Kayne Anderson BDC, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2022. Kayne Anderson BDC is an externally managed, non-diversified business development company focused primarily on first-lien secured loans to U.S. middle-market companies. It began operations in February 2021; its shares had no public market as of November 9, 2022.
Financial and operating highlights
- Q3 income and results: Investment income was $20.5 million, versus $5.0 million in Q3 2021. Net investment income was $11.2 million, versus $3.0 million. Net increase in net assets from operations was $14.6 million, versus $4.1 million, including $3.3 million of net unrealized gains.
- Nine-month results: Investment income was $45.4 million versus $10.5 million; net investment income was $24.6 million versus $5.6 million; and the increase in net assets from operations was $27.8 million versus $10.8 million. Net unrealized gains were $3.1 million, down from $5.0 million.
- Expenses and per-share data: Q3 total expenses rose to $9.3 million from $2.0 million, including $5.5 million of interest expense and $1.2 million of incentive fees. Q3 net investment income per share was $0.38 versus $0.26; net increase from operations per share was $0.49 versus $0.36. For the nine months, net investment income per share was $0.98 versus $0.63.
- Portfolio: At quarter-end, investments had fair value of $968.8 million, including $958.9 million of first-lien secured debt and $5.1 million of equity investments. The portfolio comprised 140 debt and 9 equity investments across 59 companies. Weighted-average yield to maturity on debt and income-producing securities was 9.8% at fair value. No loans were on non-accrual status.
- Balance sheet and leverage: Total assets were $992.4 million, liabilities $468.7 million, and net assets $523.7 million. NAV per share was $16.73, up from $16.22 at December 31, 2021. Outstanding facility borrowings totaled $464.0 million (net carrying value $459.2 million); asset coverage was 213%, compared with 217% at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $15.3 million; short-term investments were $4.8 million. For the nine months, operating activities used $357.4 million, financing activities provided $370.7 million, and cash increased by $13.2 million to $15.3 million. The company reported $258.8 million of facility availability at September 30, subject to borrowing-base limits.
- Distributions and capital: Dividends declared for the first nine months totaled $0.56 per share. The company issued shares for $193.6 million in that period. At September 30, investor commitments totaled $808.2 million, with $315.1 million undrawn; unfunded commitments to portfolio companies were $125.2 million.
Material changes versus comparable periods
- Investment income and net investment income grew substantially, alongside expansion of the portfolio and capital base. Total investments increased from $582.1 million at December 31, 2021 to $968.8 million at September 30, 2022.
- Borrowings increased from $267.0 million at year-end to $464.0 million. The prior Loan and Security Agreement was repaid and replaced in February 2022 with a Corporate Credit Facility and Revolving Funding Facility; interest expense rose as a result of greater average borrowings.
- Operating expenses increased, including new incentive fees in 2022. Annualized expense ratio was 6.9% for the nine months, versus 5.9% in 2021; the reported net investment income ratio was 8.2%, versus 6.8%.
- The investment mix broadened across sectors; the largest reported September 2022 industry allocations included commercial services and supplies (13.7%), trading companies and distributors (12.8%), health care providers and services (10.9%), and food products (10.3%).
Outlook, risks, and unusual items
- Management said cash, undrawn investor commitments, and available facility capacity were expected to be sufficient for anticipated investment activity over the next 12 months. It expects liquidity beyond that period to come from operations and financing. No earnings or distribution guidance was provided.
- Management intends to target asset coverage of 180%–200%, equivalent to debt-to-equity of approximately 1.0x–1.25x, subject to market conditions. It expected to renew the $150 million Subscription Credit Agreement when it matured on December 31, 2022.
- The portfolio is predominantly floating-rate, while the company also borrows at floating rates. The filing estimates that a 100-basis-point increase in base rates would raise annualized net investment income by $5.0 million, assuming the balance sheet remained constant and no mitigating actions were taken.
- Key risks include higher interest rates and inflation, economic or market deterioration, portfolio-company credit performance, leverage and financing availability, illiquidity and subjective Level 3 valuations, conflicts with the external Advisor, and maintaining BDC and RIC status. The filing noted COVID-19 and Russia-Ukraine-related uncertainty. Management reported no material pending or threatened litigation and no defaults on senior securities.
- All investments other than short-term investments were Level 3 at quarter-end; the Advisor became the Board-designated valuation designee effective September 1, 2022. The company reported no material change in its internal control over financial reporting and concluded disclosure controls were effective.
- Subsequent events: a $0.35-per-share distribution was paid October 25; shares were issued for $24.6 million on October 31; and on November 10 the Corporate Credit Facility commitment was increased from $350 million to $400 million.
Important facts for investors to verify
- Review portfolio-company credit quality, watch-list and non-accrual developments, and the valuation assumptions underlying the Level 3 portfolio.
- Confirm facility availability, borrowing-base restrictions, debt costs and maturities, and renewal or replacement of the Subscription Credit Agreement.
- Assess whether net investment income supports distributions after interest, management and incentive fees, including the effect of changing rates on both portfolio income and funding costs.
- Reconcile unfunded portfolio commitments and undrawn investor capital commitments with expected cash needs and planned investment activity.
- Check subsequent filings for changes to NAV, leverage, distributions, capital calls, and the amended Corporate Credit Facility terms.