425: Golub Capital BDC (GBDC) Anticipates Merger with GBDC 3, Projects NAV Accretion and Discusses Strategic Benefits

Golub Capital BDC (GBDC) held a conference call on May 7, 2024, discussing the proposed acquisition of Golub Capital BDC 3, Inc. (GBDC 3) and its anticipated benefits, including NAV accretion and reduced incentive fees.

Summary

• Golub Capital BDC (GBDC) discussed its financial results for the quarter ended March 31, 2024, and the proposed merger with Golub Capital BDC 3, Inc. (GBDC 3) during a conference call on May 7, 2024.
• The merger agreement is definitive, with GBDC as the surviving company, pending stockholder approvals and customary closing conditions.
• GBDC's investment adviser, GC Advisors LLC, has agreed to reduce GBDC's income and capital gain incentive fee rates from 20% to 15% in connection with the merger, effective January 1, 2024, by waiver, becoming permanent upon closing.
• The company anticipates the merger will close in the second calendar quarter of 2024.
• The Board increased the regular quarterly distribution from $0.37 to $0.39 per share in conjunction with the merger announcement and fee reduction.
• GBDC anticipates approximately $0.38 per share of NAV accretion, or about 2.5%, based on GBDC's 12/31/23 NAV and a stock price of $16.60 as of April 9, 2024.
• Based on GBDC's closing stock price of $17.09 on May 6, 2024, the NAV accretion could be approximately $0.50 per share, or about 3.3%.
• The 2024 Special Meeting of Stockholders is scheduled for May 29, 2024, to vote on the merger.
• GBDC believes it is well-positioned to face market headwinds and expects the post-merger company to be more resilient.
• Management does not anticipate significant shareholder turnover post-merger, similar to the GCIC merger.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook due to the anticipated merger benefits, reduced fees, and increased distribution. Management's confidence in the company's resilience and shareholder alignment further supports a favorable sentiment.

Positives

• The merger with GBDC 3 is expected to result in NAV accretion for GBDC shareholders.
• The reduction in incentive fee rates from 20% to 15% will benefit GBDC shareholders.
• The increase in the regular quarterly distribution from $0.37 to $0.39 per share provides immediate value to shareholders.
• GBDC's focus on the core middle market provides insulation from the resurgence of a strong BSL market.
• Management anticipates minimal shareholder turnover post-merger.

Negatives

• The merger is subject to stockholder approvals and customary closing conditions, which could potentially delay or prevent the transaction.
• There is a risk of shareholder turnover post-merger, although management expects it to be minimal.

Risks

• The document contains forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially.
• The merger is subject to stockholder approvals and customary closing conditions.
• Market headwinds could impact the performance of the post-merger company.

Future Outlook

GBDC believes it is well-positioned to face market headwinds and expects the post-merger company to be more resilient. The merger is anticipated to close in the second calendar quarter of 2024.

Management Comments

• While we're proud of GBDC's results for the quarter, we're even more excited about the two strategic announcements GBDC made in January 2024.
• With a 1% management fee, a 15% incentive fee, an 8% hurdle rate and a cumulative since-inception incentive fee cap, GBDC has set a new gold standard for shareholder alignment among publicly traded BDCs.
• We expect post-merger GBDC to be more resilient than ever especially in the context of the current market backdrop.
• I'm optimistic that it's not going to be exciting [regarding shareholder turnover].

Industry Context

The announcement highlights a trend of BDC consolidation and fee structure adjustments to enhance shareholder alignment. GBDC's focus on the middle market differentiates it from competitors more heavily invested in larger companies and BSL market.

Comparison to Industry Standards

• GBDC's reduction in management and incentive fees positions it favorably compared to other publicly traded BDCs.
• The 1% management fee and 15% incentive fee, along with an 8% hurdle rate, are competitive and shareholder-friendly.
• Other BDCs, such as Ares Capital Corporation (ARCC) and Main Street Capital (MAIN), have different fee structures and investment strategies, making direct comparisons complex.
• The estimated NAV accretion of 2.5% to 3.3% is a positive indicator compared to industry averages for similar merger transactions.

Stakeholder Impact

• Shareholders are expected to benefit from NAV accretion, reduced fees, and increased distributions.
• The post-merger company is expected to be more resilient, benefiting all stakeholders.
• The focus on the middle market may impact borrowers and sponsors in that segment.

Next Steps

• Stockholders are urged to vote on the proposed merger at the Special Meeting of Stockholders on May 29, 2024.
• The company anticipates closing the merger in the second calendar quarter of 2024.

Key Dates