significant quarterly variations and may not be indicative of the results of operations to be expected for a full fiscal year. The financial data should be read in conjunction with our consolidated financial statements and related notes thereto and with “Interim Management’s Discussion and Analysis of Financial Condition, Results of Operations and Cash Flows” included elsewhere in this prospectus supplement and “Management’s Discussion and Analysis of Financial Condition, Results of Operations and Cash Flows” included in the accompanying prospectus.
| Golub Capital BDC (1) | GCMF | |||||||||||||||||||||||||||
| As
of and for the nine months ended | As of and for the years ended | |||||||||||||||||||||||||||
| June 30, 2014 | June 30, 2013 | September 30, 2013 | September 30, 2012 | September 30, 2011 | September 30, 2010 | September 30, 2009 | ||||||||||||||||||||||
| (unaudited) | (unaudited) | (In thousands, except per share data) | ||||||||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||||||||||
| Total investment income | $ | 78,868 | $ | 60,957 | $ | 83,774 | $ | 57,859 | $ | 39,150 | $ | 33,150 | $ | 33,338 | ||||||||||||||
| Base management fee | 12,403 | 8,268 | 11,749 | 8,495 | 5,789 | 3,328 | 2,849 | |||||||||||||||||||||
| Incentive fee | 6,295 | 7,647 | 9,844 | 6,228 | 348 | 55 | — | |||||||||||||||||||||
| All other expenses | 18,485 | 13,071 | 17,786 | 15,260 | 10,197 | 6,400 | 5,011 | |||||||||||||||||||||
| Net investment income | 41,685 | 31,971 | 44,395 | 27,876 | 22,816 | 23,367 | 25,478 | |||||||||||||||||||||
| Net realized (loss) gain on investments and derivative instruments | (4,906 | ) | 18 | (1,363 | ) | (3,372 | ) | 2,037 | (40 | ) | (3,972 | ) | ||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments, derivative instruments and secured borrowings | 8,427 | 2,238 | 3,488 | 7,256 | (3,514 | ) | 2,921 | (1,489 | ) | |||||||||||||||||||
| Net increase in net assets resulting from operations | 45,206 | 34,227 | 46,520 | 31,760 | 21,339 | 26,248 | 20,017 | |||||||||||||||||||||
| Per share data: | ||||||||||||||||||||||||||||
| Net asset value | $ | 15.44 | $ | 15.12 | $ | 15.21 | $ | 14.60 | $ | 14.56 | $ | 14.71 | N/A | (2) | ||||||||||||||
| Net investment income | 0.94 | 0.98 | 1.29 | 1.15 | 1.16 | N/A | (2) | N/A | (2) | |||||||||||||||||||
| Net realized (loss) gain on investments and derivative instruments | (0.11 | ) | — | (0.04 | ) | (0.14 | ) | 0.10 | N/A | (2) | N/A | (2) | ||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments, derivative instruments and secured borrowings | 0.18 | 0.07 | 0.10 | 0.30 | (0.18 | ) | N/A | (2) | N/A | (2) | ||||||||||||||||||
| Net increase in net assets resulting from operations | 1.01 | 1.05 | 1.35 | 1.31 | 1.09 | N/A | (2) | N/A | (2) | |||||||||||||||||||
| Per share distributions declared | 0.96 | 0.96 | 1.28 | 1.28 | 1.27 | 0.55 | N/A | (2) | ||||||||||||||||||||
| From net investment income | N/A | N/A | 1.15 | 1.24 | 1.19 | 0.49 | N/A | |||||||||||||||||||||
| From capital gains | N/A | N/A | — | — | 0.09 | — | N/A | |||||||||||||||||||||
| From return of capital | N/A | N/A | 0.13 | 0.04 | — | 0.06 | N/A | |||||||||||||||||||||
| Dollar amount of distributions declared | 42,763 | 32,661 | 45,394 | 31,556 | 25,069 | 9,742 | N/A | |||||||||||||||||||||
| From net investment income | N/A | N/A | 40,605 | 30,484 | 23,254 | 8,620 | N/A | |||||||||||||||||||||
| From capital gains | N/A | N/A | — | — | 1,815 | — | N/A | |||||||||||||||||||||
| From return of capital | N/A | N/A | 4,789 | 1,072 | — | 1,122 | N/A | |||||||||||||||||||||
| S-15 |
| Golub Capital BDC (1) | GCMF | |||||||||||||||||||||||||||
| As
of and for the nine months ended | As of and for the years ended | |||||||||||||||||||||||||||
| June 30, 2014 | June 30, 2013 | September
30, 2013 | September
30, 2012 | September
30, 2011 | September
30, 2010 | September
30, 2009 | ||||||||||||||||||||||
| (unaudited) | (unaudited) | (In thousands, except per share data) | ||||||||||||||||||||||||||
| Balance Sheet data at period end: | ||||||||||||||||||||||||||||
| Investments, at fair value | $ | 1,324,890 | $ | 967,792 | $ | 1,024,645 | $ | 672,910 | $ | 459,827 | $ | 344,869 | $ | 376,294 | ||||||||||||||
| Cash and cash equivalents | 121,210 | 34,625 | 54,717 | 50,927 | 69,766 | 92,990 | 30,614 | |||||||||||||||||||||
| Other assets | 16,013 | 13,340 | 12,294 | 10,259 | 30,051 | 4,904 | 2,214 | |||||||||||||||||||||
| Total assets | 1,462,113 | 1,015,757 | 1,091,656 | 734,096 | 559,644 | 442,763 | 409,122 | |||||||||||||||||||||
| Total debt | 723,564 | 403,800 | 420,909 | 352,300 | 237,683 | 174,000 | 315,306 | |||||||||||||||||||||
| Total liabilities | 735,339 | 414,259 | 433,420 | 358,967 | 243,095 | 182,222 | 316,370 | |||||||||||||||||||||
| Total net assets | 726,774 | 601,498 | 658,236 | 375,129 | 316,549 | 260,541 | 92,752 | |||||||||||||||||||||
| Other Data | ||||||||||||||||||||||||||||
| Weighted average annualized yield on income producing investments at fair value (3) | 8.3 | % | 9.4 | % | 9.1 | % | 9.3 | % | 8.6 | % | 8.4 | % | 8.1 | % | ||||||||||||||
| Number of portfolio companies at period end | 146 | 135 | 135 | 121 | 103 | 94 | 95 | |||||||||||||||||||||
| (1) | Includes the financial information of GCMF for the period prior to the BDC Conversion. |
| (2) | Per share data are not provided as we did not have shares of common stock outstanding or an equivalent prior to the initial public offering on April 14, 2010. |
| (3) | Weighted average yield on income producing investments is calculated as income from interest and fees excluding amortization of capitalized fees and discounts divided by the average fair value of earning investments. |
| S-16 |
INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS
The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with “Selected Consolidated Financial Data” and the financial statements and the related notes thereto of us and our predecessor, GCMF, appearing elsewhere in this prospectus supplement and the accompanying prospectus. The information in this section contains forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” in the accompanying prospectus and “Special Note Regarding Forward-Looking Statements” in this prospectus supplement for a discussion of the uncertainties, risks and assumptions associated with these statements.
Overview
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the 1940 Act. In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. As a business development company and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code. We were formed in November 2009 to continue and expand the business of our predecessor, GCMF, which commenced operations in July 2007, in making investments in senior secured, one stop (a loan that combines characteristics of traditional first lien senior secured loans and second lien or subordinated loans), second lien and subordinated (a loan that ranks senior only to a borrower’s equity securities and ranks junior to all of such borrower’s other indebtedness in priority of payment) loans and warrants and equity securities of middle-market companies that are, in most cases, sponsored by private equity firms.
Our shares are currently listed on The NASDAQ Global Select Market under the symbol “GBDC”.
Our investment objective is to maximize the total return to our stockholders by generating current income and capital appreciation by investing primarily in senior secured, one stop, second lien and subordinated loans of, and warrants and minority equity securities in U.S. middle-market companies. We intend to achieve our investment objective by (1) accessing the established loan origination channels developed by Golub Capital, a leading lender to middle-market companies with over $10.0 billion in capital under management as of June 30, 2014, (2) selecting investments within our core middle-market company focus, (3) partnering with experienced private equity firms, or sponsors, in many cases with whom we have invested alongside in the past, (4) implementing the disciplined underwriting standards of Golub Capital and (5) drawing upon the aggregate experience and resources of Golub Capital.
Our investment activities are managed by GC Advisors and supervised by our board of directors of which a majority of the members are independent of us, GC Advisors and its affiliates.
Under the Investment Advisory Agreement, which was most recently reapproved by our board of directors in May 2014, we have agreed to pay GC Advisors an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. Under the Administration Agreement, we are provided with certain administrative services by the Administrator. Under the Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement.
We seek to create a diverse portfolio that includes senior secured, one stop, second lien and subordinated loans and warrants and minority equity securities by investing approximately $5.0 million to $30.0 million of capital, on average, in the securities of middle-market companies. We may also selectively invest more than $30.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base.
We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which may be referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part of all of our investment.
Portfolio composition at fair value as of June 30, 2014 and September 30, 2013 was as follows:
| June 30, 2014 | September 30, 2013 | |||||||
| Senior secured | 21.8 | % | 28.9 | % | ||||
| One stop | 65.4 | % | 54.1 | % | ||||
| Second lien | 6.6 | % | 11.0 | % | ||||
| Subordinated debt | 0.3 | % | 2.2 | % | ||||
| Equity securities | 3.3 | % | 3.3 | % | ||||
| Investments in SLF (1) | 2.6 | % | 0.5 | % | ||||
| (1) | Includes our investments in SLF subordinated notes and LLC equity interests, |
| S-17 |
As of June 30, 2014 and September 30, 2013, we had debt and equity investments in 146 and 135 portfolio companies, respectively, and investments in subordinated notes and LLC equity interests in SLF. For the three and nine months ended June 30, 2014, our income producing assets, which represented nearly 100% of our total portfolio, had a weighted average annualized income yield (which is calculated as income from interest and fees excluding amortization of capitalized fees and discounts divided by the average fair value of earning investments) of 8.3% and 8.3%, respectively, and a weighted average annualized investment income yield (which is calculated as income from interest, fees and amortization of capitalized fees and discounts divided by average fair value of earning investments) of 8.9% and 8.9%, respectively. For the three and nine months ended June 30, 2013, our income producing assets, which represented nearly 100% of our total portfolio, had a weighted average annualized income yield of 9.2% and 9.4%, respectively, and a weighted average annualized investment income yield of 9.9% and 10.5%, respectively.
Revenues: We generate revenue in the form of interest and fee income on debt investments and capital gains and distributions, if any, on portfolio company investments that we originate or acquire. Our debt investments, whether in the form of senior secured, one stop, second lien or subordinated loans, typically have a term of three to seven years and bear interest at a fixed or floating rate. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. In some cases, our investments provide for deferred interest payments or PIK interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans as fee income. Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Distributions received from LLC, and limited partnership, or LP, investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the cost basis of the investment or derivative instrument, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments and derivative instruments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.
Partial loan sales: We follow the guidance in Accounting Standards Codification, or ASC, Topic 860 – Transfers and Servicing, or ASC Topic 860, when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest”, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales, which do not meet the definition of a participating interest, remain on our consolidated statements of assets and liabilities and the proceeds are recorded as a secured borrowing until the definition is met.
Expenses: Our primary operating expenses include the payment of fees to GC Advisors under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. Additionally, we pay interest expense on our outstanding debt. We bear all out-of-pocket costs and expenses of our operations and transactions, including:
| · | organizational expenses; |
| · | calculating our net asset value (including the cost and expenses of any independent valuation firm); |
| · | fees and expenses incurred by GC Advisors payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments, which fees and expenses may include, among other items, due diligence reports, appraisal reports, any studies that may be commissioned by GC Advisors and travel and lodging expenses; interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful portfolio acquisition efforts; |
| · | offerings of our common stock and other securities; |
| · | investment advisory and management fees, including any incentive fees; |
| · | administration fees and expenses, if any, payable under the Administration Agreement (including payments under the Administration Agreement between us and the Administrator based upon our allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief compliance officer, chief financial officer and their respective staffs); |
| S-18 |
| · | fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with evaluating and making, investments in portfolio companies, including costs associated with meeting financial sponsors; |
| · | transfer agent, dividend agent and custodial fees and expenses; |
| · | U.S. federal and state registration and franchise fees; |
| · | all costs of registration and listing our shares on any securities exchange; |
| · | U.S. federal, state and local taxes; |
| · | independent directors’ fees and expenses; |
| · | costs of preparing and filing reports or other documents required by the SEC or other regulators; |
| · | costs of any reports, proxy statements or other notices to stockholders, including printing costs; |
| · | costs associated with individual or group stockholders; |
| · | costs associated with compliance under the Sarbanes-Oxley Act of 2002; |
| · | our allocable portion of any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; |
| · | direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; |
| · | proxy voting expenses; and |
| · | all other expenses incurred by us or the Administrator in connection with administering our business. |
During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.
GC Advisors, as collateral manager for the 2010 Issuer, under the 2010 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.35% of the principal balance of the portfolio loans held by the 2010 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. This fee, which is less than the management fee payable under the Investment Advisory Agreement, is paid directly by the 2010 Issuer to GC Advisors and offset against such management fee. Accordingly, the 1.375% management fee paid by us to GC Advisors under the Investment Advisory Agreement on all of our assets, including those indirectly held through the 2010 Issuer, is reduced, on a dollar-for-dollar basis, by an amount equal to such 0.35% fee paid to GC Advisors by the 2010 Issuer. Under the 2010 Collateral Management Agreement, the term “collection period” refers to a quarterly period running from the day after the end of the prior collection period to the fifth business day of the calendar month in which a payment date occurs. This fee may be waived by the collateral manager. The 2010 Collateral Management Agreement does not include any incentive fee payable to GC Advisors. In addition, the 2010 Issuer paid Wells Fargo Securities, LLC a structuring and placement fee for its services in connection with the initial structuring and subsequent amendment of the 2010 Debt Securitization. The 2010 Issuer also agreed to pay ongoing administrative expenses to the trustee, collateral manager, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports and providing required services in connection with the administration of the 2010 Debt Securitization. The administrative expenses are paid by the 2010 Issuer on each payment date in two parts: (1) a component that is paid in a priority to other amounts distributed by the 2010 Issuer, subject to a cap equal to the sum of 0.04% per annum on the adjusted principal balance of the portfolio loans and other assets held by the 2010 Issuer on the last day of the collection period relating to such payment date, plus $150,000 per annum, and (2) a component that is paid in a subordinated position relative to other amounts distributed by the 2010 Issuer, equal to any amounts that exceed the aforementioned administrative expense cap. We believe that these administrative expenses approximate the amount of ongoing fees and expenses that we would be required to pay in connection with a traditional secured credit facility. Our common stockholders indirectly bear all of these expenses.
GC Advisors, as collateral manager for the 2014 Issuer, under the 2014 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.25% of the principal balance of the portfolio loans held by the 2014 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. This fee, which is less than the management fee payable under the Investment Advisory Agreement, is paid directly by the 2014 Issuer to GC Advisors and offset against such management fee. Accordingly, the 1.375% management fee paid by us to GC Advisors under the Investment Advisory Agreement on all of our assets, including those indirectly held through the 2014 Issuer, is reduced, on a dollar-for-dollar basis, by an amount equal to such 0.25% fee paid to GC Advisors by the 2014 Issuer. Under the 2014 Collateral Management Agreement, the term “collection period” refers to a quarterly period running from the day after the end of the prior collection period to the tenth business day prior to the payment date. This fee may be waived by the collateral manager. The 2014 Collateral Management Agreement does not include any incentive fee payable to GC Advisors. In addition, the 2014 Issuer paid Wells Fargo Securities, LLC a structuring and placement fee for its services in connection with the initial structuring of the 2014 Debt Securitization. The 2014 Issuer also agreed to pay ongoing administrative expenses to the trustee, collateral manager, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports and providing required services in connection with the administration of the 2014 Debt Securitization. The administrative expenses are paid by the 2014 Issuer on each payment date in two parts: (1) a component that is paid in a priority to other amounts distributed by the 2014 Issuer, subject to a cap equal to the sum of 0.04% per annum on the adjusted principal balance of the portfolio loans and other assets held by the 2014 Issuer on the last day of the collection period relating to such payment date, plus $150,000 per annum, and (2) a component that is paid in a subordinated position relative to other amounts distributed by the 2014 Issuer, equal to any amounts that exceed the aforementioned administrative expense cap. We believe that these administrative expenses approximate the amount of ongoing fees and expenses that we would be required to pay in connection with a traditional secured credit facility. Our common stockholders indirectly bear all of these expenses.
| S-19 |
Recent Developments
Effective July 31, 2014, United Insurance sold its subordinated note and LLC equity interest investments in SLF to RGA at fair value. In connection with United Insurance’s sale of its interest in SLF to RGA, RGA entered into a subscription agreement for LLC equity interests in SLF in the same amount for which United Insurance had previously been subscribed. In addition, we entered into an amendment to the limited liability company agreement of SLF pursuant to which RGA was substituted for United Insurance as a member of SLF and the SLF investment committee was expanded to consist of two representatives of each of us and RGA (with unanimous approval required from (i) one representative of each of us and RGA or (ii) both representatives of each of us and RGA).
On August 5, 2014, our board of directors declared a quarterly distribution of $0.32 per share payable on September 26, 2014 to holders of record as of September 16, 2014.
On August 5, 2014, our Board approved, and we entered into, an amendment and restatement of the Investment Advisory Agreement, effective as of June 30, 2014, to provide that the Capital Gain Incentive Fee Base is reduced by the amount of any unamortized deferred financing costs, if and to the extent that such costs exceed all unrealized capital appreciation on a cumulative basis.
On August 5, 2014, our board of directors approved a share repurchase program which allows us to repurchase up to $50.0 million of our outstanding common stock on the open market at prices below our net asset value as reported in our then most recently published consolidated financial statements. The share repurchase program may be implemented at the discretion of management. The shares may be purchased from time to time at prevailing market prices, through open market transactions, including block transactions.
Consolidated Results of Operations
Consolidated operating results for the three and nine months ended June 30, 2014 and 2013 are as follows:
For the three months ended June 30, | Variances | For the nine months ended June 30, | Variances | |||||||||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 | 2013 | 2014 vs. 2013 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
| Interest income | $ | 23,568 | $ | 18,954 | $ | 4,614 | $ | 68,640 | $ | 50,683 | $ | 17,957 | ||||||||||||
| Income from accretion of discounts and origination fees | 1,873 | 1,639 | 234 | 5,520 | 6,104 | (584 | ) | |||||||||||||||||
| Interest income from subordinated notes in SLF | 594 | - | 594 | 1,331 | - | 1,331 | ||||||||||||||||||
| Dividend income | 952 | 1,081 | (129 | ) | 1,230 | 1,827 | (597 | ) | ||||||||||||||||
| Fee income | 1,042 | 594 | 448 | 2,147 | 2,343 | (196 | ) | |||||||||||||||||
| Total investment income | 28,029 | 22,268 | 5,761 | 78,868 | 60,957 | 17,911 | ||||||||||||||||||
| Total expenses | 12,956 | 10,268 | 2,688 | 37,183 | 28,986 | 8,197 | ||||||||||||||||||
| Net investment income | 15,073 | 12,000 | 3,073 | 41,685 | 31,971 | 9,714 | ||||||||||||||||||
| Net realized (losses) gains on investments | 1 | (77 | ) | 78 | (4,906 | ) | 18 | (4,924 | ) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments and secured borrowings | 1,206 | 734 | 472 | 8,427 | 2,238 | 6,189 | ||||||||||||||||||
| Net income | $ | 16,280 | $ | 12,657 | $ | 3,623 | $ | 45,206 | $ | 34,227 | $ | 10,979 | ||||||||||||
| Average earning portfolio company investments, at fair value | $ | 1,223,685 | $ | 866,377 | $ | 357,308 | $ | 1,163,812 | $ | 759,294 | $ | 404,518 | ||||||||||||
| Average debt outstanding(1) | $ | 592,307 | $ | 403,848 | $ | 188,459 | $ | 554,775 | $ | 372,660 | $ | 182,115 | ||||||||||||
| (1) | For the three and nine months ended June 30, 2014, we have excluded $20.3 million of secured borrowings, at fair value, which were the result of participations and partial loan sales that did not meet the definition of a “participating interest,” as defined in the guidance to ASC Topic 860. |
The results of operations for the three and nine months ended June 30, 2014 and 2013 may not be indicative of the results we report in future periods. Net income can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly comparisons of net income may not be meaningful.
| S-20 |
Investment Income
Interest income increased by $4.6 million from the three months ended June 30, 2013 to the three months ended June 30, 2014 and was primarily driven by an increase in the average earning investment balance, which is the annual average balance of accruing loans in our investment portfolio, of $357.3 million. These gains were partially offset by a decline in the weighted average annualized income yield, which declined from 9.2% for the three months ended June 30, 2013 to 8.3% for the three months ended June 30, 2014. The decrease in yield was primarily driven by interest rate compression on new investments.
Interest income increased by $18.0 million from the nine months ended June 30, 2013 to the nine months ended June 30, 2014 and was primarily driven by an increase in the average earning investment balance of $404.5 million. These gains were partially offset by a decline in the weighted average annualized income yield, which declined from 9.4% for the nine months ended June 30, 2013 to 8.3% for the nine months ended June 30, 2014. The decrease in yield was primarily driven by interest rate compression on new investments.
Income from accretion of discounts and amortization of premiums increased by $0.2 million from the three months ended June 30, 2013 to the three months ended June 30, 2014. Income from accretion of discounts and amortization of premiums decreased by $0.6 million from the nine months ended June 30, 2013 to the nine months ended June 30, 2014. Income from the accretion of discounts and the amortization of premiums fluctuates from quarter-to-quarter depending on the volume of payoffs and the discounts and premiums on the loans at the time of payoffs.
For the three and nine months ended June 30, 2014, we recorded dividend income of $1.0 million and $1.2 million, respectively, and received return of capital distributions of $2.1 million and $4.4 million, respectively. For the three and nine months ended June 30, 2013, we recorded dividend income of $1.1 million and $1.8 million, respectively, and received return of capital distributions of zero and $0.7 million, respectively.
Fee income increased by $0.4 million from the three months ended June 30, 2013 to the three months ended June 30, 2014 and was primarily driven by an increase in prepayment fees. Fee income decreased by $0.2 million from the nine months ended June 30, 2013 to the nine months ended June 30, 2014 and was primarily driven by a decrease in amendment and structuring fees.
The annualized income yield (which includes income from interest and fees but excludes amortization of capitalized fees and discounts) by security type for the three and nine months ended June 30, 2014 and 2013 was as follows:
| For the three months ended June 30, | For the nine months ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Senior secured | 6.9 | % | 7.6 | % | 7.1 | % | 7.0 | % | ||||||||
| One stop | 8.2 | % | 8.7 | % | 8.3 | % | 9.3 | % | ||||||||
| Second lien | 12.7 | % | 10.5 | % | 11.4 | % | 11.0 | % | ||||||||
| Subordinated debt | 7.5 | % | 13.7 | % | 10.8 | % | 13.5 | % | ||||||||
| Subordinated notes in SLF (1) | 8.3 | % | N/A | 6.9 | % | N/A | ||||||||||
(1) SLF’s proceeds from the subordinated notes were utilized by SLF to fund senior secured loans.
Annualized income yields on senior secured and one stop investments have declined from the three and nine months ended June 30, 2013 to the three and nine months ended June 30, 2014 due to a general trend of interest rate compression on new investments between the periods. The increase in yield on second lien debt is attributed to the inclusion of $0.7 million and $1.1 million, respectively, of prepayment fees for the three and nine month periods ending June 30, 2014. The decrease in yield on subordinated debt is due to the significant repayments in subordinated debt investments over the past twelve months and the current yield on the two remaining subordinated debt investments as of June 30, 2014 as shown in our Consolidated Schedule of Investments in the consolidated financial statements beginning on page SF-2 of this prospectus supplement. For additional details on investment yields and asset mix, refer to the “Liquidity and Capital Resources - Portfolio Composition, Investment Activity and Yield” section below.
| S-21 |
Expenses
The following table summarizes our expenses:
| For the three months ended June 30 | Variances | For the nine months ended June 30, | Variances | |||||||||||||||||||||
| 2014 | 2013 | 2014 vs. 2013 | 2014 | 2013 | 2014 vs. 2013 | |||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Interest expense and debt facility fees | $ | 4,483 | $ | 2,607 | $ | 1,876 | $ | 12,215 | $ | 7,810 | $ | 4,405 | ||||||||||||
| Amortization of debt issuance costs | 1,126 | 360 | 766 | 2,026 | 1,444 | 582 | ||||||||||||||||||
| Base management fee | 4,394 | 3,114 | 1,280 | 12,403 | 8,268 | 4,135 | ||||||||||||||||||
| Incentive fee | 1,607 | 2,785 | (1,178 | ) | 6,295 | 7,647 | (1,352 | ) | ||||||||||||||||
| Professional fees | 578 | 534 | 44 | 1,876 | 1,540 | 336 | ||||||||||||||||||
| Administrative service fee | 655 | 715 | (60 | ) | 1,979 | 1,873 | 106 | |||||||||||||||||
| General and administrative expenses | 113 | 153 | (40 | ) | 389 | 404 | (15 | ) | ||||||||||||||||
| Total expenses | $ | 12,956 | $ | 10,268 | $ | 2,688 | $ | 37,183 | $ | 28,986 | $ | 8,197 | ||||||||||||
Interest expense and debt facility fees increased by $1.9 million from the three months ended June 30, 2013 to the three months ended June 30, 2014 primarily due to an increase in the weighted average of outstanding borrowings from $403.8 million for the three months ended June 30, 2013 to $592.3 million for the three months ended June 30, 2014. The increase in our debt was driven by $246.0 million of notes pursuant to the 2014 Debt Securitization as well as the increase in our use of debt under our U.S. Small Business Administration, or SBA, debentures, which had outstanding balances of $208.8 million outstanding as of June 30, 2014 and $164.0 million as of June 30, 2013. These increases were partially offset by a decrease in our use of debt under the Credit Facility to $33.5 million as of June 30, 2014 from an outstanding balance of $36.8 million as of June 30, 2013.
Amortization of debt issuance costs increased by $0.8 million from the three months ended June 30, 2013 to the three months ended June 30, 2014 primarily due to additional capitalized debt issuance costs associated with the 2014 Debt Securitization and the acceleration of $0.4 million of capitalized debt issuance costs resulting from the amendment to our Credit Facility to, among other things, decrease the size of the Credit Facility from $250.0 million to $150.0 million. The increase in our effective annualized average interest rate on our outstanding debt from 2.9% for the three months ended June 30, 2013 to 3.6% for the three months ended June 30, 2014 was primarily the result of the increase in amortization of debt issuance costs and the issuance of new SBA debentures at higher interest rates. The interest rates on the SBA debentures are fixed at the time of issuance at a market driven spread over U.S. Treasury Notes with ten-year maturities.
Interest expense and debt facility fees increased by $4.4 million from the nine months ended June 30, 2013 to the nine months ended June 30, 2014 primarily due to an increase in the weighted average of outstanding borrowings from $372.7 million for the nine months ended June 30, 2013 to $554.8 million for the nine months ended June 30, 2014. Amortization of debt issuance costs increased by $0.6 million from the nine months ended June 30, 2013 to the nine months ended June 30, 2014 primarily due to additional capitalized debt issuance costs associated with the 2014 Debt Securitization and the acceleration of $0.4 million of capitalized debt issuance costs resulting from the amendment to our Credit Facility noted above. The increases in interest expense and debt facility fees and amortization of debt issuance costs were partially offset by a decrease in the effective annualized average interest rate on our outstanding debt from 3.3% for the nine months ended June 30, 2013 to 3.2% for the nine months ended June 30, 2014.
The base management fee increased as a result of a sequential increase in average assets from June 30, 2013 to June 30, 2014. The administrative service fee increased during the same period due to an increase in costs associated with servicing a growing investment portfolio.
The incentive fee decreased by $1.2 million and $1.4 million from the three and nine months ended June 30, 2013 to the three and nine months ended June 30, 2014, respectively, as our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets, declined as the result of yield compression on new investments.
The Administrator pays for certain expenses incurred by us. These expenses are subsequently reimbursed in cash. Total expenses reimbursed by us to the Administrator for the three and nine months ended June 30, 2014 were zero and $0.8 million, respectively. Total expenses reimbursed by us to the Administrator for the three and nine months ended June 30, 2013 were zero and $0.3 million, respectively.
As of June 30, 2014 and September 30, 2013, included in accounts payable and accrued expenses were $0.6 million and $0.3 million, respectively, for accrued expenses paid on behalf of us by the Administrator.
Net Realized and Unrealized Gains and Losses
The following table summarizes our net realized and unrealized gains (losses) for the periods presented:
For the three months ended June 30 | Variances | For the nine months ended June 30, | Variances | |||||||||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 | 2013 | 2014 vs. 2013 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
| Net realized gain (loss) on investments | $ | 1 | $ | (77 | ) | $ | 78 | $ | (4,906 | ) | $ | 18 | $ | (4,924 | )) | |||||||||
| Net realized gain (loss) | 1 | (77 | ) | 78 | (4,906 | ) | 18 | (4,924 | ) | |||||||||||||||
| Unrealized appreciation on investments | 8,778 | 4,590 | 4,188 | 22,934 | 12,293 | 10,641 | ||||||||||||||||||
| Unrealized (depreciation) on investments | (7,791 | ) | (3,856 | ) | (3,935 | ) | (14,887 | ) | (10,055 | ) | (4,832 | ) | ||||||||||||
| Unrealized appreciation on investments in SLF(1) | 205 | - | 205 | 454 | - | 454 | ||||||||||||||||||
| Unrealized (depreciation) on investments in SLF(1) | - | - | - | - | - | - | ||||||||||||||||||
| Unrealized (appreciation) on secured borrowings | - | - | - | (91 | ) | - | (91 | ) | ||||||||||||||||
| Unrealized depreciation on secured borrowings | 14 | - | 14 | 17 | - | 17 | ||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments, investments in SLF and secured borrowings | $ | 1,206 | $ | 734 | $ | 472 | $ | 8,427 | $ | 2,238 | $ | 6,189 | ||||||||||||
(1) Unrealized appreciation and (depreciation) on investments in SLF include our investments in the subordinated notes and LLC equity interests in SLF.
| S-22 |
For the three months ended June 30, 2014, we had a net realized gain of less than $0.1 million primarily due to a post-close syndication of an investment. For the nine months ended June 30, 2014, we had net realized losses on investments totaling $4.9 million primarily due to the sale of one underperforming portfolio company and the write off of two non-accrual portfolio companies.
During the three months ended June 30, 2014, we had $8.8 million in unrealized appreciation on 90 portfolio company investments, which was partially offset by $7.8 million in unrealized depreciation on 118 portfolio company investments. For the nine months ended June 30, 2014, we had $22.9 million in unrealized appreciation on 114 portfolio company investments, which was partially offset by $14.9 million in unrealized depreciation on 122 portfolio company investments. Unrealized appreciation during the three and nine months ended June 30, 2014 resulted from an increase in fair value primarily due to the rise in market prices and a reversal of prior period unrealized depreciation associated with the portfolio company investment sales and write-offs. Unrealized depreciation primarily resulted from the amortization of discounts and negative credit related adjustments that caused a reduction in fair value. Additionally, we had less than $0.1 million in net unrealized depreciation and less than $0.1 million of net unrealized appreciation on secured borrowing proceeds for the three and nine months ended June 30, 2014, respectively. The unrealized appreciation resulted from the amortization of discounts associated with the investments funded by the secured borrowing proceeds.
For the three months ended June 30, 2014, we had $0.2 million in unrealized appreciation on our investment in SLF LLC equity interests. Unrealized appreciation on the SLF LLC equity interests was driven by positive credit related adjustments associated with SLF’s investment portfolio. For the three months ended June 30, 2014, we had no unrealized appreciation or depreciation on our investment in SLF subordinated notes. For the nine months ended June 30, 2014, we had $0.4 million and $0.1 million of unrealized appreciation on our investment in SLF LLC equity interests and subordinated notes, respectively. Unrealized appreciation on the SLF LLC equity interests was driven by positive credit related adjustments associated with SLF’s investment portfolio, and unrealized appreciation of the SLF subordinated notes was the result of an increase of the contractual coupon rate of the subordinated notes.
During the three months ended June 30, 2013, we had $4.6 million in unrealized appreciation on 42 portfolio company investments, which was partially offset by $3.9 million in unrealized appreciation on 99 portfolio company investments. For the nine months ended June 30, 2013, we had $12.3 million in unrealized appreciation on 77 portfolio company investments, which was partially offset by $10.1 million in unrealized depreciation on 81 portfolio company investments. Unrealized appreciation during the three and nine months ended June 30, 2013 resulted from an increase in fair value primarily due to the rise in market prices and a reversal of prior period unrealized depreciation. Unrealized depreciation during the three and nine months ended June 30, 2013 primarily resulted from the accretion of discounts and negative credit related adjustments that caused a reduction in fair value.
Liquidity and Capital Resources
For the nine months ended June 30, 2014, we experienced a net decrease in cash and cash equivalents of $4.9 million. During the period, we used $254.6 million in operating activities primarily as a result of funding portfolio investments of $580.5 million. This was partially offset by proceeds from principal payments and sales of portfolio investments of $286.8 million and net investment income of $41.7 million. During the same period, cash used in investment activities of $71.4 million was driven by the increase in restricted cash and cash equivalents. Lastly, cash provided by financing activities was $321.0 million, primarily driven by borrowings on debt of $759.9 million and proceeds from shares sold of $64.2 million that were partially offset by repayments of debt of $468.7 million and distributions paid of $40.8 million.
For the nine months ended June 30, 2013, we experienced a net decrease in cash and cash equivalents of $1.0 million. During the same period, we used $257.0 million in operating activities, primarily as a result of fundings of portfolio investments of $554.0 million. This was partially offset by proceeds from principal payments and sales of portfolio investments of $276.5 million and net investment income of $32.0 million. During the same period, cash used in investment activities of $15.3 million was driven by the change in restricted cash and cash equivalents. Lastly, cash provided by financing activities was $240.7 million, primarily due to borrowings on debt of $304.4 million and proceeds from shares sold of $224.1 million, partially offset by repayments of debt of $252.9 million and distributions paid of $31.3 million.
As of June 30, 2014 and September 30, 2013, we had cash and cash equivalents of $11.4 million and $16.3 million, respectively. In addition, we had restricted cash and cash equivalents of $109.8 million and $38.4 million as of June 30, 2014 and September 30, 2013, respectively. Cash and cash equivalents are available to fund new investments, pay operating expenses and pay distributions. As of June 30, 2014, $71.4 million of our restricted cash and cash equivalents could be used to fund new investments that meet the investment guidelines established in each of the Debt Securitizations, and for the payment of interest expense on the notes issued in the Debt Securitizations. $29.1 million of such restricted cash and cash equivalents can be used to fund investments that meet the guidelines under the Credit Facility as well as for the payment of interest expense and revolving debt of the Credit Facility. $2.5 million of such restricted cash and cash equivalents can be used to fund investments that meet the guidelines under the Revolver, as well as for the payment of interest expense and revolving debt of the Revolver. The remaining $6.8 million of restricted cash and cash equivalents can be used to fund new investments that meet the regulatory and investment guidelines established by the SBA for our small business investment companies, or SBICs, and for interest expense and fees on our outstanding SBA debentures.
| S-23 |
As of June 30, 2014 and September 30, 2013, we had outstanding commitments to fund investments totaling $101.9 million and $76.3 million, respectively. These amounts may or may not be funded to the borrowing party now or in the future. The unfunded commitments relate to loans with various maturity dates, but the entire amount was eligible for funding to the borrowers as of June 30, 2014 and September 30, 2013, respectively, subject to the terms of each loan’s respective credit agreement.
As of June 30, 2014 and September 30, 2013, subject to leverage and borrowing base restrictions, we had approximately $116.5 million and $70.4 million, respectively, of remaining commitments and $52.2 million and $60.5 million, respectively, of availability on the Credit Facility. As of June 30, 2014, subject to leverage and borrowing base restrictions, we had approximately $15.0 million of remaining commitments and $0.6 million of availability on the Revolver. As of September 30, 2013, the Revolver was not in place.
On November 15, 2013, Holdings sold $12.0 million of Class B 2010 Notes of the 2010 Debt Securitization and on November 20, 2013, the transaction closed and proceeds of $12.0 million were received. The Class A 2010 Notes of the 2010 Debt Securitization are included in the June 30, 2014 and September 30, 2013 consolidated statements of financial condition as our debt. The Class B 2010 Notes are included in the June 30, 2014 consolidated statement of financial condition as our debt and at September 30, 2013 were eliminated in consolidation.
On June 5, 2014, we completed the 2014 Debt Securitization. The notes, or the 2014 Notes, offered in the 2014 Debt Securitization were issued by the 2014 Issuer, a wholly-owned subsidiary of ours, and the Class A-1, Class A-2, Class B and Class C 2014 Notes are secured by the assets held by the 2014 Issuer. The 2014 Debt Securitization was executed through a private placement of $191.0 million of Aaa/AAA Class A-1 2014 Notes which bear interest at three-month LIBOR plus 1.75%, $20.0 million of Aaa/AAA Class A-2 2014 Notes which bear interest at a rate of three-month LIBOR plus 1.45% through December 4, 2015 and three-month LIBOR plus 1.95% thereafter and $35.0 million of Aa2/AA Class B 2014 Notes which bears interest at a rate of three-month LIBOR plus 2.50%. The $37.5 million face amount of Class C 2014 Notes bear interest at a rate of three-month LIBOR plus 3.50%. In partial consideration for the loans transferred to the 2014 Issuer as part of the 2014 Debt Securitization, we received $119.1 million of LLC equity interests in the 2014 Issuer. We retained all of the Class C 2014 Notes and LLC equity interests totaling $37.5 million and $119.1 million, respectively. The Class A-1, Class A-2 and Class B 2014 Notes are included in the June 30, 2014 consolidated statements of financial condition as our debt. As of June 30, 2014, the Class C 2014 Notes and LLC equity interests were eliminated in consolidation.
The Credit Facility, as most recently amended on June 5, 2014, allows Funding to borrow up to $150.0 million at any one time outstanding, subject to leverage and borrowing base restrictions. The reinvestment period of the Credit Facility expires on October 21, 2014, and the stated maturity date of the Credit Facility is October 22, 2018.
Under present SBIC regulations, the maximum amount of SBA-guaranteed debentures that may be issued by multiple licensees under common management is $225.0 million and the maximum amount that a single SBIC licensee may issue is $150.0 million. As of June 30, 2014, GC SBIC IV, L.P., or SBIC IV, and GC SBIC V, L.P., or SBIC V, had $150.0 million and $58.8 million of outstanding SBA-guaranteed debentures, respectively, leaving incremental borrowing capacity of $16.2 million for SBIC V, under present SBIC regulations. As of September 30, 2013, SBIC IV and SBIC V had $146.3 million and $33.2 million, respectively, of outstanding SBA-guaranteed debentures.
SBIC IV and SBIC V may each borrow up to two times the amount of its regulatory capital, subject to customary regulatory requirements. As of June 30, 2014, we had committed and funded $75.0 million to SBIC IV and SBIC IV had SBA-guaranteed debentures of $150.0 million outstanding that mature between March 2021 and March 2024. As of June 30, 2014, we had committed and funded $37.5 million to SBIC V and SBIC V had SBA-guaranteed debentures of $58.8 million outstanding that mature between September 2023 and September 2024.
In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On September 13, 2011, we received exemptive relief from the SEC allowing us to modify the asset coverage requirement to exclude the SBA debentures from this calculation. As such, our ratio of total consolidated assets to outstanding indebtedness may be less than 200%. This provides us with increased investment flexibility but also increases our risks related to leverage. As of June 30, 2014, our asset coverage for borrowed amounts was 240.8% (excluding the SBA debentures).
On March 18, 2014, we priced a public offering of 3,500,000 shares of common stock at a public offering price of $18.05 per share, raising approximately $63.2 million in gross proceeds. On March 21, 2014, the transaction closed, the shares were issued, and proceeds, net of offering costs but before expenses, of $61.3 million were received. On April 23, 2014, we sold an additional 166,855 shares of our common stock at a public offering price of $18.05 per share pursuant to the underwriters’ partial exercise of the option granted in connection with this offering.
Although we expect to fund the growth of our investment portfolio through the net proceeds from future securities offerings and through our dividend reinvestment plan as well as future borrowings, to the extent permitted by the 1940 Act, we cannot assure you that our efforts to raise capital will be successful. In addition to capital not being available, it also may not be available on favorable terms.
| S-24 |
We believe that our existing cash and cash equivalents and available borrowings as of June 30, 2014 will be sufficient to fund our anticipated requirements through at least June 30, 2015.
Portfolio Composition, Investment Activity and Yield
As of June 30, 2014 and September 30, 2013, we had investments in 146 and 135 portfolio companies, respectively, with a total value of $1,290.5 million and $1,019.8 million, respectively, and had investments in subordinated notes and LLC equity interests in SLF with a total value of $34.4 million and $4.8 million, respectively. The following table shows the asset mix of our new origination commitments for the three and nine months ended June 30, 2014 and 2013:
For the three months ended June 30, | For the nine months ended June 30, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
(In thousands) | Percentage of | (In thousands) | Percentage of | (In thousands) | Percentage of | (In thousands) | Percentage of | |||||||||||||||||||||||||
| Senior secured | $ | 29,220 | 18.5 | % | $ | 57,956 | 20.1 | % | $ | 89,285 | 14.2 | % | $ | 136,875 | 22.5 | % | ||||||||||||||||
| One stop | 125,034 | 78.8 | 179,599 | 62.3 | 474,887 | 75.6 | 355,036 | 58.3 | ||||||||||||||||||||||||
| Second lien | - | - | 46,432 | 16.1 | 20,534 | 3.3 | 108,295 | 17.8 | ||||||||||||||||||||||||
| Subordinated notes in SLF(1) | 2,610 | 1.6 | - | - | 34,658 | 5.5 | - | - | ||||||||||||||||||||||||
| LLC equity interests in SLF(1) | 373 | 0.2 | - | - | 2,923 | 0.5 | - | - | ||||||||||||||||||||||||
| Equity securities | 1,452 | 0.9 | 4,457 | 1.5 | 5,621 | 0.9 | 8,600 | 1.4 | ||||||||||||||||||||||||
| Total new investment commitments | $ | 158,689 | 100.0 | % | $ | 288,444 | 100.0 | % | $ | 627,908 | 100.0 | % | $ | 608,806 | 100.0 | % | ||||||||||||||||
(1) SLF’s proceeds from the subordinated notes and LLC interests were utilized by SLF to fund senior secured loans. As of June 30, 2014, SLF funded senior secured loans to 31 different borrowers.
For the three and nine months ended June 30, 2014, we had approximately $77.5 million and $276.8 million, respectively, in proceeds from principal payments and return of capital distributions of portfolio companies. For the three and nine months ended June 30, 2014, we had sales of securities in two and eight portfolio companies aggregating approximately $1.8 million and $9.8 million, respectively, in net proceeds.
For the three and nine months ended June 30, 2013, we had approximately $67.5 million and $234.9 million, respectively, in proceeds from principal payments and return of capital distributions of portfolio companies. For the three and nine months ended June 30, 2013, we had sales of securities in three and ten portfolio companies aggregating approximately $25.2 million and $41.6 million, respectively, in net proceeds.
The following table shows the par, amortized cost and fair value of our portfolio of investments by asset class:
As of June 30, 2014(1) | As of September 30, 2013(1) | |||||||||||||||||||||||
Par | Amortized | Fair | Par | Amortized | Fair | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Senior secured: | ||||||||||||||||||||||||
| Performing | $ | 291,128 | $ | 288,052 | $ | 289,175 | $ | 298,989 | $ | 295,180 | $ | 295,493 | ||||||||||||
| Non-accrual(2) | 3,288 | 3,277 | 215 | 2,624 | 2,628 | 665 | ||||||||||||||||||
| One stop: | ||||||||||||||||||||||||
| Performing | 876,141 | 864,374 | 866,413 | 558,140 | 549,855 | 554,523 | ||||||||||||||||||
| Non-accrual(2) | - | - | - | - | - | - | ||||||||||||||||||
| Second lien: | ||||||||||||||||||||||||
| Performing | 86,575 | 85,040 | 86,784 | 112,714 | 111,319 | 112,873 | ||||||||||||||||||
| Non-accrual(2) | - | - | - | 384 | 382 | - | ||||||||||||||||||
| Subordinated debt: | ||||||||||||||||||||||||
| Performing | 3,584 | 3,563 | 4,164 | 21,562 | 21,374 | 22,552 | ||||||||||||||||||
| Non-accrual(2) | - | - | - | 3,034 | 3,001 | - | ||||||||||||||||||
| Subordinated notes in SLF:(3) | ||||||||||||||||||||||||
| Performing | 29,610 | 29,610 | 29,610 | 4,140 | 4,140 | 4,066 | ||||||||||||||||||
| Non-accrual(2) | - | - | - | - | - | - | ||||||||||||||||||
| LLC equity interests in SLF:(3) | N/A | 4,230 | 4,787 | N/A | 591 | 768 | ||||||||||||||||||
| Equity: | N/A | 31,560 | 43,742 | N/A | 29,491 | 33,705 | ||||||||||||||||||
| Total | $ | 1,290,326 | $ | 1,309,706 | $ | 1,324,890 | $ | 1,001,587 | $ | 1,017,961 | $ | 1,024,645 | ||||||||||||
(1) Ten and nine of our loans included a feature permitting a portion of the interest due on such loan to be PIK interest as of June 30, 2014 and September 30, 2013, respectively.
(2) We refer to a loan as non-accrual when we cease recognizing interest income on the loan because we have stopped pursuing repayment of the loan or, in certain circumstances, it is past due 90 days or more on principal and interest or our management has reasonable doubt that principal or interest will not be collected. See “—Critical Accounting Polices—Revenue Recognition.”
(3) SLF’s proceeds from the subordinated notes and LLC equity interests in SLF were utilized by SLF to fund senior secured loans.
The following table shows the weighted average rate, spread over LIBOR of floating rate, fixed rate and fees of investments originated and the weighted average rate of sales and payoffs of portfolio companies during the three and nine months ended June 30, 2014 and 2013:
| For the three months ended June 30, | For the nine months ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Weighted average rate of new investment fundings | 7.1 | % | 8.0 | % | 7.3 | % | 8.2 | % | ||||||||
| Weighted average spread over LIBOR of new floating rate investment fundings | 6.0 | % | 6.6 | % | 6.2 | % | 6.7 | % | ||||||||
| Weighted average rate of new fixed rate investment fundings | N/A | N/A | N/A | 16.0 | % | |||||||||||
| Weighted average fees of new investment fundings | 1.3 | % | 1.3 | % | 1.2 | % | 1.4 | % | ||||||||
| Weighted average rate of sales and payoffs of portfolio companies | 7.8 | % | 8.9 | % | 8.8 | % | 8.8 | % | ||||||||
| S-25 |
For the three and nine months ended June 30, 2014, the weighted average annualized income yield on the fair value of income producing loans in our portfolio was 8.3% and 8.3%, respectively. For the three and nine months ended June 30, 2013, the weighted average annualized income yield on the fair value of income producing loans in our portfolio was 9.2% and 9.4%, respectively. As of June 30, 2014, 97.2% and 96.9% of our debt portfolio at fair value and at cost, respectively, had interest rate floors that limit the minimum applicable interest rates on such loans. As of September 30, 2013, 96.1% and 95.6% of our debt portfolio at fair value and at cost, respectively, had interest rate floors that limit the minimum applicable interest rates on such loans.
As of June 30, 2014, the portfolio median EBITDA for our portfolio companies was $29.8 million. The portfolio median EBITDA is based on the most recently reported trailing twelve-month EBITDA received from the portfolio company. The portfolio median EBITDA excludes underlying borrowers in SLF.
As part of the monitoring process, GC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on an internal system developed by Golub Capital and its affiliates. This system is not generally accepted in our industry or used by our competitors. It is based on the following categories, which we refer to as GC Advisors’ internal performance rating:
Internal Performance Ratings
| Rating | Definition |
| 5 | Involves the least amount of risk in our portfolio. The borrower is performing above expectations, and the trends and risk factors are generally favorable. |
| 4 | Involves an acceptable level of risk that is similar to the risk at the time of origination. The borrower is generally performing as expected, and the risk factors are neutral to favorable. |
| 3 | Involves a borrower performing below expectations and indicates that the loan’s risk has increased somewhat since origination. The borrower may be out of compliance with debt covenants; however, loan payments are generally not past due. |
| 2 | Involves a borrower performing materially below expectations and indicates that the loan’s risk has increased materially since origination. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due). |
| 1 | Involves a borrower performing substantially below expectations and indicates that the loan’s risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 1 are not anticipated to be repaid in full and we will reduce the fair market value of the loan to the amount we anticipate will be recovered. |
Our internal performance ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or represent or reflect any third-party assessment of any of our investments.
For any investment rated 1, 2 or 3, GC Advisors will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions.
GC Advisors monitors and, when appropriate, changes the internal performance ratings assigned to each investment in our portfolio. In connection with our valuation process, GC Advisors and our board of directors review these internal performance ratings on a quarterly basis.
The following table shows the distribution of our investments on the 1 to 5 internal performance rating scale at fair value as of June 30, 2014 and September 30, 2013:
| June 30, 2014 | September 30, 2013 | |||||||||||||||
| Internal Performance Rating | Investments at Fair Value (In thousands) | Percentage of Total Investments | Investments at Fair Value (In thousands) | Percentage of Total Investments | ||||||||||||
| 5 | $ | 305,316 | 23.0 | % | $ | 178,993 | 17.5 | % | ||||||||
| 4 | 949,643 | 71.7 | 750,611 | 73.3 | ||||||||||||
| 3 | 65,257 | 4.9 | 88,458 | 8.6 | ||||||||||||
| 2 | 4,459 | 0.4 | 6,521 | 0.6 | ||||||||||||
| 1 | 215 | 0.0 | * | 62 | 0.0 | * | ||||||||||
| Total | $ | 1,324,890 | 100.0 | % | $ | 1,024,645 | 100.0 | % | ||||||||
* Represents an amount less than 0.1%.
| S-26 |
Senior Loan Fund
Effective May 31, 2013, we entered into an agreement to co-invest with United Insurance through SLF, an unconsolidated Delaware LLC whose purpose is to primarily invest in senior secured loans of middle market companies. SLF is capitalized as transactions are completed and all portfolio and investment decisions in respect to SLF must be approved by the SLF investment committee consisting of representatives of us and United Insurance (with approval from a representative of each required). SLF is capitalized with subordinated notes and LLC equity interest subscriptions from us and United Insurance. As of June 30, 2014, we and United Insurance owned 87.5% and 12.5%, respectively, of both the outstanding subordinated notes and LLC equity interests. As of June 30, 2014, SLF had subordinated note commitments from us and United Insurance totaling $100.0 million, of which approximately $33.8 million and $4.7 million in aggregate principal amount was funded at June 30, 2014 and September 30, 2013, respectively. As of June 30, 2014, SLF had LLC equity interest subscriptions from us and United Insurance totaling $25.0 million, of which approximately $4.8 million and $0.7 million in aggregate was called and contributed at June 30, 2014 and September 30, 2013, respectively.
On January 17, 2014, Senior Loan Fund II LLC, a wholly owned subsidiary of SLF, or SLF II, entered into a senior secured revolving credit facility, or the SLF Credit Facility, with Wells Fargo Securities, LLC, as administrative agent, and Wells Fargo Bank, N.A., as lender, which, as amended, allows SLF II to borrow up to $100.0 million, subject to leverage and borrowing base restrictions. The reinvestment period of the SLF Credit Facility ends April 11, 2015, and the stated maturity date is April 11, 2019. As of June 30, 2014, SLF II had outstanding debt under the SLF Credit Facility of $66.4 million.
Through the reinvestment period, the SLF Credit Facility bears interest at one-month LIBOR, plus a rate between 1.75% and 2.25%, depending on the composition of the collateral asset portfolio, per annum. After the reinvestment period, the rate will reset to one-month LIBOR plus 2.75% per annum for the remaining term of the SLF Credit Facility.
As of June 30, 2014 and September 30, 2013, SLF had total assets at fair value of $106.9 million and $13.8 million, respectively. As of June 30, 2014 and September 30, 2013, SLF’s portfolio was comprised of first lien senior secured loans to 31 and four different borrowers, respectively. As of June 30, 2014 and September 30, 2013, none of these loans was on non-accrual status. The portfolio companies in SLF are U.S. middle market companies in industries similar to those in which we may invest directly. Additionally, as of June 30, 2014 and September 30, 2013, SLF had commitments to fund various undrawn revolving credit and delayed draw loans to its portfolio companies totaling $9.9 million and $2.7 million, respectively.
Below is a summary of SLF’s portfolio, followed by a listing of the individual loans in SLF’s portfolio as of June 30, 2014 and September 30, 2013:
| As of June 30, 2014 | As of September 30, 2013 | |||||||
| (Dollars in thousands) | ||||||||
| Senior secured loans (1) | $ | 103,860 | $ | 13,677 | ||||
| Weighted average current interest rate on senior secured loans (2) | 5.2 | % | 5.9 | % | ||||
| Number of borrowers in SLF | 31 | 4 | ||||||
| Largest loan to a single borrower (1) | $ | 8,250 | $ | 8,313 | ||||
| Total of five largest loans to borrowers (1) | $ | 31,469 | $ | 13,620 | ||||
| (1) | At principal amount. |
| (2) | Computed as the (a) annual stated interest rate on accruing senior secured loans divided by (b) total senior secured loans at principal amount. |
| S-27 |
SLF Loan Portfolio as of June 30, 2014
| Current | ||||||||||||||||||
| Maturity | Interest | Principal/Par | Fair | |||||||||||||||
| Portfolio Company | Business Description | Investment Type | Date | Rate (1) | Amount | Value (2) | ||||||||||||
| (IN THOUSANDS) | ||||||||||||||||||
| 5.11, Inc. (3) | Textiles and Leather | Senior Loan | 02/2020 | 6.0 | % | $ | 3,298 | $ | 3,306 | |||||||||
| ACTIVE Network, Inc. | Electronics | Senior Loan | 11/2020 | 5.5 | 1,990 | 1,984 | ||||||||||||
| ARG IH Corporation (3) | Beverage, Food and Tobacco | Senior Loan | 11/2020 | 5.0 | 2,156 | 2,172 | ||||||||||||
| Atrium Innovations | Personal and Non Durable Consumer Products | Senior Loan | 02/2021 | 4.3 | 3,565 | 3,542 | ||||||||||||
| BJ's Wholesale Club, Inc. | Retail Stores | Senior Loan | 09/2019 | 4.5 | 2,992 | 3,000 | ||||||||||||
| Blue Coat Systems, Inc. | Electronics | Senior Loan | 05/2019 | 4.0 | 1,995 | 1,999 | ||||||||||||
| BMC Software, Inc. | Electronics | Senior Loan | 09/2020 | 5.0 | 1,990 | 1,990 | ||||||||||||
| Brasa (Holdings) Inc. | Personal, Food and Miscellaneous Services | Senior Loan | 07/2019 | 5.0 | 8,250 | 8,263 | ||||||||||||
| Connect Merger Sub, Inc. | Telecommunications | Senior Loan | 04/2020 | 4.8 | 3,985 | 4,006 | ||||||||||||
| Dell, Inc. | Electronics | Senior Loan | 04/2020 | 4.5 | 1,990 | 2,003 | ||||||||||||
| Dialysis Newco, Inc. | Healthcare, Education and Childcare | Senior Loan | 04/2021 | 4.8 | 2,500 | 2,508 | ||||||||||||
| Diversified Foodservice Supply, Inc. (3) | Beverage, Food and Tobacco | Senior Loan | 12/2018 | 6.0 | 4,240 | 4,240 | ||||||||||||
| Diversified Foodservice Supply, Inc. (3) | Beverage, Food and Tobacco | Senior Loan | 12/2018 | 7.0 | 88 | 88 | ||||||||||||
| El Pollo Loco Inc. (3) | Personal, Food and Miscellaneous Services | Senior Loan | 10/2018 | 5.3 | 4,752 | 4,788 | ||||||||||||
| Federal-Mogul Corporation | Automobile | Senior Loan | 04/2021 | 4.8 | 4,000 | 4,010 | ||||||||||||
| GSDM Holdings Corp. (3) | Healthcare, Education and Childcare | Senior Loan | 06/2019 | 5.3 | 1,804 | 1,795 | ||||||||||||
| Nuveen Investments, Inc. | Finance | Senior Loan | 05/2017 | 4.1 | 3,000 | 3,009 | ||||||||||||
| Paradigm DKD Group, LLC | Buildings and Real Estate | Senior Loan | 11/2018 | 5.8 | 2,063 | 2,063 | ||||||||||||
| Paradigm DKD Group, LLC | Buildings and Real Estate | Senior Loan | 11/2018 | 5.8 | 468 | 468 | ||||||||||||
| Paradigm Management Services, LLC (3) | Healthcare, Education and Childcare | Senior Loan | 01/2019 | 5.5 | 6,279 | 6,279 | ||||||||||||
| Payless ShoeSource, Inc. | Retail Stores | Senior Loan | 03/2021 | 5.0 | 2,000 | 2,009 | ||||||||||||
| Plano Molding Company, LLC (3) | Home and Office Furnishings, Housewares, and Durable Consumer | Senior Loan | 10/2018 | 5.3 | 1,838 | 1,838 | ||||||||||||
| Print Payroll Services, LLC | Diversified Conglomerate Service | Senior Loan | 06/2019 | 5.5 | 2,390 | 2,378 | ||||||||||||
| Print Payroll Services, LLC | Diversified Conglomerate Service | Senior Loan | 06/2019 | 3.2 | 568 | 565 | ||||||||||||
| Print Payroll Services, LLC (4) | Diversified Conglomerate Service | Senior Loan | 06/2019 | N/A | (5) | - | (6 | ) | ||||||||||
| Rug Doctor LLC (3) | Personal and Non Durable Consumer Products | Senior Loan | 12/2016 | 6.3 | 5,003 | 5,003 | ||||||||||||
| Rug Doctor LLC (3) | Personal and Non Durable Consumer Products | Senior Loan | 12/2016 | 6.3 | 428 | 428 | ||||||||||||
| Scientific Games International, Inc. | Hotels, Motels, Inns, and Gaming | Senior Loan | 10/2020 | 4.3 | 3,985 | 3,948 | ||||||||||||
| Self Esteem Brands, LLC (3) | Leisure, Amusement, Motion Pictures, Entertainment | Senior Loan | 02/2020 | 5.3 | 6,531 | 6,490 | ||||||||||||
| Self Esteem Brands, LLC (3) (4) | Leisure, Amusement, Motion Pictures, Entertainment | Senior Loan | 02/2020 | N/A | (5) | - | (4 | ) | ||||||||||
| Smashburger Finance LLC | Beverage, Food and Tobacco | Senior Loan | 05/2018 | 5.5 | 973 | 973 | ||||||||||||
| Syncsort Incorporated (3) | Electronics | Senior Loan | 03/2019 | 5.8 | 4,978 | 4,929 | ||||||||||||
| Syncsort Incorporated (3) (4) | Electronics | Senior Loan | 03/2019 | N/A | (5) | - | (11 | ) | ||||||||||
| Syncsort Incorporated (3) (4) | Electronics | Senior Loan | 03/2019 | N/A | (5) | - | (3 | ) | ||||||||||
| Systems Maintenance Services Holding, Inc. (3) | Electronics | Senior Loan | 10/2019 | 5.3 | 2,446 | 2,446 | ||||||||||||
| Take 5 Oil Change, L.L.C. (3) | Automobile | Senior Loan | 07/2018 | 5.8 | 1,432 | 1,432 | ||||||||||||
| Tectum Holdings, Inc. (3) | Automobile | Senior Loan | 09/2018 | 5.3 | 2,790 | 2,790 | ||||||||||||
| U.S. Water Services, Inc. | Utilities | Senior Loan | 08/2018 | 5.8 | 3,470 | 3,470 | ||||||||||||
| U.S. Water Services, Inc. | Utilities | Senior Loan | 08/2018 | 6.8 | 465 | 465 | ||||||||||||
| U.S. Water Services, Inc. | Utilities | Senior Loan | 08/2018 | 5.8 | 166 | 166 | ||||||||||||
| W3 Co. | Oil and Gas | Senior Loan | 03/2020 | 5.8 | 2,992 | 2,951 | ||||||||||||
| $ | 103,860 | $ | 103,770 | |||||||||||||||
| (1) | Represents the weighted average annual current interest rate as of June 30, 2014. All interest rates are payable in cash. |
| (2) | Represents the fair value in accordance with ASC Topic 820 —Fair Value Measurements and Disclosures . The determination of such fair value is not included in our board of directors' valuation process described elsewhere herein. |
| (3) | We also hold a portion of the first lien senior secured loan in this portfolio company. |
| (4) | The negative fair value is the result of the unfunded commitment being valued below par. |
| (5) | The entire commitment was unfunded at June 30, 2014. As such, no interest is being earned on this investment. |
| S-28 |
SLF Loan Portfolio as of September 30, 2013
| Current | ||||||||||||||||||
| Portfolio | Investment | Maturity | Interest | Principal/Par | Fair | |||||||||||||
| Company | Business Description | Type | Date | Rate (1) | Amount | Value (2) | ||||||||||||
| (IN THOUSANDS) | ||||||||||||||||||
| Brasa (Holdings) Inc. | Personal, Food and Miscellaneous Services | Senior Loan | 07/2019 | 5.8 | % | $ | 8,313 | $ | 8,365 | |||||||||
| SoftWriters, Inc. | Diversified Conglomerate Service | Senior Loan | 09/2018 | 6.5 | 1,578 | 1,559 | ||||||||||||
| SoftWriters, Inc. (3) | Diversified Conglomerate Service | Senior Loan | 09/2018 | N/A | (4) | - | (8 | ) | ||||||||||
| SoftWriters, Inc. (3) | Diversified Conglomerate Service | Senior Loan | 09/2018 | N/A | (4) | - | (3 | ) | ||||||||||
| Take 5 Oil Change, L.L.C. (5) | Automobile | Senior Loan | 07/2018 | 6.3 | 1,445 | 1,434 | ||||||||||||
| Take 5 Oil Change, L.L.C. (5) | Automobile | Senior Loan | 07/2018 | 6.3 | 57 | 55 | ||||||||||||
| U.S. Water Services, Inc. | Utilities | Senior Loan | 08/2018 | 5.5 | 2,218 | 2,206 | ||||||||||||
| U.S. Water Services, Inc. | Utilities | Senior Loan | 08/2018 | 6.5 | 66 | 63 | ||||||||||||
| U.S. Water Services, Inc. (3) | Utilities | Senior Loan | 08/2018 | N/A | (4) | - | (5 | ) | ||||||||||
| $ | 13,677 | $ | 13,666 | |||||||||||||||
| (1) | Represents the weighted average annual current interest rate as of September 30, 2013. All interest rates are payable in cash. |
| (2) | Represents the fair value in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures . The determination of such fair value is not included in our board of directors' valuation process described elsewhere herein. |
| (3) | The negative fair value is the result of the unfunded commitment being valued below par. |
| (4) | The entire commitment was unfunded at September 30, 2013. As such, no interest is being earned on this investment. |
| (5) | We also hold a portion of the first lien senior secured loan in this portfolio company. |
We have committed to fund $87.5 million of subordinated notes and $21.9 million of LLC equity interest subscriptions to SLF. The amortized cost and fair value of the subordinated notes in SLF held by us were $29.6 million and $29.6 million, respectively, as of June 30, 2014, and $4.1 million and $4.1 million, respectively, as of September 30, 2013. The subordinated notes pay a weighted average interest rate of three-month LIBOR plus 8.0%, which increased from three-month LIBOR plus 4.0% subsequent to closing the SLF Credit Facility. For the three and nine months ended June 30, 2014, we earned interest income of $0.6 million and $1.3 million, respectively, on the subordinated notes. We did not hold any subordinated notes during the three and nine months ended June 30, 2013 as SLF was formed in May 2013 and commenced operations in July 2013. For the three and nine months ended June 30, 2014, we earned an annualized total return on our weighted average capital invested in SLF of 9.6% and 8.0%, respectively. The annualized total return on weighted average capital invested is calculated by dividing total income earned on our investments in SLF subordinated notes and LLC equity interests by the combined daily average of our investments in (1) the principal of the SLF subordinated notes and (2) the net asset value of the SLF LLC equity interests.
Total investments at SLF continue to grow and exceeded $100.0 million as of June 30, 2014. We anticipate faster asset growth at SLF in the coming quarters. Below is certain summarized financial information for SLF as of June 30, 2014 and September 30, 2013 and for the three and nine months ended June 30, 2014 and 2013:
| As of June 30, 2014 | As of September 30, 2013 | |||||||
| Selected Balance Sheet Information, at fair value | (In thousands) | |||||||
| Investments in loans receivable, net of discount for loan origination fees | $ | 103,770 | $ | 13,666 | ||||
| Cash and other assets | 3,096 | 155 | ||||||
| Total assets | $ | 106,866 | $ | 13,821 | ||||
| Senior credit facility | $ | 66,350 | $ | - | ||||
| Payable for open trades | - | 8,259 | ||||||
| Other liabilities | 1,205 | 37 | ||||||
| Total liabilities | 67,555 | 8,296 | ||||||
| Subordinated notes and members’ equity | 39,311 | 5,525 | ||||||
| Total liabilities and net assets | $ | 106,866 | $ | 13,821 | ||||
| S-29 |
| Three months ended June 30, | Nine months ended June 30 | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Selected Statement of Operations Information: | (In thousands) | |||||||||||||||
| Total revenues | $ | 1,277 | N/A | (1) | $ | 2,390 | N/A | (1) | ||||||||
| Total expenses | $ | 1,157 | N/A | (1) | $ | 2,198 | N/A | (1) | ||||||||
| Net change in unrealized appreciation (depreciation) on investments and subordinated notes | $ | 114 | N/A | (1) | $ | 241 | N/A | (1) | ||||||||
| Net increase in net assets | $ | 234 | N/A | (1) | $ | 433 | N/A | (1) | ||||||||
| (1) | SLF was formed in May 2013 and commenced operations in July 2013. |
The SLF investment committee has elected to fair value the subordinated notes issued to us and United Insurance under ASC Topic 825 – Financial Instruments. The subordinated notes are valued by calculating the net present value of the future expected cash flow streams using an appropriate risk-adjusted discount rate model. For the three and nine months ended June 30, 2014, SLF recognized zero and $0.1 million in unrealized appreciation, respectively, on the subordinated notes. The following table presents the difference between fair value and the aggregate contractual principal amounts of subordinated notes for which the fair value option has been elected as of June 30, 2014 and September 30, 2013:
| As of June 30, 2014 | ||||||||||||||||
| (In thousands) | ||||||||||||||||
| Par Value | Carrying Value | Fair Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||
| Subordinated notes | $ | 33,840 | $ | 33,840 | $ | 33,840 | $ | - | ||||||||
| As of September 30, 2013 | ||||||||||||||||
| (In thousands) | ||||||||||||||||
| Par Value | Carrying Value | Fair Value | Unrealized Appreciation/ (Depreciation) | |||||||||||||
| Subordinated notes | $ | 4,731 | $ | 4,731 | $ | 4,646 | $ | (85 | ) | |||||||
Contractual Obligations and Off-Balance Sheet Arrangements
A summary of our significant contractual payment obligations as of June 30, 2014 is as follows:
| Payments Due by Period (In millions) | ||||||||||||||||||||
| Total | Less Than 1 Year | 1-3 Years |
| More
than | ||||||||||||||||
| 2010 Debt Securitization | $ | 215.0 | $ | - | $ | - | $ | - | $ | 215.0 | ||||||||||
| 2014 Debt Securitization | 246.0 | - | - | - | 246.0 | |||||||||||||||
| SBA debentures | 208.8 | - | - | - | 208.8 | |||||||||||||||
| Credit Facility | 33.5 | - | - | 33.5 | - | |||||||||||||||
| Revolver | - | - | - | - | - | |||||||||||||||
| Unfunded commitments(2) | 101.9 | 101.9 | - | - | - | |||||||||||||||
| Total contractual obligations(3) | $ | 805.2 | $ | 101.9 | $ | - | $ | 33.5 | $ | 669.8 | ||||||||||
| (1) | The notes offered in the 2010 Debt Securitization are scheduled to mature on July 20, 2023, and the notes offered in the 2014 Debt Securitization are scheduled to mature on April 25, 2026. The SBA debentures are scheduled to mature between March 2021 and September 2024. The Credit Facility is scheduled to mature on October 22, 2018. The Revolver is scheduled to mature on November 22, 2019. |
| (2) | Unfunded commitments represent all amounts unfunded as of June 30, 2014. These amounts may or may not be funded to the borrowing party now or in the future. The unfunded commitments relate to loans with various maturity dates, but we are showing this amount in the less than one year category as this entire amount was eligible for funding to the borrowers as of June 30, 2014. |
| (3) | Total contractual obligations exclude $20.3 million of secured borrowings. |
| S-30 |
We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of June 30, 2014 and September 30, 2013, we had outstanding commitments to fund investments totaling $101.9 million and $76.3 million, respectively.
We have certain contracts under which we have material future commitments. We have entered into the Investment Advisory Agreement with GC Advisors in accordance with the 1940 Act. Under the Investment Advisory Agreement, GC Advisors provides us with investment advisory and management services. For these services, we pay (1) a management fee equal to a percentage of the average adjusted value of our gross assets and (2) an incentive fee based on our performance. To the extent that GC Advisors or any of its affiliates provides investment advisory, collateral management or other similar services to a subsidiary of ours, we reduce the base management fee by an amount equal to the product of (1) the total fees paid to GC Advisors by such subsidiary for such services and (2) the percentage of such subsidiary’s total equity that is owned, directly or indirectly, by us.
Under the Administration Agreement, the Administrator furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations. We reimburse the Administrator for the allocable portion (subject to the review and approval of our board of directors) of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs. The Administrator also provides on our behalf significant managerial assistance to those portfolio companies to which we are required to offer to provide such assistance.
If any of the contractual obligations discussed above is terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we receive under our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
Distributions
In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income we distribute to our stockholders, we are required under the Code to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must meet the annual distribution requirements of the U.S. federal excise tax rules. We intend to make quarterly distributions to our stockholders as determined by our board of directors.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a business development company under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse U.S. federal income tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.
To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our ordinary income or gains.
We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then our stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
| · | We entered into an Investment Advisory Agreement with GC Advisors. Mr. Lawrence Golub, our chairman, is a manager of GC Advisors, and Mr. David Golub, our chief executive officer, is a manager of GC Advisors, and each of Messrs. Lawrence Golub and David Golub owns an indirect pecuniary interest in GC Advisors. |
| S-31 |
| · | Golub Capital LLC provides, and other affiliates of Golub Capital have historically provided, us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our Administration Agreement. |
| · | We have entered into a license agreement with Golub Capital LLC, pursuant to which Golub Capital LLC has granted us a non-exclusive, royalty-free license to use the name “Golub Capital.” |
| · | Under the Staffing Agreement, Golub Capital has agreed to provide GC Advisors with the resources necessary to fulfill its obligations under the Investment Advisory Agreement. The Staffing Agreement provides that Golub Capital will make available to GC Advisors experienced investment professionals and access to the senior investment personnel of Golub Capital for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. The Staffing Agreement also includes a commitment that the members of GC Advisors’ investment committee will serve in such capacity. Services under the Staffing Agreement are provided on a direct cost reimbursement basis. |
| · | GC Advisors serves as collateral manager to the 2010 Issuer and the 2014 Issuer under collateral management agreements and receives a fee for providing these services that is offset against the base management fee payable by us under the Investment Advisory Agreement. |
| · | In our common stock offerings that closed on October 19, 2012, January 18, 2013 and September 17, 2013, Golub Capital Employee Grant Program Rabbi Trust, a trust organized for the purpose of awarding equity incentive compensation to employees of Golub Capital, purchased an aggregate of $3.0 million of shares, $1.0 million of shares and $1.2 million of shares, respectively, at each respective public offering price per share. In our common stock offering that closed on September 17, 2013, GCI Development LLC, an affiliate of GC Advisors, purchased an aggregate of $0.5 million of shares at the public offering price per share. In our common stock offerings that closed on October 19, 2012 and September 17, 2013, Mr. William M. Webster IV, one of our directors, and certain of his family members purchased 10,000 shares and 40,000 shares, respectively, at each respective public offering price per share. |
| · | GC Advisors irrevocably waived $0.3 million of the incentive fee payable by us to GC Advisors for the year ended September 30, 2013. |
| · | GC Advisors also sponsors or manages, and may in the future sponsor or manage, other investment funds, accounts or investment vehicles (together referred to as “accounts”) that have investment mandates that are similar, in whole and in part, with ours. GC Advisors and its affiliates may determine that an investment is appropriate for us and for one or more of those other accounts. In such event, depending on the availability of such investment and other appropriate factors, and pursuant to GC Advisors’ allocation policy, GC Advisors or its affiliates may determine that we should invest side-by-side with one or more other accounts. We do not intend to make any investments if they are not permitted by applicable law and interpretive positions of the SEC and its staff, or if they are inconsistent with GC Advisors’ allocation procedures. |
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Fair Value Measurements
We value investments for which market quotations are readily available at their market quotations. However, a readily available market value is not expected to exist for many of the investments in our portfolio, and we value these portfolio investments at fair value as determined in good faith by our board of directors under our valuation policy and process. We may seek pricing information with respect to certain of our investments from pricing services or brokers or dealers in order to value such investments. We also employ independent third party valuation firms for all of our investments for which there is not a readily available market value.
| S-32 |
Valuation methods may include comparisons of the portfolio companies to peer companies that are public, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, discounted cash flow, the markets in which the portfolio company does business and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will consider the pricing indicated by the external event to corroborate the private equity valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from values that may ultimately be received or settled.
Our board of directors is ultimately and solely responsible for determining, in good faith, the fair value of investments that are not publicly traded, whose market prices are not readily available on a quarterly basis or any other situation where portfolio investments require a fair value determination.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
| · | Our quarterly valuation process begins with each portfolio company investment being initially valued by the investment professionals of GC Advisors responsible for credit monitoring. |
| · | Preliminary valuation conclusions are then documented and discussed with our senior management and GC Advisors. |
| · | The audit committee of our board of directors reviews these preliminary valuations. |
| · | At least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm. |
| · | The board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith. |
The factors that are taken into account in fair value pricing investments include: available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples; security covenants; call protection provisions; information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; comparisons of financial ratios of peer companies that are public; comparable merger and acquisition transactions; and the principal market and enterprise values.
Determination of fair values involves subjective judgments and estimates. Under current auditing standards, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.
We follow ASC Topic 820, Fair Value Measurements and Disclosures, as amended, for measuring fair value. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the assets or liabilities or market and the assets’ or liabilities’ complexity. Our fair value analysis includes an analysis of the value of any unfunded loan commitments. Assets and liabilities are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the asset or liability as of the measurement date. The three levels are defined as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the assets or liabilities.
Level 3: Inputs include significant unobservable inputs for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value are based upon the best information available and may require significant management judgment or estimation.
| S-33 |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or a liability’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we consider factors specific to the asset or liability. We assess the levels of assets and liabilities at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfers. There were no transfers among Level 1, 2 and 3 of the fair value hierarchy for assets and liabilities during the three and nine months ended June 30, 2014 and 2013. The following section describes the valuation techniques used by us to measure different assets and liabilities at fair value and includes the level within the fair value hierarchy in which the assets and liabilities are categorized.
Valuation of investments: Level 1 investments are valued using quoted market prices. Level 2 investments are valued using market consensus prices that are corroborated by observable market data and quoted market prices for similar assets and liabilities. Level 3 investments are valued at fair value as determined in good faith by our board of directors, based on input of management, the audit committee and independent valuation firms that have been engaged at the direction of our board of directors to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is conducted at the end of each fiscal quarter, with approximately 25% (based on fair value) of our valuations of debt and equity investments without readily available market quotations subject to review by an independent valuation firm. All investments as of June 30, 2014 and September 30, 2013, with the exception of money market funds included in cash and cash equivalents (Level 1 investments), were valued using Level 3 inputs of the fair value hierarchy.
When determining the fair value of Level 3 debt and equity investments, we may take into account the following factors, where relevant: the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons to publicly traded securities, and changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made and other relevant factors. The primary method for determining enterprise value uses a multiple analysis whereby appropriate multiples are applied to the portfolio company’s EBITDA. The enterprise value analysis is performed to determine the value of equity investments and to determine if debt investments are credit impaired. If debt investments are credit impaired, we will use the enterprise value analysis or a liquidation basis analysis to determine fair value. For debt investments that are not determined to be credit impaired, we use a market interest rate yield analysis to determine fair value.
In addition, for certain debt investments, we may base our valuation on indicative bid and ask prices provided by an independent third party pricing service. Bid prices reflect the highest price that we and others may be willing to pay. Ask prices represent the lowest price that we and others may be willing to accept. We generally uses the midpoint of the bid/ask range as our best estimate of fair value of such investment.
Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a market existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions or otherwise are less liquid than publicly traded instruments. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which such investment had previously been recorded.
Our investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
Valuation of secured borrowings: We have elected the fair value option under ASC Topic 825 — Financial Instruments, or ASC Topic 825, relating to accounting for debt obligations at their fair value for our secured borrowings which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. All secured borrowings as of June 30, 2014 and September 30, 2013 were valued using Level 3 inputs under the fair value hierarchy, and our approach to determining fair value of Level 3 secured borrowings is consistent with our approach to determining fair value of the Level 3 investments that are associated with these secured borrowings as previously described.
Valuation of other financial assets and liabilities: Fair value of our debt is estimated using Level 3 inputs by discounting remaining payments using comparable market rates or market quotes for similar instruments at the measurement date, if available.
Revenue Recognition
Our revenue recognition policies are as follows:
Investments and Related Investment Income: Interest income is accrued based upon the outstanding principal amount and contractual interest terms of debt investments. Premiums, discounts, and origination fees are amortized or accreted into interest income over the life of the respective debt investment. For investments with contractual PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not likely to be collectible. In addition, we may generate revenue in the form of amendment, structuring or due diligence fees, fees for providing managerial assistance, consulting fees and prepayment premiums on loans and record these fees as fee income when received. Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Distributions received from LLC and LP investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
| S-34 |
We account for investment transactions on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the cost basis of investment, without regard to unrealized gains or losses previously recognized. We report changes in fair value of investments from the prior period that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in our consolidated statement of operations.
Non-accrual: Loans may be left on accrual status during the period we are pursuing repayment of the loan. Management reviews all loans that become past due 90 days or more on principal and interest, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. We generally reverse accrued interest when a loan is placed on non-accrual status. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. We restore non-accrual loans to accrual status when past due principal and interest is paid and, in our management’s judgment, are likely to remain current. The total fair value of our non-accrual loans was $0.2 million and $0.7 million as of June 30, 2014 and September 30, 2013, respectively.
Partial loan sales: We follow the guidance in ASC Topic 860 when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest”, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales that do not meet the definition of a participating interest remain on our statements of assets and liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.
Income taxes
We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, we are required to meet certain source of income and asset diversification requirements, and timely distribute to our stockholders at least 90% of investment company taxable income, as defined by the Code, for each tax year. We have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from U.S. federal income taxes.
Depending on the level of taxable income earned in a tax year, we may choose to retain taxable income in excess of current year distributions into the next tax year in an amount less than what would trigger payments of federal income tax under Subchapter M of the Code. We would then pay a 4% excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable income may exceed estimated current year distributions, we accrue excise tax, if any, on estimated excess taxable income as taxable income is earned.
Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified within capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes when distributed as dividends to our shareholders.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, most significantly changes in interest rates. Many of the loans in our portfolio have floating interest rates, and we expect that our loans in the future may also have floating interest rates. These loans are usually based on a floating LIBOR and typically have interest rate reset provisions that adjust applicable interest rates under such loans to current market rates on a quarterly basis. The loans that are subject to the floating LIBOR rates are also subject to a minimum base rate, or floor, that we charge on our loans if the current market rates are below the respective floors. As of June 30, 2014 and September 30, 2013, the weighted average LIBOR floor on the loans subject to floating interest rates was 1.20% and 1.34%, respectively. In addition, the Class A and B 2010 Notes issued as a part of the 2010 Debt Securitization and the Class A-1, A-2 and B 2014 Notes issued as part of the 2014 Debt Securitization have floating interest rate provisions based on three-month LIBOR that resets quarterly, the Credit Facility has a floating interest rate provision based on one-month LIBOR that resets daily and the Revolver has a floating interest rate provision based on, at the election of Revolver Funding, either one-month, two-month or three-month LIBOR or PrivateBank’s prime rate that resets at contract maturity. As of June 30, 2014 and September 30, 2013, the weighted average LIBOR floor on the secured borrowings, which reset quarterly, was 1.25% and 1.25%, respectively. We expect that other credit facilities into which we enter in the future may have floating interest rate provisions.
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Assuming that the interim and unaudited consolidated statement of financial condition as of June 30, 2014 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.
| Change in interest rates | Increase
(decrease) in interest income | Increase
(decrease) in interest expense | Net
increase (decrease) in investment income | |||||||||
| (in thousands) | ||||||||||||
| Down 25 basis points | $ | (76 | ) | $ | (1,236 | ) | $ | 1,160 | ||||
| Up 50 basis points | 152 | 2,473 | (2,321 | ) | ||||||||
| Up 100 basis points | 1,334 | 4,947 | (3,613 | ) | ||||||||
| Up 200 basis points | 13,212 | 10,091 | 3,121 | |||||||||
| Up 300 basis points | 25,499 | 15,239 | 10,260 | |||||||||
Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments, including borrowing under the Debt Securitizations, the Credit Facility, the Revolver or other borrowings, that could affect net increase in net assets resulting from operations, or net income. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.
We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as interest rate swaps, futures, options and forward contracts to the limited extent permitted under the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
| S-36 |
Our common stock began trading on April 15, 2010 and is currently traded on The Nasdaq Global Select Market under the symbol “GBDC”. The following table lists the high and low closing sale price for our common stock, the closing sale price as a percentage of net asset value, or NAV, and quarterly distributions per share since October 1, 2011.
| Period | NAV (1) | Closing Sales Price | Premium
of High Sales Price to NAV(2) | Premium (Discount) of Low Sales Price to NAV (2) | Declared
Distributions(3) | |||||||||||||||||||
| High | Low | |||||||||||||||||||||||
| Fiscal year ended September 30, 2012 | ||||||||||||||||||||||||
| First quarter | $ | 14.53 | $ | 16.00 | $ | 14.16 | 10.1 | % | (2.5 | )% | $ | 0.32 | ||||||||||||
| Second quarter | $ | 14.69 | $ | 15.95 | $ | 14.57 | 8.6 | % | (0.8 | )% | $ | 0.32 | ||||||||||||
| Third quarter | $ | 14.58 | $ | 15.18 | $ | 14.25 | 4.1 | % | (2.3 | )% | $ | 0.32 | ||||||||||||
| Fourth quarter | $ | 14.60 | $ | 16.00 | $ | 15.05 | 9.6 | % | 3.1 | % | $ | 0.32 | ||||||||||||
| Fiscal year ended September 30, 2013 | ||||||||||||||||||||||||
| First quarter | $ | 14.66 | $ | 16.32 | $ | 14.75 | 11.3 | % | 0.6 | % | $ | 0.32 | ||||||||||||
| Second quarter | $ | 14.80 | $ | 16.66 | $ | 15.82 | 12.6 | % | 6.9 | % | $ | 0.32 | ||||||||||||
| Third quarter | $ | 15.12 | $ | 17.98 | $ | 16.02 | 18.9 | % | 6.0 | % | $ | 0.32 | ||||||||||||
| Fourth quarter | $ | 15.21 | $ | 18.50 | $ | 16.76 | 21.6 | % | 10.2 | % | $ | 0.32 | ||||||||||||
| Fiscal year ending September 30, 2014 | ||||||||||||||||||||||||
| First quarter | $ | 15.23 | $ | 19.11 | $ | 16.74 | 25.5 | % | 9.9 | % | $ | 0.32 | ||||||||||||
| Second quarter | $ | 15.41 | $ | 19.26 | $ | 17.64 | 25.0 | % | 14.5 | % | $ | 0.32 | ||||||||||||
| Third quarter | $ | 15.44 | $ | 17.97 | $ | 15.94 | 16.4 | % | 3.2 | % | $ | 0.32 | ||||||||||||
| Fourth quarter (through August 19, 2014) | N/A | $ | 17.77 | $ | 16.30 | N/A | N/A | $ | 0.32 | |||||||||||||||
| (1) | NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period. |
| (2) | Calculated as of the respective high or low closing sales price divided by the quarter end NAV. |
| (3) | Includes a return of capital for tax purposes of approximately $0.04 per share for the fiscal year ended September 30, 2012 and $0.11 per share for the fiscal year ended September 30, 2013. |
Shares of business development companies may trade at a market price that is less than the NAV that is attributable to those shares. Our NAV was $15.44 as of June 30, 2014. Our shares traded on The NASDAQ Global Select Market at $17.70 as of June 30, 2014, which represented a premium to NAV of 14.6%. The possibility that our shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over the long term is separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether our shares will trade at, above or below net asset value in the future.
On August 19, 2014, the last reported closing price of our common stock was $16.85 per share. As of August 18, 2014, we had 309 stockholders of record.
| S-37 |
UBS Securities LLC is acting as our sales agent in connection with the offer and sale of shares of our common stock pursuant to this prospectus supplement and the accompanying prospectus. Upon written instructions from us, UBS Securities LLC will use its commercially reasonable efforts consistent with its sales and trading practices to sell, as our sales agent, our common stock under the terms and subject to the conditions set forth in the equity distribution agreement dated August 20, 2014. We will instruct UBS Securities LLC as to the amount of common stock to be sold by it. We may instruct UBS Securities LLC not to sell common stock if the sales cannot be effected at or above the price designated by us in any instruction. The sales price per share of our common stock offered by this prospectus supplement and the accompanying prospectus, less commissions payable under the equity distribution agreement and discounts, if any, will not be less than the net asset value per share of our common stock at the time of such sale. We or UBS Securities LLC may suspend the offering of shares of our common stock upon proper notice and subject to other conditions.
Sales of our common stock, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act, including sales made directly on the NASDAQ Global Select Market or similar securities exchange or sales made to or through a market maker other than on an exchange at prices related to the prevailing market prices or at negotiated prices.
The sales agent will provide written confirmation of a sale to us no later than the opening of the trading day on the NASDAQ Global Select Market following each trading day in which shares of our common stock are sold under the equity distribution agreement. Each confirmation will include the number of shares of common stock sold on the preceding day, the net proceeds to us and the compensation payable by us to the sales agent, in connection with the sales.
The sales agent will receive a commission from us equal to 2.0% of the gross sales price of any shares of our common stock sold through them under the equity distribution agreement. We estimate that the total expenses for the offering, excluding compensation payable to UBS Securities LLC under the terms of the equity distribution agreement, will be approximately $300,000.
Settlement for sales of shares of common stock will occur on the third trading day following the date on which such sales are made, or on some other date that is agreed upon by us and the sales agent in connection with a particular transaction, in return for payment of the net proceeds to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.
We will report, through either quarterly reports on Form 10-Q and/or current reports on Form 8-K, at least quarterly the number of shares of our common stock sold through the sales agent under the equity distribution agreement and the net proceeds to us.
In connection with the sale of the common stock on our behalf, the sales agent may be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of the sales agent may be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to the sales agent against certain civil liabilities, including liabilities under the Securities Act.
The offering of our shares of common stock pursuant to the equity distribution agreement will terminate upon the earlier of (i) the sale of all common stock subject to the equity distribution agreement or (ii) the termination of the equity distribution agreement. The equity distribution agreement may be terminated by us in our sole discretion under the circumstances specified in the equity distribution agreement by giving notice to the sales agent. In addition, UBS Securities LLC may terminate the equity distribution agreement under the circumstances specified in the equity distribution agreement by giving notice to us.
Additional Relationships
UBS Securities LLC and its affiliates have from time to time performed and may in the future perform various commercial banking, financial advisory and investment banking services for us and our affiliates for which they have received or will receive customary compensation. UBS Securities LLC acted as an underwriter in our initial public offering, which was completed in April 2010, and our subsequent public offerings, which were completed in April 2011, February 2012, October 2012, January 2013, May 2013 and September 2013 and received customary underwriting discounts and commissions.
In addition, the sales agent or its affiliates may execute transactions with or on behalf of Golub Capital. The sales agent or its affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to Golub Capital. The sales agent or its affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to Golub Capital or any of the portfolio companies.
We may purchase securities of third parties from the sales agent or its affiliates. However, we have not entered into any agreement or arrangement regarding the acquisition of any such securities, and we may not purchase any such securities. We would only purchase any such securities if, among other things, we identified securities that satisfied our investment needs and completed our due diligence review of such securities.
| S-38 |
After the date of this prospectus supplement, the sales agent and its affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the sales agent and its affiliates in the ordinary course of its business and not in connection with the offering of the common stock. In addition, the sales agent or its affiliates may develop analyses or opinions related to Golub Capital or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding Golub Capital to our stockholders.
The principal business address of UBS Securities LLC is 299 Park Avenue, New York, New York 10171.
| S-39 |
Certain legal matters regarding the securities offered by this prospectus supplement will be passed upon for us by Dechert LLP, Washington, D.C. Dechert LLP has from time to time represented GC Advisors and the underwriters on unrelated matters. Certain legal matters in connection with the securities offered hereby will be passed upon for the sales agent by Clifford Chance US LLP, New York, New York.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The consolidated financial statements and the effectiveness of internal control over financial reporting appearing in this prospectus supplement and the registration statement have been audited by McGladrey LLP, an independent registered public accounting firm located at One South Wacker Drive, Suite 800, Chicago, IL 60606, as stated in their reports appearing elsewhere herein, and are included in reliance upon such reports and upon the authority of such firm as experts in accounting and auditing.
We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to our shares of common stock offered by this prospectus supplement and the accompanying prospectus. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus supplement and the accompanying prospectus.
We file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. We maintain a website at www.golubcapitalbdc.com and make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through our website. Information contained on our website is not incorporated into this prospectus supplement and the accompanying prospectus, and you should not consider information on our website to be part of this prospectus supplement and the accompanying prospectus. You may also obtain such information by contacting us in writing at 150 South Wacker Drive, Suite 800, Chicago, IL 60606, Attention: Investor Relations. The SEC maintains a website that contains reports, proxy statements and other information we file with the SEC at www.sec.gov . Copies of these reports, proxy statements and other information may also be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549-0102.
| S-40 |
| SF-1 |
Golub Capital BDC, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands, except share and per share data)
| June 30, 2014 | September 30, 2013 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investments, at fair value | ||||||||
| Non-controlled/non-affiliate company investments | $ | 1,287,616 | $ | 1,011,586 | ||||
| Non-controlled affiliate company investments | 2,877 | 8,225 | ||||||
| Controlled affiliate company investments | 34,397 | 4,834 | ||||||
| Total investments, at fair value (cost of $1,309,706 and $1,017,961, respectively) | 1,324,890 | 1,024,645 | ||||||
| Cash and cash equivalents | 11,392 | 16,309 | ||||||
| Restricted cash and cash equivalents | 109,818 | 38,408 | ||||||
| Interest receivable | 5,222 | 4,316 | ||||||
| Deferred financing costs | 10,514 | 7,742 | ||||||
| Other assets | 277 | 236 | ||||||
| Total Assets | $ | 1,462,113 | $ | 1,091,656 | ||||
| Liabilities | ||||||||
| Debt | $ | 703,300 | $ | 412,100 | ||||
| Secured borrowings, at fair value (proceeds of $20,064 and $8,683, respectively) | 20,264 | 8,809 | ||||||
| Interest payable | 3,689 | 1,277 | ||||||
| Management and incentive fees payable | 5,897 | 5,579 | ||||||
| Payable for open trades | - | 3,677 | ||||||
| Accounts payable and accrued expenses | 2,140 | 1,978 | ||||||
| Accrued trustee fees | 49 | - | ||||||
| Total Liabilities | 735,339 | 433,420 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Net Assets | ||||||||
| Preferred stock, par value $0.001 per share, 1,000,000 shares authorized, zero shares issued and outstanding as of June 30, 2014 and September 30, 2013 | - | - | ||||||
| Common stock, par value $0.001 per share, 100,000,000 shares authorized, 47,065,030 and 43,282,932 shares issued and outstanding as of June 30, 2014 and September 30, 2013, respectively | 47 | 43 | ||||||
| Paid in capital in excess of par | 718,760 | 652,669 | ||||||
| Undistributed net investment income | 1,647 | 2,725 | ||||||
| Net unrealized appreciation (depreciation) on investments, derivative instruments and secured borrowings | 17,652 | 9,225 | ||||||
| Net realized gain (loss) on investments and derivative instruments | (11,332 | ) | (6,426 | ) | ||||
| Total Net Assets | 726,774 | 658,236 | ||||||
| Total Liabilities and Total Net Assets | $ | 1,462,113 | $ | 1,091,656 | ||||
| Number of common shares outstanding | 47,065,030 | 43,282,932 | ||||||
| Net asset value per common share | $ | 15.44 | $ | 15.21 | ||||
See Notes to Consolidated Financial Statements.
| SF-2 |
Golub Capital BDC, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(In thousands, except share and per share data)
| Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Investment income | ||||||||||||||||
| From non-controlled/non-affiliate company investments: | ||||||||||||||||
| Interest income | $ | 25,441 | $ | 20,453 | $ | 73,935 | $ | 56,339 | ||||||||
| Dividend income | 952 | 1,081 | 1,230 | 1,827 | ||||||||||||
| Fee income | 1,042 | 579 | 1,976 | 2,328 | ||||||||||||
| Total investment income from non-controlled/non-affiliate company investments | 27,435 | 22,113 | 77,141 | 60,494 | ||||||||||||
| From non-controlled affiliate company investments: | ||||||||||||||||
| Interest income | - | 155 | 225 | 463 | ||||||||||||
| Fee income | - | 15 | 171 | 15 | ||||||||||||
| Total investment income from non-controlled affiliate company investments | - | 155 | 396 | 463 | ||||||||||||
| From controlled affiliate company investments: | ||||||||||||||||
| Interest income | 594 | - | 1,331 | - | ||||||||||||
| Total investment income from controlled affiliate company investments | 594 | - | 1,331 | - | ||||||||||||
| Total investment income | 28,029 | 22,268 | 78,868 | 60,957 | ||||||||||||
| Expenses | ||||||||||||||||
| Interest and other debt financing expenses | 5,609 | 2,967 | 14,241 | 9,254 | ||||||||||||
| Base management fee | 4,394 | 3,114 | 12,403 | 8,268 | ||||||||||||
| Incentive fee | 1,607 | 2,785 | 6,295 | 7,647 | ||||||||||||
| Professional fees | 578 | 534 | 1,876 | 1,540 | ||||||||||||
| Administrative service fee | 655 | 715 | 1,979 | 1,873 | ||||||||||||
| General and administrative expenses | 113 | 153 | 389 | 404 | ||||||||||||
| Total expenses | 12,956 | 10,268 | 37,183 | 28,986 | ||||||||||||
| Net investment income | 15,073 | 12,000 | 41,685 | 31,971 | ||||||||||||
| Net gain (loss) on investments and secured borrowings | ||||||||||||||||
| Net realized gains (losses) on investments: | ||||||||||||||||
| Non-controlled/non-affiliate company investments | 1 | (77 | ) | (4,906 | ) | 18 | ||||||||||
| Net realized gains (losses) on investments: | 1 | (77 | ) | (4,906 | ) | 18 | ||||||||||
| Net unrealized appreciation (depreciation) on investments: | ||||||||||||||||
| Non-controlled/non-affiliate company investments | 989 | 1,081 | 7,775 | 2,576 | ||||||||||||
| Non-controlled affiliate company investments | (2 | ) | (347 | ) | 272 | (338 | ) | |||||||||
| Controlled affiliate company investments | 205 | - | 454 | - | ||||||||||||
| Net unrealized appreciation (depreciation) on investments | 1,192 | 734 | 8,501 | 2,238 | ||||||||||||
| Net change in unrealized (appreciation) depreciation on secured borrowings | 14 | - | (74 | ) | - | |||||||||||
| Net gain (loss) on investments and secured borrowings | 1,207 | 657 | 3,521 | 2,256 | ||||||||||||
| Net increase in net assets resulting from operations | $ | 16,280 | $ | 12,657 | $ | 45,206 | $ | 34,227 | ||||||||
| Per Common Share Data | ||||||||||||||||
| Basic and diluted earnings per common share | $ | 0.35 | $ | 0.34 | $ | 1.01 | $ | 1.05 | ||||||||
| Dividends and distributions declared per common share | $ | 0.32 | $ | 0.32 | $ | 0.96 | $ | 0.96 | ||||||||
| Basic and diluted weighted average common shares outstanding | 46,985,908 | 37,118,379 | 44,673,591 | 32,511,415 | ||||||||||||
See Notes to Consolidated Financial Statements.
| SF-3 |
Golub Capital BDC, Inc. and Subsidiaries
Consolidated Statements of Changes in Net Assets (unaudited)
(In thousands, except share data)
| Capital | Net Unrealized Appreciation (Depreciation) on Investments, | Net Realized Gain | ||||||||||||||||||||||||||
| Common Stock | Paid in Capital | Distributions and | Derivative Instruments | (Loss) on Investments | ||||||||||||||||||||||||
| Par | in Excess | Undistributed Net | and Secured | and Derivative | Total | |||||||||||||||||||||||
| Shares | Amount | of Par | Investment Income | Borrowings | Instruments | Net Assets | ||||||||||||||||||||||
| Balance at September 30, 2012 | 25,688,101 | $ | 26 | $ | 375,563 | $ | 347 | $ | 5,737 | $ | (6,544 | ) | $ | 375,129 | ||||||||||||||
| Issuance of common stock, net of offering and underwriting costs(1) | 14,016,382 | 14 | 223,404 | - | - | - | 223,418 | |||||||||||||||||||||
| Net increase in net assets resulting from operations | - | - | - | 31,971 | 2,238 | 18 | 34,227 | |||||||||||||||||||||
| Distributions to stockholders: | ||||||||||||||||||||||||||||
| Stock issued in connection with dividend reinvestment plan | 87,322 | - | 1,385 | - | - | - | 1,385 | |||||||||||||||||||||
| Dividends and distributions | - | - | - | (32,661 | ) | - | - | (32,661 | ) | |||||||||||||||||||
| Balance at June 30, 2013 | 39,791,805 | $ | 40 | $ | 600,352 | $ | (343 | ) | $ | 7,975 | $ | (6,526 | ) | $ | 601,498 | |||||||||||||
| Balance at September 30, 2013 | 43,282,932 | $ | 43 | $ | 652,669 | $ | 2,725 | $ | 9,225 | $ | (6,426 | ) | $ | 658,236 | ||||||||||||||
| Issuance of common stock, net of offering and underwriting costs (2) | 3,666,855 | 4 | 64,102 | - | - | - | 64,106 | |||||||||||||||||||||
| Net increase in net assets resulting from operations | - | - | - | 41,685 | 8,427 | (4,906 | ) | 45,206 | ||||||||||||||||||||
| Distributions to stockholders: | ||||||||||||||||||||||||||||
| Stock issued in connection with dividend reinvestment plan | 115,243 | - | 1,989 | - | - | - | 1,989 | |||||||||||||||||||||
| Dividends and distributions | - | - | - | (42,763 | ) | - | - | (42,763 | ) | |||||||||||||||||||
| Balance at June 30, 2014 | 47,065,030 | $ | 47 | $ | 718,760 | $ | 1,647 | $ | 17,652 | $ | (11,332 | ) | $ | 726,774 | ||||||||||||||
(1) On October 16, 2012, Golub Capital BDC, Inc. priced a public offering of 2,600,000 shares of its common stock at a public offering price of $15.58 per share. On November 14, 2012, Golub Capital BDC, Inc. sold an additional 294,120 shares of its common stock at a public offering price of $15.58 per share pursuant to the underwriters’ partial exercise of the over-allotment option. On January 15, 2013, Golub Capital BDC, Inc. priced a public offering of 4,500,000 shares of its common stock at a public offering price of $15.87 per share. On February 20, 2013, Golub Capital BDC, Inc. sold an additional 622,262 shares of its common stock at a public offering price of $15.87 per share pursuant to the underwriters’ partial exercise of the over-allotment option. On May 7, 2013, Golub Capital BDC, Inc. priced a public offering of 6,000,000 shares of its common stock at a public offering prices of $17.47 per share.
(2) On March 18, 2014, Golub Capital BDC, Inc. priced a public offering of 3,500,000 shares of its common stock at a public offering price of $18.05 per share. On April 23, 2014, Golub Capital BDC, Inc. sold an additional 166,855 shares of its common stock at a public offering price of $18.05 per share pursuant to the underwriters’ partial exercise of the option granted in connection with the public offering in March 2014.
See Notes to Consolidated Financial Statements.
| SF-4 |
Golub Capital BDC, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
| Nine Months Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities | ||||||||
| Net increase in net assets resulting from operations | $ | 45,206 | $ | 34,227 | ||||
| Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities | ||||||||
| Amortization of deferred financing costs | 2,026 | 1,444 | ||||||
| Accretion of discounts and amortization of premiums | (5,451 | ) | (6,104 | ) | ||||
| Net realized loss (gain) on investments | 4,906 | (18 | ) | |||||
| Net change in unrealized (appreciation) depreciation on investments | (8,501 | ) | (2,238 | ) | ||||
| Net change in unrealized appreciation (depreciation) on secured borrowings | 74 | - | ||||||
| Proceeds from (fundings of) revolving loans, net | 2,363 | (8,155 | ) | |||||
| Fundings of investments | (580,522 | ) | (554,022 | ) | ||||
| Proceeds from principal payments and sales of portfolio investments | 286,778 | 276,506 | ||||||
| PIK interest | 251 | (851 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Interest receivable | (906 | ) | (1,614 | ) | ||||
| Other assets | (41 | ) | 7 | |||||
| Interest payable | 2,412 | 1,035 | ||||||
| Management and incentive fees payable | 318 | 1,605 | ||||||
| Payable for open trades | (3,677 | ) | - | |||||
| Accounts payable and accrued expenses | 162 | 1,152 | ||||||
| Accrued trustee fees | 49 | - | ||||||
| Net cash (used in) provided by operating activities | (254,553 | ) | (257,026 | ) | ||||
| Cash flows from investing activities | ||||||||
| Net change in restricted cash and cash equivalents | (71,410 | ) | 15,347 | |||||
| Net cash (used in) provided by investing activities | (71,410 | ) | 15,347 | |||||
| Cash flows from financing activities | ||||||||
| Borrowings on debt | 759,850 | 304,350 | ||||||
| Repayments of debt | (468,650 | ) | (252,850 | ) | ||||
| Capitalized debt financing costs | (4,798 | ) | (2,918 | ) | ||||
| Proceeds from secured borrowings | 26,082 | - | ||||||
| Repayments on secured borrowings | (14,770 | ) | - | |||||
| Proceeds from shares sold, net of underwriting costs | 64,170 | 224,065 | ||||||
| Offering costs paid | (64 | ) | (647 | ) | ||||
| Dividends and distributions paid | (40,774 | ) | (31,276 | ) | ||||
| Net cash (used in) provided by financing activities | 321,046 | 240,724 | ||||||
| Net change in cash and cash equivalents | (4,917 | ) | (955 | ) | ||||
| Cash and cash equivalents, beginning of period | 16,309 | 13,891 | ||||||
| Cash and cash equivalents, end of period | $ | 11,392 | $ | 12,936 | ||||
| Supplemental information: | ||||||||
| Cash paid during the period for interest | $ | 9,024 | $ | 6,775 | ||||
| Dividends and distributions declared during the period | $ | 42,763 | $ | 32,661 | ||||
See Notes to Consolidated Financial Statements.
| SF-5 |
| Golub Capital BDC, Inc. and Subsidiaries |
| Consolidated Schedule of Investments (unaudited) |
| June 30, 2014 |
| (In thousands) |
| Spread | Percentage | |||||||||||||||||||||||||
| Investment | Above | Interest | Maturity | Principal / Par | of | Fair | ||||||||||||||||||||
| Type | Index (1) | Rate(2) | Date | Amount | Cost | Net Assets | Value | |||||||||||||||||||
| Investments | ||||||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||
| Debt investments | ||||||||||||||||||||||||||
| Aerospace and Defense | ||||||||||||||||||||||||||
| ILC Dover, LP | One stop | P + 4.50% | 7.75 | % | 03/2019 | $ | 360 | $ | 352 | - | % | $ | 351 | |||||||||||||
| ILC Dover, LP^ | One stop | L + 5.50% | 6.50 | % | 03/2020 | 18,713 | 18,579 | 2.6 | 18,572 | |||||||||||||||||
| NTS Technical Systems | One stop | L + 6.00% | 7.25 | % | 11/2018 | 314 | 284 | - | 298 | |||||||||||||||||
| NTS Technical Systems*^ | One stop | L + 6.00% | 7.25 | % | 11/2018 | 18,918 | 18,606 | 2.6 | 18,729 | |||||||||||||||||
| NTS Technical Systems(3) | One stop | L + 6.00% | N/A | (4) | 11/2018 | - | (63 | ) | - | (30 | ) | |||||||||||||||
| Tresys Technology Holdings, Inc.(3) | One stop | L + 6.75% | N/A | (4) | 12/2017 | - | (7 | ) | - | - | ||||||||||||||||
| Tresys Technology Holdings, Inc. | One stop | L + 6.75% | 8.00 | % | 12/2017 | 3,899 | 3,832 | 0.3 | 2,340 | |||||||||||||||||
| Whitcraft LLC | Subordinated debt | N/A | 12.00 | % | 12/2018 | 1,877 | 1,856 | 0.3 | 1,877 | |||||||||||||||||
| White Oak Technologies, Inc.(3) | Senior loan | L + 5.00% | N/A | (4) | 03/2017 | - | (7 | ) | - | - | ||||||||||||||||
| White Oak Technologies, Inc.* | Senior loan | L + 5.00% | 6.25 | % | 03/2017 | 1,721 | 1,694 | 0.2 | 1,721 | |||||||||||||||||
| 45,802 | 45,126 | 6.0 | 43,858 | |||||||||||||||||||||||
| Automobile | ||||||||||||||||||||||||||
| ABRA, Inc.(3)(5) | One stop | L + 6.00% | N/A | (4) | 05/2018 | - | (16 | ) | - | - | ||||||||||||||||
| ABRA, Inc.*(5) | One stop | L + 6.00% | 7.25 | % | 05/2018 | 31,138 | 30,885 | 4.3 | 31,138 | |||||||||||||||||
| ABRA, Inc.(5) | One stop | L + 6.00% | 7.25 | % | 05/2018 | 5,166 | 5,135 | 0.7 | 5,166 | |||||||||||||||||
| ABRA, Inc.(5) | One stop | L + 6.00% | 7.25 | % | 05/2018 | 6,861 | 6,818 | 0.9 | 6,861 | |||||||||||||||||
| ABRA, Inc.*^ | One stop | L + 7.75% | 9.00 | % | 05/2018 | 4,334 | 4,271 | 0.6 | 4,334 | |||||||||||||||||
| American Driveline Systems, Inc. | Senior loan | L + 5.50% | 7.16 | % | 01/2016 | 300 | 296 | - | 261 | |||||||||||||||||
| American Driveline Systems, Inc.* | Senior loan | L + 5.50% | 7.00 | % | 01/2016 | 2,804 | 2,777 | 0.4 | 2,524 | |||||||||||||||||
| K&N Engineering, Inc.(3) | Senior loan | L + 4.50% | N/A | (4) | 04/2018 | - | (6 | ) | - | - | ||||||||||||||||
| K&N Engineering, Inc.*^ | Senior loan | P + 3.50% | 6.75 | % | 04/2018 | 6,799 | 6,719 | 0.9 | 6,799 | |||||||||||||||||
| Take 5 Oil Change, L.L.C.(3) | Senior loan | L + 5.25% | N/A | (4) | 07/2018 | - | (3 | ) | - | - | ||||||||||||||||
| Take 5 Oil Change, L.L.C.^ | Senior loan | L + 4.75% | 5.75 | % | 07/2018 | 2,953 | 2,935 | 0.4 | 2,953 | |||||||||||||||||
| Tectum Holdings, Inc.* | Senior loan | L + 4.25% | 5.25 | % | 09/2018 | 874 | 872 | 0.1 | 874 | |||||||||||||||||
| 61,229 | 60,683 | 8.3 | 60,910 | |||||||||||||||||||||||
| Banking | ||||||||||||||||||||||||||
| HedgeServ Holding L.P.^ | One stop | L + 8.25% | 5.25% cash/4.00% PIK | 02/2019 | 17,240 | 17,082 | 2.4 | 17,240 | ||||||||||||||||||
| HedgeServ Holding L.P.(3) | One stop | L + 4.25% | N/A | (4) | 02/2019 | - | (9 | ) | - | - | ||||||||||||||||
| Prommis Fin Co.(6) | Senior loan | P + 10.00% | 13.25 | % | 06/2015 | 85 | 84 | - | 2 | |||||||||||||||||
| Prommis Fin Co.*(6) | Senior loan | N/A | 2.25% cash/11.5% PIK | 06/2015 | 124 | 124 | - | 3 | ||||||||||||||||||
| 17,449 | 17,281 | 2.4 | 17,245 | |||||||||||||||||||||||
| Beverage, Food and Tobacco | ||||||||||||||||||||||||||
| ABP Corporation(3) | Senior loan | L + 4.75% | N/A | (4) | 06/2016 | - | (3 | ) | - | - | ||||||||||||||||
| ABP Corporation* | Senior loan | L + 4.75% | 6.00 | % | 06/2016 | 4,455 | 4,420 | 0.6 | 4,455 | |||||||||||||||||
| American Importing Company, Inc.^ | One stop | P + 4.50% | 7.75 | % | 05/2018 | 14,694 | 14,543 | 2.0 | 14,694 | |||||||||||||||||
| Ameriqual Group, LLC* | Senior loan | L + 6.00% | 6.50% cash/1.00% PIK | 03/2016 | 1,711 | 1,693 | 0.2 | 1,643 | ||||||||||||||||||
| Ameriqual Group, LLC* | Senior loan | L + 7.50% | 9.00% cash/1.50% PIK | 03/2016 | 830 | 825 | 0.1 | 685 | ||||||||||||||||||
| ARG IH Corporation (Arby's)^ | Senior loan | L + 4.00% | 5.00 | % | 11/2020 | 2,343 | 2,316 | 0.3 | 2,361 | |||||||||||||||||
| Atkins Nutritionals, Inc.*^ | One stop | L + 5.00% | 6.25 | % | 01/2019 | 21,455 | 21,254 | 3.0 | 21,481 | |||||||||||||||||
| Atkins Nutritionals, Inc.* | One stop | L + 8.50% | 9.75 | % | 04/2019 | 18,997 | 18,642 | 2.7 | 19,281 | |||||||||||||||||
| C. J. Foods, Inc. | One stop | L + 5.50% | 6.50 | % | 05/2019 | 43 | 34 | - | 37 | |||||||||||||||||
| C. J. Foods, Inc.(3) | One stop | L + 5.50% | N/A | (4) | 05/2019 | - | (13 | ) | ||||||||||||||||||