National Securities Research Established 1947, Member FINRA/SIPC ` Golub Capital BDC, Inc. November 2, 2016 NEUTRAL (GBDC, $17.55) Strong Origination Platform, Good Asset Quality with Very Low Non- Accruals, Consistently Increasing NAV/share, But Valuation is Fair and NII/share is Likely to Remain Flat - Initiating With A NEUTRAL Rating And $18 Price Target. Christopher R. Testa 212.417.7447 ctesta@nationalsecurities.com Investment Conclusion. We are initiating coverage of Golub Capital BDC Inc. (GBDC) with a NEUTRAL rating and $18 price target. GBDC is the public vehicle of the Golub family of funds which combined have total AUM (assets under management) of over $18 billion as of 6/30/16; making them one of the largest BDCs (public & private). Additionally, the total platform is almost entirely in leveraged loans and the ability to invest across funds provides GBDC with a significant advantage during a time when certainty of closing matters more to borrowers than pricing. This also permits the company to have relatively small hold sizes within the portfolio while still closing on larger deals in the platform; mitigating the risk of concentration within GBDC. This is demonstrated by the fact that GBDC finished 6/30/16 with a portfolio at fair value of $1.63 billion across 185 companies but the average investment size was a mere $8.2 million. Since the quarter ended 12/31/12 non-accruals as a percentage of par have averaged 0.7%. This strong asset quality at Golub has led to consistent NAV/share increases, generating strong economic returns (changes in NAV/share plus dividends divided by beginning of period NAV/share) for shareholders. We expect GBDC s NII/share to be largely flat although we expect further step-ups in NAV/share and continued sound asset quality. Despite Golub being a best-in-class originator, we believe the stock is fairly valued and we are therefore giving the company a NEUTRAL rating and $18 price target. Our $18 price target implies an estimated 2017 P/NII (Price/NII) of 14.1x, dividend yield of 7.1%, and P/NAV (Price/NAV) of 1.10x compared to the BDC sector averages of 8.8x, 10.5%, and 0.86x, respectively. * Core NII = NII + capital gains incentive fee (reversal) Source: S&P Capital IQ, National Securities Corporation Estimates Please see pages 23-26 for Important Disclosures 1
GBDC has the potential for strong portfolio growth through the remainder of fiscal 2016 and into fiscal 2017. Golub has had robust portfolio growth the past several years, likely from consistently strong asset quality and low fees which have enabled the stock to consistently trade at sizable NAV/share premiums, permitting accretive equity issuance and deleveraging. We expect that these favorable themes will continue and we expect the portfolio will finish fiscal 2016 at $1.64 billion and fiscal 2017 at $1.85 billion from $1.51 billion at the end of fiscal 2015. During the quarter ended 9/30/16 the company raised $60.1 million of equity, net, by our estimates through both a public offering and private placement with a weighted average price of $17.97 (a 13% premium to prior quarter NAV/share). The equity issuance, combined with what we expect will be further issuance of SBA debentures and another equity issuance in the quarter ended 9/30/17 will fund our estimated portfolio growth through fiscal 2017. Golub s NIM (net investment margin) and effective yields have been stable during fiscal 2016 but are down from prior years although we expect both to improve through fiscal 2017. GBDC s all-in effective yield (which takes fee income into account) finished fiscal 2015 at 8.10%, down from 8.58% in fiscal 2014 and 9.44% in fiscal 2013. All-in effective yield finished the quarter ended 6/30/16 at 7.93%. For fiscal 2013, 2014, and 2015 NIM was 8.04%, 6.96%, and 6.39%, respectively. We expect NIM will be 6.19% in fiscal 2016 before improving to 6.56% in fiscal 2017. We expect that all-in effective yield will improve to 8.29% for fiscal 2017 from our estimate of 7.91% in fiscal 2016 as a result of sponsors valuing certainty of closing over pricing and Golub having the platform to execute on these deals. GBDC s asset quality is very strong and has assisted the company in having consistently increasing NAV/share and good economic returns. Golub s NAV/share at the end of fiscal 2012 was $14.60 before increasing to $15.21 by the end of fiscal 2013, $15.55 by the end of fiscal 2014, and $15.81 by the end of fiscal 2015. As of 6/30/16, NAV/share was $15.88. Economic return in fiscal 2013, 2014, and 2015 was 9.3%, 12.5%, and 10.5%, respectively. We project economic return will be 8.7% for fiscal 2016 and 9.8% for fiscal 2017. We expect Golub s dividend to remain the same but the core NII payout ratio to step-down slightly in fiscal 2017. GBDC s $0.32/share quarterly dividend has been unchanged since the quarter ended 3/31/11. The past four fiscal years the company has had a core NII payout ratio below 100% only in fiscal 2013 when it was 99%. We anticipate the core NII payout ratio will be 101% in fiscal 2016 and 100% in fiscal 2017. Currently, shares are at a 15% premium to NAV compared the average 10% discount in the BDC space and the P/NII is 14.3x for GBDC and 9.0x for the BDC sector. Golub deserves premiums on both a NAV and NII basis to the BDC sector, in our opinion. The company has a long track record of stable to increasing NAV/share, prudent capital management, and is sizable enough to make larger deals to borrowers with strong credits and provide certainty of closing given the breadth of the total platform. However, the current multiples of the stock are close to what we believe is the fair value of the company and we do not foresee further upside in the share price at the current time. November 2, 2016 2
Company Description Golub Capital BDC, Inc. (GBDC) is a Business Development Company with headquarters in Chicago, IL. GBDC invests primarily in unitranche debt but also makes investments in first and second lien debt as well as taking some equity in portfolio companies it lends to. In fiscal 2012 Golub had more first lien loans as a percentage of fair value than unitranche loans but this has changed significantly over the past several years as unitranche financing has grown in popularity, specifically with private equity (PE) backed companies. GBDC generally does not do any non-sponsored loans. The company is managed by David Golub, CEO and Ross Teune, CFO. Mr. Golub has been at Golub Capital since 2003 and has been a director of Golub Capital and its affiliates since 1995. From 1995 2003 Mr. Golub was at Centre Partners Management LLC where he was managing director. From 1995 2000 he also was at Corporate Partners as a managing director. Mr. Teune has been at an affiliate of Golub Capital Advisors since November 2007 and was senior vice president of finance for the affiliate and was involved in financial reporting for the private debt funds. Before Golub, Mr. Teune was at Merrill Lynch Capital from 2006 2007 where he was director of strategic planning. Before Merrill, Mr. Teune was at Antares Capital from 2002 2006 as vice president of finance. Exhibit 1. Investment Portfolio at Fair Value as of 6/30/16 Source: Company Reports GBDC s portfolio had a fair value of $1.63 billion as of June 30, 2016 with 18% in healthcare, education, & childcare, 16% in diversified/conglomerate service, 10% in beverage, food, & tobacco, 9% in electronics, and 8% in retail stores. GBDC is externally managed by its investment advisor and pays both a base fee and incentive fee. The base fee is 1.375% of gross assets less cash in arrears. The incentive fee is paid only if GBDC passes a designated hurdle rate of 8.0%. Essentially, GBDC s NII less the incentive fee must post a return on prior period NAV greater than 8.0% before any fee is paid. If this return exceeds 10.0%, the investment advisor earns an even greater fee and will get 20% of the difference between the pre-incentive fee NII and the 8.0% return plus 20% of the difference between the pre-incentive NII and the 10.0% November 2, 2016 3
upper hurdle. The company has a lookback feature that nets realized and unrealized gains and losses with its incentive fee that is cumulative (since the inception of the public BDC). Golub has the lowest base management fee of any externally managed BDC. Coupled with the relatively higher hurdle rates despite the lower yields on Golub s loans and with the cumulative lookback feature, GBDC has one of the lowest fee structures for an externally managed BDC. WE ARE INITIATING COVERAGE WITH A NEUTRAL RATING AND $18 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 GBDC 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 2017, we get a result of core NII/share of $1.28 if investments end the year at $1.85 billion, yield is 8.29%, the cost of funds is 3.30%, the economic return is 9.8%, cost/fv is 98.9%, and total distributions are $1.28/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. November 2, 2016 4
Our $18 price target implies an estimated 2017 P/NII (Price/NII) of 14.1x, dividend yield of 7.1%, and P/NAV (Price/NAV) of 1.10x compared to the BDC sector averages of 8.8x, 10.5%, and 0.86x, 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. GBDC S PORTFOLIO IS 99% FLOATING RATE AND 76% UNITRANCHE LOANS GBDC s portfolio composition has changed significantly over the past four years. In fiscal 2012, the company ended the year with 40.7% of the fair value in first lien loans and 39.5% in unitranche. By the end of fiscal 2014 unitranche loans were 69.8% of the portfolio s fair value and first lien was 19.5%. As of 9/30/16 first lien loans were 10.7% of the portfolio at fair value and unitranche loans were 75.9% of the portfolio at fair value. Exhibit 3. Portfolio Mix 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. GBDC 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 (although we don t think this will be the case with Golub) 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 Estimates November 2, 2016 5
With a 10% decline in the fair value of investments, D/E increases to 1.30x from 1.04x which increases leverage significantly and the hit to NAV / share is $3.15. 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. GBDC HAS VERY STRONG ASSET QUALITY Golub has historically had very strong asset quality and has largely outperformed the industry. Non-accruals as a percentage of par have averaged 0.7% per quarter since 1Q13 even with significant portfolio growth over this time. Most recently, defaults were 0.3% of the portfolio s par value or $5.3 million between two companies out of 185 companies and a portfolio par value of $1.55 billion. Exhibit 5. Non-Accruals Chart Exhibit 6. Non-Accruals Table November 2, 2016 6
Golub has consistently had net unrealized gains on its portfolio largely as a result of its strong asset quality. During periods of substantial volatility, such as the quarters ended 9/30/15 and 12/31/15, the company s cost/fv actually remained flat and decreased, respectively. Net unrealized gains decreased from $16.0 million as of 6/30/15 to $15.1 million as of 9/30/15, for a decrease of 0.5%. From 9/30/15 to 12/31/15 net unrealized gains increased to $15.8 million from $15.1 million for an increase of 0.4%. While there are always idiosyncratic events that cause certain companies to be marked up despite volatility, when volatility in loan markets is as significant as it was during these two quarters seeing the portfolio marked up on a net basis does warrant caution in terms of the marks. Exhibit 7. Unrealized Gains/(Losses) & Cost/FV Exhibit 8. Portfolio Metrics November 2, 2016 7
Please note that in Exhibit 8 above unrealized gains and losses differ from the net unrealized gains and losses presented on Golub s balance sheet. The unrealized gains/losses in Exhibit 8 are calculated by subtracting amortized cost from the fair value of investments. GBDC ranks its investments internally on a scale of 1 through 5, with 5 representing the best performing investments and 1 being the worst. As of 6/30/16, the company had no investments ranked 1 and $93.5 million of the portfolio ranked 5, or 5.7% of the portfolio and $1.37 billion ranked 4, or 84.4% of the portfolio. Since the quarter ended 12/31/13 GBDC has averaged 0.03% of the portfolio ranked 1 on a quarterly basis and 11.6% ranked 5. Given the low non-accruals at Golub the internal rankings appear to be realistic. Exhibit 9. Investment Rankings THE STRONG PORTOFLIO PERFORMANCE HAS ENABLED GOLUB TO HAVE INCREASING NAV/SHARE AND CONSISTENTLY POSITIVE ECONOMIC RETURN A major differentiating factor for GBDC relative to peers is that GBDC has a long track record of consistently sound asset quality even during difficult economic periods and has grown its NAV/share steadily. Most BDCs have had difficulty having steady, let alone growing, NAV/share over as long a time period as Golub. This has enabled the public vehicle to trade at respectable premiums to NAV/share the majority of the time while having positive economic return to shareholders. At the end of fiscal 2012 NAV/share was $14.60 and it finished fiscal 2013 at $15.21, generating an economic return of 12.5%. In fiscal 2014 economic return was 10.5% with NAV/share increasing to $15.55 from $15.21 at the end of fiscal 2013. For fiscal 2015 NAV/share increased to $15.81 from $15.55 for an economic return of 9.9%. Thus far in fiscal 2016 NAV/share is up modestly from $15.81 to $15.88 as of 6/30/16, with the increases hindered by realized gains and undistributed NII decreasing. Net realized gains decreased to $482,000 as of 6/30/16 from $742,000 as of 9/30/15. Undistributed NII decreased from $4.2 million as of 9/30/15 to $2.6 million as of 6/30/16. We note that the biggest risk to NAV/share is likely from under-earning the dividend on a GAAP NII basis. While we forecast the company earning its dividend every quarter except November 2, 2016 8
the next one on a core NII basis, earnings have been lackluster as NIM and effective yields have been under pressure. If this trend continues (although we model it to abate) this could eat into NAV/share. We view this as a more likely risk to the company s NAV than asset quality, given the company is more prone to accept less favorable pricing on better credits than it is to stretch for yield and make riskier loans. Exhibit 10. NAV/share & Economic Return We project that economic return will be 8.7% in fiscal 2016 and 9.8% in fiscal 2017. NAV/share was $15.88 as of 6/30/16 and we model it to increase to $15.99 at 9/30/16 and $16.35 at 9/30/17. Exhibit 11. NAV/share & Economic Return - Projected Estimates GBDC HAS VERY GOOD EARNINGS QUALITY Golub has very little PIK (payment-in-kind) income and fee income as a percentage of investment income on a run-rate basis. The company amortizes origination fees over the life of the loan as opposed to recognizing them all up-front or half of the fees up-front. The low PIK interest makes the cash coverage of the dividend better and the amortization of origination fees prevents GBDC from being put in a situation where slowing origination November 2, 2016 9
volume threatens the dividend as severely as it would if it were recognizing all or half of origination fees up-front. As a percentage of investment income, PIK has averaged 0.7% per quarter since fiscal 2Q14. This is a trivial amount and is to be expected by a predominantly unitranche lender. One-stop loan structures generally do not have PIK components to them. As unitranche loans remain very popular with sponsor-backed companies and this popularity has grown and continues to grow we expect that PIK as a percentage of total investment income will remain in-line with historical norms at the company. Exhibit 12. PIK Origination fees are amortized over the life of the loan which generally makes fee income less volatile relative to peers who recognize all or half of origination fees at the time the loan is originated. However, fee income does still jump around time to time during periods of heavier prepayments. Prepayments still result in prepayment penalties recorded as fee income, with unamortized OID also accelerating into the interest income line item. Fee income as a percentage of total investment income has averaged 2.0% since fiscal 1Q14 and we expect that this will be the norm going forward, varying with prepayments. In GBDC s cash flow statements the company does not differentiate between scheduled repayments, prepayments, and sales and thus it is not perfectly clear how much of fee income is tied to prepayments. However, it is likely that periods of significant increases in fee income and concomitant increases in principal repayments and sales are largely indicative of heavy prepayments. Exhibit 13. Fee Income / Total Investment Income November 2, 2016 10
Exhibit 14. Fee Income / Repayments & Sales GOLUB S NII/SHARE IS LIKELY TO REMAIN FLAT DESPITE OUR EXPECTATIONS FOR MODEST YIELD AND NIM IMPROVEMENT Over the past several fiscal years GBDC s effective yields and NIM have come under considerable pressure. While asset quality has been very strong, earnings have been very lackluster due to these factors despite accretive capital raises and a very low cost of capital for the company. All-in effective yield has decreased from 9.44% in fiscal 2013 to 8.54% in fiscal 2014 and 8.10% in fiscal 2015. All-in effective yield was 7.93% for the quarter ended 6/30/16. NIM was 8.04% in fiscal 2013, 6.96% in fiscal 2014, and 6.39% in fiscal 2015. NIM was 6.19% in fiscal 3Q16. Exhibit 15. NIM, Effective Yield, and Cost of Funds We model all-in effective yield to be 7.91% in fiscal 2016 and 8.29% in fiscal 2017 and NIM to be 6.19% in fiscal 2016 before improving to 6.56% for fiscal 2017. We expect the company to earn better effective yields as private equity sponsors are increasingly prioritizing certainty of closing as opposed to pricing. November 2, 2016 11
Exhibit 16. NIM, Effective Yield, and Cost of Funds - Projected BDCs that have relatively large public vehicles but little to zero private AUM are at the mercy of the public markets for them to be able to take down large deals and syndicate out large portions of these deals. Absent them being able to do this, BDC shareholders would have significantly concentrated risk. In times of significant origination volume and lower risk sponsors will be willing to accept syndication risk from lenders for more favorable financing terms. However, with increased loan market volatility, declining origination volume, and, in our opinion, far greater risk, we have seen sponsors increasingly willing to accept less favorable pricing for the certainty of closing. Golub, with $18 billion of AUM across its platform, can originate larger loans and split the investment across its public vehicle and various private vehicles. The company is not relying on an originate-to-syndicate model which puts them in a favorable position during current market conditions. Exhibit 17. Yields by Loan Type November 2, 2016 12
Golub does have a senior loan fund (SLF) joint venture (JV) with RGA Reinsurance Company which as of 6/30/16 had $356.3 million of senior secured loans and a weighted average interest rate of 6.0%. The subordinated notes in the SLF had a fair value of $81.3 million and the LLC equity interest of the SLF had a fair value of $29.8 million as of 6/30/16. The total fair value of the SLF was 6.8% of the portfolio fair value as of 6/30/16. The SLF was leveraged at 1.82x (D/E) with a limit of 2.0x. At under 7% of the portfolio at fair value and very little of the 30% basket used by GBDC, the company has the capacity to grow the JV significantly. However, the JV will likely not become a substantial portion of GBDC s earnings and we expect the on-balance sheet portfolio to outpace the growth of the JV. Exhibit 18. Senior Loan Fund Investment Flow Golub s cost of funds is among the lowest in the entire BDC industry, likely due to the company s size as well as the sound asset quality of the portfolio. The all-in cost of funds, which includes facility fees and the amortization of debt issuance costs, was 3.08% in fiscal 2013, 2.99% in fiscal 2014, and 3.16% in fiscal 2015. As of 6/30/16 the debt mix was 24.9% 2010 securitization, 28.5% 2014 securitization, 29.6% SBA debentures, and 16.9% credit facility. The 2010 and 2014 securitizations had an effective cost of funds of 2.49% and 2.79%, respectively, in the quarter ended 6/30/16. Exhibit 19. Debt Mix & Cost of Funds November 2, 2016 13
We estimate that as of fiscal 4Q16 the 2010 securitization will be 25.9% of debt, the 2014 securitization will be 29.6%, SBA debentures will be 32.9%, and the credit facility will be 11.6% with an effective cost of funds of 3.32%. At the end of fiscal 2017 we anticipate the debt mix will be 22.1% 2010 securitization, 25.3% 2014 securitization, 26.0% SBA debentures, and 16.5% credit facility with an effective cost of funds of 3.30%. Exhibit 20. Debt Mix & Cost of Funds - Projected Estimates GBDC HAS THE CAPACITY TO GROW ITS PORTFOLIO SIGNIFICANTLY THROUGH THE REMAINDER OF FISCAL 2016 AND THROUGH FISCAL 2017 Golub s portfolio was $1.63 billion as of 6/30/16, up from $1.53 billion as of 9/30/15. We project that the portfolio at fair value will finish fiscal 2016 at $1.64 billion and fiscal 2017 at $1.85 billion. We model net debt issuance of $17.3 million and net equity issuance of $60.1 million in fiscal 2016. For fiscal 2017, we estimate $140.5 million of net debt issuance and $62.7 million of net equity issuance. We expect the company to have a total $300.0 million of SBA debentures outstanding as of 12/31/16 before being granted an additional $50.0 million in SBA debentures which we model will be utilized in full as of 9/30/17. During the quarter ending 9/30/16 the company had two separate equity offerings. The public equity offering was done at $18.35/share and we estimate the net proceeds after fees and underwriting expenses will be $35.1 million. The second offering was a $25.0 million private placement at $17.44/share. The weighted average issuance price was $17.97 and total estimated net proceeds are $60.1 million with estimated total shares issued to be 3.5 million. The public offering price was a 16% premium to 6/30/16 NAV/share of $15.88, the private placement was a 10% premium, and the weighted average price was a 13% premium. The offerings on a net basis will likely be accretive to NAV/share and we expect a $60.0 million gross offering ($57.0 million net) in fiscal 4Q17. November 2, 2016 14
Exhibit 21. Investment Flow Estimates Exhibit 22. Capital Allocation Estimates For purposes of calculating shares issued, we use the prior quarter NII/share estimate discounted by 10% and apply a 7% required ROE to the annualized, discounted NII/share. Changes in share count, including our estimates, are shown below in Exhibit 23. Exhibit 23. Share Count Changes Estimates We model total D/E to finish fiscal 2016 at 0.94x and regulatory D/E to finish at 0.63x. We estimate that total D/E will finish fiscal 2017 at 1.01x and regulatory leverage will be 0.65x. In fiscal 2016 we forecast NII ROAE (return on average equity) to be 7.7% before improving slightly to 7.9% for fiscal 2017. November 2, 2016 15
Exhibit 24. Leverage & NII ROAE Estimates GBDC S DIVIDENDS WILL LIKELY BE FLAT We expect Golub to maintain its quarterly dividend of $0.32/share through fiscal 2017. We model the core NII payout ratio to be 101% in fiscal 2016 before decreasing slightly to 100% in fiscal 2017. Exhibit 25. Core NII/share, Dividends, and Payout Ratios Estimates GOLUB IS WELL POSITIONED FOR A RISING RATE ENVIRONMENT GBDC expects to have incrementally higher NII in the event rates increase over 100 bps. A decrease of 25 bps is estimated to lower borrowing costs more than rates fall on floating rate loans, leading to marginally higher NII although a rate increase of 50 bps would decrease NII slightly due to interest rate floors on loans. However, with every incremental increase of rates beyond 100 bps the company expects to have increased NII. As of 6/30/16 Golub s debt portfolio was 99% floating rate and its funding mix was 70.4% floating rate. The only fixed rate debt the company has are SBA debentures, which were 29.6% of debt as of 6/30/16. We expect SBA debentures to increase to 32.9% of debt as November 2, 2016 16
of 9/30/16 and 36.0% of debt as of 9/30/17, assisting GBDC s NII more should interest rates increase. GBDC could potentially issue unsecured debt (baby bonds) although we do not model this. Given the company s portfolio is almost entirely floating rate debt it has adequately match-funded its balance sheet to benefit should interest rates increase and thus likely does not have the need to increase its cost of capital from issuing unsecured bonds. Exhibit 26. Interest Rate Shock Source: Company Reports Exhibit 27. Fixed & Floating Rate Funding Estimates Exhibit 28. Select Data & Ratios Estimates November 2, 2016 17
INVESTMENT POSITIVES: Strong Direct Origination Platform and Sourcing Capabilities Golub is a true direct originator with roughly 300 employees and a portfolio that is nearly all sponsor companies. The company has been able to drive robust origination volume even in quarters and years when the broader market trends were decidedly negative, demonstrating the capacity of the company to source loans even in a challenging environment. Strong Asset Quality Non-accruals as a percentage of par have averaged 0.7% since fiscal 1Q13 at GBDC. As of 6/30/16, non-accruals had a par value of $5.4 million out of a total loan portfolio of $1.55 billion and consisted of 2 companies out of 185 in the portfolio. Positioned Well For Rising Interest Rates Golub s loan portfolio is 99% floating rate and its debt funding is 70.4% floating rate as of 6/30/16. The company expects to earn incrementally higher NII in the event that rates increase over 100 bps. INVESTMENT RISKS: Yield and NIM Compression The past several fiscal years GBDC has experienced significant spread compression, with effective yields coming under pressure and NIM declining. We expect that this will abate as sponsors value certainty of closing more than pricing in uncertain markets such as the current ones. This is likely to put Golub in a much more advantageous position in terms of both pricing and deal flow, in our opinion. We currently expect the dividend to be earned on a core NII basis although further decreases in effective yields and thus NIM could put pressure core NII. Continued Slowdown in Sponsor Finance Merger and acquisition volume has been down significantly in the middle market, leading to sponsor finance volume to decline. The quarter ended 9/30 is typically more robust for M&A activity and sponsor finance relative to the first half of the year although this year M&A volume decreased relative to the first two quarters of the year. If this trend continues, Golub may see less favorable deal flow and pricing pressure will be exacerbated by a lower supply of loans. November 2, 2016 18
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Note: Price/NII reflects consensus NII estimate provided by S&P Capital IQ * Price reflects closing price as of 11/2/16 Source: S&P Capital IQ November 2, 2016 22
IMPORTANT DISCLOSURES: National Securities Corporation 410 Park Avenue, 14th Floor, New York, NY 10022 REG AC ANALYST CERTIFICATION The research analyst named on this report, Christopher Testa, certifies the following: (1) that all of the views expressed in this research 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 research 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 November 2, 2016 23
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 1-800-417-8000 and ask for your NSC representative, or write us at National Securities Corporation, Attn. Richard Cohen - Research Department, 410 Park Avenue, 14th Floor, New York, NY 10022, or visit our website at www.nationalsecurities.com Estimates Disclosures Legend Relevant Disclosures: 1 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 November 2, 2016 24
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 November 2, 2016 25
Charts - GBDC Source: S&P Capital IQ November 2, 2016 26