Kayne Anderson BDC, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; filed May 16, 2022. Kayne Anderson BDC is an externally managed, non-diversified business development company that invests primarily in first-lien senior secured loans to U.S. middle-market companies. The company commenced operations on February 5, 2021 and had no public market for its shares as of May 11, 2022.
Financial Position and Results
| Metric | March 31, 2022 / Q1 2022 | Comparable period or December 31, 2021 |
|---|---|---|
| Total investment income | $11.9 million | $1.7 million in Q1 2021 |
| Net investment income | $6.2 million; $0.28 per share | $0.6 million; $0.11 per share in Q1 2021 |
| Net realized gains | $0.03 million | $0.03 million in Q1 2021 |
| Net unrealized gains/(losses) | $(0.5) million | $2.8 million in Q1 2021 |
| Net increase in net assets from operations | $5.7 million; $0.26 per share | $3.4 million; $0.61 per share in Q1 2021 |
| Net asset value per share | $16.49 | $16.22 at December 31, 2021; $15.47 at March 31, 2021 |
| Total assets | $629.3 million | $586.5 million at December 31, 2021 |
| Net assets | $387.2 million | $312.0 million at December 31, 2021 |
| Investments at fair value | $620.1 million | $582.1 million at December 31, 2021 |
| Cash and cash equivalents | $5.8 million; $8.8 million including short-term investments | $2.0 million; $5.7 million including short-term investments |
| Gross debt outstanding | $242.0 million; $236.9 million net carrying value | $267.0 million; $266.3 million net carrying value at December 31, 2021 |
| Operating expense ratio | 6.6% of average net assets | 7.5% in Q1 2021 |
| Net investment income ratio | 7.2% of average net assets | 5.9% in Q1 2021 |
Investment income increased primarily because the portfolio was substantially larger than in the prior-year quarter. Expenses increased to $5.7 million from $1.1 million, including $2.8 million of interest and debt-financing expense, $1.3 million of management fees and $1.0 million of incentive fees. Net investment income represented approximately 52% of investment income in Q1 2022.
Portfolio, Cash Flow and Leverage
- At March 31, 2022, the portfolio comprised 104 debt investments and four equity investments across 50 portfolio companies. Fair value was approximately $617.1 million for long-term investments, consisting of $616.1 million of first-lien senior secured debt and $1.0 million of equity.
- Weighted-average yield to maturity was 7.4% at fair value and 7.6% at amortized cost. All investments were income-producing, and no loans were on non-accrual status.
- Q1 2022 funded investments totaled $67.7 million, while investments sold or repaid totaled $28.5 million. Net cash used in operating activities was $31.2 million, compared with $168.7 million in Q1 2021, reflecting lower investment purchases and increased financing activity.
- Asset coverage was 260% at March 31, 2022, compared with 217% at December 31, 2021. Management indicated a target asset coverage range of 200% to 180%, equivalent to a debt-to-equity ratio of approximately 1.0x to 1.25x.
- On February 18, 2022, the company repaid the $150.0 million Loan and Security Agreement and established a $275.0 million Corporate Credit Facility and a $250.0 million Revolving Funding Facility. The company also had a $175.0 million Subscription Credit Agreement, of which $14.0 million was outstanding at quarter-end.
- Available borrowing capacity at March 31, 2022 was approximately $180.5 million under the Corporate Credit Facility, $31.3 million under the Revolving Funding Facility and $161.0 million under the Subscription Credit Agreement, subject to borrowing-base limitations.
- The company had $81.8 million of unfunded commitments to portfolio companies, down from $97.8 million at December 31, 2021.
Material Changes and Subsequent Events
- Common share issuances generated $68.6 million from 4.2 million shares issued at $16.36 per share in January 2022, compared with $85.0 million from 5.7 million shares issued in Q1 2021.
- Aggregate investor capital commitments were $701.5 million at March 31, 2022, including a contingent $33.3 million commitment; $333.4 million was undrawn at quarter-end.
- On April 18, 2022, the company completed a sixth capital close of $80.2 million. Aggregate commitments increased to $761.7 million, of which $393.6 million was undrawn.
- On April 26, 2022, the company paid a $0.26 per-share distribution totaling $6.1 million; $1.2 million was reinvested for 74,084 shares.
- Interest-rate exposure is significant because substantially all new debt investments were floating-rate. Management estimated that a 100-basis-point increase in base rates would increase annualized net investment income by approximately $3.6 million, after considering the effect on debt expense.
Outlook, Risks and Unusual Items
Management expects cash, undrawn investor commitments and available credit capacity to fund investing and operating needs over the next twelve months. The filing does not provide formal earnings or distribution guidance beyond the subsequent $0.26 per-share distribution.
- Most investments are Level 3, privately held or otherwise illiquid assets valued using significant unobservable inputs. Fair-value changes may materially affect NAV and reported earnings.
- Key risks include portfolio-company credit losses, economic downturns, interest-rate volatility, inflation and market volatility, the COVID-19 pandemic, the Russia-Ukraine conflict and related sanctions, and limited liquidity of investments.
- Borrowing creates leverage, refinancing and covenant risk. The Subscription Credit Agreement expires December 31, 2022; the new facilities have borrowing-base and financial covenants, including a minimum 1.5:1.0 asset-to-indebtedness ratio under the Corporate Credit Facility.
- The company remains subject to risks associated with maintaining BDC and regulated investment company status, including required distributions of taxable income.
- Before an exchange listing, accrued incentive fees generally become payable upon an exchange listing, sale of the company or liquidation. Q1 2022 incentive fees of approximately $1.0 million were accrued.
- The filing reports no material pending litigation, no defaults on senior securities and effective disclosure controls. The filing also notes that the transition from LIBOR to SOFR could create uncertainty for investment and financing contracts.
Investor Verification Items
- Verify the borrowing-base availability and covenant compliance of the Corporate Credit Facility, Revolving Funding Facility and Subscription Credit Agreement.
- Review the concentration and credit performance of the largest industry and portfolio-company exposures, particularly commercial services, trading companies and distributors, and health care providers and services.
- Assess the sensitivity of NAV and net investment income to interest-rate changes, credit-spread movements and Level 3 valuation assumptions.
- Confirm the timing and terms of the Subscription Credit Agreement maturity and the company’s plan for refinancing or repayment.
- Reconcile capital commitments, undrawn commitments and subsequent capital closes with future investment funding needs.
- Review the effect of accrued incentive fees, distributions and any future exchange listing or liquidity event on shareholder returns.