GSBD - Goldman Sachs BDC: High Interest Rates Causing Increased Non-Accruals

2024-04-23 10:56:57 ET

Summary

• Goldman Sachs BDC (GSBD) has underperformed its peers in total return over the last 5 years, despite having a higher yield.
• The credit quality of GSBD's portfolio companies has worsened, with a higher percentage of lower-quality loans and non-accruals rising.
• The current dividend yield of 11.7% has still be fully covered with a solid margin of safety.
• Higher interest rates may have exposed management's abilities at grading and assessing the quality of potential borrowers.

Overview

I've grown to become very fond of business development companies due to their high levels of cash flow generation in an environment of elevated interest rates. The days of near-zero rates are likely behind us for a very long time. When you consider the high inflation and the low unemployment rate, there seems to be little incentive for the Fed to start cutting rates. As a result, BDCs should be able to capitalize on these higher rates with their portfolios of floating rate debt. While there may possibly be rate adjustments in September , nothing is guaranteed. Until then, we have a longer runway of elevated rates to work with....

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