Kayne Anderson BDC, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended March 31, 2021. The Company commenced operations on February 5, 2021, following its conversion from an LLC and election to operate as a business development company and intends to qualify as a regulated investment company. It is externally managed by KA Credit Advisors, LLC and seeks current income, and secondarily capital appreciation, primarily through debt investments in middle-market companies.
The Company had no public market for its shares as of May 14, 2021. Because operations began during the quarter, comparative operating results were not presented.
Financial condition and key metrics
| Metric | March 31, 2021 / Quarter |
|---|---|
| Total investment income | $1.74 million |
| Total expenses | $1.12 million |
| Net investment income | $0.61 million |
| Net realized gains | $0.03 million |
| Net unrealized gains | $2.80 million |
| Net increase in net assets from operations | $3.45 million |
| Net increase in net assets per share | $0.61 |
| Net asset value per share | $15.47 |
| Total net assets | $87.65 million |
| Cash and cash equivalents | $5.81 million |
| Investments at fair value | $173.41 million |
| Debt outstanding | $90.00 million |
| Asset coverage ratio | 197% |
The portfolio comprised 48 debt investments across 35 companies, with approximately $156 million of long-term debt investments at fair value. All long-term investments were first-lien senior secured debt, and no investments were on non-accrual status or considered credit impaired. Weighted average yield to maturity was 8.0% at both fair value and amortized cost.
Net cash used in operating activities was $168.65 million, primarily reflecting portfolio investment purchases. Financing activities provided $174.45 million, including $85.00 million from common stock issuance and $90.00 million of borrowings. The Company reported a 7.5% annualized operating-expense ratio and a 5.9% annualized net-investment-income ratio, with the ratios affected by non-recurring formation expenses.
Material changes and investment activity
- The Company raised $85.00 million through the issuance of 5,667,333 shares at $15.00 per share.
- It purchased an initial portfolio from an affiliate of the Advisor for approximately $103.0 million. The initial portfolio consisted of 18 senior secured loans, with an average purchase price of 97.4% of principal value and an average yield of 8.8% at acquisition.
- During the quarter, principal investments funded totaled approximately $161.7 million, while approximately $5.0 million of investments were sold or repaid.
- New commitments had a weighted average interest rate of 7.3%; 99.5% were floating-rate investments.
- The portfolio was concentrated in consumer durables and apparel, materials, capital goods, commercial and professional services, and health care equipment and services.
- Investments were valued at $173.41 million versus amortized cost of $170.61 million, producing net unrealized appreciation of approximately $2.80 million.
Debt, liquidity and capital resources
The Loan and Security Agreement had a $150 million commitment, $50 million outstanding, and $100 million available at March 31, 2021. Borrowings bear interest at LIBOR plus 4.25%, subject to a 1.00% LIBOR floor, and have a three-year term.
The Credit Agreement had $75 million of commitments, consisting of a $40 million Subscription Facility and a $35 million Treasury Facility. The Company had $40 million outstanding and $35 million available at quarter-end. The Subscription Facility bears interest at LIBOR plus 1.90%, subject to a 0.35% floor, and the Treasury Facility bears interest at LIBOR plus 0.20%. The Treasury Facility expires September 30, 2021, and the Subscription Facility expires December 31, 2022.
Management stated that it targets asset coverage of 180% to 200%, equivalent to a debt-to-equity ratio of approximately 1.0x to 1.25x. As of May 14, 2021, the Company had $50 million outstanding under the LSA, no borrowings under the Credit Agreement, and $8.0 million of cash and cash equivalents, including short-term investments.
Outlook, commentary, risks and unusual items
- Management expects to invest primarily in first-lien senior secured, unitranche and split-lien loans, generally targeting 80% to 90% of the portfolio in these categories.
- The Company had $3.09 million of unfunded commitments to portfolio companies at March 31, 2021. No capital calls or draw requests had been made.
- Subsequent to quarter-end, the Company issued 3,532,434 shares for $55.0 million at $15.57 per share. Aggregate investor capital commitments increased to $285.4 million, of which $145.4 million remained undrawn.
- The Company paid its first distribution, $0.15 per share, on May 14, 2021 to stockholders of record as of April 20, 2021.
- Initial organization expenses of $175,465 and offering costs of $38,952 were unusual or non-recurring contributors to quarterly expenses. No incentive fee on income or capital gains was incurred.
- Approximately 97.4% of debt investments by fair value were Level 3 investments, meaning valuation relied substantially on unobservable inputs and management judgment. Changes in valuation assumptions could materially affect NAV.
- Material risks include COVID-19-related economic disruption, credit losses, illiquidity, interest-rate changes, leverage, financing availability, conflicts with the Advisor, dependence on the Advisor, and the requirement to maintain BDC and RIC status.
- Many portfolio loans and borrowings use LIBOR-based rates. The filing states that the effect of the transition from LIBOR to alternative reference rates remains uncertain.
- The filing reported no material litigation, no defaults on senior securities, and effective disclosure controls as of March 31, 2021.
Important facts for investors to verify
- Whether portfolio fair values, particularly the substantial Level 3 valuations, are realizable and remain supported by borrower performance.
- The effect of $90 million of leverage on net investment income, NAV volatility, asset coverage and refinancing risk.
- The timing and terms of future capital drawdowns, including the $145.4 million of undrawn commitments reported as of May 14, 2021.
- Portfolio concentration in consumer durables and apparel and materials, as well as exposure to individual borrowers.
- The sustainability of net investment income after excluding initial organization and offering costs.
- The impact of LIBOR cessation and replacement reference rates on portfolio income and borrowing costs.
- Future distribution levels and the Company’s ability to satisfy RIC distribution requirements.