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1 National Securities Research Established 1947, Member FINRA/SIPC ` Goldman Sachs BDC, Inc.. October 12, 2015 BUY (GSBD, $19.79) Solid Origination Platform, Sound Asset Quality, and Potential for Significant Portoflio Growth - Initiating With A BUY Rating And $23 Price Target. Christopher R. Testa ctesta@nationalsecurities.com Investment Conclusion. We are initiating coverage of Goldman Sachs BDC Inc. (GSBD) with a BUY rating and $23 price target. GSBD has a unique origination platform which, as it evolves, should lead to less reliance on sponsor originations going forward. Goldman has the ability to leverage its 500 private wealth management professionals across 13 cities in the United States to source non-sponsor, family owned originations that are generally off the radar of potential competitors. This also has the potential to insulate this part of originations from pricing pressure and should help maintain a steady NIM (net investment margin). GSBD has a shareholder friendly structure. Firstly, the company s administrative expenses related to support by Goldman Sachs Asset Management (GSAM) as well as the costs of the salaries of the CEO, CFO, and teams are entirely paid for by GSAM. Also, the Board is entirely independent. GSBD has moderate leverage and significant spare capacity on its credit facility. This, combined with sound asset quality (no non-accruals since going public) further enhances our belief that the stock will continue to trade at or above NAV permitting accretive equity issuance when needed to grow the portfolio significantly. We also anticipate GSBD can increase its quarterly dividend by $0.02/share in 1Q16 to $0.47. Although Goldman does have a significant second lien position in its portfolio it is worth noting that the risk profile of this book, particularly attachment point leverage and cyclicality of the sectors lent to, is largely similar to the first lien investments in the portfolio. Our $23 price target implies an estimated 2016 P/NII of 11.0x, dividend yield of 7.8%, and P/NAV of 1.13x compared to the BDC sector averages of 8.5x, 11.5%, and 0.85x, respectively. Source: S&P Capital IQ, National Securities Corporation Estimates Please see pages for Important Disclosures 1

2 GSBD should have a stable NIM aided by unique origination sourcing. Goldman s BDC has a unique, proprietary sourcing network for family owned businesses through its large network of 500 private wealth managers across the United States. The ability to source these investments is particularly advantageous because these deals are not shopped around per se like some in the sponsor finance arena. We project that NIM will finish 2015 at 9.91%, up a full 100 bps from the 2014 level of 8.81%. We then expect NIM will decline modestly in 2016 to 9.61%. For 2015 and 2016 we estimate all-in effective yields to be 10.88% and 10.58%, respectively, from 9.41% in GSBD can likely grow the portfolio significantly through the remainder of 2015 and We anticipate that GSBD will finish 2015 with a portfolio fair value of $1.21 billion and 2016 at $1.57 billion, up from $943.5 million at year end We expect that total debt issuance for 2015 and 2016 will be $96.1 million and $79.8 million, respectively. For 2015 and 2016 we forecast net equity issuance of $133.9 million and $190.0 million, respectively. Goldman has solid asset quality and a portfolio that is not as risky as it appears on the surface. Goldman has not had asset quality issues since going public. Although the company has sizable portfolio allocations to second lien debt, the company s second lien structures are similar to first lien investments in terms of attachment point leverage and pricing. With a portfolio only 30.1% senior secured first lien by fair value, GSBD s weighted average debt/ebitda (earnings before interest, taxes, depreciation, and amortization) stood at only 4.2x as of 6/30/15 which is similar to a first lien portfolio. For 2Q15 the yield by cost on second lien debt was only 30 bps higher than senior secured first lien debt. We anticipate that GSBD can increase its quarterly dividend by 2 cents per share in We think at that as the BDC moves into its targeted leverage range (D/E between 0.50x-0.75x) and the portfolio grows, the steady state of interest income, excluding fees, will be able to support an increased dividend of $0.47/share on a quarterly basis from $0.45/share. For 2015 we anticipate the company will pay out 93% of NII and in 2016 will pay out 90% of NII. The company paid out 95% of NII in 2014 although the dividend ramped throughout the year and there was a special dividend in 4Q14. Currently, shares are at 2% premium to NAV compared the average 15% discount in the BDC space and the P/NII is 9.8x for GSBD while 8.5x for the BDC space. We think that GSBD deserves a premium to the sector as the company has conservative attachment point leverage, sound asset quality, and better growth potential than most of the BDC sector. While the NII/share growth of 8.1% we expect in 2016 compared to 2015 is not staggering, it is respectable in an increasingly challenging environment for middle market lenders. October 12,

3 Company Description Goldman Sachs BDC, Inc. (GSBD) is a Business Development Company with headquarters in New York, NY. The company originates loans across the capital stack including first and second lien senior secured debt and unitranche investments. The company went public on March 18, The company is managed by Brendan McGovern, CEO, Jonathan Lamm, CFO, and Jon Yoder, COO. Mr. McGovern joined Liberty Harbor (name of BDC prior to going public) in 2006 and before this was at Dresdner Kleinwort as a research analyst. Prior to Dresdner, he was Managing Director at Amaranth Advisors where he worked on multiple creditrelated desks. Mr. Lamm has been CFO of Liberty Harbor since March 2013 and joined the firm in He has been a vice president of Goldman Sachs (NYSE: GS-NR- $180.23) since Mr. Yoder has been COO of Liberty Harbor since March 2013 and has been at the firm since He joined Goldman in 2005 and before this was at Paul, Weiss, Rifkind, Wharton & Garrison, LLP since Exhibit 1. Investment Portfolio at Fair Value as of 6/30/15 Source: Company Reports GSBD s portfolio had a fair value of $1.03 billion as of June 30, 2015 with 8.8% in diversified telecommunication services, 7.7% in real estate management & development, and 7.2% in internet software & services. The portfolio had a weighted average reported yield by cost of 11.3% as of 2Q15. Goldman primarily invests in debt although it does have a small preferred stock position at 2.5% of the portfolio at fair value as of 2Q15. Interest income was 92% of revenue in 2Q15. GSBD is externally managed by its investment advisor and pays both a base fee and incentive fee. The base fee is 1.50% of gross assets in arrears. The incentive fee is paid only if GSBD passes a designated hurdle rate of 7%. Essentially, GSBD s NII less the incentive fee must post a return on prior period NAV greater than 7% before any fee is October 12,

4 paid. If this return exceeds 8.75%, the investment advisor earns an even greater fee and will get 20% of the difference between the pre-incentive fee NII and the 7% return plus 20% of the difference between the pre-incentive NII and the 8.75% upper hurdle. WE ARE INITIATING COVERAGE WITH A BUY RATING AND $23 PRICE TARGET In order to arrive at our target price we utilize a variant thesis, expected value analysis of our base case plus a bull case and bear case. While the valuation is heavily weighted towards the base case (80%) we assign 10% weights to the upside and downside scenarios in order to capture the full spectrum of possibilities that the company may encounter over the next couple of years. We prefer to value GSBD and BDCs in general on a NII basis as opposed to NAV basis because fair value marks that flow into equity under GAAP are difficult to forecast, especially with private investments, and do not necessarily reflect the true fundamentals of the company. Exhibit 2: Expected Value Analysis Source: National Securities Corporation Estimates The above table represents our assumptions which drive our valuation. For example, in our base case for 2016, we get a result of adjusted NII/share of $2.09 if investments end the year at $1.57 billion and yield is 10.58%, the cost of funds is 2.95%, the economic return is 12.5%, cost/fv is 100.2%, and total distributions are $1.88/share. We do this for both years and for three scenarios. Based upon each scenario s performance it is assigned a multiple and discounted back at our calculation for the weighted average cost of capital (WACC) and then multiplied by the probability to arrive at our expected value. The sum of the expected values equals our price target. Our $23 price target implies an estimated 2016 P/ NII of 11.0x, dividend yield of 7.8%, and P/NAV of 1.13x compared to the BDC sector averages of 8.5x, 11.4%, and 0.85x, respectively. The economic return is calculated by taking year-end NAV minus the beginning of the year NAV and adding distributions divided by the beginning of the year NAV. October 12,

5 GSBD S PORTFOLIO IS 86% FLOATING RATE AND 30% FIRST LIEN SENIOR SECURED LOANS GSBD has continued to rotate its portfolio out of second lien debt and has significantly increased its unitranche originations, an in-demand product especially for sponsor finance. The first lien composition is down from 2013 levels but has steadily trended up from year end 2014 levels as shown below in Exhibit 3. Exhibit 3: Portfolio Mix Source: Company Reports, National Securities Corporation While we value BDCs on a NII basis, it is significant to note that fair value marks 1) impact GAAP NAV, which influences regulatory capital levels and 2) if truly reflective of portfolio performance, give an indication to potential losses the BDC may experience. GSBD is focused on generating current income that will be distributed to shareholders although it still realizes gains and losses on investments and the unrealized gains and losses could still either increase or decrease equity. Thus, even if the investments that are marked down continue to pay contractual interest and principal as scheduled, negative fair value marks could hinder the company s ability to issue equity above NAV and cause D/E to increase. These scenarios are reflected in Exhibit 4 below. Exhibit 4: Impact of FV Marks on NAV, Leverage, and Returns Source: Company Reports, National Securities Corporation Estimates October 12,

6 With a 10% decline in the fair value of investments, D/E increases from 0.43x to 0.50x which increases leverage significantly and the hit to NAV / share is $2.77. Negative fair value marks could potentially cause the company to trade at a more discounted NAV multiple which could restrain the company s ability to issue equity on an accretive basis, although we do not think GSBD will need to issue further equity through the remainder of GSBD s asset quality is strong with no non-accrual investments for all reported periods since going public. Also, the lowest internal investment ranking of 4 has been zero for all reported periods since going public. However, the ranked 3 bucket has been 6.5%, 7.0% and 9.4% of investments in 4Q14, 1Q15, and 2Q15, respectively. There have been negative fair value marks although this has improved significantly in 2Q15 as a result of positive marks on the first lien senior secured portfolio. Exhibit 5: Unrealized Gains/(Losses) & Cost/FV Source: Company Reports, National Securities Corporation There is $4.5 million in unrealized losses stemming from common equity. The position in Lone Pine Resources preferred stock has a slight unrealized gain but the common stock is marked at a fair value of zero and is the entire unrealized loss of common equity. Exhibit 6: Reason for Negative FV Marks on Common Equity Source: Company Reports, National Securities Corporation October 12,

7 Exhibit 7: Portfolio Metrics Source: Company Reports, National Securities Corporation Despite GSBD being 30.1% first lien senior secured, we think that the inherent risk in the portfolio is overstated. Generally first lien investments have attachment point leverage of 3.5x-4.0x in the capital structure. Despite GSBD having 36.5% of the portfolio in 2 nd lien debt and 26.9% in 1 st lien last out unitranche, the company has maintained conservative attachment point leverage and yields by cost. Exhibit 8: Yield by Cost Source: Company Reports October 12,

8 Exhibit 9: Attachment Point Leverage Source: Company Reports, National Securities Corporation Exhibit 10: Portfolio Debt Investments Source: Company Reports, National Securities Corporation October 12,

9 GSBD HAS THE CAPACITY TO GROW THE PORTFOLIO SIGNIFICANTLY THROUGH 2016 Goldman has the ability to grow its portfolio to $1.21 billion by year end 2015 and then to $1.57 billion by year end 2016, from $943.5 million at year end We anticipate that the company will be able to continue to utilize its $560 million revolving credit facility to partially fund growth. Given our belief that the stock is likely to trade at NAV, the company should be able to deleverage the balance sheet and pay down the revolver before taking on more debt again to continue growth. Thus, we do not think the capacity on the revolver will need to be raised through We expect that GSBD will issue a total of $96.1 million and $79.8 million of debt in 2015 and 2016, respectively. For 2015 and 2016 we anticipate net equity issuance of $133.9 million and $190.0 million, respectively. Exhibit 11: Investment Flow Source: Company Reports, National Securities Corporation Estimates Exhibit 12: Capital Allocation Source: Company Reports, National Securities Corporation Estimates For purposes of calculating shares issued, we use the prior quarter NII/share estimate discounted by 10% and apply a 9% required ROE to the annualized discounted NII/share. Changes in share count, including our estimates are shown below in Exhibit 13. October 12,

10 Exhibit 13: Share Count Changes Source: Company Reports, National Securities Corporation Estimates GSBD SHOULD BE ABLE TO MAINTAIN NIM AND INCREASE RETURNS ON EQUITY AS LEVERAGE INCREASES Total D/E went to 0.43x in 2Q15 from 0.33x in 1Q15. Despite the increased leverage, NII ROAE fell by 90 bps mostly reflecting a 10 bps drop in all-in effective yield. We expect that NII ROAE will finish 2015 and 2016 at 9.6% and 10.1%, respectively. For 2015 and 2016 we expect average D/E of 0.47x and 0.55x, respectively. Exhibit 14: Leverage & NII ROAE Source: Company Reports, National Securities Corporation Estimates We think that GSBD has a very unique origination platform. The company is able to source investments that many other middle market lenders do not see. Goldman Sachs Asset Management has 13 private wealth management offices in the United States with 500 professionals. The rates earned on these non-sponsor, directly originated and sourced investments should be higher than sponsored deals which currently comprise roughly 80% of investments. However, it seems plausible that non-sponsor business can become 35%- 40% of total investments from 20% today if private wealth management continues to grow as it has. October 12,

11 In addition, Goldman has invested in infrastructure necessary to truly originate direct loans. The BDC has 32 investment professionals, 17 are in direct lending, and 5 cover sponsor relationships and deal sourcing. Also, GSBD has a joint venture (JV) with Cal Regents in its senior credit fund (SCF). Cal Regents has $9 billion in private equity assets and has good relationships with sponsors although GSBD does the majority of investment sourcing and origination. Exhibit 15: GSAM Assets Under Supervision Source: Company Reports, National Securities Corporation As a result of this unique sourcing and origination platform, we project that NIM will finish 2015 at 9.91%, up a full 100 bps from the 2014 level of 8.81%. We then expect NIM will decline modestly in 2016 to 9.61%. For 2015 and 2016 we estimate all-in effective yields to be 10.88% and 10.58%, respectively, from 9.41% in Exhibit 16: NIM Source: Company Reports, National Securities Corporation Estimates October 12,

12 GSBD HAS A SHAREHOLDER FRIENDLY STRUCTURE IN PLACE Goldman has a shareholder friendly structure in place. The company is externally managed but is under GSAM. The BDC does not get charged for administrative support from GSAM. Even the executive officers salaries are paid by GSAM, not GSBD. The Board of Directors is completely independent as well, with no executive officers sitting on the Board. Additionally, the company has a share repurchase program in place in the event the stock falls below NAV enough to provide for a meaningful return on capital for shares repurchased. GOLDMAN HAS THE POTENTIAL TO INCREASE THE DIVIDEND IN 2016 We think that GSBD will increase its quarterly dividend of $0.45/share to $0.47/share in 1Q16 as a result of higher, steady-state earnings power from the portfolio. We expect that GSBD will pay out 93% and 90% of NII in 2015 and 2016, respectively, from 95% in Exhibit 17: Dividends & Coverage Source: Company Reports, National Securities Corporation Estimates GSBD S PORTFOLIO IS POSITIONED WELL FOR A RISING RATE ENVIRONMENT GSBD s portfolio is 86% floating rate with spreads over LIBOR or the Fed funds rate. Some of the investments have LIBOR floors. Currently, GSBD s debt funding is 100% floating rate although this may change over time if the company introduces some fixed rate debt in the future. The company anticipates declining NII through the first 100 bps of rate increases due to the floors in place on its investments coupled with a floating rate credit facility with no floor. Beyond the 200 bps increase though, GSBD foresees increasing NII. October 12,

13 Exhibit 18: Interest Rate Shock Source: Company Reports Exhibit 19: Select Data and Ratios Source: Company Reports, National Securities Corporation Estimates INVESTMENT POSITIVES: Potential to Grow the Portfolio Significantly We project that GSBD will finish 2015 and 2016 with a portfolio fair value of $1.21 billion and $1.57 billion, respectively from $943.5 million at year end We project Goldman can fund this growth with $96.1 million of debt and $133.9 million of equity in In 2016 we anticipate funding of $79.8 million of debt and $190.0 million of equity. Unique Origination Platform for Better Pricing GSBD can likely maintain pricing on its loans given the unique sourcing of investments. We think as these deals comprise a larger portion of total originations relative to sponsor deals NIM will be largely maintained despite competitive pricing pressures in the middle market currently. October 12,

14 Potential to Increase the Dividend in 2016 GSBD paid $1.69 in total distributions for 2014, paying out 95% of NII. We expect the company will increase the dividend in 1Q16 to $0.47/share from $0.45/share currently. We expect NII payout ratios will be 93% and 90%, respectively. INVESTMENT RISKS: Increased Competition and Pricing Pressure Many BDCs have seen yields and NIM under pressure due to the competitive environment persisting in the middle market. While Goldman can continue to utilize more of its private wealth management sourced originations to offset this to an extent, the fact remains that there are still many competitors who have been willing to take on greater attachment point leverage at worse pricing. Rising Interest Rates GSBD is currently 100% funded with a credit facility floating off LIBOR and has 86% of its portfolio as floating rate as of 2Q15. However, due to LIBOR floors Goldman anticipates decreasing NII if there are interest rate increases of 100 bps. Beyond 200 bps, GSBD anticipates increasing NII. October 12,

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18 Note: Price/NII reflects consensus NII estimate provided by S&P CapitalIQ * Price reflects closing price as of 10/12/15 Source: S&P CapitalIQ October 12,

19 IMPORTANT DISCLOSURES: National Securities Corporation 410 Park Avenue, 14th Floor, New York, NY REG AC ANALYST CERTIFICATION The Estimates analyst named on this report, Christopher Testa, certifies the following: (1) that all of the views expressed in this Estimates report accurately reflect his personal views about any and all of the subject securities or issuers; and (2) that no part of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by him in this Estimates report. IMPORTANT DISCLOSURES This publication does not constitute and should not be construed as an offer or the solicitation of any transaction to buy or sell any securities or any instruments or any derivatives of the securities mentioned herein, or to participate in any particular trading strategies. Although the information contained herein has been obtained from recognized services, and sources believed to be reliable, its accuracy or completeness cannot be guaranteed. Opinions, estimates or projections expressed in this report may make assumptions regarding economic, industry, company and political considerations, and constitute current opinions, at the time of issuance, which are subject to change without notice. This report is being furnished for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Any recommendation(s) contained in this report is/are not intended to be, nor should it / they construed or inferred to be, investment advice, as such investments may not be suitable for all investors. When preparing this report, no consideration to one s investment objectives, risk tolerance and other individual factors was given; as such, as with all investments, purchase or sale of any securities mentioned herein may not be suitable for all investors. By virtue of this publication, neither the Firm nor any of its employees shall be responsible for any investment decisions. Before committing funds to ANY investment, an investor should seek professional advice. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice, or to be used by anyone to provide tax advice. Investors are urged to consult an independent tax professional for advice concerning their particular circumstances. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, either expressed or implied, is made regarding future performance. National Securities Corporation (NSC) and its affiliated companies, shareholders, officers, directors and / or employees (including persons involved with the preparation or issuance of this report) may, from time to time, have long or short positions in, and buy or sell the securities or derivatives (including options) thereof, of the companies mentioned herein. One or more directors, officers, and / or employees of NSC and its affiliated companies, or independent contractors affiliated with NSC may be a director of the issuer of the securities mentioned herein. NSC and / or its affiliated companies may have managed or October 12,

20 co-managed a public offering of, or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this report within the last three (3) years, or may, from time to time, perform investment banking or other services for, or solicit investment banking business from any company mentioned in this report. This research may be distributed by affiliated entities of National Securities Corporation (NSC). Affiliated entities of NSC may include, but are not limited to, vfinance Investments, Inc., National Asset Management and other subsidiaries of our parent company, National Holdings Corporation. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce if any, may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. Furthermore, NSC may follow emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. This report does not take into account the particular investment objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, the investor should exercise independent judgment as to whether it is suitable in light of his/her particular circumstances and, if necessary, seek professional advice. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Additional information relative to securities, other financial products, or issuers discussed in this report is available upon request. Neither this entire report, nor any part thereof, may be reproduced, copied or duplicated in any form or by any means without the prior written consent of National Securities Corporation. All rights reserved. NSC is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corporation (SIPC). For disclosures inquiries, please call us at and ask for your NSC representative, or write us at National Securities Corporation, Attn. Al Scerbo - Supervision Department, 410 Park Avenue, 14th Floor, New York, NY 10022, or visit our website at Estimates Disclosures Legend Relevant Disclosures: 1 National Securities (NSC) is a market-maker in the securities of the subject company 2 In the past twelve (12) month period, NSC and / or its affiliates have received compensation for investment banking for services from the subject company 3 In the past twelve (12) month period, NSC and / or its affiliates have received compensation from the subject company for services other than those related to investment banking 4 In the past twelve (12) month period, NSC was a manager or a co-manager of a public offering of one or more of the securities of the issuer 5 In the past twelve (12) month period, NSC was a member of the selling group of a public offering of the security (ies) of the issuer October 12,

21 6 One or more directors, officers, and / or employees of NSC and / or its affiliated companies is / are a director (s) of the issuer of the security which is the subject of this report 7 NSC and / or its affiliates expects to receive or intends to seek compensation for investment banking services from the subject company at some point during the next three (3) months 8 A Estimates analyst or a member of his / her household has a financial interest in the securities of the subject company as follows: a) long common stock; b) short common stock; c) long calls; d) short calls; e) long puts; f) short puts; g) long rights; h) short rights; i) long warrants; j) short warrants; k) long futures; l) short futures; m) long preferred stock; n) short preferred stock 9 As of the end of the month immediately preceding the date of publication of this report or the end of the prior month if the publication is within ten (10) days following the end of the month, NSC and / or its affiliates beneficially owned one percent (1%) or more of any class of common equity securities of the subject company. 10 Please see below for other relevant disclosures Shares of this security may be sold to residents of all 50 states, Puerto Rico, Guam, the US Virgin Islands and the District of Columbia. *Investment banking services provided in the previous 12 months MEANING OF RATINGS: BUY: the stock is likely to generate a total return of at least 10% over the next 12 months and should outperform relative to the industry. NEUTRAL: the stock is likely to perform in-line with the industry over the next 12 months. SELL: the stock is likely to underperform (from a total return perspective) relative to the industry over the next 12 months. NR: Not Rated SP: Suspended October 12,

22 Charts - GSBD Source: S&P Capital IQ. October 12,