Golub Capital's Q2 2025: Navigating Contradictions in Dividends, Tariffs, and Market Activity

Dividend strategy and market conditions, tariff exposure and impact assessment, dividend payout and financial leverage strategy, portfolio risk and tariff exposure, market activity and deal opportunities are the key contradictions discussed in Golub Capital BDC, Inc.'s latest 2025Q2 earnings call.



Earnings and Investment Activity:
- Golub Capital BDC (GBDC) reported adjusted NII per share of $0.39 for the quarter, equivalent to an adjusted NII return on equity of 10.4%, with an adjusted return on equity of 8%.
- Adjusted net income per share included $0.09 per share of adjusted net unrealized losses. The company closed on just 2.3% of reviewed deals for new investments.
- The decline in investment activity was due to a challenging macro environment and a focus on quality over quantity in investments, aiming to manage risk more conservatively.

Credit Performance and Portfolio Quality:
- Nearly 90% of GBDC's investment portfolio remained in the highest performing internal rating categories, with investments in rating categories 4 and 5 at 90%.
- The number of nonaccrual investments increased modestly to 70 basis points, reflecting the restructuring of two investments and the addition of three new nonaccrual investments.
- The company attributed this to weak performance in a small tail of underperforming borrowers, emphasizing early detection and intervention in potential vulnerabilities.

Leverage and Cost Optimization:
- GBDC's average net leverage during the quarter was 1.17 turns, within the target range of 0.85 to 1.25 turns.
- The company reduced borrowing costs and maintained a stable debt-to-equity ratio through debt stack initiatives, strategic refinancing, and debt repricing.
- These efforts aimed to optimize GBDC's balance sheet and enhance earnings potential in a challenging interest rate environment.

Portfolio Composition and Strategy:
- The median EBITDA for calendar Q1 2025 originations was $54 million, with new originations focused on the core middle market with LTVs generally in the mid-30% to 40% range.
- The company prioritized conservative LTVs and leveraged its scale to lead deals, with over 50% of its originations coming from repeat borrowers.
- This strategy aligns with GBDC's focus on resilient middle market companies, where risk-adjusted return potential is perceived to be better than in the large borrower market.