Golub Capital BDC, a business development company, entered into a definitive merger agreement with Golub Capital BDC 3, with Golub Capital BDC as the surviving company, subject to certain stockholder approvals and customary closing conditions. Following the merger, Golub Capital BDC is expected to have $8.5 billion of total assets at fair value and investments in more than 340 portfolio companies on a pro forma basis as of Sept. 30, 2023. The boards of directors of both Golub Capital BDC and Golub Capital BDC 3 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 Golub Capital BDC 3 will receive newly issued shares of Golub Capital BDC based on a ratio determined shortly before merger close. Golub Capital BDC 3 stockholders will receive Golub Capital BDC shares based on a ratio that is the greater of: (a) a NAV-for-NAV exchange of shares with Golub Capital BDC or (b) if Golub Capital BDC shares are trading at a premium to NAV at the closing of the merger, a number of shares of Golub Capital BDC equal in value to Golub Capital BDC 3’s NAV per share, plus a premium of up to 50% of any premium to NAV in the trading price of Golub Capital BDC shares at merger close, with a maximum premium equal to 3% of Golub Capital BDC 3’s NAV per share.
The proposed merger will increase Golub Capital BDC’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 Sept. 30, 2023.
The combined portfolio is expected to be substantially similar to Golub Capital BDC’s current portfolio, as more than 99% of Golub Capital BDC 3’s investments overlap with those of Golub Capital BDC. Post-closing, Golub Capital BDC 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 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 Sept. 30, 2023: 1) non-accruals as a percentage of Golub Capital BDC’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 experience modest improvement in internal performance ratings.
In support of the proposed merger, Golub Capital BDC’s investment adviser, GC Advisors, agreed to reduce the income incentive fee and capital gain incentive fee rate from 20% to 15%. The reduction in incentive fee will become permanent upon merger close and will be effective as of Jan. 1, 2024, as GC Advisors has agreed to unilaterally waive incentive fees above 15% 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.
The combined company is expected to be able to access a wider array of debt funding solutions than Golub Capital BDC as a standalone 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 Golub Capital BDC’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 Sept. 30, 2023, with an expected decrease of Golub Capital BDC’s standalone GAAP leverage of 1.24x to approximately 1.10x.
“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,” David B. Golub, CEO of Golub Capital BDC, said. “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 Golub Capital BDC 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 Golub Capital BDC and Golub Capital BDC 3 stockholder approvals, customary regulatory approvals and other closing conditions. Assuming satisfaction of these conditions, the transaction is expected to close in Q2/24.
