Goldman Sachs BDC, Inc. (NYSE:GSBD) Q1 2019 Earnings Conference Call Transcript
May 10, 2019 • 09:00 am ET
(Operator Instructions) And our first question is from the line of Finian O'Shea from Wells Fargo.
Hi, guys. Good morning. Thanks for taking my questions.
Hey, Finian. Good morning.
First on Garden Fresh (sic) (Country Fresh). The (inaudible) this quarter. I know it's a second lien, so the marks can be very volatile. Can you kind of describe the sequential market this -- or a function of the asset going on non-accrual and being worked out potentially, helping us think about sort of the risk of second lien in that sense when you see something last quarter that was marked in the 70 range? Or was this a big sequential leg-down in the performance of that company?
Yeah. Hey, Fin. So Jon here. First off, let me give some context. So our loan to Country Fresh is frankly a very small position in the portfolio. It was less than $10 million of invested capital compared to the $1.5 billion of total balance sheet investments. So a little context there. But to give you a little color, it's a sponsor backed company where -- that processes and distributes fresh-cut fruits and vegetables to retailers. Our underwriting thesis when we made this loan was really centered on the large scale and national operational footprint of the company that we thought acted as a nice competitive advantage and a barrier to entry for competitors. We also saw strong industry growth trends. This company distributes predominantly to retailers who -- because they're being increasingly held accountable for food -- increased food safety regulations, they are choosing to outsource a lot of that fresh-cut fruit and other sort of food preparation to third parties. So in any event -- and we also are seeing, of course, strong consumer demand for healthy, convenient food products, which was the underlying demand pull-through of the products that the company was processing and distributing. But regardless, during the course of 2018, certain performance issues started to emerge. Much of it was related to raw material and labor cost issues. But we were pleased that during the course of 2018, the sponsor, which had invested significant capital below our debt, continued to invest additional capital throughout 2018. That being said, we did -- if you look at sort of our marks quarter-over-quarter over the course of 2018, we were marking down the position to reflect what we thought was a prudent view of the increased risk of the position.
In the first quarter of 2019 -- and I guess this kind of gets to the heart of your question of, obviously, there was a pretty big move from the fourth quarter to the first quarter in the mark. In the first quarter of 2019, we became aware of some significant liquidity concerns at the company that really prompted both the first lien and second lien lender groups to start focusing on a restructuring. And you were right in asking or suggesting that this happened very quickly. It definitely did happen quite