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Golub Capital BDC (GBDC) Merger Agreement with Golub Capital BDC 3, Inc. Conference (Transcript)

Golub Capital BDC (GBDC)

Merger Agreement with Golub Capital BDC 3, Inc. Conference Call

Company Participants

David Golub - CEO

Matthew Benton - COO

Christopher Ericson - CFO & Treasurer

Conference Call Participants

Finian O'Shea - Wells Fargo

Erick Miller - Vanguard

Presentation

Operator

Hello everyone, and welcome to GBDC's Special Investor Conference Call, related to the proposed merger between Golub Capital BDC, Inc. and Golub Capital BDC 3, Inc.

Before we begin, I'd 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 of 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 GBDC's SEC filings.

For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the home page of our website, which is www.golubcapitalbdc.com and click on the Events/Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded.

With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

David Golub

Hello everybody, and thanks for joining us today.

I'm joined by Chris Ericson, our Chief Financial Officer; and Matt Benton, our Chief Operating Officer.

We're pleased to announce today that GBDC has entered into a merger agreement with Golub Capital BDC 3 or GBDC 3 for short. Our goal in today's call is to explain the rationale for the merger, to announce a reduction in GBDC's incentive fee rate in connection with the merger and to talk about the expected implications for GBDC going forward. We posted a short presentation about the proposed merger on GBDC's website, and we'll be referring to that presentation throughout the call today. After we go through our prepared remarks, we'll be happy to take your questions.

Let's start with some context. Our philosophy about issuing new GBDC shares, it's been consistent since the company's IPO in April of 2010. And the framework's simple. We strive to issue new shares if it's good for existing stockholders, it's good for new stockholders and it's good for GBDC. It's got to be good for all three. Long time GBDC stockholders will recall that this is the framework that we applied to GBDC's merger with Golub Capital Investment Corporation, which we also sometimes refer to as GBDC 2, which we announced in November of 2018.

We think the merger with GBDC 2 has proven to be a win-win-win. It was good for GBDC stockholders, it was good for GBDC 2 stockholders and it was good for GBDC. So we applied that same framework throughout our process of evaluating a potential merger with GBDC 3. GBDC's Board, along with the independent directors’ financial advisor, legal counsel, we went through a careful methodical process and concluded that a merger with GBDC 3 meets the frameworks criteria and results in a very exciting opportunity for GBDC.

Let me walk you through the terms of the proposed merger, and then let me review why GBDC's Board and our advisors believe it's compelling. Let's turn to Slide 4, which briefly describes the transaction. The transaction is structured as a stock-for-stock merger. And each GBDC 3 stockholder will be receiving a number of GBDC shares that's going to be determined at closing. I'll talk in a few moments about how that exchange ratio will be determined.

The combined company will continue to trade under the ticker, GBDC. And while post-merger, GBDC is going to look a lot like pre-merger GBDC, one important difference is that post-merger GBDC's income and capital gains incentive fee rates is going to be lower. It's going to go from 20% to 15%. The reduction in incentive fee rates will become permanent when the merger closes, but it's going to be effective as of January 1, 2024, as GC Advisors has agreed to unilaterally waive incentive fees above 15% for periods during the pendency of the merger.

We'll talk about this fee structure change in more detail later, but we think this change is very significant. It not only better aligns the manager with stockholders but it positions GBDC to deliver leading risk-adjusted returns over different economic and rate cycles, given our core focus on investing at the top of the capital structure by first-lien, first-out senior secured floating rate loans to resilient companies backed by partnership-oriented private equity sponsors.

GBDC's standalone earnings power has increased meaningfully in the context of higher base rates. This increased level of profitability was further enhanced by our decision to reduce the base management fee to 1% last summer. GBDC's earnings power is going to be further meaningfully increased via this merger and via the incentive fee reduction to 15% from 20%.

Given this increase in earnings power, the Board approved and declared an increase in the quarterly base distribution per share from $0.37 per share to $0.39 per share beginning with the March 2024 distribution. The Board expects to continue to apply its supplementary distribution framework to the degree earnings for the fiscal quarter ended December 31, 2023 exceed the $0.37 per share quarterly distribution that was paid on December 29, 2023.

Moreover the Board announced its intention to declare a series of special distributions related to undistributed taxable income. These special distributions are expected to be paid in three equal quarterly installments of $0.05 per share for a total of $0.15 per share. And the first of these special distributions is expected to have a record date shortly after the proposed merger closes, with the next two in subsequent quarters.

That said, the Board reserves the right to revisit its intentions with respect to the dividend if market conditions or GBDC's prospects change materially. As for next steps, the immediate next step is that GBDC and GBDC 3 expect to file a joint proxy and registration statement in February and begin the process of soliciting stockholder approval for the merger. The transaction's anticipated to close in the second calendar quarter of 2024, subject to regulatory and stockholder approvals and other customary closing conditions.

Now let me pass the microphone to Matt Benton, who's going to detail the proposed merger consideration and how it's designed to deliver a win-win. Matt's also going to go over the merger rationale in more detail.

Matthew Benton

Thanks, David.

Let's turn now to Slide 5 to discuss the proposed merger consideration. The transaction contemplates GBDC issuing shares to GBDC 3 stockholders in exchange for their GBDC 3 shares. The exchange ratio will be determined by a formula.

Before we go through the math of the exchange ratio, let me describe the logic behind the formula. At a high level, the merger has been structured to be NAV neutral to GBDC at a minimum with the potential to be NAV accretive, depending on GBDC's ultimate share price at the time of the merger closing. In essence, the formula does a couple of things. First, the formula gives GBDC 3 stockholders' consideration at least equal to GBDC 3's NAV per share at closing.

Second, if GBDC is trading at a premium to its NAV per share immediately prior to closing, the formula gives GBDC 3 stockholders' incremental consideration up to a limit. In other words, if GBDC 3 issued shares that are premium to its NAV in the proposed transaction, it would be accretive to GBDC. A portion of that accretion would flow to GBDC 3 stockholders in the form of incremental merger consideration via a premium paid.

Slide 5 shows how the math works out in three representative scenarios and using September 30, 2023 NAVs as a proxy for NAVs determined at merger close. The only difference between these scenarios is the assumption for GBDC's market price per share and corresponding price to NAV ratio at the time the exchange ratio is ultimately determined. ...

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