Golub Capital BDC Inc (NASDAQ: GBDC ) is one of the smallest BDCs, but its investment advisor, Golub Capital, is one of the largest players in middle market finance, participating and seeing more deals than most in the middle market.
Its deal flow gives it an edge, and a new secondary offering brings a compelling buying price.
What's the deal?
When BDCs need to raise capital, they do so with secondary stock offerings. Golub Capital will issue as many as 4.025 million new shares at a price of $18.05, raising some $72.65 million to grow its balance sheet.
The recent offering sent shares down roughly 5% to $18.22, down from $19.14 before the offering. Said another way, there's a rare sale on Golub Capital shares.
Here's why Golub is a buy right now
Golub Capital currently yields 7%, which puts it on the lower-end of high-yield BDC stocks. However, there's a case to be made Golub Capital has a superior investment portfolio.
The company's "special sauce" lies in its new Senior Loan Fund, which is listed as a reason for Golub's new stock offering.
A senior loan fund (SLF) is a favorite "trick" of top BDCs. Ares Capital (NASDAQ: ARCC ) has one. Fifth Street Finance (NASDAQ: FSC ) is trying to create one. They're not just handed out like Halloween candy, however. It takes the confidence of a lender to provide low-cost capital to get a fund off the ground.
Running the numbers
Traditionally, BDCs use low leverage on higher-risk, higher-yield debt investments. A senior loan fund, however, uses higher leverage on lower-risk, lower-yield debt investments.
The SLF's current investments yield 5.7% when unlevered. Adding in cheap capital from a Wells Fargo credit facility, I estimate Golub Capital can earn as much as 16.8% on capital it contributes to the SLF. For reference, Golub Capital's current portfolio -- excluding SLF assets -- yields 9.3% per year.
The best case scenario is one in which Golub Capital morphs to become a 70-30 portfolio of traditional middle market loans and the SLF.
At 30% of the portfolio, the SLF would boost Golub Capital's total investment yields to 11.55% per year.
Getting in now
At 1.2 times book value, and a dividend yield of 7%, Golub Capital shares aren't priced for the opportunity embedded in its senior loan fund. The loan fund could add up to 2.2 percentage points to Golub's investment yields, driving earnings and attracting investors to a well-managed BDC.
The SLF won't explode overnight, but the current yield is plenty of reason to buy and wait.