Kayne Anderson BDC, Inc. quarterly report, Q2 FY2022

Kayne Anderson BDC, Inc. — Form 10-Q Summary

Reporting period: Quarterly and six-month periods ended June 30, 2022; filed August 15, 2022. Kayne Anderson BDC is an externally managed, non-diversified BDC that invests primarily in senior secured debt of middle-market companies and intends to qualify as a regulated investment company. The company commenced operations on February 5, 2021, so the prior-year comparison period covered an earlier stage of portfolio build-out.

Financial Position and Portfolio

Total assets were $734.7 million, versus $586.5 million at December 31, 2021.
Net assets were $389.8 million, versus $312.0 million; NAV per share increased to $16.55 from $16.22.
Investments at fair value totaled $726.4 million, comprising $716.6 million of first-lien senior secured debt, $1.4 million of private equity and $8.4 million of short-term investments.
The portfolio included 128 debt investments and five equity investments across 52 portfolio companies. Weighted-average yield to maturity was 8.4% at fair value and 8.5% at amortized cost.
The largest industry exposures by fair value were commercial services and supplies at 17.9%, trading companies and distributors at 12.2%, and health care providers and services at 12.1%.
All debt investments were income producing, and no loans were on non-accrual status at June 30, 2022.

Operating Results and Cash Flow

Metric	Three months ended June 30, 2022	Three months ended June 30, 2021	Six months ended June 30, 2022	Six months ended June 30, 2021
Total investment income	$13.0 million	$3.8 million	$24.9 million	$5.6 million
Total expenses	$5.9 million	$1.8 million	$11.5 million	$3.0 million
Net investment income	$7.1 million	$2.0 million	$13.4 million	$2.6 million
Net realized gains	$0.0 million	$0.0 million	$0.02 million	$0.05 million
Net unrealized gains/(losses)	$0.3 million	$1.2 million	$(0.2) million	$4.0 million
Net increase in net assets from operations	$7.5 million	$3.2 million	$13.2 million	$6.7 million

Net investment income per share was $0.30 for the quarter and $0.58 for the six months, compared with $0.24 and $0.35, respectively, in the prior-year periods.
Net increase in net assets from operations per share was $0.32 for the quarter and $0.57 for the six months, compared with $0.38 and $0.91 in the prior-year periods. The lower six-month result reflected the decline in unrealized investment gains.
Net investment income represented approximately 55% of quarterly investment income and 54% for the six-month period, compared with approximately 52% and 47%, respectively, in the prior-year periods.
Operating cash flow was $(128.4) million for the six months, driven primarily by $181.5 million of portfolio investment purchases, partly offset by $43.8 million of sales and principal repayments.
Financing activities provided $129.8 million, including $68.6 million from common stock issuance and net borrowings under the new credit facilities. Cash and cash equivalents ended at $3.4 million; cash plus short-term investments totaled approximately $11.8 million.

Debt, Liquidity and Capitalization

Outstanding principal debt was $342.0 million at June 30, 2022, versus $267.0 million at December 31, 2021. Net carrying value was $337.1 million after deferred financing costs.
Debt consisted of $78.0 million under the Corporate Credit Facility, $150.0 million under the Revolving Funding Facility and $114.0 million under the Subscription Credit Agreement.
Amount available under the facilities was $288.0 million, subject to borrowing-base and other limitations. The Subscription Credit Agreement was scheduled to expire on December 31, 2022.
The asset coverage ratio was 214%, compared with 217% at year-end, above the statutory minimum of 150%. Management stated a target asset coverage range of 200% to 180%, equivalent to approximately 1.0x to 1.25x debt-to-equity.
Unfunded commitments to portfolio companies were $91.5 million, down from $97.8 million at December 31, 2021. Investor capital commitments totaled $761.7 million, including a contingent $13.3 million, with $393.6 million undrawn at quarter-end.

Material Changes Versus Prior Comparable Period

Investment income increased substantially as the portfolio expanded, rising 241% for the quarter and 348% for the six months versus the prior-year periods.
Net investment income increased 262% for the quarter and 417% for the six months, while management fees, interest expense and incentive fees also increased with portfolio size and leverage.
The company funded $117.2 million of investments during the second quarter, compared with $68.4 million in the prior-year quarter. New commitments were predominantly floating-rate and had a weighted-average rate of 7.7%.
Debt investments at fair value increased to $716.6 million from $578.2 million at year-end 2021. Industry classifications changed from GICS Level 2 to Level 3, limiting direct comparability of sector percentages.
On February 18, 2022, the company refinanced the $150.0 million Loan and Security Agreement with the Corporate Credit Facility and Revolving Funding Facility.
Common stock issued during the first six months totaled 4.2 million shares for $68.6 million, compared with 9.2 million shares for $140.0 million in the prior-year period.

Outlook, Risks and Unusual Items

Management stated that cash, undrawn investor commitments and available credit capacity were expected to fund anticipated investment activities over the next twelve months.
Subsequent to quarter-end, the company reduced the Subscription Credit Facility commitment to $150.0 million, increased the Corporate Credit Facility commitment to $350.0 million, and issued 7.7 million shares for $125.0 million at $16.30 per share.
The company paid a July 2022 distribution of $0.30 per share; total distributions were $7.1 million, of which $1.4 million was reinvested.
Interest-rate exposure is significant because both portfolio investments and borrowings are substantially floating-rate. Management estimated that a 100-basis-point increase in base rates would increase annualized net investment income by approximately $3.8 million, while a 200-basis-point increase would add approximately $7.6 million.
Most investments are Level 3 and valued using models, market-yield analyses and unobservable inputs. Fair-value changes could materially affect NAV and reported earnings.
Key risks include portfolio-company credit losses, leverage and covenant compliance, refinancing and borrowing-base risk, LIBOR transition, illiquidity, economic and market volatility, the COVID-19 pandemic, the Russia-Ukraine conflict, and the ability to maintain BDC and RIC status.
Incentive fees on income and capital gains accrued in the first six months totaled $1.7 million. Before an exchange listing, accrued incentive fees generally become payable upon an exchange listing, sale or liquidation event.
No material litigation, defaults on senior securities or changes materially affecting internal control were reported.

Important Facts for Investors to Verify

Confirm the post-quarter-end debt balances, facility availability, borrowing-base capacity and the December 31, 2022 expiration or replacement of the Subscription Credit Agreement.
Review Level 3 valuation assumptions, particularly credit spreads, portfolio-company performance and the reported unrealized depreciation in Arborworks, Trademark Global and United Safety & Survivability.
Assess the effect of higher benchmark rates on both portfolio income and borrowing costs, including the company’s floating-rate floors and SOFR-linked facilities.
Verify the sustainability of distributions relative to net investment income, including the impact of accrued but unpaid incentive fees and non-cash or PIK income.
Evaluate unfunded portfolio commitments, investor capital-call capacity and the concentration of exposures in commercial services, trading companies and health care.
Confirm the impact of the July 2022 $125.0 million equity issuance on NAV, leverage, portfolio growth and per-share earnings.