Goldman Sachs BDC (GSBD) and Goldman Sachs Middle Market Lending (MMLC) amended and restated their agreement and plan of merger, dated Dec. 9, 2019. GSBD and MMLC are affiliated business development companies that are managed by Goldman Sachs Asset Management (GSAM).
In order to comply with provisions of the Investment Company Act of 1940, which require that a merger of affiliated business development companies not result in dilution to either party, the original merger agreement contained a closing condition whose satisfaction was dependent on the trading price of GSBD’s common stock. Heightened volatility in the current market precipitated by the COVID-19 pandemic created uncertainty as to whether this condition can be met. As a result, on June 11, GSBD and MMLC amended and restated the original merger agreement in its entirety to eliminate the closing condition while ensuring that the transaction would not result in dilution to either party. Key changes in connection with the amended and restated merger agreement include:
- The consideration has been changed from a fixed exchange ratio to a “net asset value for net asset value” exchange, whereby the exchange ratio will be determined at closing such that shares issued by GSBD to MMLC shareholders will result in an ownership split of the combined company based on each of GSBD’s and MMLC’s respective net asset values. Based on March 31, 2020 net asset values and pro forma for the MMLC distributions, transaction costs and the repayment of MMLC’s revolving credit facility described below, GSBD would issue approximately 1.0656 shares for each MMLC share outstanding. The total share consideration to MMLC shareholders would represent a 17% premium to the pro forma MMLC net asset value, based on the closing market price of GSBD as of June 10.
- The variable cap on GSAM’s incentive fees (the variable incentive fee cap) has been extended for an additional year, through the end of 2021. The variable incentive fee cap provides that incentive fees payable to GSAM will be reduced if net investment income (NII) would be less than $0.48 per share without implementation of the incentive fee cap.
- Upon closing the transaction, GSAM has agreed to reimburse GSBD and MMLC for all fees and expenses incurred and payable by GSBD or MMLC or on their behalf in connection with the transaction, subject to a cap of $4 million with respect to each of GSBD and MMLC.
- Prior to closing the merger, MMLC’s board of directors will declare a $75 million distribution to MMLC shareholders relating to the pre-closing period. This distribution is an amount equal to approximately 8.1% of MMLC’s March 31, 2020 net asset value.
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“We believe the merger of GSBD and MMLC will result in significant benefits for each set of shareholders, and we are pleased to move forward with the transaction on amended terms, despite the recent market volatility,” Brendan McGovern, president and CEO of GSBD and MMLC, said. “The combined company will benefit from increased scale and balance sheet strength, which are key attributes in the current market environment.”
Additional Highlights:
- GSAM expects the merger to be accretive to GSBD’s NII per share both in the short and long-term, reflecting the variable incentive fee cap through 2021 described above, as well as anticipated optimization of the combined company’s capitalization following the close of the transaction.
- The merger will result in an overall improvement in GSBD’s portfolio metrics, including a higher portfolio yield, greater single-name diversification and a reduction in the percentage of non-accrual investments.
- Based on the respective net asset values of GSBD and MMLC at March 31, 2020 pro forma for the $75 million distribution to MMLC shareholders and other additional adjustments, the merger will result in deleveraging, with GSBD’s net debt to equity decreasing from 1.40x at March 31, 2020, to 1.14x. This expected deleveraging creates more capacity to deploy capital into today’s investment environment while adding a greater margin of safety to maintain GSBD’s investment grade credit rating and compliance with regulatory and contractual leverage ratio requirements.
- Simultaneous with the closing of the merger, MMLC’s revolving credit facility due March 2022, will be repaid in full and GSBD’s revolving credit facility will be expanded to $1,695 million. Pricing on GSBD’s revolving credit facility will remain unchanged at LIBOR plus 1.875%.
- The combination more than doubles the size of GSBD and is expected to result in benefits of scale, including improved access to diversified funding sources, cost synergies and greater trading liquidity.
- The transaction represents a combination with a known and seasoned portfolio, as all of MMLC’s investments were originated by GSAM and 95% of MMLC’s investment portfolio overlaps with that of GSBD.
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As a result of the merger, GSBD’s total investments and commitments will be $3.2 billion, consisting of investments in 111 portfolio companies operating across 39 different industries. The combination will result in a 40 basis point increase on the weighted average yield of GSBD’s investment portfolio at amortized cost. GSBD’s exposure to senior secured loans will increase from 92% to 95.6% of total investments. The portfolio’s single name diversification by number of portfolio companies will increase by 4%. Investments on non-accrual will decrease from 0.9% to 0.4% of the total investment portfolio at amortized cost. The median EBITDA of the portfolio companies will remain relatively unchanged, from $37.8 to $37.5 million.
To aid in the analysis of a potential transaction, the board of directors of each of GSBD and MMLC established a special committee, consisting exclusively of their respective independent directors. The board of directors of both GSBD and MMLC, following the recommendation of each of their special committees, unanimously approved the amended and restated merger agreement and the transactions contemplated therein. The consummation of the merger is currently expected to occur in Q4/20, subject to satisfaction of certain closing conditions, including GSBD and MMLC stockholder approval, regulatory approval and other closing conditions.
BofA Securities served as financial advisor and Dechert is serving as legal counsel to the special committee of GSBD. Morgan Stanley served as financial advisor and Eversheds Sutherland is serving as legal counsel to the special committee of MMLC. GSAM’s legal advisor is Wachtell, Lipton, Rosen & Katz.
Goldman Sachs BDC and Goldman Sachs Middle Market Lending are specialty finance companies that have elected to be regulated as a business development company under the Investment Company Act of 1940. They were both formed by Goldman Sachs to invest primarily in middle-market companies in the United States and are externally managed by Goldman Sachs Asset Management. Both entities seeks to generate current income and, to a lesser extent, capital appreciation primarily through direct originations of secured debt, including first lien debt, unitranche loans, including last out portions of such loans, and second lien debt, and unsecured debt, including mezzanine debt, as well as through select equity investments.
