Kayne Anderson BDC, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2021, filed August 16, 2021. The Company commenced operations on February 5, 2021 after converting from an LLC and electing to operate as an externally managed business development company and intends to qualify as a regulated investment company. Its objective is to generate current income and, to a lesser extent, capital appreciation primarily through debt investments in middle-market companies.
There was no public market for the Company’s shares as of August 13, 2021. The Company is managed by KA Credit Advisors, LLC, an indirect subsidiary of Kayne Anderson Capital Advisors, L.P.
Financial results and key metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Total investment income | $3.8 million | $5.6 million |
| Total expenses | $1.8 million | $3.0 million |
| Net investment income | $2.0 million | $2.6 million |
| Net realized gains | $0.015 million | $0.047 million |
| Net unrealized gains | $1.2 million | $4.0 million |
| Increase in net assets from operations | $3.2 million | $6.7 million |
| Net investment income per share | $0.24 | $0.35 |
| Increase in net assets per share | $0.38 | $0.91 |
- Net asset value was $145.0 million, or $15.76 per share, at June 30, 2021, compared with net assets of $(0.8) million at December 31, 2020 before operations commenced.
- The six-month total return was 6.1%. Annualized operating expense and net investment income ratios were 6.8% and 6.4%, respectively; these ratios include non-recurring initial organization costs.
- The Company paid a first distribution of $0.15 per share in May 2021; $0.85 million was recorded as distributions to stockholders, including $0.021 million reinvested through the dividend reinvestment plan.
- Cash flow from operating activities was negative $216.0 million, primarily reflecting $225.2 million of portfolio investment purchases. Financing activities provided $219.6 million, including $140.0 million from share issuances and $81.0 million of borrowings. Ending cash and cash equivalents were $3.6 million.
Portfolio, debt and liquidity
- At June 30, 2021, the portfolio comprised 82 debt investments in 61 companies, with fair value of approximately $219.7 million and amortized cost of $215.7 million. Approximately 99.6% of debt investments were first-lien senior secured and 0.4% were senior unsecured.
- Weighted-average yield to maturity was 7.7% at fair value and 7.8% at amortized cost. Approximately 98% of new debt investment commitments during the quarter carried floating rates.
- Total investments, including $4.6 million of short-term investments, had fair value of $224.3 million. Approximately $205.2 million, or most of the portfolio, was classified as Level 3.
- Outstanding debt was $81.0 million, consisting of $50.0 million under the Loan and Security Agreement and $31.0 million under the Credit Agreement. Net carrying value was $80.5 million after deferred financing costs.
- Total debt commitments were $225.0 million, with $144.0 million available subject to borrowing-base limitations. The asset coverage ratio was 279%, compared with the statutory minimum of 150%.
- As of August 12, 2021, borrowings were $50.0 million, with no Credit Agreement borrowings, and cash and short-term investments totaled $22.9 million.
- The Company had $21.6 million of unfunded commitments to portfolio companies, principally related to Pretzels, Gusmer Enterprises and MacNeill Pride Group.
Material changes and developments
- The Company issued shares for aggregate proceeds of $140.0 million during the six months ended June 30, 2021, including $55.0 million raised on April 23 at $15.57 per share.
- On July 23, 2021, the Company issued 2.9 million shares for $45.0 million at $15.72 per share. Aggregate subscription commitments increased to $367.7 million, of which $182.7 million remained undrawn.
- On July 27, 2021, the Company paid a $0.22-per-share distribution totaling $2.0 million; $0.6 million was reinvested.
- Michael J. Levitt resigned as Chief Executive Officer on June 14, 2021 and remained an interested director. James C. Baker was appointed Chief Executive Officer.
- Because operations began in February 2021, the filing does not provide a meaningful prior comparable operating period. Management specifically states that comparative financial statement tables are not presented.
Guidance, outlook, risks and unusual items
- Management expects, depending on market conditions, approximately 80% to 90% of the portfolio to consist of first-lien senior secured, unitranche and split-lien loans, with the balance in higher-yielding and opportunistic investments.
- The Company targets asset coverage of 200% to 180%, equivalent to a debt-to-equity ratio of approximately 1.0x to 1.25x, but may change this target based on market conditions.
- No loans were on non-accrual status at June 30, 2021, and all investments were income producing. However, the portfolio is concentrated in private and illiquid investments, and fair values depend substantially on Level 3 models and unobservable assumptions.
- Key risks include COVID-19 and related economic disruption, portfolio company credit performance, interest-rate volatility, availability and pricing of financing, leverage, liquidity, illiquidity and valuation uncertainty, conflicts with the external adviser, and maintaining BDC and RIC status.
- The portfolio and credit facilities use LIBOR-based pricing. The filing states that the effect of the transition from LIBOR to alternative reference rates remains uncertain.
- Interest-rate sensitivity analysis estimated that a 100-basis-point increase in rates would increase annualized net investment income by approximately $0.2 million, while a 200-basis-point increase would increase it by approximately $1.5 million.
- Prior to an exchange listing, incentive fees may accrue but generally are not payable in cash until an exchange listing, sale or liquidation event. No incentive fee was incurred during the reported periods.
- The Company purchased its initial portfolio for $103.0 million from an affiliate of the adviser, creating a related-party transaction and an important valuation and conflict-of-interest consideration.
- Management reported no material pending litigation, no defaults upon senior securities and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Reconcile the post-quarter-end $45.0 million equity issuance, additional subscription commitments and subsequent $0.22-per-share distribution.
- Review the composition, concentration and credit performance of the 82-investment portfolio, particularly the largest industry exposures: consumer durables and apparel, materials and capital goods.
- Assess the sensitivity of NAV and earnings to Level 3 valuation assumptions, credit spreads, portfolio company performance and realized losses.
- Verify available borrowing capacity, covenant compliance, debt maturities and the planned treatment of the Credit Agreement’s Treasury Facility, which was scheduled to expire September 30, 2021.
- Monitor the $21.6 million of unfunded portfolio commitments and the $182.7 million of undrawn investor capital commitments as of the dates reported.
- Evaluate the impact of LIBOR transition, floating-rate assets and variable-rate debt on future net investment income.
- Review adviser fees, incentive-fee accrual mechanics, affiliate transactions and the absence of a public trading market for the shares.