The Trends and Changes Facing Golub Capital BDC

Source: Company.

Anyone investing in companies knows that they don't operate in a vacuum, and Golub Capital BDC, (NASDAQ: GBDC  ) is no exception. What does Golub's market environment look like? What are the key features, risks, and opportunities? 

In this installment, we'll examine Golub's place in a fascinating industry. The key takeaways? The industry has been growing, and Golub could face competition from a new class of BDC operators. Like most BDCs, Golub is enjoying high demand for its services and an easy time financing. While it faces the same risks that other BDCs face, so far it's managing them well. 

A growing industry 
The BDC space has grown dramatically in the past decade. In 2000, there were only seven BDCS, and there were more than 50 by the end of 2013. But the price of entry into the industry isn't insignificant. 

Expertise is an obvious requirement. A company should have the ability to analyze deals, deliver financing, and provide advice and guidance to target companies. It also has to be able to manage regulatory compliance -- there are a lot of rules when it comes to running a BDC.

Private equity firms are a natural fit for the space: They already have the infrastructure and expertise to analyze credits, deliver financing, and deal with regulatory issues, and BDCs represent a nice complementary revenue stream. Thus, it's not surprising that Golub is part of a private equity group, and that the big name private equity funds all have BDCs -- Apollo, KKR, and Blackstone among them. 

Will big banks join the sector?
There is, however, potential for a new class of participants by way of The Volcker Rule. The rule places new restrictions on large banks which prohibits them from acquiring or having interest in private equity firms. However, the rule notably excludes BDCs. 

Thus, the banks might also join the party, as managing BDCs would allow them to tap into the mid-size lending market, generating fees and yield while bypassing some of the big bank restrictions. This could be a risk for existing BDCs. In Golub's case, a large bank-backed BDC with a similar strategy could siphon away some of the deal flow and introduce more price competition.

For now, deal flow is moving toward BDCs
However, at this time, BDCs are enjoying a lot of opportunities. Those same restrictions that might prompt banks to open BDCs are also partially responsible for the recent rise in deal flow toward the shadow banking sector, which includes BDCs. The reason is simple: If a company wants a loan and can't get it from a bank, it can look elsewhere -- and in this environment of low interest rates and high liquidity, the demand for leveraged loans has been significant.

Of course, deals doesn't necessarily translate to good deals. The major risk is that, in an environment of relatively easy money, BDCs will start chasing mediocre deals in order to utilize capital and generate higher returns. Two hallmark signs to watch out for are a sudden diversification away from a core strategy or a rapid growth in portfolio size.

In any event, a BDC's core strategy is the key element to keep in mind: BDCs tend to be quite differentiated, so a good deal for one might not represent a good deal for another. Golub, for example, has stuck to its strategy of targeting secure financings for lower-risk companies -- meaning that its sweet-spot deal is probably going to look a lot different than the one Prospect Capital goes after. 

Financing is readily available 
Fueling the leveraged lending business is, well, leverage. BDCs usually borrow in order to lend, so financing is a key issue. 

In general, the environment has been attractive. Fitch recently reported that all of its surveyed BDCs have accessed debt markets in the last two years, and Golub is no exception. The company completed a $400 million financing deal earlier this year, alongside peers like Ares, which generated  $750 million by issuing notes in November and January.

In other words, BDCs are pretty flush with cash at the moment. That's nice for now, but any investor should be looking toward the future. What happens if a BDC has to meet a payment in a tighter credit situation? Is its balance sheet stable enough? While that situation hasn't arisen yet, it very well could, so it's worth keeping in mind.  

To tackle this issue in more detail, we'll take a look at Golub's balance sheet in a future installment. Next time, we review the competitive landscape.

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.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3016232, ~/Articles/ArticleHandler.aspx, 8/31/2015 6:08:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Anna Wroblewska

Anna began her career in finance as a college intern at a hedge fund, and she hasn’t been able to escape its siren song ever since. She’s done academic research at Harvard Business School and UCLA, was the COO of a wealth management firm, and now writes about finance, economics, behavior, and business.

Today's Market

updated Moments ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:59 PM
GBDC $16.78 Up +0.13 +0.78%
Golub Capital BDC,… CAPS Rating: *****