Golub Capital BDC, Inc.

David B. Golub – Chief Executive Officer and Director Ross A.

Teune – Chief Financial Officer

Greg Mason – Stifel Nicolaus & Company, Inc. Jonathan Bock – Wells Fargo Securities, LLC

Thank you, Upshur and good afternoon to everybody. Thanks for joining us today.

I’m joined here in New York office by Ross Teune, our Chief Financial Officer. Earlier today, we issued our fourth quarter earnings press release and posted a supplemental earnings presentation on the website.

As the operator mentioned, we’ll refer to this presentation throughout the call today. I’m going to start by providing an overview of the September 30, 2012 quarterly financial results.

Ross is then going to take us all through our quarterly financial results in more detail and I’ll come back and provide a summary of our common stock offering one that we completed in October and also update you on current portfolio activity and current market conditions. With that, let’s get started.

As highlighted on slide 2 of the investor presentation, I’m pleased to report we had another strong quarter. For the three months ended September 30, 2012, we generated net income of $8.7 million, or $0.34 a share, and that compares to $5.4 million, or $0.21 a share for the quarter ended June 30, 2012.

Net investment income for the quarter ended September 30 was $7.8 million, or $0.30 a share, as compared to $6.7 million, or $0.26 a share for the quarter ended June 30. As you know, for the period of time we have that total current swap outstanding, we’ve also proceeded to give you an adjusted figure, so adjusted to include net spread payments of $0.1 million 100,000 from the swap.

Net investment income was $0.31 per share for the quarter ended June 30, and that compared to $0.30 per share for the quarter ended June 30. This is our final statements with respect to the total return swap.

As we terminated the swap and that final payment is the end of it, so I’m happy to report we won’t be continuing to talk about adjusted NII performance going forward. So if we look at NII plus TRS income of $0.31 a share and EPS of $0.34 a share, I want to walk you through the bridge of the $0.03 difference.

There are three principal pieces to it. First, we had net realized and unrealized gains on investments of $1.2 million, or $0.05 a share comprised of $1.7 million of unrealized depreciation on the investment portfolio and this was across a variety of middle market debt and equity securities.

We had a $500,000 realized loss on the sale of one portfolio company investment and equity investment. The realized loss on this portfolio company equity investment, it was in a company called strategic partners, was largely offset by a prepayment penalty we earned on that debt investment, the prepayment penalties in net investment income.

So first, we had that net realized and unrealized gains on investments. Second, we had net realized and unrealized losses on our treasury futures contract and that constituted about $300,000 or $0.01 a share.

You will recall that we put in place some treasury futures that hedge interest rate risk on unpriced SBIC debentures. We priced rather the SBA priced, the SBIC debentures on September 19 and in conjunction with that we terminated all of the futures contract.

So as of September 30, there are no remaining futures contracts outstanding. This is an interesting one right; we’ll obviously get the benefit of the lower rates on those SBIC debentures over the life of the SBIC debentures.

But for the reason that we hedged the interest rate we have a small loss on that this quarter, so a nickel positive good guy on net realized and unrealized gains on investments, a penny bad guy on net realized and unrealized losses on the treasury futures. And finally, we had a penny loss on the termination of the total return swap.

Turning to slide 3 of the investor presentation, I want to highlight that there is an increase in our net asset value this quarter from 14.58 to 14.60 per share. This is consistent with our goal you’ve heard me talk about many times before of earning our distribution and maintaining a stable net asset value over time with relatively limited quarter-to-quarter volatility.

I also want to highlight that degree of diversification and granularity of the portfolio because I think this is one of the factors it differentiates us from a lot of our competitors. As you can see on the second table of this slide as of September 30, GBDC had 121 separate investments in portfolio companies with an average investment size of about $5.6 million.

This highlights the strength and breadth of our capitals origination platform and our leading market position, which gives us the ability to create a very diversified portfolio. I’m now going to turn the floor over to Ross who is going to discuss the financial results in more detail.

As I said at the outset, I’m going to come back and provide some commentary on the stock offering we recently completed and an update on current originations activity and current market conditions. Ross, over to you?

Great, thanks, David. I’ll begin on page 4 of the investor presentation.

As we communicated back in our call in August, we did experience an increase in originations for the quarter ended September 30 with total originations of a $113.4 million, this was up from $52.4 million for the quarter ended June 30. On a year-to-date basis, total originations in fiscal 2012 were approximately $428 million, which compares to total originations of approximately $364 million in fiscal 2012.

Exits from repayments and sales for the quarter totaled $70.9 million. This was up from $34.1 million for the quarter ended June 30.

Taking into account other variables such as net fundings or pay downs on revolvers, net change in unamortized fees and net change in unrealized gains or losses, overall net quarterly funds growth for the quarter was $36.3 million. This represents a 5.7% increase from June 30, and is up 46% from September 30, 2011.

As shown on the table of the bottom, our asset mix was relatively stable for the quarter. We had slight increase in one stop loans to 39% of the total portfolio with a corresponding job and subordinated debt investments.

Looking to the balance sheet on the next slide, we ended the quarter with total assets of $734 million in total cash and restricted cash of $50.9 million. We had borrowings of $352.3 million, which includes $174 million in floating rate debt issued through our securitization, $123.5 million of fixed rate SBA debentures and $54.8 million on our revolving credit facility.

Our growth in total investment this quarter was largely financed to an increase in the borrowings on its revolving credit facility as the balance of our debt issued via securitization and through the SBIC debentures was unchanged quarter-over-quarter. At September 30, 2012, net asset were $375 million.

And as David mentioned, our net asset value per share was $14.60. From a GAAP perspective, our debt-to-equity ratio was 0.94 times, adjusted for the excluding SBIC debentures, our regulatory debt-to-equity ratio was 0.61 times.

Looking to the statement of operations on slide 6, total investment income for the quarter was $16.2 million, which is up $1.4 million from the prior quarter. The growth in total investment income was driven by an increase in average investment as well as an increase in discount amortization.

As I mentioned, we had an increase in runoff during the quarter. We also had an increase in prepayment fees.

On the expense side, total expenses of $8.4 million increased by about $300,000 during the quarter, which is primarily attributable to an increase in interest expense driven by higher average debt outstanding. The net gain on investments and derivatives for the quarter was just under $1 million, which David provide the details in his opening remarks.

Turning to slide 7, these charts graphically summarized the breakdown of our new originations and end of period investment. As shown on the left chart, new originations for the quarter were $113.4 million with one stop investments representing 63% of the total.

You can see senior secured representing 33% with the remaining 3% investment in equity securities. The chart in the right provides the product breakdown, and again you can see a modest increase in one stop investments with a corresponding decrease in subordinated debt.

Turning to slide 8, looking at the spread analysis slide focus first on the red line. This line represents the interest income or all income earned on investments, excluding amortization of discounts and origination fees, primarily due to an increase in prepayment and other fees during the quarter.

The interest income yield increased from 9.3% to 9.5%. However, if you exclude the prepayment and other fees that we earned during the quarter, the interest income yield would have been fairly flat at about 9.3%.

Looking at the top line, the dark blue line, this yield includes the discount amortization and again, this yield increased as a result of the increase on the red line, but also a little bit more as again as we had hired discount amortization during the quarter as repayments increased. Turn to slide 9 for new investments, the weighted average rate at our new middle market investments was 8%.

This is down slightly from the quarter ended June 30, and is also slightly below the average of the rate on investments that paid off during the quarter. Again, the weighted average rate on our new investment is based on the contractual interest rate at the time of funding for variable rates.

This would be based of the LIBOR spread and the impact of any LIBOR floor for fixed rate loans would be the stated fixed rate. As shown in the middle of the side, the investment portfolio remains predominantly invested and floating rate loans with variable rate loans representing 87% of the total portfolio as of September 30, 2012.

Looking at slide 10 and 11, the fundamental credit quality continues to be very strong with non-earning assets as a percentage of total investments on a cost basis at 1.3% and 0.5% as a percentage of total investments on a fair value basis. As shown on slide 11, portfolio risk ratings remains stable with over 90% of the investments in our portfolio rated at 4, 5, and happy to report that there were no new non-earning accounts added during the quarter.

As a reminder, independent valuation firms valued approximately 25% of our total investments as of September 30, 2012. Looking at slide 12, the board declared a distribution of $0.32 a share payable on December 28, 2012 to shareholders of record as of December 14, 2012.

Turn to slide 13, liquidity and investment capital remains adequate with restricted and unrestricted cash of $50.9 million as of September 30, again restricted cash is cash held in our securitization vehicle and our SBIC entity and is available for new investments that qualify for acquisition by these entities. In addition subject to leverage and borrowing base restrictions, we had approximately $20.2 million of available capital for borrowings on our $75 million revolving credit facility.

In regards to the revolving credit facility, effective October 21, we amended the facility to extend the reinvestment period for another year through October 21, 2013 and also extended the maturity date by two years to October 20, 2017. In regards to our SBIC, we had $26.5 million of available and approved debentures as of September 30 and as a reminder we are in application with the SBA for a second SBIC license.

I’ll now turn it back to David, who again can provide some commands on our stock offering and update, and kind of market conditions.

Thanks Ross. As Ross just summarized, although we had approximately $100 million of available capital as of September 30, we did decide to a small kind of stock offering in mid-October.

We did it, because we’re starting to see an increase in deal flow as a result of fiscal cliff discussions and anticipations of higher dividend and capital gains tax rates at the start of the year. So we’ve raised approximately $44 million in new capital through the offering as we’ve done in previous offerings at trust organized by Golub Capital for the purpose of awarding incentive compensation to our employees for just an aggregate of $3 million worth of shares in the offering.

We’re very proud of the ownership of GBDC by Golub Capital employees, and believe that this alignment is part of what lies at the core of our success posturing the right incentives between our investment team on the one hand and our shareholders on the other hand. Raising the additional capital proved to be the right decision.

We currently have a very strong pipeline of transactions that we anticipate. We’ll close before December 31, and we anticipate that we’re going to have very strong net funds growth for the quarter ended December 31.

We’re not so positive about the outlook for new deals in the quarter ended March 31, 2013. We’ve seen this movie before back in 2010 and what we anticipate going to happen is that we’re going to see a strong push to close deals before anticipated tax increases on January 1, 2013 and this is going to cause a state of deal closings in December and relatively low volume quarter in the first quarter of calendar 2013.

Let me also talk about what’s going on with the spreads and leverage trends in the middle market. We’ve all seen the trends in the liquid credit markets toward tighter spreads and higher leverage.

In middle market lend, we’ve been somewhat insulated from these trends, but not immune. And the trends have started to trickle down to middle market lend resulting in a degree of both leverage creep and pricing compression.

We continue to search as we always do for the most attractive risk-adjusted returns in the market. And with that in mind, we continue to focus on one stop loans, most of all and senior secured investment.

Second, as Ross previously highlighted our new investments in the quarter ended September 30 were predominantly one stops and senior secured investments. And we anticipate the same will be true for new investments during the quarter ended December 31.

In particular, we continue to be very cautious about mezzanine and junior debt opportunities. Part of this is a function of what we view as competition induced leverage creep and low pricing, and part of it is a function of our own nervousness about the level of macro uncertainties in the world today.

Overall, we think this is very attractive time for middle market lending. Our franchise is strong at sourcing and underwriting new investments.

And those are exactly the skills that I think are increasingly important in a credit market like the one that we are in. We’re going to continue to use our origination platform to identify and close on high-quality loans that we think have a low probability of getting into trouble, and focused on producing long-term value for our shareholders in the way we always have, which is by avoiding losing money.

I’m going to stop there and open the floor for questions. Once again thanks everybody for your time and for your support.

Operator, let’s start the questions.

Great, thank you. Good morning, David.

I’m just curious about looking at your mix this quarter versus last quarter, last quarter you did 92% senior secured, this was more of a one stop, yet we saw the average interest rate go from 8.2% last quarter to 8 flat this quarter. Can you talk about what you are seeing given that you did more one stop this quarter, was there enhanced competition or what was driving that kind of spread compression?

So let’s talk first about what’s driving our mix and then talk about spreads. So in the first category, which is what’s driving our mix?

We are in the marketplace right now aggressively seeking to push our mix towards one stops. We think this is an attractive market or one stops both from a sponsor perspective and from our perspective.

And in an environment like we’re seeing in calendar Q3 and calendar Q4 of 2012, reliability certainty of close is a very important criteria for our clients. One stops are particularly attractive.

So I’m not surprised by the September 30 level of one stops in these numbers and my expectation is that the December quarter is going to see a continuing high level of one stops. Let me now shifted and talk about the spread piece.

There’s definitely been a degree of spread compression in the marketplace, and it’s hard to put a finger on exactly how to quantify that. But I would say if you were to look at 2012 from a calendar standpoint, 2012 as a whole, we’re probably looking at or middle-market senior debt and one stops were probably looking at between 50 and 75 basis points of spread compression.

And I think that’s reflected in the chart on page 9, where you see Q2 results that 8.9%, Q3 at 8.2% and Q4 at 8%. There is some variability on a deal-by-deal basis, not all one stops for the same price.

Some have richer spreads than others. The same is through traditional senior.

The range on both of them probably is about 125 basis points from low spread assets to high spread assets within each of those categories. But I think that the reality of our market right now is approximately a 50 to 75 basis points spread compression from beginning of calendar 2012 to now.

Do you think that will change as we go into the kind of year end rush of deals running to get done before December 31?

I do not see spread compression reversing. I think spread compression is more likely to continue than it is to reverse.

Great; and then one additional question kind of on that one stop, you’ve referred some other BDC’s, namely areas talk about, doing a one stop and then essentially kind of back leveraging it. Are you doing any of that, or have you thought about doing any of that to come back some other spread compression, I think you’re experiencing, the market is experiencing?

Great question, yes, we have seen areas in particular doing more, what they call back leverage. Just to elaborate on that for others in the call who aren’t familiar with this approach.

What they are essentially doing is taking a one stop loan that they’ve made and dividing it into two tranches of first out piece and the last out piece, and they will then sell the first out piece to typically a bank. And the spread that the first out lender will get will be lower than the spread on the loan, and this augments the yield on the loan.

The effect of this is really the same as using additional balance sheet leverage. You’re just applying the leverage on a loan by loan basis as opposed to on a portfolio basis.

We have found to-date Greg that we can achieve much more cost efficient leverage on a balance sheet basis e.g., at the portfolio level rather than on a loan by loan level. So we have not been aggressively pursuing these back leverage or first out, last out type deals.

I do think, it can be an effective approach. This is not something I think is universally bad to use, but it’s not something that we have been aggressively pursuing principally, because we find that we can achieve cheaper, more flexible leverage at the portfolio level.

Okay great. And then one last thing on slide 8, you kind of show that the total yield went from 10% flat to 10.5% you said because of some payoffs this quarter.

Could you put some numbers around may be what we should be thinking about as more of the one-time income this quarter from the prepayments that probably aren’t part of a longer term earnings run rate?

Yeah, this is Ross. I mean we have 9.3% to 9.5% as David mentioned, we had a prepayment penalty on strategic partners and kind of back into the math there.

But I mean the prepayment on that deal was about 300,000, I mean that is somewhat of…

Unusual.

Unusual or non-recurring, I mean we will get those obviously from time to time. But that was kind of the magnitude of that prepayment penalty that causes that 20 basis points increase.

Great, thank you.

Good afternoon and thank you for taking my questions. David, with an expected pickup in calendar 4Q deal activity, perhaps you could maybe give us a sense of portfolio velocity and perhaps maybe loans that might have a high probability of prepayment.

If you give us a sense of perhaps what net growth could be not in the specific terms of dollar amounts, but just a general sense of repayments will be relatively sub-debt or not?

Sure, so what we’re seeing in the market right now is, we’re not seeing an unusual increase in the phase of repayments and prepayments. We are seeing an unusual level of recap activity.

And there is some new deals from new M&A in addition that’s continuing a phase. The piece of it that has accelerated is recap activity and the recap activity is in our opinion, very largely a function of anticipated tax law changes.

So if I were to prognosticate and it is just that, I don’t have the ability to give anything other than some broad insights here. My expectation would be that we’re not going to see a very large increase in prepayments or repayments activity in a 12/31 quarter and we will see an unusually high level of origination.

Okay. And then getting to your point of recap, so often times, investors might see the potential for a dividend, recap as a higher risk loan.

And perhaps maybe you could give us some additional color as PE firms choose to take money off the table, how you choose to mitigate the risk of the allocating debt capital to transition were perhaps a private equity sponsor is going to be a little bit free or now have a capital taking off the table?

Sure, I think that lending in recapitalizations is more complicated and maybe we’re spending a minute on in terms of our capital philosophy here. You are absolutely correct that all things being equal that lending to a company whose owner has just taken money off the table is disadvantageous relative to lending money to a company whose owner has just written a check.

Having said that, our review is that there are also some very positive attributes about some recaps let me give you some. In many cases the recaps that we’re involved with are companies that we already know, already have been a lender too, though the management team, though the company, though the industry have followed for in many cases years, in many cases the recaps or with sponsors who we have a very longstanding relationship with, multiple obligors under their control, a long history of working with them, a long history of successfully seeing their companies repay loans.

In addition in an environment like the one that we’re in where there is a lot of demand or recap capital, we are by then our origination platform in a position to be highly selective and we can choose the companies that are particularly strong and resilient. Finally, we can be selective about the structures that we finance.

And one of the things we look for is making sure that there is still very significant equity value in the company, where the sponsor may take some money off the table, but on a loan to value basis there is still very substantial value less than the equity as a company, so there is ample incentive for the sponsor to stay engaged. All in I actually think our recapitalization deal tend to be lower risk than our new investments.

And I recognize there are some vectors that work in different directions when we are evaluating and underwriting these two broad classes of deals, new LOBs on the one hand and recaps on the other. But I think our assessment is that the recaps that we do actually have significantly lower risk not higher risk than average.

That’s great color, thank you. And David with your focus on the middle market in particular specialization in lower risk and higher quality senior debt may be give us a sense of competition in particular relative to commercial banks and whether or not, you are starting to see the effects of additional regulation come through the deal line to point where you’re see a smaller amount of tax commercial bank activity to the extend there was some in the first place?

We’ve seen relatively limited banks activity in our state since the financial crisis to the areas where we’ve seen meaningful bank activity tend to the areas we are not particularly active, e.g. asset based lending and lending on a very low leverage level generally to non-sponsored company.

Within our states, we have seen relatively limited bank involvements and we continue to see relatively limited bank involvements. Bank of Montreal is perhaps the only bank I would say as an exception to that rule.

We do compete aggressively with being of from time-to-time.

Okay. And then one last question as it relates to the liability side of the balance sheet.

In the BDC landscape today, a number of BDCs have issued retail baby bonds or longer dated maturity paper obviously at a higher interest cost yet, obviously that’s not the case here and perhaps you can elaborate on the reasoning of such a decision and the benefits as well as the risks of perhaps not participating in that market to-date?

Sure, I was quoted in case anyone is interested in seeing it in the recent Wall Street general article on the baby bonds and I’ll just elaborate on our negativity about baby bonds to-date. There is nothing wrong with the unsecured debt.

There’s nothing wrong with long-duration debt. There’s nothing wrong with the diversified sources of debt, count me in favor of all three of those.

There is something wrong with high cost debt. So the typical baby bond when you look through the economics and account issuance cost, as average cost is about 6%.

If we were to look at the typical BDC issuing baby bond and I’ll stick on one that has a 2% management fees just for the sake of this illustration. If you look at that 6% debt cost plus 2% management fee or 8% cost of capital before there is any return whatsoever to shareholders.

So if we assume that BDC then turns around and invests the incremental dollar baby bond proceeds in the new loan at 11% and we subtract the 8% in interest cost and management fees that leaves you with 3% without a little bit of incremental expense at BDC level. We have some credit losses that we would have to account for and we have to carry to the, our incentive fee to the BDC manager.

So maybe in a good case scenario that leaves about 2% for shareholders. To our judgment, I will call it capital, that’s not an adequate to return for the risk for shareholders.

We can see why it’s very attractive to managers, and the example I just gave, the manager is actually earning more than the shareholders are on that incremental investment. The manager is earning the 2% management fee, and let’s say an additional half of point to slightly more than that in incremental incentive fee.

So that the manager is earning between 2.5% and 3% and the shareholders are earning less than 2%. So I can understand why it’s good for the manager.

We are very focused on producing very high-quality consistent predictable returns for our shareholders and it doesn’t fit our model at that cost level.

I appreciate it and agree with the comments. It’s nice to see people focused on net return to shareholders, because too often BDC’s choose to run it at a higher expense level and issue more equity than is actually needed.

So thank you very much.

Thank you, operator. Again, I appreciate everyone taking the time to join us this afternoon.

Thank you for your support of Golub Capital BDC and as always if you have further questions, please feel free to reach after Ross or to me at any time.