Golub Capital BDC’s Balance Sheet: The Assets

Taking a closer look at Golub Capital BDC’s balance sheet, specifically it’s lending portfolio.

Jul 28, 2014 at 1:21PM
Golub

Source: Company.

The primary component of Golub Capital BDC's (NASDAQ:GBDC) assets is unsurprisingly its portfolio of loans. Let's take a look at how Golub is structuring its lending, as well as what the risks are for the company. 

Investments: Weighted toward senior secured 
Golub has been progressively shifting its portfolio toward senior secured and one-stop loans over the past year.

Together, these categories now make up 87% of the firm's total portfolio. This is part of a longer-term trend on Golub's part; subordinated debt investments went from 10% of the portfolio in September 2012 to 2.2% in September 2013, while one-stop investments went from 30.5% to 54.1%.

Why on earth would Golub replace higher-yielding loans with lower-yielding ones? 

Golub is sensing froth in the lending market and wants to put its money into secure loans that have a very strong probability of repayment. It's particularly favoring the one-stop loan lately: over 80% of its new originations were one-stop loans, compared to 13.5% senior secured loans.

Wait, what are one-stop loans again?
Considering how important one-stop loans are to Golub's portfolio, let's take a deeper look at some of their risks and rewards.

Golub's one-stop loans have two key qualities. First, they're structured as senior secured loans, meaning they're backed by collateral, and Golub has first priority on the money. In other words, if the specified assets have to be sold to repay the loan, Golub is first in line to collect the proceeds. 

The second key quality is that these loans usually let the borrower pay a lump sum at the end of the loan instead of paying interest and principal over time.

The obvious risk to this strategy is if something changes for the worse and the borrower is no longer able to repay or refinance the loan when it comes due. This could be especially risky if communication about what's happening is scarce in the interim. 

In other words, Golub does take a risk by offering these loans. The company notes that due to these risks, it's able to extract better monitoring and remediation terms with its borrowers. Obviously, taking a senior secured position also helps. The risk is still there, though, so it's one you should be aware of. 

What kind of default rates are we talking about? 
In the case of Golub's senior secured and one-stop loans, "non-accrual" rates (meaning that Golub has stopped trying to collect payment on an overdue or defaulting loan) are under 1% if you look at the past year and a half: 

Golub Investments Image

One-stop loans don't have a non-accrual rate. That also might be because none came due in these periods, though, so don't get too excited just yet. 

You may have noticed that non-accruals are rather significant on subordinated loans. These are, quite simply, riskier loans. They have higher fixed interest rates and, in Golub's case, they generally only pay interest over the course of the loan instead of interest and principal. It's common for subordinated loans to pay interest in the form of cash or "payment-in-kind" interest, meaning that the payment is made with equity or added to the principal, to be paid later on.

Sound risky? It definitely is. Just as with one-stop loans, there's a risk the borrower won't be able to make the lump-sum payment at the end. It's worse in this case because subordinated debt isn't backed by assets which can be sold, and it also carries a higher interest rate so the amount to be paid back is a lot higher. If payment-in-kind interest is used, the risks can be significant. 

It looks like Golub took those risks to heart and is reducing this already modest portion of its portfolio even further.

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.


Anna Wroblewska has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers