Golub Capital BDC, Inc. Stock

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended June 30, 2026. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. This is David Golub, and I'm joined by Tim Topicz, our Chief Operating Officer; Rob Tuchscherer, Senior Managing Director and Officer of GBDC; and Chris Ericson, our Chief Financial Officer.

For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies, companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended June 30, and we posted an earnings presentation on our website. We'll be referring to this presentation during today's call. I'm going to start with headlines and a brief summary of performance for the quarter. Then Tim, Rob and Chris are going to walk you through our operating and financial performance in more detail. Finally, I'll wrap up with some observations on current market conditions and our outlook, and we'll take questions.

So the headline for the quarter is this. GBDC's performance was much better than last quarter, not as good as we'd like and better than it looks. So that's a lot. That's a 3-parter. So let me take a few moments to unpack each of the 3 parts of that headline. First, GBDC's performance was much better than last quarter. That's pretty clear from the data. Adjusted net income per share was $0.22. That compares to an $0.18 per share loss last quarter, and it translates into an annualized adjusted ROE of 6.2%. The key driver of the improvement quarter-over-quarter was a decrease in adjusted net realized and unrealized losses. Such losses went from $0.52 per share last quarter to $0.12 per share this quarter. At the same time, adjusted NII per share remained solid and consistent with last quarter at $0.34 per share, which translates into an adjusted NII ROE of 9.5%.

Finally, GBDC paid a $0.33 per share distribution. Now for those of you who are familiar with GBDC, you can see from the data I just described why the quarter was not as good as we'd like. GBDC has delivered a 9.4% net IRR on NAV since our IPO in 2010. If we compare that to GBDC's annualized adjusted ROE for the quarter of 6.2%, it's clearly a few points below GBDC's 16-year plus average. Now you've heard us talk for several quarters about how we're in a credit cycle, how we're in a period that's marked by sustained elevated credit stress.

We've also talked, including on last quarter's call about our view that what we're seeing fits a pattern. It's a pattern that when things shift from a borrower-friendly environment to a more lender-friendly one, we tend to see a period of bumpiness in results. So I'm not entirely surprised to see a degree of bumpiness in GBDC's results for the quarter. And my expectation is that we're going to see a large degree of bumpiness across the BDC industry as results come in. That all said, some quarters feel worse than the numbers and some quarters feel better than the numbers. This quarter feels to me better than the numbers. Why do I think that?

Well, GBDC's net realized and unrealized losses for the quarter, the $0.12 per share of loss, they arose primarily from a small number of junior debt and equity positions and not from the core debt portfolio. We saw a lot of stability in the core debt portfolio. This is important because our experience is that the kinds of write-downs that we had, they're typically one-offs.

Put differently, I'm encouraged by the health and resilience of the vast majority of GBDC's portfolio. I'll have more to say about that in my outlook in my closing remarks. For now, I'm going to let Tim, Rob and Chris go into the quarter in more detail. Tim?

Thanks, David. Let's start on Slide 3 and walk through the drivers of GBDC's earnings in the quarter. I'll start with the drivers of our $0.34 per share of adjusted net investment income and then unpack credit gains and losses that contributed to $0.22 per share of adjusted earnings. Let me start with the drivers of net investment income. There were 3 in the quarter. Number one, improving investment income yield; number two, stable borrowing costs; and number three, prudent expense management. Let's go through each of these in turn.

First, on investment income yield, it was 9.9% annualized, which increased modestly quarter-over-quarter. It was supported by a stable weighted average spread in the portfolio, consistent base rates throughout the quarter and to a lesser extent, a modest amount of accelerated fee recognition and discount accretion tied to a handful of payoffs. And number two, borrowing costs held steady at 5.3% annualized, one of the lowest borrowing costs in the listed BDC peer group and a real competitive advantage for GBDC and its investors.

And then number three, operating expenses remained low. GBDC continues to benefit from its gold standard fee structure. There's nothing new to call out here. It's just continued efficiency.

Now let's unpack the drivers of GBDC's $0.22 per share of adjusted earnings. Overall, credit performance remains solid. Approximately 87% of our portfolio at fair value remains in our highest performing internal rating categories. And investments on nonaccrual status remained low at just 1.9% of the portfolio at fair value. That's a level well below the average of our listed BDC peers. We did, however, recognize $0.12 per share of adjusted net realized and unrealized losses in the quarter. Here's how that breaks down.

Approximately $0.08 per share of unrealized losses from markdowns on junior debt and equity investments in 2 portfolio companies that were taken to nonaccrual status or were on a nonaccrual status in the quarter. Those losses were somewhat offset by unrealized gains due to a small degree of reversal of last quarter's spread-driven unrealized losses. We recognized approximately $0.04 per share of net realized losses. This was driven primarily from the successful restructuring of RWA and Holdco in [indiscernible] in the quarter.

Importantly, the realized losses resulting from these restructurings were more than fully offset by the reversal of unrealized losses in the same investments. And then lastly, and on a positive note, we recognized $4 million of net realized gains on the exit of equity investments in a couple of portfolio companies. As a reminder, GBDC will in certain instances, co-invest in the equity of high-performing borrowers and the liquidation of these equity investments, which historically has typically happened at a gain, is one of the factors that have contributed to GBDC's top quartile credit performance since IPO.

Now regarding balance sheet changes and distributions in the quarter. NAV per share declined slightly to $14.25 per share. We wrapped up the quarter with net debt to equity of 1.23x. That was down slightly from the prior quarter, while average leverage throughout the quarter was also 1.23x. Total distributions paid in the quarter were $0.33 per share, and our Board of Directors declared a $0.33 per share distribution for the fourth fiscal quarter of 2026.

We also kept up our opportunistic share repurchase program during the quarter. The company bought back 1.1 million shares at a weighted average price of $12.90 per share or an approximate 10% discount to our March 31, 2026, net asset value. In addition, the Golub Capital Rabbi Trust purchased approximately $31 million or 2.4 million shares of GBDC during the quarter for incentive compensation purposes. This brought purchases of GBDC shares by the trust to $70 million over the last 12 months.

Golub Capital affiliates now hold about 8% of GBDC shares outstanding. That's an indication of a high degree of alignment between Golub Capital and GBDC investors. Now turning to Slide 7. Here, we've laid out the NAV per share bridge quarter-over-quarter. And you can see how the earnings drivers that I just walked through translate into GBDC's June 30, 2026, net asset value per share of $14.25. Adjusted NII per share of $0.34 fully covered the $0.33 per share distribution that was paid out during the quarter.

Adjusted net realized and unrealized losses were $0.12 per share and share repurchases added $0.01 per share of NAV accretion. Put it all together, and you get a net asset value that moved down modestly from $14.35 to $14.25 in the quarter. So that's the earnings summary for the quarter. With that, let me hand things over to Rob to take us through our investing activity and portfolio in more detail. Rob?

Thanks, Tim. I will now highlight our third fiscal quarter investment activity and provide some additional context on portfolio performance. Turning to Slide 8. In the second calendar quarter of 2026, at the Golub Capital level, our team originated nearly $3 billion of new investment commitments. GBDC participated in these new originations on a limited basis with $13 million in new investment commitments in the quarter, given slow repayments and our desire to focus on accretive share repurchases.

We remained highly selective and conservative in our underwriting, closing on just 1.5% of deals reviewed in the quarter at a weighted average loan-to-value of approximately 45% Existing sponsor relationships and portfolio company incumbencies accounted for approximately 54% of our origination volume, and we made loans to 9 new borrowers.

Further, GBDC continued to participate in add-on investment commitments to existing portfolio companies via transactions in the secondary market. Leveraging the capabilities of our capital markets desk, we acquired incremental interest in existing loans to high-quality borrowers at discounts to fair value, which we believe will prove accretive to GBDC's returns over time. We continue to leverage our scale to lead deals, acting as the sole or lead lender on 99% of our transactions in the quarter.

About 78% of our new origination volume in the third fiscal quarter supported M&A-driven transactions such as LVOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment.

Of GBDC's $13 million in new investment commitments in the quarter, 94% were in senior secured debt investments. New investments carried a total weighted average rate of 8.9%, which included a 5.2% weighted average spread.

Turning to Slide 10. As of June 30, 2026, GBDC's $8.2 billion portfolio remains well diversified across 424 different borrowers. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represent less than 0.2% of the overall portfolio on average, and our top 10 investments comprise just 13% of the overall portfolio, which represents a concentration level that is less than half of the average of our listed BDC peers.

GBDC's portfolio is also diversified by industry subsector with 51 individual subsectors represented. Investments in software portfolio companies continue to represent our single largest industry subsector exposure at 26%. I mentioned on last quarter's earnings call that we plan to report back on additional work we were performing to assess the impact of AI on our software holdings. You will recall that we are experts in software lending, having completed more than 1,000 software loans representing over $90 billion in principal over the last 20 years, with a default rate averaging about 5 basis points per year. I'm pleased to report that we completed a full re-underwrite of our current software portfolio this last quarter. I'm going to outline the key takeaways. However, there will be more detail on an update to our quarterly investor presentation, which we plan to publish later this month.

Our credit by credit re-underwrite was multifactored. It included evaluating revenue model, product criticality, data moats, regulatory complexity and switching costs. In addition to our internal assessment, we engaged a leading third-party consulting firm at the expense of the manager, not the fund, to perform an independent AI risk assessment. The third-party consultant analyzed potential product displacement and end-user workflow risks. They also assess the ability for companies with higher potential product displacement and end-user workflow risks to adapt in this new environment. The results of our internal AI risk analysis showed that less than 10% of our software portfolio was subject to elevated AI disruption risk. The third party consultants AI risk assessment concluded that fewer than 3% were at elevated risk.

We believe our software-related risk is very manageable, and we believe there will be opportunities for Golub Capital in the software space, in part because many other lenders are leaving the sector or reducing exposures.

On Slide 11, you can see that nonaccruals increased slightly quarter-over-quarter to 1.9% of total investments at fair value, but remain at very low levels in absolute terms and relative to the broader listed BDC sector. During the quarter, the number of nonaccrual investments increased from 19 to 20 as the addition of 4 investments were partially offset by the removal of 3 portfolio companies.

Our focus, as always, with underperforming borrowers is to use our deep bench of experienced investment professionals and the playbook that we've developed over several decades to minimize realized losses.

Slide 12 shows the trend in internal performance ratings for the entire GBDC portfolio. As Tim noted earlier, approximately 87% of the total investment portfolio remained in our top 2 internal performance rating categories. and investments rated 3, which signal a borrower may have the potential to or is expected to be performing below expectations, was 10.6%, modestly above historical averages.

The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 2.8% of the portfolio at fair value. Now I'm going to turn it over to Chris to take us through our financial results in more detail.

Thanks, Rob. I will now cover GBDC's financial performance and liability profile for the third fiscal quarter of 2026. First, turning to performance. Slide 13 highlights the key drivers of GBDC's net investment spread, which increased modestly quarter-over-quarter to 4.6% on an annualized basis.

Let's walk through the key components in detail. Starting with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield increased approximately 20 basis points sequentially to 9.9% annualized, the result of stable weighted average reference rates and spreads across the portfolio while benefiting from some accelerated discount accretion and fees from loan payoffs in the quarter.

Our cost of debt, the teal line, increased modestly -- approximately 10 basis points to 5.3%. Net-net, GBDC's weighted average net investment spread, the gold line, increased modestly quarter-over-quarter to 4.6% annualized.

Moving to the balance sheet on Slide 16. We ended the quarter with approximately $8.2 billion of total portfolio investments at fair value, $4.6 billion of outstanding debt and $3.7 billion of total net assets. Net debt-to-equity leverage for the quarter ended at 1.23x, down 0.01x from the prior quarter, reflecting the impact of lower average investments outstanding in the quarter.

Turning to GBDC's liquidity on Slide 19. Overall, our liquidity position remains strong, and we ended the quarter with approximately $2 billion of liquidity from unrestricted cash and undrawn commitments on our corporate revolver and the unsecured revolver provided by our adviser. This provides more than 1.3x coverage of our unfunded investment commitments and the upcoming maturities of our 2026 and 2027 notes. Supporting the strength of our balance sheet, in May 2026, we issued $500 million in 5-year unsecured notes, which we swapped to SOFR plus 218 basis points.

Subsequent to quarter end, we successfully amended certain terms and extended the maturity of our syndicated corporate revolver to July 2031 in partnership with our 18 bank partners. Total commitments under the revolver remained at approximately $2 billion with an accordion provision allowing for an increase in total facility size of up to $3 billion. Among other restated terms, we successfully negotiated the removal of the 10 basis point term SOFR credit spread adjustment and maintained a drawn spread of term SOFR plus 1.525% to 1.775%, subject to borrowing base levels. GBDC continues to have what we believe is one of the most competitively priced revolvers across our listed BDC peers.

Our debt funding structure highlighted on Slide 20 remains highly diversified across multiple financing markets. Our weighted average borrowing costs of 5.3% annualized remains one of the lowest in our listed BDC peer group and is underpinned by a differentiated investment-grade ratings profile.

Consistent with our asset liability matching principle, approximately 80% of GBDC's total debt funding is floating rate or swapped to a floating rate and 64% of our debt funding is in the form of unsecured notes across a well-laddered maturity profile. Following the July maturity extension of GBDC's corporate revolver, the weighted average maturity on our outstanding debt at June 30 was 4.8 years, well in excess of the weighted average maturity on accruing debt investments of 3.1 years, reflecting a prudent approach to asset and liability matching. Now I'll hand it back over to David for closing remarks.

Thanks, Chris. Last quarter, we introduced 2 themes. And in my view, both of these themes continue to play out in this quarter's results. First, we said that we thought the direct lending market had shifted direction, and we still do. After a long period of trending more borrower friendly since the beginning of this year, we think the market has been growing more lender friendly. It's happening slowly in part because of light M&A volumes.

Deal activity picked up in Q2 relative to Q1, but it remained well below what we consider a normal level. And spreads on new deals are generally up 25 to 50 basis points in the context of this wind direction shift. The second theme we introduced was we said we anticipated a continued period of elevated credit stress.

Our expectation was that sustained elevated credit stress that this would continue to be an industry-wide headwind throughout calendar Q2. And this has also proved right. We can see it in the data, including the recently released Fitch default report. We think it's also going to be reflected in lower industry returns on equity and higher dispersion in performance between managers as this quarter's earnings season continues.

Our expectation is that in this environment, Golub Capital is going to once again outperform. This stems in part from our strategy. We focus on first lien loans to resilient businesses in resilient industries, and we have limited exposure to junior debt. That helps in this kind of environment. But it's also about our strong underwriting and monitoring. We think we're particularly strong at early identification of problem credits and mitigating the credit losses on those problem credits in part because of that early attention.

Overall, I continue to believe we're in a Darwinian moment for private credit. I said that earlier this year, and I continue to believe it. I think that firms with sustainable competitive advantages with strong performance and with well-diversified long-term capital bases, they're going to adapt and take share. And firms with less good credit performance or with over reliance on certain kinds of capital like retail products, they're going to struggle.

Private equity sponsors in this context are soon going to know which private credit firms they can count on to provide consistent, steady access to compelling financing solutions and which private credit firms can't do that. And I think all of this is going to continue a pattern that I started to talk about last year. It's the growing separation between the winners and the winers. With that, operator, can you please open the line for questions?

[Operator Instructions] Your first question comes from the line of Finian O'Shea with Wells Fargo.

David, on capital allocation, appreciating the posture of focus on delevering and buybacks. Can you hit on how much of that stemmed from sort of the other variable, which is the quality and price of new investment opportunity? And if that -- if that sort of preference is expected to continue here as you've delevered a little bit? Or should you expect to go more conservative as, say, the new investment opportunity isn't great and there are still some credit headwinds in the industry?

We always need to think through the trade-offs between buying back shares, making new investments, having leverage be in our target range. And all of those are goals that we have that we want to achieve and there's some trade-offs between them.

So you quite correctly pointed out that in this last quarter where we saw relatively slow payoffs, we made the decision to slow down on new investing activity in order to achieve our goals with respect to repurchases and with respect to a bit of deleveraging. I think the payoffs are going to increase, and that's going to give us a lot more flexibility to be able to play more in new investing activity and simultaneously continue to achieve our leverage goals and our repurchase goals. But we're going to have to continue to monitor all of these different options and weigh the pros and cons against each other because I think these are at core alternative uses of capital. I think it's very important for you, Fin, and I know you focused on this before others have as well to focus on the emphasis we put on repurchase of shares.

When BDC shares are trading at a discount, they're trading at a discount to what managers are saying fair value is. I think that's a really important fact to bear in mind as you think about why some of them do repurchase their shares and some don't.

Agree. Very helpful. Just a follow-up on credit pressure. We're seeing a bit more last couple of quarters, including this quarter on the home services area, you have a little bit of that. Seeing if you could outline anything thematically going on there, if it's sort of a repeat of like the health care roll-up issues or something in the K-shaped economy or whatnot?

I think you're right that we're seeing a pattern, and I describe the pattern maybe less about being home services than about being businesses that are impacted by slower degrees of home sales. So it's been there's been some good writings on this. So we've seen that we are in a period since 2022 when mortgage rates have gone up. So if you are a homeowner and a holder of a pre-2022 mortgage, you're reluctant to give up that mortgage because your replacement mortgage will be much more expensive, even if you want to move. So that has cut down the amount of moving activity.

And I think one of the reasons why some home services businesses have seen slack demand is related to this move volume being below normal. I don't think that can persist forever. I think this is a self-curing problem, but I don't think it's going to be cured tomorrow either. So you're going to see some continued pressure in that space on businesses that are reliant on -- or that are influenced by the amount of moving activity.

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

Just one on the -- in terms of the deal activities in terms of the deals you saw in the quarter. And you mentioned a brief pickup in some of the spreads on new investments. Wonder if you could just further flesh that out. What are you seeing in terms of terms, in terms of docs versus what you saw in the March quarter?

Sure. So I think most folks in our industry expected 2026 to see much stronger M&A volumes than we saw in 2025. And as the year turned, as we got into January and February, that did not happen. In fact, we saw reductions, not increases in M&A in Q1. In Q2, we saw a little bit of recovery, Ken, but we're still operating in a very modulated, very constrained M&A environment for private equity-backed M&A. If you look at the overall stats, it can be a little confusing because industry M&A volumes are very influenced by some very large strategic deals. But if you look at the private equity ecosystem, M&A has been low. As a consequence of that, I think there's been more competition and more attention around the deals that are getting done. And that's mitigated to a degree, the spread widening and the improvement in terms that we would otherwise have seen in private credit in Q2.

We still saw some. I mentioned in the prepared remarks about a 25 basis point to 50 basis point improvement in pricing, and there's also been some improvements in terms and in leverage levels. So the overall situation is actually a bit better than just that spread increase. But I think we're going to see more. I think we're going to see more when M&A starts to recover more clearly. And I think over the course of the coming quarters, we'll see both an improvement an increase in M&A activity and a further improvement in the terms and conditions available for new loans for private credit players.

Got you. Very helpful there. And just one follow-up, if I may. Within the software loan portfolio there, the sequential pickup in the bottom 3 risk grades. Wonder if you could just talk about any common themes there? Anything notable driving some of the movement there?

Yes. I mean let's go back to a conversation that we had at the very beginning of the year, Ken. I was asked, so all this AI stuff, you've got some competitors who are saying it's a big nothing. And I said very pointedly, it is not a big nothing. There is a very significant change in the cost of coding as a result of AI. And there are going to be winners and losers in the industry that arise because of this very, very, very significant change that was not fully anticipated. I think what I also said at the time was I think we're well positioned for this. We are experts in software lending. We've been doing it for a very long time, very successfully. And we've been thinking about AI in the context of our lending activity. All that's true. I'm also going to say we're not perfect. And Rob Tuchscherer talked about how in our re-underwriting and in our -- looking at our portfolio with an outside consultant, we identified that we had a subset, a small subset but identifiable subset of our software loans where the companies are susceptible to some issues related to AI. I think we're seeing that. I think we're beginning to see that. I think that's going to become a continuing theme, not just for us, but for everybody in the industry.

Software is going to separate into winners and losers. I think our portfolio is very manageable, but there were a couple of instances in the portfolio where we're distinguishing some losers or some potentially challenged companies in our portfolio and reflecting that in valuations.

Your next question comes from the line of Paul Johnson with KBW.

Just with the trends we've seen across the sector, I mean, credit has been normalizing, you're talking about here on the call, a little bit of migration within your portfolio as well. I guess, how good of a grasp do you think that you have in terms of kind of outlining the tail within the portfolio? I mean, at this point, do you think that, that the tail within the portfolio is pretty much known or it's still growing at this point? I mean it's relatively kind of early on in this normalization process. I'm just curious kind of where you think the industry is at in terms of the tail that we've seen increasing across the space and then also, I guess, within GBDC's portfolio.

So I think you're on to some -- if there's a critical point for investors and analysts to focus on right now. I think it's exactly where you were headed. We're in the credit cycle. I've been saying it for a year. Others denied it for a while. I don't think there's a lot of denial anymore. We're in a credit cycle. There's elevated credit stress. It's going to result in winners and losers within people's portfolios, and it's going to create winners and losers between different managers because it's during credit cycles that dispersion between different managers becomes really significantly pronounced. So we've already started to see that. I think we're going to see more.

One of the patterns that I've seen over 30 years is that some managers do a better job than others in early identification of problems. We are giant believers in early identification of problems. The reason we focus so much on this is that when -- in our experience, when you identify a problem situation early, there are just a lot more options that you can explore with a sponsor, with a management team. And when you come into a situation that's problematic late when there are liquidity issues, there tend to be no good options and a choice between some bad and terrible options. So we're very focused on this early identification. That leads us, I think, to identify our tail earlier than others. It also leads us, I think, to value that tail more accurately because we're on it. So I think that's where we're at right now. I think we're in at a phase where we're most of the way towards having identified the credits in our portfolio that are going to have challenges. And I think across the industry, there are others who are not at the same phase. And you're going to see that over the course of this quarter and the next several quarters.

That's very helpful. And also, I guess, in terms of like the growth that you're seeing because there is still growth out there as well, of course. And it's obviously different across different industries. But what is like the quality of growth that you're still seeing within sponsor-backed portfolios? Is it may be coming down, not as strong as it was, but I'd just be curious how much of this is organic growth versus growth that's just becoming more challenged and perhaps requires more M&A to kind of achieve that -- those sufficient growth rates.

So I think if you look at the Golub Capital Altman Index numbers, it's instructive vis-a-vis your question, Paul. What it shows, if you look at the numbers is that we're still seeing a growing economy. We're still seeing growth in revenues and EBITDA in our portfolio companies. The pace of that growth is moderate, especially on an inflation-adjusted basis. It's moderate. It's not as strong as it was in the immediate post-COVID period. It's not bad. It's not recessionary, but it's muddling growth. And my expectation is that we're going to continue to see that pattern.

There's some outlier events that may occur, including situation in the Middle East that could drive in a more negative direction. But I see a lot of momentum right now and a lot of resilience in the U.S. economy in this slow to medium growth range. What does that mean for M&A volumes? I think there are a lot of pent-up buyers and pent-up sellers in the private equity ecosystem. What we need is a period of stability, a period where we've got less uncertainty around rates, less uncertainty around energy prices, and we'll start to see a growing degree of M&A. And I think that would be very healthy for the PE ecosystem.

Your next question comes from the line of Robert Dodd with Raymond James.

David, if I can go back to software, I apologize almost for that briefly. I mean, I think 3 of your new nonaccruals this quarter were software. Were they all in the group that you would have considered elevated AI risk? Or are there other themes also going on in the software kind of segment? And your software segment is pretty broad because the way you define it. Are there other issues going on there? Or were all of those issues you precisely as you say, like going to the table quickly and kind of putting them on nonaccrual earlier than you think some others might be willing to do?

Look, I don't -- Robert, I don't think there's ever just one reason for almost anything in life. So I don't want to lead everyone to think, oh, this is all just AI. There are always multiple issues. In some cases, there are acquisitions that have been made where the integration maybe isn't going as smoothly as was expected. It's very difficult to successfully generalize about sources of -- or reasons for underperformance. But I would also say I think AI is and will continue to be a meaningful factor.

Got it. Follow-up on that. I mean, the number you gave, I mean, your internal assessment was less than 10% subject to elevated AI risk. And then the third party, I think, was less than 3%, if I heard correctly. That's a pretty significant difference in terms of the third party being meaningfully more optimistic than your internal assessment, but maybe, hey, credit guys are always pessimistic. So can you give us any -- what would they -- you gave a little color on it, but I mean, were there significant -- is there a theme there on why their analysis, the third party came out with a meaningfully more optimistic assessment than your own internal...

I actually view the 2 much more similarly than you do. I wouldn't get too focused on the difference between these 2. We don't have exactly the same grading scale. There's no agreement on here's the basis for making an assessment or here's what exactly the words mean. I think I would take a different conclusion or a different lesson from the 2 different analyses, which is they're both low numbers. And that's the really important thing, Robert. They're both low numbers. The reality, if you ask me, is that if we looked across the software industry, the proportion of software companies that are going to be vulnerable to AI-related elevated risks, it's a lot higher than what's in our portfolio.

Our focus on enterprise risk systems that are deeply embedded in their clients' businesses that control data that our systems of record that are, in many cases, in regulated industries where security and other issues are hard to manage. I mean that's why our software is in good shape. It's because of choices that we've made, underwriting decisions that we've made over an extended period of time about what constitutes a Golub software credit. And I think that's really the key thing I want to -- I would like for you and others to take away.

Got it. Got it. I appreciate that. One more, if I can, real quick. On the dividend, in prior quarters, you said you'd revisit the dividend or reevaluate the policy in context of industry trends, right? Spreads, moderate base rates, that was the past. Right now, it sounds like spreads are moving a little higher. The forward outlook for base rates might be more up than down or at least stable. I don't think it's -- I don't think we're going to 3 SOFR anytime soon, but that's -- I'm not a rate forecaster. So would you say the dividend is always under review, obviously, but do you think there's any reevaluation is likely to be a more longer-term issue if we sit in an environment with a little higher SOFR, a little wider spreads in the short term, the real valuation might not be necessary.

So those are clearly helpful, right? I mean higher base rates are good, higher spreads are good. Whenever we talk about dividend policy, I just want to remind everybody about our approach. And our approach is we want to pay out an amount that is a good distribution for shareholders while at the same time, holding a steady NAV and not changing our dividend too frequently. So those are all things we need to weigh. And I'd say the trends in the last quarter were a little helpful on that front. I don't think many of us were expecting the SOFR forward curve to switch directions and has. That's a useful thing from the standpoint of being able to project future earnings power. But it's something we're going to have to continue to watch. It's part of what being a floating rate debt manager involves. You got to constantly be looking at what's forward earnings power.

Your next question comes from the line of Ethan Kaye with Lucid Capital Markets.

You mentioned some opportunities, I think, in the secondary market here. Can you kind of just help us -- kind of like size that for us, how much was done? I guess maybe this quarter, it wasn't too significant given overall investment levels, but is this something that you think there's still opportunity for going forward? And maybe also, can you kind of ballpark at what percent discount some of these purchases were executed?

Sure. So let me take a step back because this, again, is a subject that's gotten a lot of, in my mind, confusing and misinformation. So there have been a series of articles in the press about how secondary sales of private credit, this is new and bad. And I want to take the opposite position. I think it's old and good. We've had a desk at Golub Capital focused on sales and trading of private credit loans for more than a decade. We're a market leader at doing it. This is something that we have been doing a very long time. Why is it good? Well, sometimes in private credit borrower lending groups, there's a lender who wants to sell. If you think about this in the simplest of context, they have an old fund. They have a desire to rebalance and put their capital in a different place. They have a debt facility that's maturing. They have lost confidence in a sponsor or a sponsor relationship. There are lots of different reasons.

And from a borrower standpoint, once there's a lender who wants to sell, their choice is they can either have an unhappy lender in their group or they can have a new lender. We think that it's almost always better for them to have a new lender, and we're in the business of facilitating that. In the process, we also -- because of this position we're in as the largest sales and trading party, we also get to see a lot of stuff.

And sometimes what we see, we want to buy. In the calendar year-to-date, the Golub Capital sales and trading activity has exceeded $2 billion. It's a record first half for us. And across the platform, we've seen some opportunities to buy some loans that we think are attractive. Is it a major part of the platform's overall origination activity?

No. The vast preponderance of what we're doing is arrangement -- origination of new loans. But we think it's a meaningful competitive advantage of the platform to have this sales and trading expertise. We think it's good for our sponsor clients because we're able to help them replace unhappy lenders with happy ones. And we think it's good for our investors because it gives us a source of information opportunities that aren't widely available. For GBDC in calendar Q2, this was not a meaningful source of new investment activity, but I'm glad you raised it because I think it's an example of a competitive advantage of the Golub Capital platform.

Understood. I appreciate that. And then one more for me. You talked about in the prepared remarks, some of the kind of reversal of some of the spread-driven right, markdowns from last quarter. I think we heard from another peer kind of indicate on their call that there was still actually some pressure on their NAV in 2Q from this. I'm just wondering if there's anything maybe you can point to that might drive that distinction, right? Like is it perhaps a function of the respective markets you guys are focused on?

So I don't think we saw a lot of spread-related valuation movement in the portfolio in Q2. I think that was primarily a Q1 event. There was a little bit of bounce back in -- what I mean by that is spread tightening in the larger size range of the private credit universe in Q2, but not a lot. The main story was stabilization. So I think what you're going to see across Q2 results in the industry is credit-related valuation changes. And my expectation is we're going to see a bunch of those. That's what happens when you're in a credit cycle.

There are no further questions at this time. I will now turn the call back to David Golub for closing remarks.

Great. Thanks, everyone, for listening today. As always, if you have a question that we did not cover today or that you think of later, feel free to reach out, and we look forward to talking to you again in the quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended March 31, 2026. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings.

For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. I'm joined today by Tim Topicz, our Chief Operating Officer; Rob Tuchscherer, Senior Managing Director and Officer of GBDC; and Chris Ericson, our CFO. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended March 31, 2026, and we posted an earnings presentation on our website.

We'll be referring to that presentation during the call today.

We're going to change from our usual format today. I'm going to start with headlines and some commentary on what I think is happening in private credit. And then Tim, Rob and Chris are going to walk you through our operating and financial performance in detail. Following that, we'll open the line for questions. So let me start with headlines. GBDC had a small loss for the quarter, about 1% of NAV, and that was primarily because of mark-to-market fair value write-downs. Adjusted NII per share for the quarter was $0.34. That corresponds to an annualized adjusted NII return on equity of 9.5%.

Nonaccruals remain low in both absolute terms and relative to BDC industry peers and performance ratings for GBDC's borrowers not only remain strong, they actually improved modestly quarter-over-quarter. Now let's drill down on that first headline. I said the loss this quarter was primarily from fair value markdowns. To remind long-time BDC investors and to educate new ones, GAAP for a BDC loan investments isn't the same as GAAP for loans made by banks. When a bank makes a $100 loan, the asset stays on the bank's balance sheet at $100 regardless of what happens to market interest rates. There's a separate impairment reserve that the bank can use to buffer potential credit losses, but bank accounting doesn't account for changes in spreads.

BDC accounting does account for changes in spreads.

We mark our loans to fair value every accounting period. So when spreads widen, we write down our loans even when they're paying interest on time and even when we expect them to pay off at par. So this last quarter saw meaningful spread widening and that caused us to write down fair values even on our well-performing credits. Now whenever we have a quarter with this kind of meaningful spread widening, you'll hear us talk about how there's a big difference between temporary losses and permanent losses. Realized credit losses are permanent. They don't come back. If we can avoid realized credit losses, the mark-to-market adjustments, they reverse over time as borrowers move toward payoff or as their credit attributes improve or as market spreads narrow. The good news is that we currently think that most of this quarter's fair value write-down will reverse in future quarters. Tim is going to walk you through why in a few minutes.

I want to talk before handing the mic over about the bigger picture here. The spread widening that we saw this last quarter, it's part of a larger macro picture. I want to spend a few minutes talking about the forces that are causing changes in the private credit landscape, the impact of those forces and where I think we're likely to go from here. In the last several earnings calls, we've talked about headwinds facing direct lending. We've talked about how base rates have declined by about 1.5 percentage points since 2022. We've talked about how spreads have narrowed over the same period. Spreads have come down by more than 1 percentage point. So between base rates and spread reductions, that's 2.5 to 3 percentage points of return headwinds.

We've also talked about elevated credit stress and how that's been reflected in higher default rates, more frequent restructurings and utilization of PIK amendments. In the last quarter, we can say we can add a new headwind, concerns about AI and software. So these 4 headwinds, lower base rates, lower spreads, elevated credit stress, AI fears, they've had a big impact. We've seen lower returns across the public BDC sector with average returns on equity falling from about 9% in 2023 and '24 to between 4% and 5% last year. We've seen a big increase in dispersion, too. The dispersion of performance between top quartile managers and bottom quartile managers has always been large in the BDC space, but it's been particularly large in the last year with top managers performance going down a little and bottom manager performance going down a lot.

The third impact, shareholders have spoken. We've seen a sell-off in publicly traded BDCs, which now trade at large discounts, and we've seen a spike in redemption requests in nontraded BDCs. All of these impacts, they've contributed to a final impact. And I'd characterize that final impact as a shift in wind direction. We've moved from a market that for years was becoming more borrower-friendly to one that's now becoming more lender-friendly. Now this trend is new, but we're already seeing wider spreads and more attractive deal terms. So what does this mean? Where are we headed from here? I'm usually very cautious about making predictions. You've heard me talk many times about how challenging the prediction business has been since COVID. But I'm going to offer the following thoughts about where I think the market is headed based on what I see today.

My first prediction is actually a repeat from last quarter. I think we're in a Darwinian moment for private credit. Firms that have sustainable competitive advantages, that have strong performance from a credit standpoint, that have well-diversified long-term capital bases, they're going to adapt and take share. Firms with not so good credit performance or with an overreliance on retail products, they're going to struggle. Private equity sponsors are very soon going to know which credit firms can provide them with consistent, steady access to compelling financing solutions and which credit firms can't. All this is going to lead to a pattern we called out last year, a growing separation between what we call winners and whiners. Second prediction. I expect this period of credit stress to continue for a while. We're not through this credit cycle yet. We at Golub Capital try very hard to identify and escalate problems early.

So we tend to be ahead of the market in recognizing and dealing with credit issues. My observation based on what I'm seeing in industry data and to a lesser extent in our portfolio is that there remains a subset of companies that are not adapting well to current economic conditions that are ultimately going to need to restructure and that hasn't happened yet. A third prediction, I think market conditions are going to become even more lender-friendly, especially if M&A continues to rebound. Capital has left and in some respects via continuing redemptions, continues to lead direct lending. Supply and demand, it's going to drive wider spreads. These wider spreads are going to create short-term losses from the fair value adjustments that we talked about earlier, but the same wider spreads are also going to create medium- and long-term benefits from higher earnings on new loans and from reversal of prior period fair value markdowns.

We're confident that Golub Capital and GBDC are going to be among the winners. We're very optimistic about our medium- to long-term ability to produce premium returns for our investors, consistent with our nearly 16-year track record with GBDC since it went public. Now I'm going to pass the call over to Tim, Rob and Chris to discuss operating performance in the quarter in more detail, and I'll be back at the end for questions. Tim?

Thanks, David. Let's start on Slide 3 and discuss the drivers of GBDC's $0.34 per share of adjusted NII and negative $0.18 per share of adjusted earnings. First driver, overall credit performance remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories and investments on nonaccrual status remained very low at just 1.4% of the total investment portfolio at fair value. This level is well below the average of GBDC's listed BDC peers.

Second driver, GBDC's investment income yield of 9.7% annualized was down 30 basis points sequentially. The decrease was primarily driven by the full quarter impact of lower SOFR following the interest rate cuts of late 2025. Third driver, GBDC's borrowing costs declined by 20 basis points to 5.2% annualized, one of the lowest borrowing costs in the listed BDC peer group. The decline was similarly driven by the impact of lower SOFR, an offset that highlights one of the advantages of GBDC's predominantly floating rate debt capital structure. Fourth driver, GBDC's earnings continued to benefit from a gold standard fee structure and one of the lowest operating expense loads in the listed BDC peer group. And finally, as David previewed, credit spread widening drove the majority of the $0.52 per share of net realized and unrealized losses, resulting in a $0.18 per share loss in the quarter.

Regarding balance sheet changes and distributions in the quarter, NAV per share declined to $14.35 per share. We ended the quarter with net debt to equity of 1.24x, consistent with prior quarters and within our targeted range of 0.85 to 1.25, while average leverage throughout the quarter was 1.21x, a modest decrease from prior quarters. Total distributions paid in the quarter were $0.33 per share. Our Board of Directors declared a $0.33 per share distribution for the third fiscal quarter of 2026. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. The company repurchased 2.2 million shares in the quarter at a weighted average price of $12.43 per share or an approximately 16% discount to December 31, 2025, net asset value.

In addition, the Golub Capital Rabbi Trust purchased approximately $19 million or 1.5 million shares of GBDC during the quarter for the purposes of awarding incentive compensation. Turning to Slide 7. You can see how the earnings drivers I just mentioned translated into GBDC's March 31, 2026, net asset value per share of $14.35. Adjusted NII of $0.34 fully covered the $0.33 per share base distribution that was paid out during the quarter. Adjusted net realized and unrealized losses were $0.52 per share. and $0.02 per share of net asset value accretion from share repurchases. Taken together, these results drove a net asset value per share decrease to $14.35. Now let's unpack the $0.51 per share of unrealized losses on Slide 8. It's important for investors to note that unrealized losses are not all created equal. When they are credit related, they often don't come back.

On the other hand, when borrowers perform, the unrealized losses reverse over time as loans mature or spreads tighten. So a key question to ask when interpreting GBDC's results is how much of the unrealized loss in the March 31 quarter is likely to prove temporary. While there's no way to be sure except in hindsight, we find it informative to look at how much unrealized loss is embedded in borrowers that are performing in line or better than expectations at underwriting. In our experience, such unrealized losses are likely to reverse over time. Our preliminary analysis suggests the vast majority of unrealized losses were attributed to borrowers that are performing at least as well as we expected at the time of underwriting. You'll recall that GBDC's internal performance ratings categorize borrowers on this basis.

For example, borrowers with ratings 4 or 5 are performing in line or better than expectations at underwriting, and we expect them to continue to perform as expected. Approximately 70% of the $0.51 per share of net unrealized losses this quarter or $0.35 per share came from borrowers rated 4 or 5. Because the borrowers are performing well, our view is that the fair value adjustments taken in the quarter were primarily driven by market spreads and are likely to reverse over time. Put differently, if GBDC were a bank and we didn't have to make fair value adjustments based on market spreads, the quarter would have been profitable. That said, we're not taking the expected reversal of unrealized losses for granted. We are keenly focused on avoiding permanent credit impairment and minimizing realized credit losses.

Long-time GBDC investors are familiar with our playbook, careful underwriting, proactive portfolio monitoring, early detection of potential vulnerabilities and early intervention to address those vulnerabilities. The remaining 30% of net unrealized losses or $0.16 per share came from borrowers rated 3 or lower. These markdowns reflect the impact of the mix of market spreads and further credit deterioration in known troubled credits. In fact, the majority of the $0.16 per share of unrealized losses were related to borrowers on nonaccrual status as of March 31, 2026 or previously restructured portfolio companies. I will now turn the call over to Robert Tuchscherer to walk through our portfolio in more detail.

Thanks, Tim. I will now highlight our second fiscal quarter investment activity and provide some additional context on portfolio performance. Turning to Slide 9. In the first calendar quarter of 2026 at the Golub Capital level, our team originated over $3.3 billion of new investment commitments. GBDC participated in these new originations on a limited basis with $17.7 million in new investment commitments in the quarter, given slow repayments and our desire to focus on accretive share repurchases. We remain highly selective and conservative in our underwriting, closing on just 1.9% of deals reviewed in the quarter at a weighted average loan-to-value of approximately 42%.

We leaned in on existing sponsor relationships and portfolio company incumbencies for approximately 69% of our origination volume, and we made loans to 10 new borrowers. We continue to leverage our scale to lead deals, acting as the sole or lead lender on 94% of our transactions in the quarter. We focused on the core middle market, defined as borrowers with between $10 million and $100 million of annual EBITDA, which we believe continues to offer better risk-adjusted return potential than the larger end of the market. The median portfolio company EBITDA for originations for this quarter was $76 million. About 57% of our new origination volume in the second fiscal quarter supported M&A-driven transactions such as LBOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment.

Of GBDC's $18 million in new investment commitments in the quarter, 98% were in senior secured debt investments. New investments carried a total weighted average rate of 8.8%, which included a 4.9% weighted average spread. Turning to Slide 11. As of March 31, 2026, GBDC's $8.3 billion portfolio remains well diversified across 420 different borrowers. The number of portfolio companies in GBDC's portfolio has increased nearly 26% over the past 3 years, further enhancing our diversification. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average, and our top 10 investments comprise just 13% of the overall portfolio, which represents a concentration level that is less than half of the average of our listed BDC peers.

GBDC's portfolio is also well diversified by industry subsector with 52 individual subsectors represented. Software portfolio companies represent approximately 26% of GBDC's portfolio at fair value. Before moving on to credit quality, I'd like to expand on our software portfolio in light of recent investor interest in the potential for AI disruption. But before I go into detail, I want to remind everyone of what informs our view. In short, we're specialists in software investing at Golub Capital. We have been investing in software companies for a long time, more than 20 years. We've completed over 1,000 software deals representing in excess of $90 billion in commitments over that period. We're also good at it. Over those 20 years, we've had an annualized default rate of just 0.05% or 5 basis points.

We've also got a great team, including 25 dedicated investment professionals with over 230 years of combined experience through multiple credit and technology cycles. We've got a well-developed underwriting approach. It starts with a long-held view that the most creditworthy software companies are dominant players in a niche market. These winners typically provide enterprise-critical platforms with sticky and embedded workflows, long implementation cycles and high switching costs. In 2023, we began including a systematic framework for assessing AI risk at the borrower level for all new software deals and across our software portfolio. This framework assesses potential AI risk at both the product and end market levels.

We continue to believe that AI risk is not the same across all software companies and subsectors and therefore needs to be evaluated at the borrower level on a case-by-case basis. Finally, 95% of our software investments are in first lien senior secured loans with significant equity cushion behind them. In many instances, we are lending at a 35% loan-to-value, which means that enterprise value of the borrower would have to decline by 65% before our senior debt position even begins to be impaired. As we look at Slide 12, you can see that within our existing software portfolio, which represents approximately 26% of GBDC's portfolio, 95% of the software investments are in internal performance ratings categories 4 and 5, our highest-rated categories.

The performance ratings of our software portfolio compares favorably to the overall GBDC portfolio. During the quarter, we re-underwrote our software portfolio and established a new metric, degree of AI disruption risk. Our analysis has led us to conclude that only 8% of the software portfolio is subject to an elevated level of AI disruption risk. We plan to continue to monitor AI disruption risk over the coming quarters and plan to report back on our findings. On Slide 13, you can see that nonaccruals increased slightly quarter-over-quarter to 140 basis points of total investments at fair value, but remain at very low levels in absolute terms and relative to the broader listed BDC sector.

During the quarter, the number of nonaccrual investments increased to 19 with the addition of 5 portfolio company investments. The financial health of our portfolio companies generally remains strong. Our portfolio's average interest coverage ratio of 1.8x increased quarter-over-quarter. The portfolio's average leverage level also showed strength, declining about 0.25 turns of debt to EBITDA from year-end 2024. Additionally, healthy enterprise values continue to underpin our loan positions as loan-to-value ratios remained stable at approximately 45%.

Slide 14 shows the trend in internal performance ratings for the entirety of GBDC's portfolio. As Tim noted earlier, nearly 90% of the total investment portfolio remained in our top 2 internal performance ratings categories and investments rated 3 signaling a borrower may have the potential to or is expected to be performing below expectations, decreased quarter-over-quarter to 8.7%. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 2.2% of the portfolio at fair value. I'm going to turn it over to Chris now to take us through our financial results in more detail.

Thanks, Rob. I'll now cover GBDC's performance and liability profile for the second fiscal quarter of 2026. First, on performance. The economic analysis on Slide 15 highlights the drivers of GBDC's net investment spread of 4.5%. Let's walk through this slide in detail. We start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell approximately 30 basis points sequentially to 9.7% annualized, largely reflecting the full quarter impact of the rate cuts from the fourth calendar quarter of 2025.

Our cost of debt, the teal line, decreased approximately 20 basis points to 5.2%, reflecting our approximately 80% floating rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined slightly. Moving to the balance sheet on Slide 18. We ended the quarter with over $8.3 billion of total portfolio investments at fair value, $4.7 billion of outstanding debt and $3.7 billion of total net assets. Net debt-to-equity leverage was 1.24x at quarter end, relatively flat compared to the prior quarter, reflecting the impact of lower average investments outstanding during the quarter, but offset by the impact of fair value markdowns and share repurchase activity. Turning to GBDC's liquidity on Slide 21. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.4 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unsecured revolver provided by our adviser.

Our debt funding structure highlighted on Slide 22 remains highly diversified and flexible. Our weighted average borrowing cost of 5.2% annualized remain low and what we believe to be one of the lowest in our listed BDC peer group and is underpinned by a differentiated investment-grade ratings profile. Consistent with our asset liability matching principle, 80% of GBDC's total debt funding is floating rate or swapped to a floating rate, which positions us well to continue to modulate the impact of lower interest rates on investment income through offsetting lower interest expense on our borrowings. 51% of our debt funding is in the form of unsecured notes across a well-laddered maturity profile. Our next unsecured note maturity is in August 2026, and we continue to evaluate new issue pricing levels in the unsecured debt market. Importantly, we have the requisite liquidity available under our revolving credit facility and balance sheet flexibility to mitigate refinancing risk associated with these maturing bonds. With that, operator, could you please open the line for questions?

[Operator Instructions] Your first question comes from Kenneth Lee with RBC Capital Markets.

Just one on the software loan side of the portfolio. And you talked about the new AI risk framework, and I think it's about 8% of the investments being at risk there. Wonder if you could just talk a little bit more about the -- some of the characteristics that underlie some of those investments, commonalities there? And what sorts of mitigation could you see being performed over time on those types of investments?

Sure. Thanks, Ken. I'll start, and Rob, maybe you can add to what I'm going to say when I'm done. So for some context, we started investing in software at a time when almost no other lenders did. So the idea of being a lender to this space at a time that's contrarian is, for us, not uncomfortable. In some ways, all of the noise that you're hearing right now about risks in software is good for us because we understand the difference between good software credits and bad software credits, and it means less competition.

What we're seeing in the marketplace right now is many pure lenders who had started to get into software lending in the last few years want to be able to report to their shareholders how they're reducing their software exposure. So they're literally not participating in marketplace opportunities for new loans. So that's just some context for you. The exercise that Rob talked about involved looking at our portfolio from the standpoint of degree of AI disruption risk. And he correctly said that 8% of the roughly 25% of our portfolio that's in software. So it's roughly 2% of our overall portfolio is in a category of elevated AI risk. That doesn't mean we think we're going to lose money on these loans. They could be low leverage, they could be near maturity. There are a lot of other factors that go into whether we're going to see elevated risk of credit loss in these loans. But this is a very important rating system from the standpoint of both evaluating new loans and helping us figure out from a monitoring perspective, what should be our goals with those borrowers.

So for example, it would be reasonable to conclude that if we see elevated risk of AI disruption, we're going to want to reduce exposure or we're going to want to get paid for the exposure that we're taking. We may want to increase pricing. We may want to increase equity cushions. We may want to take other steps that reduce risk. So what kinds of companies fall in this category. The most significant element of the category are companies that are involved in providing tools that enable others who are writing code to do so more effectively. This has historically been a significant category of software companies. It's not a category that we've historically been attracted to, but we do have a couple of exposures that fall in this category. I'd say that's the largest component of the group. Rob, if you want to add more color, please do.

Yes. Thanks, David. Yes, building on what David is talking about in terms of the different attributes. As I mentioned in my remarks, we look at it at 2 levels. One would be on the product side and then the second would be at the end user level. So if you look at the handful of businesses that are falling into what we would categorize as potential for higher AI disruption risk. David mentioned one category of products, which we develop in tools. The other would be something that is more reliant on content creation. So a business such as Pluralsight, which we're all well aware of.

And then on the end market side, you would have businesses that serve end markets that maybe are not seeing headcount reductions today, but could see them in the future. So for example, contact center or call center type businesses are ones that we will be monitoring more closely. But again, this is really a forward-looking metric given that the performance of the portfolio has remained really strong. But I think from our perspective, as I mentioned, we're going to continue to monitor for AI disruption risk and roll this analysis forward and report back on our results in the coming quarters.

Great. Very helpful there. And just one follow-up, if I may, just on capital allocation. I saw that you repurchased some stock in the quarter. Looking out, is the preference to lean more towards repurchases versus new investments?

I think we're going to continue to evaluate the best ways in which to allocate our capital. So it's hard to answer your question in an absolute sense. We've got to look at the opportunities in front of us and that includes share repurchases that includes new investment opportunities, that includes working within our target leverage framework. So there are many factors that go into that.

Your next question comes from Ethan Kaye with Lucid Capital Markets.

Kenneth covered a couple of my questions, but just maybe one for David. In your introductory remarks, you kind of mentioned based on some industry data you're seeing, there's perhaps a subset of companies across the industry that -- portfolio companies across the industry, borrowers that are really not adapting well to these economic conditions. I guess just kind of curious like what's your diagnosis as to why these companies either have not adapted or have not been able to adapt? And is it something that -- is the capital structure related? Is it something related to the fundamental business, the sector they're in? Just any kind of through lines you can draw regarding those companies would be helpful.

Sure. So first off, let's talk about some of the indicia that we're seeing of elevated credit stress. So you can see it in Fitch default data. You can see it in the degree of business of restructuring advisers and restructuring lawyers. You can see it in the quantum of PIK amendments that are coming through. You can see it in the broadly syndicated market and the proportion of the market that's trading below 85. There are a whole variety of data points that I think are visible that illustrate that we're in a period of some elevated credit stress. In some prior periods like this, that elevated credit stress has been concentrated in a single industry. So think about the fiber telecom crisis of the early 2000s.

We don't really see that right now. It's not all in one industry. There are though some red threads that are common themes. So one common theme, people talk about the K-shaped recovery are companies that are focused on the lower end consumer. The lower-end consumer is stretched right now. You can see it in subprime auto data, subprime credit card data. And so with the recent increases in gas prices, my expectation is that's going to get worse. A second red thread is companies that are beneficiaries of moving of people selling their house and moving to a new house. The rate of moving is very low right now because of people locked in by low interest rate mortgages that they put in place before interest rates went up.

So if you're in the furniture business or the home decor business or the HVAC business, these are all linked to a significant degree to moves. And so those have been under some pressure. A third red thread is some areas where we've seen changes in consumer behavior. During COVID, there was a very significant increase in interest in purchasing in virtually all outdoor sports, hiking, fishing, hunting, boating, many of bicycling. Many of those areas have seen decreased spending levels in the period since, and it didn't kind of go back to previous normal. It's gone lower than previous normal.

So those are some examples. And then there are some that I'd say are more specific to the private equity ecosystem. There are some companies that were overleveraged, bought at very high multiples and overleveraged in the peak LBO boom of 2021 and early 2022. And in some cases, those companies weren't designed from a capital structure standpoint to be able to tolerate plus 5% on interest rates. I don't think it's a one factor, Ethan. I think there are a bunch of different themes that you see in the market today. And I think that's one of the reasons that this credit cycle is unusually elongated. It's not like there's just one industry that needs to go through a restructuring process. There are a large number of companies in a variety of industries that need to do so.

[Operator Instructions] Your next question comes from Robert Dodd with Raymond James.

I don't want to go back to software, but I'm going to anyway. Can you give us any color on kind of growth dynamics like net revenue, revenue retention, which is recurring revenue or same-store sales concepts. I mean when I look at the Altman data that you published, which is obviously, I think, a platform-wide set of data, there has been a noticeable slowdown in software growth. I mean everything is still growing over the last several quarters. I mean, how relevant is that to the assets that are in the BDC? And can you give us any color on kind of like -- any metrics about how they're doing versus, again, the Altman numbers paint a certain picture?

So thank you, Robert. So for those who are not familiar with what Robert is alluding to, we publish a quarterly index called the Golub Capital Altman Index and it looks at the growth in both revenues and EBITDA for the first 2 months of each quarter. And we're able to show those numbers by some industry sectors where we have a sufficient -- and a sufficient number of companies to make the numbers meaningful. And Robert is correct that if you look at the data over the last, I'd say, half dozen quarters, the good news is we're continuing to see growth across the U.S. economy generally and across the software sector, both growth in revenues and growth in earnings, and we're seeing a slowdown in growth in revenues and earnings.

Interestingly, that slowdown is not just in software. That slowdown is broad-based. It's across industries. Among the stronger industry segments that we've seen is software. So there isn't a selectivity, Robert, where the software companies that are included in the index are meaningfully different from the software companies that are in the GBDC portfolio. Wherever we have data, we're showing the data. I think what the data says is that the software industry remains healthy, that you're not seeing -- as of now, you're not seeing AI eat the software industry. But -- but you are seeing across the entirety of the U.S. economy, you are seeing a bit of a slowdown in growth.

Got it. Moving on to kind of the outlook for active -- kind of market is somewhat slower Q1, beginning of Q2 has started to see a pickup, but not a rocket ship exactly. What's your view on how you think -- I mean, all the things were pent-up exits, et cetera, those all still stands, but it doesn't mean they happen this year. I mean what's your view on kind of how that could trend? We've gone through a period of volatility. Sometimes that takes a period to recover from spreads are wider, et cetera. I mean what's kind of your view on how and it is a crystal ball moment, how the rest of the year could play out in terms of activity and general market trends.

Yes. We haven't yet talked today about an elephant in the room, which is the oil markets and the situation in the Strait of Hormuz. I think that's a very large factor in respect of your question. So predicting the future of M&A trends almost requires an assumption about the straits. In one scenario, we get near-term resolution, oil prices come down, there's reasonable predictability about energy prices going forward. I think that scenario points to significant momentum and recovery in M&A.

The alternative scenario, which is continued uncertainty, not lack of clarity, higher oil prices, increasing shortages in parts of the world of jet fuel and fertilizer and petrochemicals, I think that scenario points to an extended period of relatively impaired M&A activity because uncertainty is not the friend of deals. You can have bad news and still have deals, but uncertainty is very challenging for deals. So I'm not sure, Robert, as to which of those 2 paths we're going to see. I'm hopeful that we'll see some resolution and that we'll be in the first of those 2 scenarios. But I don't think anybody can be certain right now which of those is going to transpire.

Your next question comes from Derek Hewett with Bank of America.

Could you talk about the sustainability of the dividend following the reset last year? Dividend coverage is lower versus kind of -- kind of the pro forma number last quarter and relative to where it is today, especially when we're in an environment where you have the uncertainty in the Middle East, plus you have normalized -- you have credit normalization that could be a drag on earnings in the coming quarters.

So great question. You provide context again. We did a dividend reset recently, and it was challenging to figure out what the right level is because of uncertainty about base rates, uncertainty about spreads, uncertainty about credit. There are many different factors that impact earnings power. I think where we came out was a good place. I think if you look at our NII per share this last quarter, it's an illustration of the earnings power of the company today. And I think we talked in the call about several different paths to increasing that earnings power, including higher spreads and including gains, realized and unrealized gains. So this is something we're going to need to continue to watch and study and make sure that we continue to put our dividend in the right place as a floating rate loan fund, we need to be responsive to market.

Okay. And then I might have missed this in the opening comments, but could you provide a little bit more color on what caused the increase in PIK? And then of the total, like what percentage of PIK was just like your typical PIK by design versus amendment PIK?

I don't think we disclosed that in our comments today. And to be honest, I don't remember what exactly is in the queue on that. So I'm going to ask to come back to you after we've reviewed what we've disclosed, and we can share that with you.

Derek, it's Tim. I might just jump in there and just say, generally speaking, the vast majority of our PIK interest is associated with borrowers that we've structured a PIK toggle into the credit agreement at the time. of underwriting as opposed to PIK amendments to support portfolio companies from a liquidity perspective. So that's the vast majority. We did see an uptick in PIK interest income for the quarter versus the prior quarter, but that was largely driven by one portfolio company that elected to toggle more PIK interest in this quarter than it did in the prior quarter. Hopefully, that gives you more context.

Your next question comes from Paul Johnson with KBW.

Just going back to software, 1 or 2 questions there. I'm just curious how do you, I guess, approach any sort of software restructuring or discussions around the topic with the software company in this environment. And I'm just thinking most of those companies probably would prefer to avoid any sort of insolvency or any sort of indication of a potential restructuring, certainly any sort of bankruptcy for any sort of concerns around obviously, retainment of clients.

So I would imagine maybe you would be getting involved there a little bit earlier on than normally you would. But I'm curious kind of is it just more of a recurring check-in with most of these companies? Or do you look to take potentially be a little bit more aggressive in taking action sooner in the current environment?

So again, I'll start with some comments on that, and then I'm going to ask Rob, who's been leading our software underwriting efforts for years to comment as well. Our approach is always the same. You want to identify problems early. When you identify problems early, there are more options that we, as lenders, as sponsors, that management teams can undertake to resolve them. So we're big believers in not sweeping things under the rug and instead in escalating issues and having discussions about them early. That's true in software. That's true in other areas as well.

In software, we also maintain very close dialogue with both our sponsor clients and our management teams. Again, we view ourselves as having 2 sets of partners when it comes to portfolio companies, both the sponsor and the management team. And sometimes one is more important, sometimes the other is more important. This is not an asset class where you make a loan, put the document in the drawer and pray. That's not an effective strategy for running a direct lending program. It's -- our approach is the polar opposite of that. We really work very hard to engage with our sponsor clients and our portfolio companies to help them during both good times and in bad times. Rob?

Yes, I don't have much to add. I would agree that we have a pretty methodical portfolio management process that spans all 4 of our industry verticals. So I don't think there's much of a difference in terms of our process or approach. I think the other point that I think is important in these situations is that although it's always a balancing act, given the fact that 95% of our software portfolio is in first lien senior secured loans and well diversified, I think that when we come into these discussions, we feel pretty good about where we sit in the capital structure and our position. So I think that helps when we're having these discussions with sponsors if there is an ask on an amendment or there's some degree of underperformance.

Got it. Appreciate it. That's all very helpful. One just higher-level question. I mean in terms of just market activity, where is that kind of gravitated to in this environment? I mean is the market still available in terms of kind of the large buyouts, the more of the large unit tranche, $1 billion-plus type of financing acquisitions in the market? Or is it, at this point, a little bit more averse to the larger transaction size and you're seeing potentially more activity kind of further down the market? That's all for me.

I think we're seeing activity across the size range. So I don't think it's restricted to just small or just big. I think that it's -- in terms of putting together a larger group of lenders interested in a particular transaction, it's harder in software right now. And in some respects, it's harder for very large deals because some of the bite sizes of some players in the market who are interested in the large market, those bite sizes have come down in the context of slower subscriptions and redemptions in the nontraded space.

Got it. And then I guess one more further -- just one more on that point, if you don't mind me putting one more in here. But have you seen that the pressure from redemptions and the subs you just mentioned, has that impacted the market in any way from some of your more kind of usual competitors, as you mentioned here, commitment sizes or pricing by any means.

Look, I think we all live in a world of supply and demand. So there's a lower degree of capital that's looking for new investments right now. That's part of the -- that may be the biggest factor contributing to what I referred to in my prepared remarks is this shift in wind direction that's caused the market to go from blowing toward more borrower-friendly to now where it's blowing more lender-friendly.

This concludes the question-and-answer session. I'll turn the call to David Gallop for closing remarks.

Thank you. So just wanted to thank everybody for listening this morning and for your questions. As always, if there's a topic that you're interested in that we did not cover or did not cover in the depth you want, please feel free to reach out. Look forward to talking to you all next quarter.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended December 31, 2025.

Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings.

For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded.

With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. I'm joined by Tim Topicz, our Chief Operating Officer; and Chris Ericson, our Chief Financial Officer.

For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong and partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended December 31, and we posted an earnings presentation on our website. We'll be referring to this presentation during the call today.

I'm going to start, as I usually do with headlines and a summary of performance for the quarter. Then Tim and Chris are going to walk you through our operating and financial performance for the quarter in detail. And finally, I'll wrap up with some observations on current market conditions and our outlook for the coming period.

Let's start with 3 headlines. The first headline is that despite 4 continuing industry headwinds, GBDC had an okay quarter, not great, but solid given the environment. Adjusted NII per share was $0.38, which translates to an adjusted NII ROE of 10.2%. Adjusted net income per share was $0.25 for an adjusted ROE of 6.7% and GBDC paid a $0.39 per share distribution.

So what are these headwinds? I described all 4 last quarter. First, lower base rates; second, tighter spreads, not just in our market, but across almost every credit asset class other than subprime. Third, muted M&A activity, although the second half of calendar '25 improved relative to the first half; and fourth, continued high levels of credit stress. The second headline is that we expect these headwinds to continue for some time, and we're planning for a challenging 2026. The third headline, consistent with our comments on last quarter's call, is that our Board of Directors revisited GBDC's dividend policy. And after careful evaluation and in light of the headwinds I just described, the Board decided to reset the company's quarterly base dividend to $0.33 per share or about 9% of NAV per share.

We also plan to maintain the quarterly variable supplemental dividend policy going forward. We believe this change is consistent with our 4 long-standing dividend priorities: maintaining a stable net asset value over time, minimizing excise taxes over time, adjusting our base distribution level infrequently and paying as high a dividend yield on NAV as sustainable, consistent with those goals.

Now I'll pass the call over to Tim Topicz to discuss operating performance in the quarter in more detail.

Thanks, David. Let's begin on Slide 4. GBDC's $0.38 per share of adjusted net investment income and $0.25 per share of adjusted earnings were driven by 4 key factors this quarter. Let me walk through each of those in turn. First, overall credit performance generally remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. Investments on nonaccrual status remained very low at just 0.8% of the total investment portfolio at fair value.

This level is well below that of our BDC peer industry average. And although adjusted net unrealized and realized losses increased to $0.13 per share, they were primarily related to fair value markdowns on a small tail of underperforming borrowers at GBDC, including $0.06 per share in markdowns on equity investments in these borrowers.

The second key earnings driver, GBDC's investment income yield of 10% was down 40 basis points sequentially, mostly driven by lower base rates and to a lesser extent, lower weighted average spread across the portfolio. These negative headwinds were in part offset by the third key earnings driver, a continued decline in GBDC's borrowing costs, reflecting the impact of GBDC's predominantly floating rate debt capital structure. And finally, GBDC's earnings continued to benefit from a market-leading fee structure and one of the lowest operating expense loads in the public BDC sector.

Now shifting to investment activity. GBDC's investment portfolio decreased by a modest 1.5% quarter-over-quarter to $8.6 billion at fair value. We remain highly selective and conservative in our underwriting. We closed on just 3.1% of the deals we were reviewed in the quarter at a weighted average LTV of approximately 43%. We leaned on existing sponsor relationships and portfolio company incumbencies for approximately 60% of our origination volume and made loans to 18 new borrowers.

We continue to leverage our scale to lead deals, acting as sole or lead lender in 96% of our transactions in the quarter. And we continue to focus on the core middle market, which we believe continues to offer better risk-adjusted returns potential than the larger borrower market. The median portfolio company EBITDA for our originations in the quarter was $81 million.

Continuing on Slide 4, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.39 per share. As David mentioned at the outset, our Board of Directors has updated the base distribution level to $0.33 per share. And in addition, we'll evaluate on a quarterly basis, a variable supplemental distribution that will seek to distribute 50% of the earnings in excess of $0.33 per share.

Continuing on with other balance sheet updates. Net debt to equity remained stable quarter-over-quarter, ending at 1.23x within our targeted range of 0.85x to 1.25x. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. Total shares repurchased in calendar year 2025 grew to 5.5 million shares or $76.5 million in aggregate value. In the quarter, these capital management transactions resulted in $0.01 per share of accretion to net asset value.

I'm going to turn it over to Chris now to take us through our financial results in detail.

Thanks, Tim. Turning to Slide 7. You can see how the earnings drivers Tim just described and distributions paid in the quarter translated into GBDC's December 31, 2025, NAV per share of $14.84. Adjusted NII per share of $0.38, a $0.39 per share base distribution paid out during the quarter, adjusted net realized and unrealized losses of $0.13 per share and $0.01 per share of NAV accretion from share repurchases. Together, these results drove a net asset value per share decrease to $14.84.

Turning to Slide 10. This details our origination activity for the quarter. Net funds growth defined as funded commitments and delayed draw term loan and net revolver draws less exits and sales and net of market value changes in portfolio fair value decreased by $130 million for the quarter. This was primarily due to repayments and exits outpacing funded new originations and delayed draw term loans and net revolver draws. Looking at the bottom of the slide, the weighted average rate on new investments was 8.6%, a decline of 30 basis points from the prior quarter, primarily the result of lower base rates at origination. Investments that repaid in the quarter were at a weighted average rate of 9.4%.

Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent around 87% of the portfolio at fair value.

Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 20 basis points across 420 distinct portfolio companies. Additionally, our largest borrower represents just 1.6% of the debt investment portfolio and our top 10 largest borrowers represent just 12% of the portfolio. We believe GBDC is one of the most diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of December 31, 2025, 92% of our investment portfolio consisted of first lien senior secured floating rate loans to borrowers across a diversified range of what we believe to be resilient industries.

The economic analysis on Slide 13 highlights the drivers of GBDC's net investment spread of 4.6%. Let's walk through the slide in detail. I'll start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts, which decreased approximately 40 basis points sequentially to 10%. Our cost of debt, the teal line, decreased approximately 20 basis points to 5.4%, reflecting our approximately 80% floating rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined modestly quarter-over-quarter to 4.6%.

Moving on to Slides 14 and 15, let's take a closer look at our credit quality metrics. On Slide 14, you can see that nonaccruals increased quarter-over-quarter to 80 basis points of total investments at fair value and 1.3% of total investments at amortized cost, but remain at very low levels in absolute terms and relative to the broader BDC sector. During the quarter, the number of nonaccrual investments increased to 14 investments as the return to accrual status of 1 portfolio company investment following a restructuring was offset by the addition of 6 portfolio company investments during the quarter.

Slide 15 shows the trend in internal performance ratings. As Tim noted earlier, approximately 89% of the total investment portfolio remained in our top 2 internal performance rating categories. And investments rated 3, which signals a borrower may have the potential to or is expected to perform below expectations as compared to that underwriting, increased modestly to 10.1% of the total investment portfolio. The proportion of investments rated 1 and 2, which are the investments we believe are most likely to see significant credit impairment, remained very low at just 1.3% of the portfolio at fair value.

As we usually do, we're going to skip past Slides 16 through 19. These slides have more detail on GBDC's financial statements, dividend history and other key metrics.

I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on Slides 20 and 21. First, let's focus on the key takeaways on Slide 21. Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well positioned with 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile. Consistent with our asset liability matching principle, 81% of GBDC's total debt funding is floating rate or swapped to a floating rate, levels that we believe are among the highest in the sector. GBDC is well positioned to continue to modulate the impact of lower interest rates on investment income through offsetting lower interest expense on its borrowings.

And overall, our liquidity position remains strong, and we ended the quarter with approximately $1.3 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unused unsecured revolver provided by our adviser.

Now I'll hand it back over to David for closing remarks.

Thanks, Chris. I spoke at the beginning of this call about the 4 headwinds our industry has been facing, lower base rates, tighter spreads, muted M&A and a protracted credit cycle. I want to shift now to talk about the impacts of these headwinds. There are likewise 4 I want to highlight. First, private credit ROEs have come down, including across the BDC space. By our estimates, public BDC net returns are on average about 4 percentage points lower year-over-year based on earnings reports through September 30. We've seen similar findings from consultants who cover the broader private credit fund space. Now this isn't a surprise, funds of floating rate loans are necessarily impacted by lower base rates, lower spreads and credit losses.

Second impact, dispersion between good managers and let's call them not so good managers has increased. There's always been a lot of alpha in private credit. Now it's particularly high. Again, not a surprise, the overwhelming driver of alpha in private credit comes from minimizing realized credit losses and periods of credit stress put this to the test.

Third impact, the headwinds have generated a lot of press, maybe not as colorful as last quarter's cockroaches, but still plentiful.

And fourth, we've seen shareholders respond. We've seen shareholders respond by revaluing public BDCs and by increasing redemptions from semi-liquid BDCs.

So where does the puck go from here? One of the advantages that comes with age and experience is pattern recognition. Now this moment doesn't feel exactly like prior periods, but there are some elements that ride. So I want to share my take. After a period of growth and new entrants, the private credit industry is maturing and will now, in my judgment, go through a Darwinian moment. Some firms will adapt and thrive and some won't. This isn't a bad thing. We've been here before. And in some ways, this Darwinian moment, it feels a little overdue. And it's true, we're worriors, not optimists, but this doesn't mean we're pessimist either.

Based on our experience through multiple cycles over the last 30-plus years, this is actually the kind of environment where we and other private credit specialists outperform. We have a playbook for doing that. It's a playbook that served us well for decades, including through a number of periods more stressful than this one. The playbook involves being very selective when making new loans, focusing on early detection, the borrower underperformance, working with sponsors for early intervention and addressing problems proactively.

Our approach, it's really all about minimizing realized credit losses and being ready to play offense as opportunities arise. We're confident that this playbook will once again serve us well as we manage through this one.

With that, operator, could you please open the line for questions?

[Operator Instructions]

Your first question comes from the line of Finian O'Shea of Wells Fargo.

So David, to start, the big topic, of course, is software. You're not only one of the leading private credit firms, but one of the leading early investors in software. So of course, we'll ask you about that. I know this is a tough one, but any thoughts on the recent developments from AI firms that have spooked the software market and of course, the private credit market. Do they give you concern in your software portfolio that's, of course, more enterprise SaaS-based? Maybe concern from what happened in the last couple of weeks, but also concern as to what the progress from AI might look like in a few years from now when a lot of these credits will still be on your books?

Thanks, Fin. Yes, SaaSpocalypse, let's talk about it. Look, there's a real issue here. This is not just a market tantrum. I think underlying the recent market action, there are 2 core, you can call them perspectives or insights. The first is that AI is advancing more quickly than most people expected and especially so in respect of tools that make coding easier. So this month's Plaud advances are the latest manifestation of this trend, but it's a trend.

The second is that some software companies are vulnerable to AI disruption as a result of this. I'd say we agree with both of these perspectives, and we think the market is right that there are going to be winners and losers from AI. We also think everybody -- and this is implicit in your question, everybody needs to approach what's going on with AI with a bit of humility. Nobody really has all the answers here. This is a new technology, and it's been moving at a pace that even experts in the field have not expected.

I want to go into more depth on who we think are going to be the winners and losers. But before I do that, I want to talk about what informs our view. And you mentioned a few elements of this. Short version, we're specialists at this. We've been investing in software companies for 20 years. We've completed 1,000 software deals over that period. We're good at this. Over that 20 years, we've had only 5 defaults. We've had 0.25% of our $145 billion of software commitments as defaulted.

We've got a great team. We've got 25 dedicated professionals. We've got over 200 years of combined experience in this space across multiple credit and technology cycles. And we've approached this in a way you'd expect a very Golub way. We've developed our own underwriting approach. It starts with a proprietary risk mapping framework, and that steers us to business models that we think are attractive. It steers us away from business models that we think have various vulnerabilities. We've developed proprietary diligence templates that enable us to pressure test this resilience. And that includes AI risk. We've been looking at AI risk for years.

So what does that lead us to like? Let me give you some examples. We like enterprise-critical platforms, and those platforms have some characteristics that are common to them. They have sticky embedded workflows. They have long implementation cycles. It's hard for clients to switch to alternative products. We like market leaders that have proprietary data sets. Sometimes those are customer generated, sometimes they're not, but AI competitors can't easily replicate proprietary data sets. We like working with sponsors who are experts. They're leaning in early. They're themselves experts in AI. They're guiding their companies to be ahead of disruption.

What don't we like? Well, we have very little exposure to software that's focused on content creation, software that's focused on analytical overlays, software that's tool-based. We think there are going to be a lot of losers in those areas. So we are always evaluating our portfolio. We're big believers in early identification of problems. But you go through a period like we're going through right now in terms of market action, it leads to an immediate response at Golub Capital to review the portfolio. So we've been doing that in real time.

And our conclusion so far is we feel quite confident in the portfolio. We're not saying that there is no AI risk. We're very -- we're knowledgeable enough to know that we need to stay very humble and we need to stay very vigilant in looking at AI risk. But based on where we are right now, we feel very good about where the portfolio is positioned.

Very helpful. I appreciate all that color. And I'll just keep my follow-up on the topic too. The sort of -- a lot of the inbounds come in and sort of question the loan to values, what that might mean. It looks like you and peers are still investing in software at sort of normal capital structure parameters, but that's, of course, last quarter's data and all that.

Has this, I guess, I guess, for one, has it -- has this -- what we see in the public market, is there a sort of similar pause going on, whether it be on your side or the private equity side? And then kind of more importantly, if that does happen, do you think that means -- does that mean the risk amplifies like if you compare it to health care services a few years ago, where those models were dependent on sort of roll-ups to achieve their EBITDA synergies and so forth? Like is there that sort of element in software where higher cost of equity, higher cost of debt will itself be a problem?

So I think it's early right now to reach conclusions, but let's talk about a couple of different scenarios. In one scenario, it becomes meaningfully more challenging for software companies, even good software companies to access capital in the broadly syndicated loan market or the high-yield market. I'd argue that's actually a positive for private credit specialists like us because that will mean more opportunities, that will mean better pricing, that will mean better capital structures. But you're going to -- we and others will need to make choices about which transactions we think are truly resilient and which we think are not. And I'm confident we can do that. So I view that scenario, Fin, as generally a positive.

There's a second scenario in which this is a blip and the market comes roaring back and we quickly revert to where we were before this latest market action began. I think that's unlikely. I think there are enough real aspects to the insights about AI risk that we're likely not to see a quick bounce back.

And then the third scenario I'd point to is sort of in between. It's one in which the market becomes more, what's the right word, picky about which companies and which credits it likes and which ones it doesn't like. I think that third scenario is where the puck is headed longer term. But my guess is we're going to go through scenario 1 to get to scenario 3.

Your next question comes from the line of Ethan Kaye of Lucid Capital Markets.

Firstly, in your prepared remarks, you suggested you're planning for a challenging 2026. Just hoping you can kind of dig into that a bit. Is that more broadly -- related more broadly to the leveraged lending sector? Do you also kind of foresee some kind of budding challenges at GBDC? And is this a commentary on both earnings and credit or one or the other? Just any expansion on that comment would be helpful.

Sure. So as I mentioned in the prepared remarks, we think that the market environment right now is challenging. SOFR is down, it's probably going to go down a little more. Spreads are at pretty much a 5-year low. And while they feel like they've stabilized some, the back book is still not at the same level that the front book is at. M&A, which everybody went into this year saying, oh, this year, it's finally going to happen. We're going to see the breaking the dam. I'm still seeing a muted M&A environment. And I'd like to see more. I'm not saying it won't happen. I'm saying we haven't seen it yet.

And finally, on credit, I think we are in a credit cycle. And I've been saying this now for many quarters. I think we're seeing elevated levels of credit stress in both the broadly syndicated market and in the private credit market, and everybody is working through their issues, including us. I think we're well positioned, Ethan, relative to the industry. But I think there's been a fair amount of happy talk in the industry.

And I want to be very candid with you and with our investors that this is a challenging environment right now. It's harder for us to produce the ROEs that we want to be producing in the current environment than it's been in recent years. That doesn't mean that I'm not optimistic about GBDC's long-term prospects. I am. But I think part of our job is being very candid about when we're in an environment with headwinds and when we're in an environment with tailwinds.

Understood. I appreciate that. And then one other I wanted to ask a bit about the deployment outlook. I know you kind of just mentioned you're not seeing a broad recovery in M&A yet. But I guess, if you do see that, right, leverage is kind of towards the top of the range and you guys are actively buying back shares here, which looks prudent. But hoping you can give a bit of color on how you're kind of weighing these competing capital allocation opportunities in the face of maybe finite capital resources.

So I think you said it very well. We've got to balance multiple goals. And in the context of shares trading at a meaningful discount to NAV, we will continue to be active in repurchasing shares because we think that's good for shareholders. We also, in the context of portfolio turnover, we'll be looking for the best opportunities to redeploy that capital in attractive new loans. So we've got multiple things that we're going to be doing at the same time. We've got to find the right balance.

[Operator Instructions]

And your next question comes from the line of Robert Dodd of Raymond James.

Hate to stick on kind of the software theme. But what do you think the risks are of sort of unknown unknowns? I mean when you lay out the case of your moats, as everybody is calling proprietary entrenched software, sticky software, proprietary data, et cetera. What are the risks that those moats turn out to be not as deep as they are perceived to be at the moment. It seems like a market-wide phenomenon that the same moats are indicated by you and your competitors.

And what's the -- I mean, to put it bluntly, AI -- is AI agents are quite good at scraping data and using it from their own purposes. So proprietary data might not stay proprietary in some cases. So what are the risks you think that those moats evaporate given the pace of AI? And to your point, some of it is accelerating faster than experts would have thought a couple of years ago. Maybe it's going to be better at building bridges across those moats 2 years from now than you currently think?

So great question, Robert. And let's, again, think about this across a couple of different scenarios. So let's think about a scenario in which AI advances continue to be rapid. In those scenarios, where you have enterprise players with lots of customers, deeply embedded relationships, the risk that you -- that those companies have starts with slower growth. So the first impact that one would imagine from this would be lower equity valuations associated with lower growth trajectories. And that would be lower growth in terms of new logos, and it would be lower growth in terms of a bleeding of some existing customers.

The second level of risk would be that the risk would be so significant that not only would you see it in slower growth, you'd see it in some negative growth. You'd see it in some reduction in revenues. I think, again, for good software companies, it's quite unlikely that you're going to see immediate collapse. You're going to see a melting as opposed to a meltdown.

And then the third scenario would be the meltdown scenario would be AI comes up with a capability that's so strong relative to the incumbent product that it effectively replaces the incumbent product in a short period of time. I think that's the least likely of the 3 scenarios. So as we think about what's going on right now, what this argues for what my 3 buckets argue for is that we likely should be focused first on equity market reaction. And then second, on credit market reaction because in order for AI to be a real problem for credit markets, we need to see scenario 2 or scenario 3. We got to blow past scenario 1, at least in a significant number of cases.

I appreciate that color. The kind of follow-on to that point is, to your point, if it's scenario 1 and you're in these assets for -- they might be slower growing and the equity holders might lose capital, but you may have the opportunity to -- may or may not have the opportunity to get out. Would you expect going forward to do less software deals given the -- is the risk return because they still seem to be -- the ones that are getting done are still priced pretty tight, it's widening a little bit. But is that -- given the risks are potentially so outsized, would -- do you expect there to be a shift in kind of the amount of software you'd want to onboard into the portfolio over the next 5 years, call it?

So my expectation, Robert, is that the market is going to reprice risk. So it's hard to answer that question without making an assumption about how the market digests information and what that means in terms of go-forward spreads. The broadly syndicated market has repriced spreads. You're not going to see new software deals come out at the same spread levels that existing borrowers are at, where their loans are trading at 95 or 90 or 85. Market is saying those deals are underpriced.

So I think it's hard to answer your question without seeing some more data about how private markets digest what's going on right now and in particular, what that means for pricing and structure and leverage in new deals. I will be surprised if Golub Capital doesn't continue to be a leading software lender. We're very good at this. We've got a deep set of relationships with the sponsors who are best in the business at this. But in terms of answering your question about a specific capital deployment goal, I think it's premature to answer that.

Your next question comes from the line of Paul Johnson of KBW.

Just sticking with software here. Can you just maybe talk about, in general, the software trends, maybe sort of like pre-AI disruption risk or kind of the disruption risk that's getting priced into the market today, I ask is the Golub Altman index or the middle market [indiscernible] index that you guys put out, I noticed that the tech sector revenue growth has kind of fell off over -- here over the last several quarters. And what has kind of been the underlying trends, I guess, broadly for that industry? And maybe kind of what's driving the slower growth there?

Sure. Thanks, Paul. It's a great question, and I think important for us all to be focused on some of those trends in addition to be thinking about longer-term AI risks. So if we look at the Golub Altman index numbers in sequence, what we see is that the technology/software area has been, over time, persistently growing faster than the rest of our portfolio. Having said that, like the rest of the portfolio, we've seen some slowdown in year-over-year growth in that sector. And if you then kind of peel back this onion some more, what we see is selectively a slowdown in bookings. And this isn't just true in the Golub Capital portfolio.

I think across software in both larger companies and midsized companies, we've seen over the course of the last 2 years, some slowdown in new bookings trends. Said differently, corporate clients are moving more slowly to adopt and pay for new software products relative to the prior period. So why is that? Well, it's hard to figure out that next layer of the onion because there's actually a bunch of different reasons. Part of it is companies dealing with cost pressure. Part of it is companies digesting prior investments in tech.

I don't think it's a generalized move away by corporate customers, a generalized move away from adopting new software applications and using them to improve their businesses. I think that's continuing. I think we're seeing a bit of a cyclical pattern right now where software bookings are lower than they've been. And I think that will likely come back.

Very helpful, David. I appreciate that. And maybe just last question on your portfolio at GBDC. I was wondering if you can kind of share, if possible, how much of the portfolio or of the software book is ARR-based structures? And I guess any additional color on that in terms of conversion and companies near cash flow breakeven, that type of thing? And then maybe more broadly as well, just how you think about kind of the defensive structure or the thesis around that with those types of deals kind of given the risk increasing today?

Sure. So just for those of you who are not experts, what Paul is referencing is loans called ARR loans or recurring revenue loans where the rubric for the credit underwriting is not traditional EBITDA coverage or interest coverage data. It would be more based on revenue multiples and expectation of that turning into EBITDA in a few years' time. So we were early originators of AR loans, as you know, about 10 years ago. We've actually reduced the exposure to ARR loans in recent years as pricing has gotten tighter in those loans, and we think the attractiveness of them has reduced.

So the proportion of the GBDC portfolio that's in ARR loans has actually gone down meaningfully in recent years as a lot of our older ARR loans converted to EBITDA loans converted to traditional loans and as we've reduced the volume of new ones. I will look to see after this call, Paul, at what we've disclosed on this and what we can disclose, but that's the generalized trend. I do think in addition to spreads being tighter, that in an environment in which bookings trends have gone down, I think ARR loans are tougher. Not to say they're all good or all bad. This is always a situation where you need to judge individual loans on their merits, but it's a more -- it's been a more challenging space.

There are no further questions at this time. And with that, I will now turn the call over to David Golub for closing remarks. Please go ahead.

Thank you, operator. I just want to thank everybody for their time this morning. As always, if you have any questions that we didn't get to today, please feel free to reach out, and we look forward to following up with you next quarter.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter and fiscal year ended September 30, 2025.

Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings.

For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded.

With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. I'm joined by my colleagues, Tim Topicz and Chris Ericson. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter and year ended September 30, 2025, and we posted an earnings presentation to our website. We'll be referring to that presentation during the call today.

I'm going to start with headlines and a summary of performance for both the quarter and the fiscal year. Then Tim and Chris are going to go through our operating and financial performance for the quarter in more detail. And finally, I'll come back and wrap up with some observations on current market conditions and our outlook for the coming period.

With that, let's jump in. So I see 2 primary headlines to today's news. The first, GBDC had a solid quarter and a strong end to fiscal year 2025. It was bolstered by solid credit results across our portfolio. Second, at the same time, the private credit direct lending market faces some headwinds and GBDC is not immune from those headwinds.

Let me expand and unpack each of these headlines. First, let's talk about performance. For the quarter, adjusted NII per share was $0.39, and that translates to an adjusted NII ROE of 10.4%. Adjusted net income per share was $0.36 for an adjusted ROE of 9.6%. For fiscal year 2025, GBDC paid $1.65 per share of cumulative distributions, representing 10.9% of end-of-year net asset value per share. Further, GBDC ended fiscal year 2025 with a net asset value per share of $14.97. That's $0.34 above GBDC's net asset value per share at its IPO in 2010. GBDC is one of only a very small number of BDCs that have delivered NAV per share growth since IPO.

GBDC's performance reflected a continuation of trends that you've heard me talk about over the last several quarters. Overall credit performance remained solid and earnings were supported by decreasing but still attractive portfolio spreads and attractive borrowing costs. At the same time, and this is the second key headline, the direct lending market is facing some headwinds, headwinds that GBDC isn't immune to.

What are those headwinds? First, spreads have narrowed. Now this isn't just true of middle market direct lending. We've seen tighter spreads across traditional fixed income, asset-based finance, high yield, the broadly syndicated loan market. Spreads are tighter just about everywhere other than subprime. Second headwind, base rates have started to come down, and the market expects them to come down further. Third headwind, and this is the most important, we're in a credit cycle. There's an unusual level of defaults and credit stress in the leveraged loan market today. That's both the liquid leveraged loan market, including the broadly syndicated market as well as the private credit market. This has been the case for over a year, and I anticipate it's going to continue for some time.

We'll talk more about these headwinds over the course of today's call, but I want to highlight 2 ramifications of these headwinds. First, they're causing a spade of colorful news articles about the sector. Some of these articles are quite insightful, some less so. I'm going to talk in my closing remarks about some of the insightful ones. And second, they're causing very significant dispersion in performance among direct lending managers. Some managers are continuing to produce solid returns, mostly down a bit from last year, but still solid. And some other managers are producing poor results. I described this last quarter as being a story about winners and whiners, and I said this pattern would continue, and it is continuing.

Before I pass the mic to Tim and Chris to go over operating results in more detail, I want to comment on the decision by our Board to declare a $0.39 per share distribution for the first fiscal quarter of 2026. In connection with this decision, the Board also determined that it would be prudent to revisit GBDC's dividend policy early next year when we hope to have more information on the forward outlook for rates and asset spreads and financing costs. GBDC plans to approach the dividend question with the same underlying strategy we've had since our IPO.

To remind those of you who haven't heard me talk about dividend strategy before, we're guided by 4 goals. First, we seek to maintain a stable net asset value per share over time. Second, we seek to minimize excise taxes over time. Third, we seek to adjust our base distribution level infrequently. And finally, we seek to pay as high a dividend yield on NAV as sustainable, consistent with the above goals, the 3 prior goals. Now we can't always achieve all 4 of these goals at the same time. And at such times, we need to find the right balance.

I'll have more to say in my closing remarks, but to sum up my intro, GBDC demonstrated strong and resilient earnings in fiscal 2025 despite macro surprises and despite market volatility. The market today is challenging. But based on our experience through multiple cycles over multiple decades, we believe this is the kind of environment where we and other private credit specialists outperform.

Now I'll pass the call over to Tim Topicz to discuss the quarter in more detail.

Thanks, David. Let's begin on Slide 4. GBDC's $0.39 per share of adjusted net investment income and $0.36 per share of adjusted earnings were driven by 4 key factors. First, overall credit performance remains solid. Approximately 90% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. The $0.03 per share of adjusted net unrealized and realized losses were primarily related to the successful restructurings of certain loan investments in the quarter that were on nonaccrual status and select write-downs on a certain portion of GBDC's tail of underperforming borrowers. Investments on nonaccrual status decreased to a very low level, 0.3% or 30 basis points of the total investment portfolio at fair value. This level remains well below the BDC peer industry average.

Second, earnings were supported by declining but still attractive spreads consistent with recent quarters. GBDC's investment income yield was 10.4%, a sequential decline of 20 basis points, primarily driven by: one, a modest decline in weighted average base rates; and two, modest compression of weighted average portfolio spread during the quarter. The headwinds were somewhat offset by a sequential increase in fee and dividend income related to certain early loan repayments and a dividend associated with the recapitalization of one portfolio company.

Third, a decline in GBDC's borrowing costs partially offset the sequential decline in investment income yield. There were 2 main drivers here. First, the full quarter impact of repricing GBDC's syndicated corporate revolver to a draw spread of 1-month SOFR plus 1.525% with a 32.5 basis point in unused fee. Second, we elected to call the final legacy GBDC 3 debt securitization in advance of its 2030 stated maturity. The combined impact was a reduction in effective borrowing costs during the quarter to 5.6% annualized, which we believe is an industry-leading level.

And fourth, earnings benefited from lower operating expenses due to GBDC's market-leading fee structure of a 1% base management fee, a 15% incentive fee and an 8% income incentive fee hurdle, which will become increasingly relevant in a market environment characterized by lower reference interest rates and historically tight investment spreads.

GBDC's investment portfolio decreased modestly quarter-over-quarter to just under $8.8 billion at fair value. The decrease was the result of $371 million in repayments and exits, net of $60 million in new investment commitments that funded in the quarter. We remain highly selective and conservative in our underwriting, closing on just 3.8% of deals reviewed in the quarter and a weighted average LTV of approximately 42%. We leaned on our existing sponsor relationships and portfolio company incumbencies for approximately half of our origination volume and delivered an uptick in deal activity with new borrowers. We continue to leverage our scale to lead deals, acting as sole or lead lender in 90% of our transactions in the quarter.

We focused on the core middle market, which we believe continues to offer better risk-adjusted return potential than the large borrower market. The median EBITDA for our originations in the quarter was $61 million. While larger cap opportunities are experiencing greater pressure on spreads and terms given robust conditions in the public credit market and increased competition, the breadth of our origination capabilities allows us to flexibly seek attractive risk-adjusted returns for GBDC. For instance, in respect to the larger borrower market, in the quarter, Golub Capital acted as joint lead arranger on a $4.5 billion unitranche facility in support of Clearlake's acquisition of Dun & Bradstreet, the largest private credit LBO recorded to date. While in the core middle market, we acted as lead lender and administrative agent on a new unitranche facility to Olo Inc. to support Thoma Bravo's take private of a leading provider of mission-critical technology infrastructure to U.S. restaurant chains.

Continuing on Slide 4, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.39 per share. Net debt to equity decreased modestly quarter-over-quarter, ending at 1.23x within our targeted range of 0.85x to 1.25x. During the quarter, we opportunistically repurchased 368,000 shares, and this brought total repurchases to 2.9 million shares or $40.6 million in aggregate value for the fiscal year. Since quarter end, GBDC repurchased an additional 2.5 million shares at an average price of $13.69 per share, unlike many other BDC managers who prioritize AUM growth. We approach repurchase opportunities with the goal of maximizing investor returns.

I'm going to turn it over to Chris now to take us through our financial results in more detail.

Thanks, Tim. Turning to Slide 7. You can see how the earnings drivers Tim just described and distributions paid in the quarter translated into GBDC's September 30, 2025 NAV per share of $14.97. Adjusted NII per share of $0.39 was in line with $0.39 per share base distribution paid out during the quarter and adjusted net realized and unrealized losses were $0.03 per share. Together, these results drove a net asset value per share decrease to $14.97.

Turning to Slide 10, which details our origination activity for the quarter. Net funds growth, defined as new funded commitments less exits and sales and net of market value changes in portfolio fair value decreased by $192 million for the quarter as repayments and exits outpaced funded new originations and delayed draw term loan and revolver draws.

Looking at the bottom of the slide, the weighted average rate on new investments was 8.9%, a decline of 30 basis points from the prior quarter, the result of tighter new origination spreads and lower SOFR reference rates. Investments that repaid in the quarter were at a weighted average rate of 9.8%.

Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent around 87% of the portfolio at fair value.

Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 20 basis points across 417 distinct portfolio companies. Additionally, our largest borrower represents just 1.5% of the debt investment portfolio and our top 10 largest borrowers represent just 12% of the portfolio. We believe GBDC is one of the most diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of September 30, 2025, 92% of our investment portfolio consisted of first lien senior secured floating rate loans to borrowers across a diversified range of what we believe to be resilient industries.

The economic analysis on Slide 13 highlights the drivers of GBDC's net investment spread of 4.8%. Let's walk through this slide in detail. I'll start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell approximately 20 basis points sequentially to 10.4%. Our cost of debt, the teal line, decreased approximately 10 basis points to 5.6%, reflecting our approximately 80% floating rate debt funding structure while benefiting from a full quarter contribution of the amendment to our syndicated corporate revolver and the decision to early repay the final outstanding legacy GBDC 3 debt securitization during the quarter. Net-net, GBDC's weighted average net investment spread, the gold line, declined modestly quarter-over-quarter to 4.8%.

Moving on to Slides 14 and 15, let's take a closer look at our credit quality metrics. On Slide 14, you can see that nonaccruals decreased to 30 basis points as a percentage of total investments at fair value and 60 basis points of total investments at amortized cost. The number of nonaccrual investments remained at 9 investments as the disposition of 1 portfolio company investment and the return to accrual status of 1 portfolio company investment following the restructuring was offset by the addition of 2 portfolio company investments during the quarter.

Slide 15 shows the trend in internal performance ratings. As Tim noted earlier, nearly 90% of the total investment portfolio remained in our top 2 internal performance rating categories and investments rated 3, signaling a borrower may have the potential to or is performing below expectations as compared to at underwriting remain low at just 9.6% of the total investment portfolio. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 1% of the portfolio at fair value.

As we usually do, we're going to skip past Slide 16 through 19. These slides have more detail on GBDC's financial statements, dividend history and other key metrics.

I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on Slides 20 to 21. First, let's focus on the key takeaways on Slide 21. Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well positioned with 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile. In September, we capitalized on favorable market conditions to issue an additional $250 million of our 2028 notes at a yield to maturity of 5.05%, which we swapped to a floating rate of SOFR plus 172 basis points. Consistent with our asset liability matching principle, 81% of GBDC's total debt funding is floating rate or swapped to a floating rate, levels that we believe are amongst the highest in the sector, positioning GBDC well to modulate the impacts of lower interest rates on investment income through offsetting lower interest expense on its borrowings.

Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.2 billion of liquidity from unrestricted cash on drawn commitments on our corporate revolver and the unsecured revolver provided by our adviser.

Now I'll hand it back over to David for closing remarks.

Thanks, Chris. As I said at the outset, GBDC posted another quarter of solid results, rounding out a strong fiscal year 2025. Let's shift and first talk about our outlook for the economy in the BDC sector, and then I want to address the recent spade of colorful press articles about the private credit space.

In terms of the overall U.S. economy, the picture right now is confusing. On the one hand, the U.S. economy continues to show surprising resilience. We see this in the Golub Capital Middle Market Report for Q3, which showed continuing solid year-over-year growth in revenues and EBITDA across our portfolio, albeit at a bit slower pace than we saw in 2024. Yes, there are signs of weakness, especially the lower-end consumer. But overall, the economy is doing quite well.

On the other hand, there continues to be a tale of companies that are not adjusting well to the current environment. And we see this in the default rate in the broadly syndicated market, which is currently running at about 2.5x historical average levels and in the growth of realized and unrealized losses in the BDC space generally. As I've said for several quarters, we're in a protracted credit cycle.

One way to interpret the weakness in certain BDC stock prices over recent weeks is that the market is paying closer attention to credit issues and especially to the increase in realized and unrealized losses at some BDCs. We expect elevated credit stress to persist, and we expect this to continue to impact different BDCs in different ways. This is consistent with what I said last quarter. We expect the gap between winners and whiners to widen, and the winners will be those with proven competitive advantages and a long track record of low credit losses across cycles.

Finally, I'd like to wrap up by addressing some of the recent press about private credit. We've seen an unusual number of colorful and dramatic press pieces about private credit and some made good points while others have been, in my opinion, less well informed. Jamie Dimon created some ruckus with his comments about when you see a cockroach, but we think he was making an important point. He wasn't, in fact, picking on private credit. If you look at the transcript, what he was saying correctly is that we're in a period of elevated credit stress. This means it's an appropriate time to be cautious, to be careful, to examine your portfolio carefully, to look for problems and to try to find ways through early intervention to mitigate the potential for credit losses. If that sounds familiar, it should. This is standard operating procedure at Golub Capital and GBDC.

A second spate of articles covered First Brands and Tricolor, 2 high-profile bankruptcies that Golub Capital and GBDC had absolutely no exposure to. Some commentators have said that these are cases of private credit gone awry. We disagree. First Brands' debt was in the broadly syndicated loan market and Tricolor's was in the securitization market. Neither company had Golub Capital style private credit and neither had a private equity sponsor. In our view, it's odd to blame private credit for either of these.

More generally, we believe that private credit when done right, is boring, intentionally so. Golub Capital makes first lien senior secured loans to resilient companies in resilient industries backed by top-quality private equity firms. We've been doing it for more than 20 years. We've been building a set of competitive advantages that have enabled us to produce consistently low credit losses and strong returns for our investors. This playbook has guided us well for decades, and we think it will continue to do so going forward.

With that, operator, could you please open the line for questions?

[Operator Instructions] And with your first question comes from the line of Jordan Wathen with Wells Fargo.

Just a question on the availability of co-invest and not specifically to this vehicle, but just in the market generally. Have there been any changes in the availability or quality of those companies that you can get equity co-invest in, say, over the past 1, 3, 5 years?

So by way of context and background, Golub Capital has often done equity co-invests alongside debt investments that we make. Sometimes we also do stand-alone equity investments. We've done about 400 equity co-investments over the last 20 years. We look at the track record that we have on those equity co-investments, and it's very strong. It's the equivalent from an IRR standpoint of a top-tier private equity firm.

We have not seen any meaningful change in either our approach or the availability of equity co-invests as we've historically done them. I'm not sure whether that's consistent or inconsistent with other firms. I'm not sure there are other firms that are as disclosive as we are about the strategy or the number or the track record of their equity co-invest. So I don't want to speak to the industry, but I would feel comfortable saying that we're not really seeing a change in our approach or in the availability of the equity co-invest that we make.

Okay. I was just curious, there's a lot out there about continuation funds, and it seems like deals are happening that way. And obviously, private credit is supplying leverage to those. So I don't know if just because of the greater amount of deal flow with continuation vehicles and the like if you had more opportunities to invest today than in the past. But thank you for your answer. I appreciate it.

[Operator Instructions] Your next question comes from the line of Robert Dodd with Raymond James.

Hello, Robert, if you're talking, we can't hear you.

I apologize. I was muting myself. So sorry about that. David, I wanted to go back to the comments on your closing comments on kind of the state of the economy that the confusing picture. Some areas doing well, some less well. I mean, are there any themes that you can point to? I mean, obviously, wage inflation is still out there, but broad inflation is still out there as well. So I mean, are there particular areas -- if we go back a few years, there were some issues in health care, where wage inflation and health care didn't have the pricing power to cope with that to a degree, right? Are there any areas developing now where we're still seeing kind of cost inflation starting to outstrip the ability for pricing to be passed on?

Yes. It's a good question, Robert. And I'd tell you an area where I have some optimism and an area in which I have some concerns. The area where I have some optimism is I think we are beginning to see and we're going to see more impact from the provisions in the big beautiful bill that made capital spending more attractive for companies by enabling companies in many cases to get an immediate deduction for that capital spending. I think we're already seeing some unlocking of capital spending, and I'm not just talking about the AI boom. And I think that's going to be very good for the economy generally.

The area in which I have concerns is the subprime consumer. So there are a number of different data points that all indicate that the subprime consumer is under stress. If you look at the credit card data, you've seen not only increased delinquencies, but you see reduced spending. You see increased delinquencies in subprime mortgage. We've seen significant increased delinquencies in subprime auto. So I think what that reflects is a low-end consumer who's stretched. We're not seeing wage increases in that area as we were in the earlier post-COVID period.

And to your point, we are seeing food cost inflation and housing, particularly rent increases that I think are problematic. So it's a mixed picture. It is, as I said, confusing, and I caution everybody against being too confident in predictions because the accuracy of predictions in this post-COVID period about the macro economy, the pattern has been poor.

I appreciate that color. On kind of the other point, on spreads, right? I mean, they have compressed. They've compressed everywhere, right? So to your point, I mean, private credit spreads have kind of maintained their premium. So on that, I mean, what's the risk in your view that, that premium doesn't get maintained? And then on the complete flip side to that, what do you think would be necessary for broad spreads to move higher without it being triggered by some credit catastrophe?

So again, it's a great question, Robert. I think there's a bit of a mythology that your question bursts. The mythology is that private credit spreads have compressed because of an imbalance between supply of capital and demand for capital. It's a nice theory, but that theory does not explain the compression of spreads across a whole variety of debt categories, including investment grade, including high yield, including the broadly syndicated sector, including securitization. I mean it's everywhere other than subprime.

So spreads are an indicator of confidence. And right now, investors are talking with their feet that they would rather be invested in debt investments of various sorts than in other investments. In order for the spread situation to change, I think there needs to be a change in perspective, a change in sentiment that's pretty broad. Right now, there is a lot of investor optimism. I think we would need to see new facts come out that would cause investors generally to reset. And I think that reset would probably affect not just private credit, but a lot of investment categories, including equities.

And with no further questions in queue, I'd like to turn the conference back over to David Golub for any closing remarks.

Sure. I want to thank everyone for their time this morning. And as always, please feel free to reach out if there's a subject or issue that we didn't cover adequately today. Thanks for coming, and we look forward to talking to you next quarter.

This concludes today's conference call. You may now disconnect.