Golub Capital BDC’s Income Statement & Opportunities

Taking a closer look at Golub Capital BDC’s income statement and areas of potential revenue growth.

Jul 28, 2014 at 1:25PM
Golub

Source: Company.

Golub Capital BDC's (NASDAQ:GBDC) income and expenses are tied, as you might expect, to its lending portfolio. While Golub doesn't offer the high yields of some of its competitors, its income statement is a demonstration of its conservative strategy -- and with the addition of a senior loan fund last year, we might see additional growth from this understated BDC.

Income and expenses
Golub makes money primarily from the interest it charges through its financing activities, and to a lesser extent from fees and dividend income. Golub also earns when its investments and secured borrowings increase in value. 

Golub's expenses are also primarily related to the management of its portfolio: interest and debt financing, management and incentive fees to GC Advisors (Golub's external manager), and other professional and administrative fees and expenses. 

With nearly 99% of income coming from interest and over 41% of expenses tied to financing, management fees, and incentive fees, it's a pretty straightforward picture. 

Here's a quick look: 

Investment Income

(in thousands)

Percentage of total income

Interest income

$ 24 977.00

98.9%

Dividend income

$ 262.00

1%

Fee income

$ 21.00

0.1%

Total income 

$ 25 260.00

 

Expenses

   

Interest and debt financing

$ 4 540.00

18%

Base management fee

$ 4 185.00

16.6%

Incentive fee

$ 1 656.00

6.6%

Professional fees

$ 640.00

2.5%

Administrative service fees

$ 742.00

2.9%

General and administrative 

$ 145.00

0.6%

Total expenses

$ 11 908.00

47.1%

Net gains (losses) on investments

   

Net realized gains on investments

$ 87.00

 

Net unrealized appreciation on investments

$ 662.00

 

Net change in unrealized (appreciation) on secured borrowings

$ (12.00)

 

Total net increase in net assets 

$ 737.00

2.9%

Net increase in net assets

   
 

$ 14 089

55.8%

As noted, Golub also makes money from portfolio appreciation. I would, however, tend to disregard the unrealized gains, or at least take them with a grain of salt (which is also easy because they're such a small proportion of the income statement). 

The reason we like interest income and ignore unrealized gains
Most of Golub's assets are not valued based on market prices. Why?

When there isn't a liquid market for something, it's not simple to determine the market price.

Instead, these assets are valued based on internal valuation procedures, which take into account any available market data and, according to Golub, might require a significant amount of judgment or estimation. This means that "gains" in the form of unrealized gains aren't that informative -- they'll give you an idea of the value, but to know the numbers with certainty requires the asset to actually be sold.

On the other hand, interest income is interest income: Golub knows how much it's going to get, and those payments are consistent. If a borrower doesn't pay, the amount that was previously recorded as income for that loan is subtracted. 

Thus, the fact that the vast majority of Golub's income comes from interest payments, rather than portfolio appreciation, is a nice feature of the income statement. 

This income is stronger still because of the types of loans that Golub makes. Close to 90% of Golub's assets are in the form of senior secured and one stop loans, which are both backed by collateral.

In other words, these are very conservative loans, with a very high likelihood of payment. 

Future powerhouse? Golub's senior loan fund
In May of 2013, Golub partnered with United Insurance Company of America to co-invest in senior loans. What does that mean? 

As my colleague Jordan Wathen has pointed out, senior loan funds are special because they employ leverage on low-risk, low-yield investments. 

This means that by borrowing funds from its credit facility through Wells Fargo, Golub can enhance the returns on the senior secured loans it makes in the senior loan fund. The weighted average interest rate on those loans is, as of March 31, 2014, 5.5% -- by adding leverage, Golub can increase this quite a lot.  

Right now, the senior loan fund is a small but growing part of Golub's portfolio. It's an interesting strategy, because it allows Golub to stick to what it knows best (conservative lending), while potentially giving investors a significantly higher rate of return. I'm looking forward to seeing how it changes the characteristics of Golub's income statement as it grows.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers