Golub Capital BDC Announces Merger Agreement with Golub Capital BDC 3

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January 18, 2024, 07:27 AM

Filed Under: Industry News

Related: Business Develoment Company, Golub Capital, Golub Capital BDC, Lawrence Golub, Private Equity News

Golub Capital BDC entered into a definitive merger agreement with Golub Capital BDC 3, Inc. (“GBDC 3”), with GBDC as the surviving company, subject to certain stockholder approvals and customary closing conditions. Following the merger, GBDC is expected to have $8.5 billion of total assets at fair value and investments in over 340 portfolio companies, on a pro forma basis as of September 30, 2023. The Boards of Directors of both GBDC and GBDC 3 have approved the transaction with the participation throughout by, and the unanimous support of, their respective independent directors.

Under the terms of the proposed merger, stockholders of GBDC 3 will receive newly issued shares of GBDC based on a ratio determined shortly before merger close (the “Exchange Ratio”). GBDC 3 stockholders will receive GBDC shares based on a ratio that is the greater of: (a) a NAV-for-NAV exchange of shares with GBDC; or (b) if GBDC shares are trading at a premium to NAV at the closing of the merger, a number of shares of GBDC equal in value to GBDC 3’s NAV per share, plus a premium of up to 50% of any premium to NAV in the trading price of GBDC shares at merger close, with a maximum premium equal to 3% of GBDC 3’s NAV per share. The process for determining the Exchange Ratio is described more fully in the section below under the title “Exchange Ratio.”

GBDC believes the proposed merger with GBDC 3 is compelling for GBDC stockholders for several reasons:

Increased scale and liquidity. The proposed merger will increase GBDC’s scale meaningfully, with its investment portfolio at fair value expected to increase from approximately $5.5 billion to approximately $8.1 billion, on a pro forma basis as of September 30, 2023. The increased market capitalization of GBDC following the merger is anticipated to provide greater trading liquidity and the potential for greater institutional ownership than GBDC as a stand-alone company. The transaction also is expected to deliver operational synergies by eliminating redundant expenses.

Consistent investment strategy. The combined portfolio is expected to be substantially similar to GBDC’s current portfolio, as over 99% of GBDC 3’s investments overlap with those of GBDC.1 Post-closing, GBDC expects to continue the same investment strategy it has followed since its IPO in 2010: focusing on first lien senior secured and one-stop loans to U.S. middle market companies in resilient industries that are often owned by private equity firms. Credit quality is expected to remain strong and to improve on a pro forma basis as of September 30, 2023: 1) non-accruals as a percentage of GBDC’s total debt investments at fair value are expected to decrease to 0.9% from 1.2%; and, 2) the combined company would expect to see modest improvement in internal performance ratings.

Improved fee structure. In support of the proposed merger, GBDC’s investment adviser, GC Advisors LLC (“GC Advisors”), has agreed to reduce the income incentive fee and capital gain incentive fee rate from 20.0% to 15.0%. The reduction in incentive fee will become permanent upon merger close and will be effective as of January 1, 2024 as GC Advisors has agreed to unilaterally waive incentive fees above 15.0% for periods during the pendency of the merger. GBDC’s cumulative incentive fee cap, since-inception lookback period and income incentive fee hurdle rate of 8% per annum will all remain in place.

Expected wider access to long-term, low-cost, flexible debt capital. The combined company is expected to be able to access a wider array of debt funding solutions than GBDC as a stand-alone company, and potentially to receive more attractive terms as a result of the combined company’s increased scale, including potentially in the investment grade unsecured debt market.

The transaction is expected to be immediately accretive to GBDC’s net investment income per share. This accretion is expected to be driven by the combined company’s lower incentive fees and lower combined operating expenses.

The combined company will have incremental investment capacity as financial leverage at closing on a pro forma basis as of September 30, 2023 is expected to decrease from GBDC’s stand-alone GAAP leverage of 1.24x to approximately 1.10x.

Additionally, the exchange ratio structure offers the potential for further accretion to GBDC’s NAV per share if GBDC is trading at a premium to NAV when the merger closes (see section below under the title “Exchange Ratio”).

Based on the earnings power of the Company and the new incentive fee rate, on January 16, 2024, GBDC’s board of directors increased GBDC’s quarterly base distribution by over 5% and declared a quarterly distribution of $0.39 per share, which is payable on March 29, 2024, to stockholders of record as of March 1, 2024. GBDC’s Board expects to continue to evaluate the potential for supplemental distributions under its quarterly variable supplemental distribution framework, which was introduced in fiscal year 2023.

GBDC’s Board has also announced its intention to declare additional special distributions totaling $0.15 per share, to be distributed in three consecutive quarterly payments of $0.05 per share per quarter, with the record date of the first special distribution expected to occur shortly after the closing of the proposed merger.2

David B. Golub, CEO of GBDC, said, “We believe the proposed merger with GBDC 3 is a win-win-win—good for GBDC stockholders, good for GBDC 3 stockholders and good for GBDC. We’re pleased to announce the proposed reduction of GBDC’s incentive fee rate to 15.0% in connection with the proposed merger, another milestone in GBDC’s history of raising the bar for shareholder alignment. GBDC’s pro forma fee structure positions it to provide market-leading returns across different economic and interest rate environments while keeping its investment strategy focused at the top of the capital structure (first lien, first out senior secured sponsor backed floating rate loan investment strategy). We believe this will be a unique differentiator especially in the context of GBDC’s meaningfully increased scale post-merger.”

The combined company will remain externally managed by GC Advisors and all current GBDC officers and directors will remain in their current roles. The combined company will continue to trade under the ticker GBDC on the Nasdaq Global Select Market.

Consummation of the proposed merger is subject to GBDC and GBDC 3 stockholder approvals, customary regulatory approvals and other closing conditions. Assuming satisfaction of these conditions, the transaction is expected to close in the second calendar quarter of 2024.

Prior to the anticipated closing of the proposed merger, each of GDBC and GBDC 3 currently intends to maintain its usual practice of declaring and paying distributions and, to the extent necessary, will declare and pay any special distributions required to distribute sufficient taxable income to continue to comply with its regulated investment company status.