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Goldman Sachs BDC, Inc.  (NYSE:GSBD)
Q4 2018 Earnings Conference Call
March 01, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. This is Ian, and I'll be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Fourth Quarter 2018 Earnings Conference Call. Please note that all participants will be in listen-only mode until the end of the call, when we will open up the line for questions.

I will now turn the call over to Ms. Katherine Schneider, Head of Investor Relations at Goldman Sachs BDC. Katherine, you maybe begin your conference.

Katherine Schneider -- Head of Investor Relations

Thanks, Ian. Good morning, everyone. Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's beliefs regarding future events that, by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings. This audio cast is copyright material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent.

Yesterday, after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the home page of our website at www.goldmansachsbdc.com, under the Investor Resources section. These documents should be reviewed in conjunction with the company's Form 10-K filed yesterday with the SEC. This conference call is being recorded today, March 1, 2019, for replay purposes.

With that, I'll turn the call over to Brendan McGovern, CEO of Goldman Sachs BDC, Inc.

Brendan McGovern -- Chief Executive Officer

Great. Thanks, Katherine. Good morning, everyone, and thank you for joining us for our fourth quarter earnings conference call. As usual, in terms of the agenda for the call, I'll start by providing an overview of our fourth quarter results, as well as key highlights for 2018. Jon Yoder, who is joining us remotely from San Francisco, will discuss our investment activity and portfolio metrics, and Jon Lamm will discuss our financial results in greater detail. And finally, I'll conclude with some closing remarks before we open the line for Q&A.

So with that, net investment income per share was $0.56 in Q4, bringing net investment income per share for the full year to $2.06 or an 11.4% return on common equity for 2018. Our net investment income covered our dividend by 124% during the quarter and 114% for the full-year 2018. Importantly, in each fiscal year, since our inception in 2012, net investment income has exceeded the dividend, reflecting our efforts to produce stable income that supports the distributions that are shareholders' value. To that end, our Board declared a $0.45 per share dividend, payable to shareholders of record as of March 29, 2018.

I'd like to pause, and briefly look back over 2018, and reflect on our execution. As you are aware, 2018 was highlighted by the passage of the Small Business Credit Availability Act, which amended key provisions of the '40 Act and enabled BDCs to increase leverage among other things. We view this regulatory change positively as, we believe, it will permit the company to pursue a broader range of assets, including lower risk, lower yielding, first-lien assets, while at the same time, potentially enhancing returns on equity. After obtaining your approval to permit the company to pursue an increasing leverage, GSAM implemented a significant base management fee reduction from 1.5% on all assets to 1% on all assets.

As a result of this change, we believe, the company's cost structure is among the lowest in the industry, especially when factoring in the long-standing limiter in our incentive fee structure, whereby realized and unrealized losses are netted against income for the purpose of calculating incentive fees. We are gratified that the market has recognized GSAM's differentiated approach. And we believe that the comparatively lower cost of capital that has been awarded the company positions it well to continue to deliver attractive risk-adjusted returns. In fact, our increased balance sheet flexibility has already had a meaningful impact on the company.

During the course of 2018, we generally found that investment opportunities in first-lien loans were more attractive than those in second-lien loans. In the last three quarters of 2018, 83% of the company's new originations were in first-lien loans. We are pleased that the company was able to pursue these investment opportunities and improve its asset mix, and still deliver attractive levels of net investment income.

Furthermore, the company has made progress restructuring its Senior Credit Fund joint venture with Cal Regents. Recall that this partnership was setup to enable the company to gain proprietary exposure to first-lien loans and a leverage structure that did not count against the BDC regulatory debt limit. In light of the relaxed limitation on leverage, we believe, the utility of this joint venture is diminished. And therefore, we and our partner have agreed in principle to dissolve the vehicle.

As a result, GSBD will simply take onto its balance sheet, it's half of the assets in the partnership and Cal Regents will retain its half of the assets. Pro forma for this transaction, which we anticipate will close at or near the end of Q1, first-lien investments would account for 63% of GSBD's assets based on the company's year-end static investment portfolio. In addition, single-name asset diversification will improve as the number of portfolio exposures will increase from 72% to 99%, assuming all portfolio exposures constant at 12.31%.

We believe our efforts to move swiftly and decisively, following the change in regulation, have benefited the company greatly. Our asset mix has shifted to lower yielding, but less risky assets, while net investment income production has remained strong. Furthermore, we believe that by high-grading asset quality, increasing single-name diversification, and taking steps to simplify our corporate structure with the unwind of our JV partnership, the company's funding profile has improved.

Going forward, we believe, the access to attractive forms of financing will be a differentiator for BDCs, so we remain focused on both the left and the right side of our balance sheet. In 2018, we increased the size of the company's unsecured 4.5% convertible unsecured notes outstanding to $135 million. And more recently, we increased the size of the company's revolving credit facility to $795 million. We also received an investment-grade rating from Fitch in 2018, and we're pleased this rating was recently affirmed with a stable outlook.

Overall, 2018 was a very busy year for the company. And as we look forward, we continue to believe that the strong economic environment, particularly here in the US, provides a good backdrop to execute our lending strategy. While overall portfolio company metrics -- portfolio company performance has been solid, during the quarter, we did placed certain investments in two portfolio companies, NTS Communications and Animal Supply Corp. on non-accrual status.

I'd like to pause on each of these investments to give you transparency to help put these outlier results into context. NTS Communications is a telecom company operating both the CLEC and fiber network, primarily in West Texas. Our total cash investment in the company, including follow-on investments, is $50 million. I'm pleased to report that, in December 2018, NTS entered into a sale transaction, pursuant to which we agreed to receive a cash payment of $56 million for our claim, with the potential for that amount to increase under certain circumstances.

Including the cash payments we have received late (ph) to-date, the total cash proceeds, upon close of the transaction, would be approximately $66 million, representing a 7% IRR and greater than 1.3 times multiple on our initial investment. Notwithstanding this positive NPV outcome, we concluded that the appropriate accounting treatment was to turn off the income accrual as per our payout agreement, the full amount of the accrued and picked interests would not be collectible pursuant to its contractual terms.

The NTS sale transaction is subject to customary approvals, including FCC review, and we expect the deal to close during the second quarter ending June 30, 2018. Animal supply is a more fluid situation, but there are recent developments that we would like to share, Animal Supply is a nationwide distributor of pet food and supplies. Our investment thesis centered on the company's leading industry position and positive industry tailwinds, driven by long-term trends driving demand for pet food supplies.

And during 2018, the company's performance and profitability declined. We determined that the best course of action was to deleverage the capital structure to better position the company to perform. As of last Friday, we successfully closed restructuring by swapping our debt for equity and providing additional working capital to enable the company to increase fill rates, revenue and EBITDA. We believe that with a clean balance sheet and a more focused management, the company is well positioned to benefit from stable industry trends and consolidation opportunities. We look forward to keeping you updated on the company's progress.

Following these successful animal supply restructuring and pro forma for the closing of the pending NTS transaction, non-accrual investments represented 0.6% at both fair value and amortized cost. And finally, subsequent to quarter-end, our Board of Directors renewed the company's stock repurchase plan for an additional year, which extends the plan to March 18, 2020. Under the plan, the company may repurchase up to $25 million of its common stock, if the market price is below the company's most recently announced NAV per share, subject to certain limitations.

With that, let me turn it over to Jon Yoder in San Francisco, who will discuss our portfolio investment activity and results of the quarter in greater detail.

Jon Yoder -- Chief Operating Officer

Great. Thank you, Brendan. During the fourth quarter, deal activity in the middle market was relatively muted as a result of increased volatility in the broader credit and equity markets. While the private debt markets are distinct from broadly syndicated loan in high-yield bond markets, volatility in the broader credit markets can slow down transaction volumes within our markets.

However, we do believe that this disruption can positively impact private credit markets in a number of ways. First, volatility tends to result in credit spread widening, which is good when we're going out and making new loans. Second, when the public markets are disrupted, more borrowers are seeking capital from private lenders like us. This expands our investment universe and gives us increased bargaining power to drive better terms and structures for our investments.

As we sit here on the first day of March, the public credit markets have largely recovered from the volatilities seen at the end of last year. However, the episode is a good reminder of the value of the BDC structure and the stable capital base it provides to take advantage of opportunities, when other investment fund structures are suffering redemptions and are forced to act defensively.

Turning to specific investments for the quarter, new investment commitments and fundings were $154.2 million and $130.2 million, respectively. Regarding placement in the capital structure, as Brendan previewed, new originations, this quarter, were comprised of 79% first-lien loans, 4% first-lien/last-out unitranche, 11% second-lien loans, 3% in preferred and common stock and 4% in the Senior Credit Fund. These new investment commitments were across eight new portfolio companies and eight existing portfolio companies.

Notwithstanding the muted activity I mentioned during the quarter, which had slowed sponsor activity, we remained active with our family and found around (ph) relationships, and of our eight new portfolio companies, two of these companies were sourced from our private wealth channel. Sales and repayment activity totaled $52.9 million, driven primarily by the full repayments of investments in two portfolio companies, both of which were second-lien investments.

The weighted average yield of our total debt in income producing investments at cost was 10.9% at the end of the fourth quarter as compared to 11.3% at the end of the third quarter. Regarding portfolio composition, at the end of the year, total investments in our portfolio were $1.375 billion at fair value, comprised of 89.3% senior secured loans, including 53% in first-lien, 7.8% in first-lien/last-out unitranche, and 28.5% in second-lien debt, as well as 0.5% in unsecured debt, 3.2% in preferred and common stock, and 7% in the Senior Credit Fund. We also had $96.8 million of unfunded commitments as of December 31, bringing total investments and commitments to $1,472.2 million.

As Brendan mentioned earlier in the call, we're pleased with the progress that we've made in increasing the company's single-name portfolio diversification. We increased the company's single-name portfolio diversity by 9% quarter-over-quarter and 29% year-over-year. As of quarter-end, the company had 136 investments across 72 portfolio companies operating across 33 different industries.

So, turning to credit quality. The underlying performance of the majority of our portfolio companies was stable quarter-over-quarter. The weighted average net debt-to-EBITDA of the company's non-investment portfolio was 5.6 times at quarter-end versus 5.3 times at the end of the third quarter. This increase was primarily attributed to our investment in Animal Supply that Brendan described earlier. It also resulted from some new investment commitments on existing portfolio companies that we upsized during the quarter on the back of positive performance, which drove leverage modestly higher.

The weighted average interest coverage of the company's non-investment portfolio at quarter-end was 2.2 times, which was unchanged from the prior quarter. The Senior Credit Fund continues to be the company's largest investment at 7% of the total investment portfolio. Over the trailing 12 months, the Senior Credit Fund produced a 11% return on our invested capital. During the quarter, the Senior Credit Fund had new originations of $11.5 million across three existing portfolio companies.

Sales and repayments were $48.3 million, resulting in a net funded portfolio reduction of $33 million during the quarter. The total size of the portfolio was $451.8 million at quarter-end. As of the end of the fourth quarter, the weighted average yield at cost on investments in the Senior Credit Fund was 7.7%, just modestly higher from the prior quarter at 7.5%.

First-lien loans comprised 96.6% of the total investment portfolio within the Senior Credit Fund in all of our investments are floating rate. The Senior Credit Fund portfolio also remains well-diversified with investments in 32 portfolio companies operating across 20 different industries. As Brian mentioned earlier, we're planning to dissolve the Senior Credit Fund joint venture and we expect to receive half of all assets onto our balance sheet. As a result of this, the company's first-lien debt exposure and single-name portfolio diversification will meaningfully increase.

I'll now turn the call over to Jonathan to walk through our financial results.

Jonathan Lamm -- Chief Financial Officer

Thanks, John. We ended the fourth quarter of 2018 with total portfolio investments at fair value of $1.375 billion, outstanding debt of $664 million and net assets of $710 million. Our net investment income per share was $0.56 as compared to $0.54 in the prior quarter. Earnings per share were negative $0.03 as compared to $0.47 in the prior quarter, primarily driven by markdowns on investments in the portfolio, including Animal Supply as previously discussed.

During the quarter, our average debt-to-equity ratio was 0.9 times versus 0.7 times in the prior quarter. We ended the fourth quarter with debt-to-equity ratio of 0.94 times versus 0.79 times at the end of Q3. We are pleased with the gradual growth of our balance sheet this quarter into additional attractive income-producing assets.

As we have spoken about in prior quarter earnings conference calls, our utilization of higher balance sheet leverage will be dictated by underlying asset selection each quarter. Asset composition, in turn, will drive our leverage profile. This is a reflection of prudent risk management practices, which, we believe, are core competency of Goldman Sachs. We will seek to maintain a meaningful cushion relative to the regulatory asset coverage requirement as we have done historically.

Turning to the income statement. Our total investment income for the third quarter was $36 million, which was down from $38 million last quarter. The decrease quarter-over-quarter was primarily driven by replacement of certain investments on non-accrual status and partially offset by higher interest income as a result of new income-producing assets. Total expenses were $13 million for the fourth quarter as compared to $16 million in the prior quarter. Expenses were down quarter-over-quarter, primarily driven by a decrease in incentive fees, which was partially offset by an increase in interest and other debt expenses.

NAV was down quarter-over-quarter as we ended Q4 with net asset value per share at $17.65 versus $18.13 in the prior quarter. The decline in NAV was largely driven by our investment in Animal Supply. Our supplemental earnings presentation provides a NAV bridge to walk you through the changes from the third quarter to the fourth quarter. The company had $42.2 million in taxable accumulated undistributed net investment income at quarter-end, resulting from net investment income that has consistently exceeded our dividend. This equates to $1.5 per share on current shares outstanding. As Brendan mentioned earlier in the call, financing is a critical component to our framework, following the passage of the SPCA act.

As of December 31, 2018, the company had $850 million of total debt commitments across secured and unsecured debt. This provides the company with total debt-to-equity capacity of up to 1.2 times. In February 2019, we increased the size of our revolving credit facility to $795 million, up from $695 million, thus providing the company with incremental debt capacity. The company currently has an investment-grade rating from Fitch. We seek to operate in a manner to retain the company's investment-grade rating. Our current debt capacity provides the company with sufficient runway to gradually increase our balance sheet over time.

That said, as part of our overall financing strategy, we continued to evaluate other sources of debt with a particular emphasis on continuing to diversify our sources of funding.

With that, I will turn it back to Brendan.

Brendan McGovern -- Chief Executive Officer

Great. Thanks, Jonathan. Looking back, 2018 was a year of significant change for the BDC industry. We believe the actions taken to benefit from the changing regulatory backdrop have positioned the company well as we head into 2019. As always, we thank you for the privilege of managing your capital. And we look forward to continuing to work hard on your behalf over the remainder of the year.

So, with that, let's open up the line for questions. So, go ahead, Ian.

Questions and Answers:

Operator

Ladies and gentlemen, we will now take a moment to compile the Q&A roster. Our first question is from the line of Finian O'Shea from Wells Fargo Securities.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hi, guys.

Brendan McGovern -- Chief Executive Officer

Hey, Finian. How are you?

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hey, guys. Very well. Also a first question on the SLF news. It seems like you guys deliberated this for, maybe, a couple of quarters, and arrived at the conclusion that the utility has diminished. Kind of looking at the asset mix and leverage here, this will bring you up, I think, above one to one. And essentially, all else equal, the utility was better in the SLF, given the fee rates. So, the question is for a risk-adjusted return, what do you then intend to do with your portfolio construct in that new -- either 30% or less encumbered asset bucket to drive returns?

Brendan McGovern -- Chief Executive Officer

So, there is a fair bit in the question, Fin. Maybe, just a quick discussion of the decision as we talked about. When we first put that Senior Credit Fund in place, obviously, the regulatory backdrop was such that the BDCs were capped at $1 of debt per $1 equity. So, we viewed it as an attractive way to get exposure, leverage existing origination capabilities of the platform, lower yielding loans, that with the benefit of the off balance sheet leverage that doesn't kind of against the cap, could produce a nice return. Frankly, it's a little bit of an unnatural way to go back, doing that, and trying to get that sort of exposure.

So, our overall standpoint here is, there is really no need to go through the imaginations of having that joint venture in place, we can simply deal on balance sheet, what used to be done within a vehicle, and there's a lot of benefits that derive to the company from doing that. There is a diversity that we talk through. But frankly, I would say, the most important benefit, Fin, is clearly, in a two-to-one world, financing is a much bigger contributor of alpha of returns. Having an optimal cost of financing is a huge component to being a good and stable company in this industry.

And so, from a lender standpoint, bringing the assets on balance sheet really doesn't prove the funding profile of the business. Lenders would much rather look at whole loans on the balance sheet that they can look, and feel, and touch, then be asked to leverage an equity investment and investment in a leveraged joint venture. So, we think, this is a dramatic improvement to our funding profile overall. I guess, from a technical perspective, yes, this wasn't a vehicle that was not being charge fees, now bring those on balance sheet grosses up our fees.

But as we know and we've really been a leader in the industry in that regard, we've taken a dramatic approach to what the fee structure should look like in the course of investment portfolio focused on low-yielding assets, while most of the industry has only offered a discount in fees on dollars. Over the one-to-one cap, our discount is from $1. And so, holistically, if you look at what we're doing here, all of that was through the lend of two-to-one. And we think the company ends up in just much more transparent and better place, overall.

Jonathan Lamm -- Chief Financial Officer

And Brendan, if I could chime in there because I think the other piece, Fin, that you asked about was a strategy question around what happens, how do we plan to use the 30% bucket, going forward. I think Brendan kind of alluded to this, but under the old sort of leverage capital regime of one-to-one, using that 30% bucket, obviously, all BDCs were focused on what they could do to really drive kind of alpha with that 30% bucket, obviously, as (inaudibe) by utilizing the Senior Credit Fund structure.

As we pivot into the two-to-one world, it seems to us, there's less, much less value in the 30% bucket in trying to get alpha from some sort of non-traditional investment strategy, but rather that health is really going to come as Brendan mentioned by optimizing your balance sheet, and making sure that you're getting the best sort of financing structures at the lowest rates and so on. So, that's much more of our focus is making sure that the left hand side of our balance sheet supports really good financing on the right hand side of our balance sheet, and drives good net interest margins that ultimately produce that return.

And then, the final thing I would say, just strategically, is you've heard us say this before, but we believe that the core competency of our team is in underwriting credit. And so, we don't want to -- we never have thought we would go utilize that 30% bucket for something non-core that's outside of our core competency, and just another good reason why we don't intend to use that 30% bucket for something that we don't feel our team is well-suited and has this core competency.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Sure. (Technical Difficulty) continue the dialog at touch, perhaps not 30% quote-unquote bad assets, but assuming this collapse will be to facilitate, I think, as you kind of outlined, a more favorable draw on the credit side, you'll then have -- you'll then have assets supported by your equity and unsecured debt, and sort of the question is, will we see a bigger second-lien composition or other forms of junior?

Jonathan Lamm -- Chief Financial Officer

So, Brendan, I'm sure you have thoughts here too. I mean, I think that what we -- the value -- the reason why we sought the approval of shareholders to go to the two-to-one world was really more about flexibility. And so, obviously, when you're constrained one-to-one, that limits the types of assets that you can do that still produce the income that supports the dividend levels that the investors look for in the BDC structure. And so, by virtue of going to two-to-one, that obviously opens up our investment universe quite a bit more.

And so, I guess, what I would say, Fin, is that, yes, you're right. And as we talked quite a bit about on the call, we've definitely been very focused on first-lien investments. I think that's a function mostly of what we're seeing is the attractive investment opportunities in the market today. That could reverse. It definitely could reverse. We could fund ourselves at a point in time, again, if we dial back to 2009, 2010, 2011, junior capital looks really attractive.

And if we end finding ourselves in an environment like that again, we very well could pivot back into more junior debt. But at the moment, given kind of what we're seeing in the marketplace, we're feeling much better about staying higher in the capital structure and driving returns utilizing, as I was saying, optimized financing structures. And that's what we intend to pursue for the time being as long as the market opportunities continue to point us toward those first-lien assets.

Brendan McGovern -- Chief Executive Officer

The only thing that I would add there, and we've talked about this a fair bit. There will be absolutely, unequivocally, a correlation between the amount of leverage we're using and the asset mix that we have on balance sheet. So, we have a risk management process internally. We will look to the volatility profile of our assets as a guide about how to lever the entirety of the portfolio. So, in that world that Jon described, that could come to pass where junior capital does become more interesting, you would naturally see overall leverage levels come down. And so, that's how we operate the business.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Thank you, guys, for the color.

Operator

And our next question comes from line of Leslie Vandegrift from Raymond James.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Hi. Good morning. Thank you for taking my question.

Brendan McGovern -- Chief Executive Officer

Hey, Leslie.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Hey. Just the first one on the NAV change for the quarter. You mentioned in the prepared remarks that the portion that was Animal Supply. What portion of the overall NAV decline was just from overall market volatility that we saw in December?

Jonathan Lamm -- Chief Financial Officer

I'll take the crack, Leslie. So, certainly, Animal Supply was the single biggest contributor, but you do see mark-to-market changes going through the numbers as well. So, if you look in total, I'm talking in dollar terms, and I might be occupied by a little bit, so forgive me. But roughly, we marked the book down by $25 million, about $13 of that was Animal Supply. So, the remainder -- so, roughly half is just other names where just more normal mark-to-market volatility. If you took that component alone, you're talking probably close to 1.5% on NAV.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Okay. And then, so far in first quarter, we've seen a bit of a bounce in other BDCs that have already reported have given a little bit of a range of what they think has come back. Do you have a similar thought?

Jonathan Lamm -- Chief Financial Officer

So, the observation of the market is certainly the same. As you know, Leslie, from a process perspective, valuation is something we do in a coordinated fashion among our organization, including with our controllers' group, including with our Board of Directors. So, certainly don't want to signal one way or another any change, but to the extent there are Q4 impacts that were mark-to-market. I think there are some things that you'll see we mark up, should those conditions hold, but we prefer to talk about that in May.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Okay. All right. And then, on Animal Supply, when you guys originally invested in this, I believe it was back in 2016, if I remember correctly, it was a smaller investment in couple (inaudible) debt investment, so it eventually went into the Senior Credit Fund, I believe.

Brendan McGovern -- Chief Executive Officer

Right.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Did that -- A, are those still there, so will you be getting your portion of those back with the dissolving of the fund on balance sheet? And B, just can you kind of walk me through the last few quarters, the increasing of the debt in Animal Supply as they always have an issue?

Brendan McGovern -- Chief Executive Officer

Sure. So, you're correct. In the initial investments -- so, there is a portion of investment in the first-lien part of that capital structure that was made through the Senior Credit Fund. And so, that Animal Supply first-lien investment will be treated no differently than any other investment within the Senior Credit Fund, the BDC would take back its half of that investment, Cal Regents would take back its half of the investment as well. And so, there will be -- everything we're doing with the restructuring of that JV, Animal Supply would be consistent with that in terms of its treatment. That's how that's structured.

In terms of the company, the performance, I'm sure, you'll appreciate. There's some confidentiality provisions that make it hard to have a completely fulsome conversation, but we'll do our best. Animal Supply, what the business does, Leslie, it's a distributor pet products, pet food, so again, very stable underpinnings to that business. There are long-term secular trends around pet ownership, particularly, here in the States that have given rise to a nice backdrop for that part of the business.

The business was, I'll describe it as, one of the last investments in an older vintage PP&E fund. And I would say, over the course of, call it, the past couple of quarters, and especially, more recently, that PE manager was hoping to effectually not commented (ph) that that didn't come to pass. And along the way, I think, yes, if I say distractions at the company perspective in light of those aspirations.

And so, as things start to unfold, we and the other junior lenders in the capital structure, as I described, really just thought it was appropriate to put ourselves in a position of more influence and outcome, we structured the capital structure and swap our debt for equity. And we continue to be -- construct around the overall market dynamics for the space. It's a really interesting industry. There's a lot of consolidation opportunities that, we think, can actually provide tremendous synergies in certain areas.

So, we're pleased we've got that restructuring done. We think it puts the company on a much better footing -- much better liquidity footing to manage working capital, which is a hugely important issue. In the space, if you've got working capital, you can meet your fill rates. If you meet your fill rates, you get revenue and EBITDA. That has been a problem. That should no longer be a problem here with the company. So, we're pleased to support that -- support the business in that regard, and we look forward to continue to give you guys updates as to how the company is performing as we head into 2019.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Okay. Thank you. And just lastly, here on NTS, you mentioned that, right now, would be about $56 million, if you sold it today, if it was close today. The sale transactions for $56 million were some triggers to increase that possibly. I know you can't give me exact numbers, but what kind of triggers are we talking about with that business?

Jonathan Lamm -- Chief Financial Officer

So, we have that -- trick figures is probably not the word I would use, Leslie. So, basically, there is an ordinary course sale of the business. There is a strategic company that is owned by a private equity sponsor that has entered into a purchase agreement with the business. As part of that, there was a, I would say, a multi-tiered negotiation between certain lenders, as well as the company in terms of the appropriate way to split the overall value in light of that transaction.

So, we have agreed, we have entered into a payoff letter, pursuant to which the BDC would receive at least $56 million. That number could increase. The increase, we're certainly not counting on it. What we've tried to do is, incentivize the company to keep a lid on fees and expenses associated with the transaction. So, we might be the beneficiary, if we're successful in that regard. But we don't anticipate there being a multiple higher than that $56 million number. So, the important part here is, of course, we never pleased to be describing a non-accrual investment, but I think there's a lot of important context to this particular deal.

We put in $50 million, but we have modified very shortly to getting back $56 million. So, more than our initial investment, we've already received $10 million over the course of investment from the company. So, should this -- the transaction move forward as we anticipate, and there's nothing concerning about the nature of the transaction, they are just processes. The telecom business, the FCC has to approve the sale of the business.

We get $56 million versus our initial investment of $50 million. That's a 7% annualized IRR. That's a 1.3 times money multiple. That being said, from a strict accounting perspective, really wouldn't be appropriate to accrue the income into our income statement we've agreed in this payoff letter to get proceeds certain. And so, we determined not to accrue the income, while we're waiting for the transaction to close. So, it's simple as that.

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Okay. Thank you for taking my questions this morning.

Jonathan Lamm -- Chief Financial Officer

Thank you.

Operator

And your next question comes from the line of Christopher Testa from National Securities.

Christopher Testa -- National Securities Corporation -- Analyst

Hi. Good morning. Thank you for taking my questions. Just wanted to discuss the pro forma non-accrual numbers you gave. When you're bringing the SEF on balance sheet, does that also include a professional physical therapy in your pro rata part of that non-accrual asset as well?

Brendan McGovern -- Chief Executive Officer

So, we can come back with the exact answer there, but Pro PT is a very small component of the Senior Credit Fund, so we (inaudible) taking back our half Pro PT at the balance sheet, but that number, I believe, does include that. But we can come back and confirm that.

Jonathan Lamm -- Chief Financial Officer

Yeah. The number -- the pro forma numbers that we gave does not include the Senior Credit Fund coming on balance sheet, but, Chris, for the -- pro forma for the Senior Credit Fund coming on balance sheet, the non-accrual numbers are basically what we gave you.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. Okay. That's fair. And just on Animal Supply as well, just curious what happened kind of over the course of the quarter? Because you guys kind of had to mark the costs, and then, it went down to $73 million. Could you just tell -- till the extent you're able to disclose -- I know it's a private company, but could you get into any more detail around what happened over the course of the quarter with that?

Brendan McGovern -- Chief Executive Officer

Yeah. This is -- we'd love to grow -- there's sort of certain sensitivities around the nature the company was trying to accomplish that we prefer not to get into wouldn't be appropriate, given our confidentiality restrictions. That being said, I think fair to say, what we thought might come fast became clear -- was likely not going to come to pass. And that coupled with some deterioration in performance is what gave rise to the mark during the period.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. Okay. That's fair. And with the dissolution of the SCF and bringing that on balance sheet, I appreciate it, your comments in response to Fin's questions. Just wondering, how much of this consideration was due to the inherent economic leverage of having this and going above one-to-one versus it's just not being the right structure for you guys in terms of the returns it was generating?

Brendan McGovern -- Chief Executive Officer

If you really peel it back, there is not a tremendous amount of economic substance to change here. So, sitting here today before we've not affected this transaction, the BDC has in the SOI and equity investment in this joint venture. We schedule out every single investment. We give you details about how that vehicle is financed. Effectively, the impact of this is to resolve that equity investments and bring on the balance sheet the assets and effectively, we would then intend to leverage it on balance sheet. You can once think of it as bring on both our half of the assets and liabilities at the SCF. And so, that's really -- the substance somewhat is taking place here.

Jonathan Lamm -- Chief Financial Officer

Yeah. And Christopher, the other point to note is, in these joint venture structures, you have under the SEC exempted relief for co-investment across the platform, you don't have the ability to cross-allocate between a joint venture in any of your other vehicles, so there is an increased amount of flexibility by bringing those assets back on balance sheet and having them in accounts that those assets effectively be able to be cross-allocated with other accounts. It enables you to do different types of transactions long term. So, though the structure was a great structure that we had good returns on, this just provides that much greater flexibility.

Brendan McGovern -- Chief Executive Officer

If you're starting a business today that have the ability to lever two-to-one, and you had a blank sheet of paper, what we're doing is exactly what you would do. In a one-to-one world, the SCF made sense, but that's just no longer applies.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. Okay. Appreciate the detail. And I know you guys increased the credit facility. And now, looking forward, as you're going to be buying back the loans from the SCF at least your half, are you finding that another convertible or unsecured debt is more attractive at the current time?

Brendan McGovern -- Chief Executive Officer

We've increased the size of our revolver in the near term, Chris. And that gives us certainly capacity to be able to bring the Senior Credit Fund assets on to the balance sheet. But as I mentioned in my prepared remarks, we're definitely continuing to look at opportunities to diversify our sources of funding. We definitely view our investment-grade rating is critical for the long-term flexibility of the company and the balance sheet. And so, while I'd say that near-term, an unsecured offering is not necessarily probably attractive right now, just given where the market is. That being said, we continue to evaluate that and we'll certainly talk to you about that as the quarters proceed.

Jonathan Lamm -- Chief Financial Officer

The only point (ph) I'd add, Chris, is if you look again, your post two-to-one, the debt capacity of the company goes up, which means we have the potential when we think about unsecured offerings to do a bigger tranche size. That should benefit us from an execution perspective over time. The convertible market is a unique one, where $100 million or $150 million tranche is something that market is OK with, you get a relatively small group of investors. The larger institutional investment-grade market, if you an index-eligible, it's got to be a $300 million tranche. And I think, when you think about our financing structure, in general, and the total balance sheet here were added size of scale where that opportunity is available to us. And then, at the right time, that can be something that we pursue.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. Okay. And one more, if I may, just your unitranche book has been shrinking. And I know you guys mentioned that first-lien seems to be the better risk-adjusted return here. Are you guys finding now that a lot of your borrowers, specifically the sponsored ones are valuing maybe more bifurcated structure, or are you just shying away from unitranche, given that a lot of the borrowers are using unitranche as an excuse to get lenders to go out very deep in the capital structure in terms of leverage?

Brendan McGovern -- Chief Executive Officer

Again, the bifurcated unitranche structure and strategy in a one-to-one world was effectively a way to embed some leverage in the investment as well, a very small and nominal amount, so strategically, it does become a little bit less important. And I think as a result, the industry participants are probably turning to a little bit less than they once were. It's an interesting structure. I'm sure at some point, we'll do a handful of transactions there as well. But as Jon Yoder described, right now, and it's sort of the last three quarters as we've looked at our origination cadence, just true first-lien attachment $1.1 million (ph) has been the better of the risk reward opportunities that we've seen.

Christopher Testa -- National Securities Corporation -- Analyst

Got it. That's all for me. Thanks for taking my questions today.

Brendan McGovern -- Chief Executive Officer

Our pleasure.

Operator

And our next question is from line of Arren Cyganovich from Citi.

Kelly Wang -- Citigroup -- Analyst

Hi. Good morning. This is Kelly Wang. I'm working for Arren today. Thanks for taking my question. Most of my questions have been asked, but maybe, can you give an update on the credit and business performance of the other companies in the portfolio that are currently not placed on non-accrual status? And is there any rating migration that we should be aware of?

Brendan McGovern -- Chief Executive Officer

Any rate -- so, are -- those still remains, Kelly, you're talking about other previous non-accrual investments? Is that the books of the (inaudible)?

Kelly Wang -- Citigroup -- Analyst

Yeah.

Brendan McGovern -- Chief Executive Officer

Yeah. So, there is certainly no ratings migrations that are noteworthy there. The biggest of those exposures is probably Hunter Defense, which is an investment that has actually improved in performance. We will take quite significantly since we did restructure that investment as well. I think when you look at the market value of the other previous non-accruals, it's relatively de minimis at this point.

Kelly Wang -- Citigroup -- Analyst

Okay. And can you just talk about the general competitive dynamic? And what's your loan origination outlook for 2019 versus 2018?

Brendan McGovern -- Chief Executive Officer

Sure. I'll crack. And Jon, if you want to jump in, please go ahead.

Jon Yoder -- Chief Operating Officer

Yeah. I was going to say, as I mentioned in the prepared remarks, the fourth quarter was kind of muted in terms of sponsor activity, just because of, I think -- whenever you see volatility in the broader market, it causes a lot of M&A activities slow down as people try to recalibrate what are appropriate purchase price multiples to detain. Obviously, markets -- broader markets, credit and equity have rallied and stabilized here in the first couple months of 2019, and I think what we're seeing is frankly quite robust activity so far this year. It's hard to -- I mean, as we saw last year, where I think nobody really predicted the bout of volatility that came upon us, starting in mid-November and going to the end of the year, it's very hard to know whether another one of those volatility ballots will strike us again this year. But as we sit here today with a good strong healthy backdrop, we're seeing quite robust sort of transaction activity levels.

Kelly Wang -- Citigroup -- Analyst

Great. Thank you for taking my questions.

Operator

And your next question is from the line of Michael Ramirez from SunTrust.

Michael Ramirez -- SunTrust Banks, Inc. -- Analyst

Hey. Good morning, guys. Thanks for taking our questions.

Brendan McGovern -- Chief Executive Officer

Sure. How are you?

Michael Ramirez -- SunTrust Banks, Inc. -- Analyst

Good. So, many of your public peers have characterized this environment's remaining competitive in line with your comments this morning. You mentioned deal activity was relatively muted, but could you help us understand what percentages of deals that came across your debt that you closed this quarter? And sort of how does that compare to prior period, including those source part of wealth channel, and maybe additionally, when you're passing on a deal, what are some characteristics are you trying to avoid? And how has this changed from prior years?

Jon Yoder -- Chief Operating Officer

Yeah. Brendan, I have a few thoughts on that, and you probably have some as well. So, in terms of your first question regarding I think sort of look-to-book rates, are we still seeing that we're doing the same percentage of the overall deals that come across our desk? I would say that, that's actually holding relatively consistent. We look at literally hundreds and hundreds of transactions every year. And we do a very small number of actual deals of new deals. I think last year, by recollection in terms of new portfolio companies that we added was in the neighborhood of 25 or something like that, and that compares with said many hundreds of deal opportunities.

So, kind of low single-digit percentage of the deals that we see actually result in deals that we close on. The fourth quarter, one of the things I think it really highlights is, when you do have sponsored transaction volumes that kind of diminish, as I described earlier, largely I think as a function of volatility in the markets, we have another sort of sourcing engine that we can pivot to or that we -- that can be active, which is our non-sponsor channel. And so, in prior quarterly calls, we've described how those two channels can be a little bit countercyclical to each other.

When there is very robust private equity activity, what we tend to see is that sponsor -- I'm sorry non-sponsor on businesses are looking to take advantage of that robust private equity activity to sell their businesses to private equity. In periods where private equity is less active, we find that non-sponsored business seek their financing needs more from lenders and to grow their businesses or fulfill their capital needs. So, it does have an inherent and sort of countercyclicality to the two sourcing mechanisms. And I think that's kind of what we saw a bit in the fourth quarter, where we did add a couple of new companies that came through our private wealth non-sponsored sort of channel.

But overall, as I said -- overall, if you look at our look-to-book ratio pretty stable. Your question around what causes us the pass-on deals. I think the most important factor that we're -- that we think about -- and this is probably been true throughout our history, but certainly is very much in top of mind today is, we really are looking for businesses that we think are quite durable and less exposed to economic cycles. We are highly cognizant of the fact that we're not macroeconomists, and we're not here predicting that there is a recession in the offing. But because we're not macroeconomists, it does make us want to stay a bit more focused on durable types of companies.

And so, I'd say, probably the biggest reason why we pass on the companies as we find that there are exposures that we think won't -- or ones we want to take through an economic cycle. There is -- of course, there's always other types of issues you can run into with individual companies. You can find out that they've got some sort of customer concentration or some other sort of risk that's idiosyncratic. Or you could find that the market is just more aggressive than you want to be.

Some people might be willing to add more leverage than we think is appropriate. Some people might be willing to do deals without covenants that we might not want to do. So, it can be those competitive reasons why you might not do a deal, but I think the number one reason why we pass on deals is because we're just not comfortable with the profile of the business and the durability of the business through a cycle.

Michael Ramirez -- SunTrust Banks, Inc. -- Analyst

All right. That's great color. Thank you.

Operator

At this time, there are no further questions. Please continue with any closing remarks.

Brendan McGovern -- Chief Executive Officer

Great. Thanks, Ian. Thank you all for joining us for this call. If you guys have any questions, please don't hesitate to follow-up with us directly. And have a great day and great weekend.

Operator

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Incorporated fourth quarter 2018 earnings conference call. Thank you for your participation. You may now disconnect.

Duration: 52 minutes

Call participants:

Katherine Schneider -- Head of Investor Relations

Brendan McGovern -- Chief Executive Officer

Jon Yoder -- Chief Operating Officer

Jonathan Lamm -- Chief Financial Officer

Finian O'Shea -- Wells Fargo Securities -- Analyst

Leslie Vandegrift -- Raymond James & Associates, Inc. -- Analyst

Christopher Testa -- National Securities Corporation -- Analyst

Kelly Wang -- Citigroup -- Analyst

Michael Ramirez -- SunTrust Banks, Inc. -- Analyst

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