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Golub Capital BDC Inc (NASDAQ:GBDC)
Q2 2020 Earnings Call
May 11, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Golub Capital BDC, Inc.'s March 31, 2020 Quarterly Meeting Conference Call.

Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees for future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Golub Capital BDC, Inc.'s filings with Securities and Exchange Commission.

For material, the Company intends to refer to on today's earnings conference call, please visit the Investor Resources tab on the homepage of the Company's website, www.golubcapitalbdc.com and click on the Events/Presentations link. Golub Capital BDC's earnings release is also available on the Company's website in the Investor Resources section.

As a reminder, this call is being recorded for replay purposes.

I would now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

David B. Golub -- Chief Executive Officer

Thanks Celina. Hello, everyone, and thanks for joining us today. I'm joined virtually today by Ross Teune, our Chief Financial Officer; Greg Robbins and Jon Simmons, both Managing Directors at Golub Capital. We and the rest of the Golub Capital team hope that you and your loved ones are all safe in these challenging times. We're grateful that our team is healthy, safe and working effectively from home.

We're going to talk a lot today about the economic impacts of COVID-19. But first, I want to take a moment to acknowledge the human impact. About half of Golub Capital's team, myself included, live in or near New York city, and I'm sure everyone on this call's read about how New York city has been hard hit by COVID with over 170,000 documented cases and over 140,000 -- I'm sorry, and over 14,000 confirmed deaths. The impact of COVID-19 in our community is palpable. We all know folks who've been sick or worse.

What's also palpable is that spirit of resilience and solidarity. In my neighborhood and across the city, we open our windows at 7:00 P.M. every night to clap and cheer for the healthcare workers who are on the front lines. We've been doing it for weeks, and it's still a very emotional moment for me and, I think, for most people. The New York Times recently featured an op-ed by my friend Nick Kristof that highlighted a number of exceptional organizations that are involved in COVID-19 relief. We're proud to support their work, and I hope you'll consider joining us.

This morning we issued our earnings press release for the quarter ended March 31 and we posted an earnings presentation on our website. We'll refer to that presentation through the call today.

Let me start with the headline on Slide 4. The headline is that GBDC's results for fiscal Q2 were in line with the preliminary estimates that we filed on April 13. Adjusted net investment income per share was $0.33, adjusted EPS was a loss of $1.71, and NAV per share was $14.62, which was toward the high-end of the NAV range we published previously.

Before I go on to discuss these results in more detail, I think it's important to put them in context. COVID-19 is already and it's going to continue to have a significant impact on virtually every US company, including GBDC. Following the closing of the rights offering, we think GBDC will be even more well equipped to navigate in a COVID-19 world. Our goal today is to give all of you a transparent and analytical assessment of the impact of COVID-19 on GBDC to date and to review the risks and opportunities that we see for GBDC going forward. We'll then go through GBDC's results for the quarter in detail.

So let's move to Slide 6. Slide 6, you can see -- we think it's difficult to overstate the impact of COVID-19 on the US economy in March. After a long steady run of GDP growth of 2% to 3%, the economy contracted by nearly 5% in calendar Q1. What's interesting is almost all of that contraction occurred in March. A key cause and effect of the Q1 contraction was an unprecedented spike in job losses. In late March and continuing into April, the economy lost jobs at a rate of over 5 million per week, causing the unemployment rate to spike. It's continued to spike post quarter end. Most recent number I saw was 14.7%, a level not seen since the Great Depression.

As large portions of the economy effectively shut down, financial markets sold off as you can see on Slide 7. So against this backdrop, how did GBDC fare? We start with two pieces of good news. Turning to Slide 9, the first piece of good news is that GBDC's portfolio was designed to be resilient. The portfolio is largely exposed to industries that have been relatively insulated from COVID-19 like enterprise software and technology business services, financial services and more. Loans to companies in these industries constitute over 75% of GBDC's portfolio. Moreover, the size, diversification, and granularity of GBDC's portfolio mitigate the potential impact of idiosyncratic COVID-19 issues that may affect specific borrowers. The average size of each investment in GBDC's portfolio was less than 40 bps as of March 31.

Second piece of good news, shown on Slide 10, is that GBDC has minimal exposure to many of the areas that have been hardest hit by COVID-19, sectors like airlines and aircraft finance, energy, hotels, entertainment and gaming. Investments in these COVID-19 impacted industries represented less than 1% of GBDC's portfolio at fair value at March 31. Similarly, GBDC's focus on lending at the top of the capital structure to sponsor-backed companies means that the portfolio has minimal exposure to second lien debt, mezzanine debt, and other asset classes that we believe are particularly vulnerable in today's environment.

GBDC's aggregate exposure to these asset classes also represented less than 1% of the portfolio at fair value as of March 31. But I don't mean to be arguing that GBDC is immune to COVID-19. Turning to Slide 11, you can see that GBDC has exposure to several industry sub-sectors that have experienced and likely will continue to experience material COVID-19 impact. Areas we're particularly focused on include restaurants, dental care, eye care, fitness franchises and retail. These sub-sectors represent a bit less than 20% of GBDC's portfolio at fair value at March 31.

We believe many of the borrowers in these sectors are well positioned and that they're going to be fine, and let me explain why. In restaurants, we've focused on proven concepts, mostly in quick service and fast casual, both of which have historically done well in recessions. Many of our borrowers offer drive-through carryout or they pivoted to doing so. In fact, one of our restaurant obligors reported their highest-ever sales day last week with no traditional sit-down customers. In dental and eye care, we focused on market-leading regional franchises, and we believe they'll recover when they're permitted to reopen. In some cases, we believe they may even capture pent-up demand when they reopen.

In fitness franchises, we focused on low-cost, high-value concepts that we believe are well matched to an environment where consumers are more cost conscious. And in retail, we focused on consumer staples and franchisors that we believe are relatively insulated from cyclical pressure. In fact, the majority of our portfolio has been deemed essential and has remained open during COVID-19 and others in the portfolio that have been subject to some store closures have seen a significant increase in e-commerce revenue.

These are all mitigants but let me be clear that [Technical Issues] COVID-19 challenges, particularly in this portion of the portfolio, and we're proactively managing GBDC's portfolio to address these issues. But before I and my colleagues describe those initiatives, let's first review how these challenges affected GBDC's results for the second fiscal quarter, for the quarter ended March 31.

In short we saw two main impacts. First on Slide 12, there was a downward migration in our internal performance ratings from categories 4 and 5, which are loans performing at or better than our expectations at underwriting, to category 3, which are loans that are performing or are expected to perform below expectations. Category 3 increased from 7.2% of the portfolio at fair value at 12/31/19 to 26.5% of the portfolio at 3/31. The majority of that increase was driven by investments in the sub-sectors that I identified earlier as the most exposed to COVID-19 challenges. The percentage of the portfolio performing materially below expectations in categories 1 and 2 was essentially unchanged quarter-over-quarter.

Turning to Slide 13. COVID-19 also precipitated the widening of credit spreads. The combination of COVID-19 credit issues and wider spreads together caused unrealized losses of $2.06 per share on GBDC's NAV. One way to look at drivers of that unrealized loss would be based on the internal performance ratings. So for investments in categories 4 and 5, we view spread widening as the primary driver of the unrealized losses as we think these borrowers are performing at or better than original expectations. So on average, if you look at, loans in categories 4 and 5, they were marked down from 99.9% of par [Technical Issues] to 96.2% of par as of March 31. That markdown accounted for a $1.02 of GBDC's adjusted unrealized net depreciation per share for the quarter or about half of the total.

For investments in category 3, our view is that the unrealized losses reflect a combination of both spread widening and credit stress. As we said earlier, the majority of the increase in category 3 came from GBDC's investments in sub-sectors that we believe are exposed in a material way to COVID-19. On average, loans in category 3 were marked down from 96% of par at 12/31 to 90% of par at 3/31, a larger average markdown compared to categories 4 and 5. Markdowns in category 3 accounted for $0.86 of GBDC's adjusted unrealized net depreciation per share for the quarter or 42% of the quarter -- I'm sorry, 42% of the total.

In categories 1 and 2, the average markdown was several points greater than the average markdown in category 3, again not surprising. We believe the markdowns in this category reflect the stress of COVID-19 on top of preexisting credit challenges. Categories 1 and 2 are relatively smaller portion of GBDC's portfolio, about 2% of total investments at fair value, and markdowns in categories 1 and 2 contributed $0.18 of GBDC's adjusted unrealized net depreciation per share for the quarter, or 9% of the total.

Slide 14 provides a bridge from 12/31/19 NAV per share of $16.66 to 3/31/20 NAV per share of $14.62. From an adjusted NII perspective, GBDC generated $0.33 per share, not surprising, given our 8% annualized income incentive fee hurdle rate. In the next column, you can see realized credit losses. Net realized losses amounted to $0.03 per share, very small amount. The clear driver of the NAV per share decline in the quarter was the unrealized depreciation of $2.06 per share that we just reviewed in detail.

So how do we think about these unrealized losses. Well, one level, as long as our underlying borrowers continue to pay their principal and interest, unrealized losses in the portfolio will reverse over the remaining life of the loans. That's just loan math. We're hopeful that a large portion of the unrealized losses will reverse much sooner than that, as credit spreads start to normalize over the coming months. This is what happened in Golub Capital's loan portfolios following the 2008 financial crisis.

Put differently, unrealized losses offer a snapshot picture every quarter, but at the end of the day, only one thing matters for lenders who hold their loans to maturity, a loan either pays off or it doesn't. Accordingly, as we think about what job 1 is for Golub Capital, job 1's really clear, it's to minimize GBDC's permanent or realized credit losses.

With that, let me turn it over to Gregory Robbins, who is going to provide some specifics on how we're approaching that task. Gregory?

Gregory A. Robbins -- Managing Director

Thank you, David. Turning to Slide 16, we've been focusing on two key strategies. First, proactively managing our portfolio; and second, fortifying GBDC's balance sheet. Let's discuss each in turn.

The first focus area on Slide 17 has been proactive portfolio management. There have been three phases to this. In the first phase, which began earlier this year, we opened up lines of communication with our portfolio companies, private equity sponsors and industry consultants to gather data and assess COVID-19 risk by borrower. In support of these efforts, the Golub Capital direct lending team, consisting of more than 130 professionals, pivoted from loan origination to portfolio management. We undertook detailed analysis using 13-week cash flow forecast, real-time sales figures, and other proprietary data to segment that portfolio and identify the most affected borrowers.

In the second phase, we developed and executed on short-term game plans for the borrowers most affected by COVID-19. We also helped many of our borrowers apply for loans under government programs, where this was appropriate. In the third phase, which is where we are now, we're designing and executing on longer-term game plans for all of our borrowers. We're doing this collaboratively with the management teams and sponsors of each company. In the many cases where the borrower is doing fine despite COVID-19, the game plan is business as usual.

In more challenging cases we are focused on credit enhancing amendments or on incremental investments where we, as first-lien lenders, may contribute to a solution alongside capital support from the private equity sponsors. Every deal is different, but we think our deep partnerships with sponsors and our lead position on the preponderance of our loans has given us the power and the nimbleness to structure win-win solutions. Where sponsors are unable or unwilling to support a company, we'll also prepare to take the keys, and in the small number of cases, we expect we will do so. We have deliberately built out our workouts team over last 12 months to prepare for an economic downturn.

The second focus area, as outlined on Slide 18, has been fortifying GBDC's balance sheet to support existing investments and create future opportunities. We've spoken about this in the context of GBDC's rights offering, which subscription period concluded on May 6th and is expected to raise approximately $300 million of new equity for the Company. GBDC intends to use the rights offering proceeds for three key purposes. First, to repay outstanding indebtedness; second, to make credit enhancing incremental investments to support existing portfolio companies; and third, to make selective new investments.

Pro forma for the rights offering, GBDC's GAAP leverage will decrease from 1.22 times to 0.92 times as of March 31st, which is at the low end of our targeted range and well within our 150% asset coverage test. We have developed a use of proceeds plan, which we anticipate will give GBDC a significant amount of additional flexibility, liquidity and borrowing capacity. We expect to be able to provide you with more detail on that game plan shortly.

We also believe that the rights offering has bolstered GBDC's flexibility to play offense on new transactions in the future. Right now, new deal M&A is on hold with buyers and sellers unable to agree on the day of the week. That's OK, because for now, we want to stay focused on credit enhancing incremental investments in our portfolio. But if we go out three months to six months, this will change. History has shown that some of the most attractive opportunities exist during and after significant market dislocations.

As illustrated on Slide 19, leverage levels decreased dramatically after the global financial crisis, and Golub Capital was able to capitalize significantly on those opportunities. We believe recent market events will likely lead to a sustained lender-friendly environment, much like we saw after the last recession. Lower leverage, higher spread, improved covenants, and enhanced downside protection are [Technical Issues] expect to see come out of the current market environment.

So to summarize this portion of the presentation, while we recognize that uncertainty is high and likely to persist, we believe GBDC is well positioned to navigate COVID-19. As shown on Slide 20, we believe GBDC has developed a number of powerful competitive advantages. In our experience, sustainable competitive advantages are the key to consistent, replicable, premium shareholder returns.

With that, let me hand it over to Jon to go through our results for the March quarter in more detail. Jon?

Jonathan D. Simmons -- Director, Corporate Strategy

Thanks, Gregory. I'm on Slide 22. First, just as a reminder, in addition to the GAAP financial measures in our investor presentation, we've also provided certain non-GAAP measures to make GBDC's financial results easier to compare to our results prior to our merger with GCIC. These non-GAAP or adjusted measures seek to strip out the impact of the merger-related purchase premium write-off and amortization and are further described in the appendix of our earnings presentation. We'll refer to these adjusted measures where appropriate, as we think they are a better indicator of GBDC's financial performance.

With that context, let's look at the results for the quarter in the column on the far right of the page. Adjusted net investment income per share or as we call it income before credit losses for the March 31st quarter was $0.33, unchanged from the previous quarter. Adjusted net realized and unrealized loss per share was $2.04. This compares to adjusted net realized and unrealized gain per share of $0.02 for the quarter ended December 31st, 2019. As David discussed in his remarks, the adjusted net realized and unrealized loss for this quarter was primarily driven by unrealized losses from the impact of COVID-19.

Loss per share and adjusted loss per share for the March 31st quarter was $1.71. This compares to earnings per share and adjusted earnings per share for the December 31st quarter of $0.35. As a result of a loss per share, our NAV per share declined approximately 12.2% to $14.62 as of March 31st from $16.66 at December 31st.

On March 30th, 2020, we paid a quarterly distribution of $0.33 per share, and then finally, on April 9th, 2020, our Board declared a quarterly distribution of $0.29 per share payable on June 29th, 2020 to stockholders of record as of June 9th, 2020. This distribution is consistent with historical quarterly cash distributions at an annualized rate of approximately 8% of net asset value.

I'll now hand the call over to Ross to go through the results in more detail. Ross?

Ross A. Teune -- Chief Financial Officer and Treasurer

Great. Thanks, Jon. I'll start on Slide 23. This slide highlights our total originations of $167 million and total exits and sales of investments of $291 million for the quarter ended March 31st. Factoring in unrealized depreciation and other portfolio activity, including a record level of revolver fundings, total investments at fair value decreased by 5.4% or approximately $238.1 million.

One point I want to highlight. As of March 31st, we had just $17.5 million of remaining undrawn commitments on revolvers and $134.1 million of remaining undrawn commitments on delayed draw term loans. These are small numbers in the context of GBDC's balance sheet and liquidity position.

As shown on the bottom table, the weighted average rate of 7.1% on new investments, the weighted average spread over LIBOR on new floating rate investments of 5.2%, and the weighted average fee on new investments all declined from the prior quarter, primarily due to a higher percentage of traditional senior secured originations this quarter. The weighted average rate on investments that paid off of 7.7% was relatively consistent with the prior quarter. As a reminder, the weighted average interest rate on new investments is based on the contractual interest rate at the time of funding. For variable-rate loans, the contractual rate would be calculated using current LIBOR, the spread over LIBOR, and the impact of [Phonetic] any LIBOR floor.

The top of Slide 24 shows that GBDC's portfolio remained highly diversified by obligor with an average investment size of less than 40 basis points. Bottom of the slide shows that our overall portfolio mix by investment type has remained consistent quarter-over-quarter with one-stop loans continuing to represent our largest category at 82%.

Turning to Slide 25. 97% of our investment portfolio remains in first-lien senior secured floating rate loans and in defensively positioned and -- defensively positioned in what we believe are to be resilient industries.

Turning to slide 26. This graph summarizes portfolio yields and net investment income spreads for the quarter. Focusing first on the light blue line. This line summarizes or represents the income yield or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium, the income yield decreased by 20 basis points to 7.8% for the quarter ended March 31, primarily due to the continued decline in LIBOR. The investment income yield, the dark blue line, which includes amortization of fees and discounts, also decreased by 20 basis points, 8.2% during the quarter ended March 31st. Weighted average cost of debt for the aqua blue line also decreased by 20 basis points to 3.7%. As a result, our net investment spread, or the green line, which is the difference between the investment income yield and the weighted average cost of debt, remained stable at 4.5%.

Flipping to the next two slides, non-accrual investments as a percentage of total debt investments at cost and fair value increased modestly to 2.3% and 1.6%, respectively, as of March 31st. During the quarter, the number of non-accrual investments increased to a total of 10. As David discussed in his opening commentary, primarily due to the COVID-19 outbreak, the percentage of investments rated 3 on our internal performance ratings increased to 26.5% of the portfolio at fair value as of March 31st. As a reminder, independent valuation firms value at least 25% of our investments each quarter. For the quarter ended March 31st, the total percentage of portfolio company investments valued by the independent valuation firms was over 40%.

Slides 29 and 30 provide further details on our balance sheet and income statement as of and for the three months ended March 31st. Turning to Slide 31. This graph illustrates our long history of steady growth in NAV per share since our IPO prior to the impact of COVID-19 in the quarter ended March 31st.

Turning to Slide 32, the graph on the top summarizes our quarterly returns on equity over the past five years and the graph on the bottom summarizes our quarterly regular distributions as well as our special distributions over the past five years.

The next slide summarizes our liquidity and investment capacity as of March 31st in the form of restricted and unrestricted cash, availability on our revolving credit facilities, and debentures available through our SBIC subsidiaries. As previously highlighted, the rights offering we announced on April 1st expired on May 6th. The offering was meaningfully oversubscribed and will raise approximately $300 million in net proceeds.

Slide 34 summarizes the terms of our debt facilities as of March 31st prior to the application of any proceeds from the rights offering, as well as our focus on diversified long term and stable sources of debt capital.

With that, I'll turn it over to David for some closing remarks. David? Thanks, Ross. So to summarize today's discussion, the COVID-19 outbreak led to credit stress and wider spreads in calendar Q1 2020. This in turn caused large unrealized losses in GBDC's portfolio. Our key priority now is to proactively manage the portfolio to minimize realized credit losses. If we're successful, the rest will take care of itself. At GBDC, we have a long and industry-leading track record of keeping credit losses low, including through many prior periods of market uncertainty and volatility. We believe we entered this period with a series of compelling competitive advantages that are stronger than ever, including our experienced team, scale, sponsor relationships and industry expertise. Our track record, our competitive advantages, and the deep sense of humility should position us well to manage GBDC through these challenging times. With that, let me thank you for your time today and for your partnership. Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Finian O'Shea of Wells Fargo. Please go ahead with your question.

Finn O'shea -- Wells Fargo Securities -- Analyst

Hi, good morning. Thanks for -- good afternoon. Thanks for having me on, and hope everyone is doing well. David, first question on the rights offering proceeds. You -- I think Greg actually gave a bit of a break down there. Are you able to provide any more color on the split between debt pay-down and new commitments? And on new credit enhancing commitments, what kind of pipeline do you have now for those portfolio opportunities?

David B. Golub -- Chief Executive Officer

Great. So let me address each of those two questions. So let's talk first about rights offering proceeds. I don't have an exact answer for you right now, but I can give you a directional answer. Let's start with the goals that we're undertaking to apply the rights offering proceeds to pursue. We want to use the proceeds to fortify liquidity and to create more flexibility. So that combination will equip us to play both offense and defense within the portfolio and capitalize on, what Gregory was talking about, the attractive lending environment that we're anticipating is going to develop once the M&A market regains its footing.

So we're currently thinking is that we'll use about $140 million of the proceeds to retire several older debt facilities that are no longer in their reinvestment periods. There is the 2014 CLO that's been winding down and there's the two SLF facilities. By paying off those facilities, we create a large amount of unencumbered assets to add to what is already a large amount of unencumbered assets on GBDC's balance sheet.

We're also in discussions to expand one or more of our long-term bank facilities. In combination, the increase in unencumbered assets and the increase in size of one or more of our long-term bank facilities, should put us in a position where we have ample liquidity, we have significant availability under our debt facilities, and we have hundreds of millions in unencumbered assets. So, I'm pleased with how that's developing. We also plan to continue to explore other debt alternatives, including unsecured notes, when the market becomes more attractive for those.

Second question you asked, Finn, if I understood right, was what's the pipeline look like for these credit-enhancing incremental investments that you've heard me talk about. And the answer is good. We're in a lot of discussions right now with sponsors, as you would imagine, to address longer-term amendments, and in many cases, those amendments will include some combination of new investment by sponsors, deferral of interest by junior debt providers, some improvement in our credit position, in some cases a repricing of our loans, in some cases a new investment by us on attractive terms.

So we've got a large number of those that we're working on right now, and I think that sort of transaction is going to be the focus of what we're working on over the course of the next three months or four months. We're going to continue to look at the potential to do new deals, but the truth is there is not much new going on right now. As Gregory put it, the M&A market is dead because buyers and sellers can't agree on the day of the week. So it's both timely for us to be focused on these credit-enhancing incrementals in our own portfolio and there is also not much competition for time in respect of that.

Finn O'shea -- Wells Fargo Securities -- Analyst

Thank you. That was a lot of good color. I was -- you more or less answered sort of my next question on the Morgan Stanley credit facility amendment that was -- the relapse or collapse in commitment was pushed out just one quarter. Presumably, there would need to be cash proceeds to pay that down. You just kind of touched on that you're looking at other forms of unsecured and other debt there. But anything we should look at, given the sort of near term from here reduction in that credit capacity.

David B. Golub -- Chief Executive Officer

So I think what you're alluding to is that in our filings last quarter, we indicated that we extended, but not permanently, a portion of the Morgan Stanley Bank facility, and we are in discussions with Morgan Stanley and with our other bank providers about the right mix of commitments under our long-term bank facilities. The truth is we don't need all of that Morgan Stanley facility. So maintaining it in this current form is not something that we would like to pursue, but we've got a number of different options that are attractive. We're going to make a final decision on that in the coming weeks.

Finn O'shea -- Wells Fargo Securities -- Analyst

Okay. Thank you. And just one final for me. I'll hop back in. On the dividend, recently reduced to $0.29 as part of the portfolio update. Is the BDC able to earn that payout through the rights offering transaction?

David B. Golub -- Chief Executive Officer

I think there are a lot of factors right now that are going to impact NAV per share. We just went through a quarter where we had a very significant unrealized loss that reduced NAV per share. When I think about dividends for GBDC, what I would like to see us have is a steady dividend that slowly increases over time, and that's what we did for about 10 years prior to the COVID-19 quarter. So what we've got to assess prospectively is where is NAV per share going to settle post the uncertainties associated with COVID-19. I think once we have more clarity about that, we will be able to have a firmer answer on your question. I think right now the answer to your question is, we're just going to, along with everybody else, have to muddle through with the uncertainties created by this COVID-19 environment.

Finn O'shea -- Wells Fargo Securities -- Analyst

Yeah. That's all for me. Thanks so much.

Operator

Thank you. Our next question comes from the line Ryan Lynch of KBW. Please go ahead with your question.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Hey, good afternoon. First, I wanted to just touch again on the rights offering. I know you guys gave some general commentary on kind of the thoughts behind why that was done. But what's one of the primary reasons behind the rights offering? Did it have to do with any concerns of potential covenant breaches around any of your securitizations? And the potential impacts of diverting cash flow to pay down those securitizations versus cash flows that are required to be paid out as the dividend regarding RIC status.

David B. Golub -- Chief Executive Officer

No, I don't think it was quite as you described it. I would describe it somewhat differently. I would say that COVID-19 created an environment in which we saw a much wider range of potential future scenarios than we typically do. So if you typically think about the future in terms of a bell curve and you shape your base case assumptions around the middle of the bell curve, you can create an upside case and a downside case that are a little off of that base case and cover the vast preponderance of potential scenarios.

In a COVID-19 world, you can't do that. The curve is a very different shape. It's much flatter with much fatter tails. So as an asset manager in a COVID-19 world, we came to the conclusion that it made sense to have more flexibility in our capital structure to be able to manage effectively through a much wider array of different scenarios.

Now in some of those scenarios, we were concerned that we wouldn't have sufficient capital to be able to do these credit-enhancing incremental investments and simultaneously to be able to make best use of the low-cost liabilities that GBDC contractually has. So I'm not saying, Ryan, that your question isn't the right question. I think that those concerns are among a whole slew of concerns that drove us to conclude that the rights offering was the right thing to do. I put that larger group of concerns under the rubric of an increased level of uncertainty in the environment and a desire to have a balance sheet that would work well in the context of a wider array of different forward scenarios. I feel very good about where we are now.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Okay. Do you think that longer-term, this will have you reevaluate how you compose the right side of your balance sheet, given that you guys ran with zero unsecured notes or unsecured debt, which a lot of other BDCs have chosen to make that part of their liability structure, which is obviously the higher-cost debt which is bad during the uptimes, but in downtimes like this it creates a significant amount of unencumbered assets that become very important in a downturn like this. And I don't know if we're going to see BDCs do dilutive rights offerings like this, especially the ones with significant amounts of unsecured debt. So do you think that you will rethink your liability structure going forward as far as the composition of it goes?

David B. Golub -- Chief Executive Officer

We had already rethought our liability structure. And as I commented on in the September quarter discussion and the December quarter discussion, we had begun a serious evaluation of getting an investment grade rating and of issuing unsecured notes. So I'm a believer in unsecured notes. I think that we have a place in the liability structure of a scaled BDC and I'm sure it's something we're going to be seeking to explore subject to that market normalizing in terms of costs.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Okay. And then, just kind of a technical one. With the unfunded commitments, I think you guys had $152 million at the end of the quarter. What was the level of unfunded commitments that were revolvers or commitments that were kind of at the full discretion of the borrower to draw down versus commitments that had some sort of like delayed-draw term loan or were not at a full discretion of the borrower to drawdown?

David B. Golub -- Chief Executive Officer

The vast preponderance of our undrawn commitments at quarter end were in the form of acquisition focused DDTLs. I think we were down to $16 million of revolvers that were undrawn. Most obligors drew their revolvers in March of 2020.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Okay. And then --

Ross A. Teune -- Chief Financial Officer and Treasurer

We did break that down on our Q this quarter, Ryan. So it's -- yeah, $17.5 million was the exact number of unfunded revolvers.

David B. Golub -- Chief Executive Officer

Thank you, Ross.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Yeah, thank you. I didn't see that. Okay. And then, one other one. As far as calendar second quarter, so the June quarter ended, assuming that there is no change in fair value for your portfolio, it's just held constant, do you anticipate the total return look back feature of your incentive fee structure kicking in holding everything else equal? I'm just trying to get a feel for what you guys are looking at versus my model.

David B. Golub -- Chief Executive Officer

Let us review that with you offline. I think we still have some cushion before the NII incentive fee look back would restrict NII incentive fees. But I'll also tell you that we don't anticipate that NII incentive fees are going to be terribly high in the near term.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Okay. Yeah, it would be great if you could follow up with that.

David B. Golub -- Chief Executive Officer

Because of the hurdle.

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Yeah, OK. Thanks for taking my questions. I appreciate your time. I'll hop back in the queue.

Operator

Thank you. Our next question comes from the line of Matt Tjaden of Raymond James. Please go ahead with your question.

Matt Tjaden -- Raymond James -- Analyst

Hi, everyone. Afternoon and hope all is well. So just two quick ones. The first one, revolving around sponsor attitude and willingness to put in more capital. So just any general commentary you can give there? And specifically, I guess what we would be interested in is whether or not there is any difference in willingness to put in more capital by industry. So, for example, for a retail portfolio company versus more of a staple, say, healthcare, is there any difference in willingness to put in more capital? Thank you.

David B. Golub -- Chief Executive Officer

I would say, there's not a difference based on industry. What matters most in discussions with sponsors about level of sponsor support are two factors. The first factor is to what degree they like the company, see the capacity for its performance to rebound, and for it to be a successful investment for them. Sponsors, for obvious reasons, they're economic animals. They want to focus their resources on those companies that are going to do well for them.

The second issue, which comes up sometimes, infrequently but sometimes, is that a particular investment comes from an older fund, and the sponsor has limited resources remaining that are available to it in that older fund, and it may have some competing needs in the context of COVID-19. So where we anticipate some of the most challenging conversations with sponsors are those that are in the second category, where the sponsor would like to provide support, but doesn't have the capacity to do so to the degree it would like to.

I would say on balance, and look, it's still early days, but on balance, we've been very gratified by the way in which sponsors have engaged with us in a very solutions-oriented collaborative fashion.

Matt Tjaden -- Raymond James -- Analyst

Great, that's helpful. And then last one, just any color you can provide on the scale of amendment reliefs within the quarter and then through April, whether or not that has sped up would be very helpful. Thank you.

David B. Golub -- Chief Executive Officer

We had relatively little in terms of amendment activity in calendar Q1. There were roughly a dozen companies that were heavily impacted by COVID-19 where we agreed to reduce the cash pay spread of our loans and to have a portion of the spread be payable in PIK. Virtually, all -- I think all but one of our borrowers fully paid their principal and interest in the quarter. I anticipate there will be a need for a lot of amendments going forward.

I think most of those amendments are going to be in calendar Q3 actually as opposed to calendar Q2, because bear in mind that for most companies they had two good months and one bad month in Q1. So Q1 financial results will, in the preponderance of cases, not trip covenants. Q2 financial performance, however, is going to be harder for many companies not to trip covenants. So those financial statements would be due over the summer and that would be when I would anticipate the biggest crunch of amendments would be needed.

Matt Tjaden -- Raymond James -- Analyst

That's all for me. Thanks, guys. Appreciate it.

Operator

[Operator Instructions]

David B. Golub -- Chief Executive Officer

And Celina, let's do one more.

Operator

And at this present time, no one has registered for any questions. Please continue with your presentation or closing remarks.

David B. Golub -- Chief Executive Officer

Excellent. I just want to thank everyone [Technical Issues] we wanted to provide a lot of data to help everyone understand the COVID-19 consequences and challenges prospectively. Hope this was helpful. Thank you for listening. Thank you for your partnership, and as always, please feel free to reach out to us if you have further questions. Look forward to chatting next quarter.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

David B. Golub -- Chief Executive Officer

Gregory A. Robbins -- Managing Director

Jonathan D. Simmons -- Director, Corporate Strategy

Ross A. Teune -- Chief Financial Officer and Treasurer

Finn O'shea -- Wells Fargo Securities -- Analyst

Ryan Lynch -- Keefe, Bruyette & Woods -- Analyst

Matt Tjaden -- Raymond James -- Analyst

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