Kayne Anderson BDC, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 14, 2023. Kayne Anderson BDC is an externally managed, non-diversified BDC focused primarily on senior secured loans to U.S. middle-market companies. Its shares were not listed, and no public market existed for them.
Key financial metrics
Amounts below are in millions, except per-share data, percentages and portfolio statistics.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $41.2 | $20.5 | $118.3 | $45.4 |
| Net investment income | $21.4 | $11.2 | $62.4 | $24.6 |
| Net realized and unrealized gains (losses) | $(7.5) | $3.4 | $(8.1) | $3.2 |
| Net increase in net assets from operations | $13.9 | $14.6 | $54.3 | $27.8 |
| Net investment income per share | $0.53 | $0.38 | $1.62 | $0.98 |
| Operating increase per share | $0.34 | $0.49 | $1.41 | $1.10 |
- Balance sheet and NAV: September 30 total assets were $1,320.6 million, total liabilities $639.9 million and net assets $680.7 million. NAV was $16.40 per share, down from $16.50 at December 31, 2022. Net assets rose from $592.0 million, substantially reflecting share issuance.
- Investments: Portfolio fair value was $1,294.2 million, including $1,269.5 million of first-lien senior secured debt, $8.1 million of equity and $16.6 million of short-term investments. The portfolio covered 72 companies; approximately 97.7% was first-lien senior secured loans, 1.7% junior debt and 0.6% equity. All debt investments were floating-rate. Weighted average yield on debt and income-producing securities was 12.4% at fair value.
- Credit quality and concentration: One investment was on non-accrual, representing 1.9% of debt investments at cost and 1.1% at fair value; there were none at year-end 2022. Trading companies and distributors, food products, and commercial services and supplies were the largest industries at 13.8%, 10.9% and 10.5% of long-term investment fair value, respectively.
- Debt and liquidity: Gross debt principal was $598.0 million ($592.7 million net carrying value), versus $577.0 million at year-end 2022. Debt comprised $192.0 million on the corporate facility, $306.0 million on the revolving funding facility, $25.0 million on the subscription credit agreement and $75.0 million of senior unsecured notes. Cash plus short-term investments totaled about $29.0 million. Reported asset coverage was 214%, versus 203% at year-end; the statutory minimum is 150%. Management targets 180%–200% coverage, subject to market conditions.
- Cash flow and distributions: For the first nine months, operating activities used $56.3 million and financing activities provided $60.2 million; cash increased $3.9 million to $12.4 million. Cash distributions declared totaled $59.6 million ($1.53 per share) versus $13.2 million ($0.56 per share) in the prior-year period. The $0.53-per-share September-quarter distribution was paid October 13.
- Expenses and operating ratios: Interest expense was $13.9 million in Q3 and $38.4 million for nine months, compared with $5.5 million and $11.3 million, respectively. The nine-month ratio of operating expenses to average net assets was 11.9%, up from 6.9%; the ratio of net investment income to average net assets was 13.3%, up from 8.2%.
Material changes and management commentary
- Investment income and net investment income increased sharply year over year as the portfolio and floating-rate yields grew. Higher funding costs were also significant: average borrowing costs rose, and nine-month average debt interest rates were 8.2% versus 4.8% in 2022.
- Despite stronger net investment income, Q3 operating results were lower than in 2022 because investment fair values recorded a $7.5 million net unrealized loss, versus a $3.3 million gain. Arborworks Acquisition was the largest negative Q3 valuation contributor, at $8.2 million; it was also the largest negative contributor for the nine-month period, at $8.3 million.
- New investment activity was subdued in Q3: four new commitments totaled $29.8 million gross, while commitments sold, exited or repaid were $36.8 million. Funded investments were $41.8 million and repayments were also $41.8 million.
- Management stated that cash, undrawn investor commitments and available credit capacity were expected to meet anticipated investment needs over the next 12 months. At September 30, unfunded portfolio-company debt commitments were $109.1 million, generally subject to covenants and other conditions.
- After quarter-end, an October 16 capital close added $101.2 million. As of the filing, aggregate investor commitments were $988.2 million, of which $329.9 million was undrawn. The October distribution reinvestment issued 96,731 shares.
Outlook, risks and unusual items
- No specific earnings or distribution guidance was provided. The company said its liquidity needs beyond 12 months would depend on cash generated from operations and financing activities.
- Interest-rate sensitivity is material. The filing estimates that a 100-basis-point rate decrease would reduce annualized net investment income by $7.4 million; a 100-basis-point increase would add $7.4 million, assuming the balance sheet remains unchanged.
- The subscription credit agreement, with $25.0 million outstanding at September 30, expires December 31, 2023. The portfolio is also exposed to floating-rate funding costs, borrower credit deterioration and potentially illiquid investments. Most portfolio debt and equity is Level 3 fair value, requiring significant judgment and unobservable inputs.
- The filing identifies continued strain in the banking system as a potential risk because the company depends on bank relationships. It also highlights general economic, inflation, interest-rate, portfolio-company and financing risks.
- PIK interest was $1.3 million for the nine months, or 1.1% of interest income; it is non-cash when accrued and may still contribute to taxable distributions. Management reported no material pending or threatened litigation and no defaults on senior securities. The company reported compliance with its note covenants.
Important facts for investors to verify
- Monitor the Arborworks non-accrual and valuation, including the basis for its substantial markdown and any recovery or further deterioration.
- Confirm refinancing, repayment or replacement of the subscription credit agreement before its December 31, 2023 expiration.
- Track borrowing costs, facility availability under borrowing-base limits, asset coverage and compliance with debt covenants.
- Assess whether recurring cash income supports distributions, particularly as distributions increased and some reported income includes non-cash PIK accruals.
- Review subsequent portfolio marks, the concentration and performance of larger industry exposures, and the assumptions supporting Level 3 valuations.