Golub Capital BDC: A Strong 12% BDC Yield Trading Below NAV (NASDAQ:GBDC)

Golub Capital BDC (NASDAQ:GBDC) lately accomplished its merger with Golub Capital 3 BDC which has led to a a lot greater market portfolio worth for the BDC. Golub Capital’s internet funding revenue outstripped its dividend by margin within the second quarter, resulting in a protected 12% yield for revenue buyers. Golub Capital additionally convinces by way of non-accrual proportion which, regardless of edging up post-merger, the long run pattern may be very a lot favorable. I additionally like that Golub Capital’s shares have fallen under internet asset worth these days which possible has one thing to do with the broader sell-off within the BDC sector these days. I consider the drop is a shopping for alternative for Golub Capital and the danger profile for revenue buyers is skewed to the upside!

Earlier ranking

I rated shares of Golub Capital a purchase in June — 11% Yield And Upside Associated To Merger Transaction — because the BDC had a catalyst regarding the merger with Golub Capital 3 BDC. Golub Capital’s merger was set to result in transaction synergies and to create a a lot bigger, extra diversified BDC for buyers to attract revenue from. Golub Capital’s portfolio worth elevated considerably following the merger and the BDC generated a ton of internet funding revenue whereas sustaining good stability sheet high quality.

Merger completion and portfolio development

The merger with Golub Capital 3 BDC prompted the BDC’s portfolio worth to extend drastically within the second-quarter. The rise within the portfolio worth to $7.87B (+46% Q/Q) was virtually completely pushed as a result of merger between the 2 BDCs and isn’t the results of a serious increase to the BDC’s originations. As prior to now, Golub Capital’s portfolio contains primarily first liens so a serious change to the portfolio construction post-merger didn’t happen.

Golub Capital’s non-accrual proportion, after the shut of the merger, deteriorated barely, however not by lots. The BDC’s non-accrual proportion, which reveals the quantity of troublesome and non-performing loans in its portfolio, was 1.0% (primarily based off of truthful worth) as of the top of the June quarter. Whereas the non-accrual proportion elevated 0.1 PP quarter-over-quarter, Golub Capital’s non-accrual pattern during the last yr, nevertheless, is optimistic and signifies a cloth enchancment in asset high quality forward of the merger.

$M Q2’23 Q3’23 This autumn’23 Q1’24 Q2’24 Complete Investments $5,525.0 $5,516.6 $5,443.4 $5,394.7 $7,867.5 Non-Accrual (at price) 1.8% 1.6% 1.7% 1.5% 1.6% Non-Accrual (at truthful worth) 1.5% 1.2% 1.1% 0.9% 1.0% Click on to enlarge

(Supply: Writer)

Golub Capital generated $92.7M in internet funding revenue (after tax) in Q2’24, displaying 26% year-over-year development. The rise in internet funding revenue is as a result of BDC mixed its portfolio with its acquisition goal, so buyers shouldn’t anticipate a continuation of the present NII pattern. Golub Capital did, nevertheless, information for transaction synergies, together with a discount in its incentive charges on revenue and capital features.

The distribution protection profile seemed as wholesome as ever for Golub Capital, with the BDC producing 1.18X protection in comparison with 1.31X in Q1’24. I calculate the dividend protection ratio by dividing the corporate’s internet funding revenue by GBDC’s $0.39 per-share common dividend solely. Nonetheless, buyers ought to notice that Golub Capital pays supplementary dividends, which amounted to $0.11 per-share within the final quarter. Consequently, shares of Golub Capital yield 12%, and never 11% (which is the yield calculated primarily based solely off of the common dividend).

Golub Capital Is A Cut price

After the acquisition of Golub Capital 3 BDC, the mixture of asset values additionally led to a rise in internet asset worth: in Q2’24, Golub Capital’s BDC totaled $15.32/share in comparison with a pre-acquisition internet asset worth of $15.12/share.

Earnings buyers can at the moment get a 4% low cost to internet asset worth, which is because of BDCs promoting off in expectation of the Federal Reserve reducing the federal fund fee. A optimistic inflation report for July — which confirmed an inflation fee of solely 2.9% — and a weak studying of the employment report final week all however assure a Federal Fund fee lower later this month. Price cuts are usually perceived as a unfavourable occasion for BDCs, particularly those who have invested funds into variable rate-paying debt.

I consider Golub Capital might commerce at a P/NAV ratio of 1.1X given its low non-accrual proportion and appreciable extra dividend protection. A ten% premium to internet asset worth implies a good worth within the neighborhood of $16.85 per-share and might be achieved in case the BDC captures synergy potential associated to its merger with Golub Capital 3 BDC.

Dangers with Golub Capital

As issues stand now, I don’t see any points with the non-accrual proportion or with the BDC’s NII efficiency. Golub Capital’s dividend protection profile strongly helps the common dividend and the corporate is decreasing its charges, which is ready to be a optimistic catalyst for NII development. What would change my thoughts about Golub Capital is that if the BDC noticed a better non-performing mortgage ratio or if the BDC didn’t earn enough internet funding revenue.

Closing ideas

Golub Capital simply accomplished its merger with Golub Capital 3 BDC and the funding agency has seen a cloth enhance in its portfolio worth in addition to its internet funding revenue. Golub Capital additionally supported its dividend properly with internet funding revenue in Q2’24 and is ready to seize merger synergies, which ought to additional enhance the corporate’s dividend protection profile.

Golub Capital’s non-accrual proportion elevated barely within the final quarter, however the long run (1-year) pattern in non-performing loans is definitely fairly optimistic: the non-accrual proportion decreased by roughly 33% within the final yr. Additional, as a result of sell-off within the BDC trade in current weeks, shares of Golub Capital at the moment are priced under internet asset worth, resulting in an improved threat profile in addition to a better yield for revenue buyers.