Business Context and Reporting Period
Kayne Anderson BDC, Inc. filed its Form 10-K for the fiscal year ended December 31, 2020. The financial statements are for Kayne Anderson BDC, LLC, the predecessor entity, before its February 5, 2021 conversion to a Delaware corporation and election to be regulated as a business development company under the Investment Company Act of 1940.
The Company was formed in May 2018 to invest primarily in first-lien senior secured, unitranche and split-lien loans to U.S. middle-market companies. It had not commenced investment operations as of December 31, 2020; operations began on February 5, 2021.
Key Financial Metrics
| Metric | Year ended December 31, 2020 |
|---|---|
| Investment income/revenue | $0 |
| Administrative and marketing costs | $25,724 |
| Organizational costs | $782,426 |
| Total expenses | $808,150 |
| Net loss | $(808,150) |
| Cash and cash equivalents | $10,000 |
| Total assets | $417,609 |
| Total liabilities | $1,215,759 |
| Member’s capital deficit | $(798,150) |
| Net cash used in operating activities | $0 |
There were no investment operations, portfolio activities, debt borrowings or distributions during the reporting period. Total return was not meaningful because the Company remained in the development stage.
Material Changes and Subsequent Events
- On January 25, 2021, investors committed an aggregate of $154.3 million to purchase common stock.
- On February 5, 2021, the Company sold 5,666,667 shares for $85.0 million, or approximately $15.00 per share.
- On February 5, 2021, the Company purchased an initial portfolio of 18 senior secured loans for approximately $103.0 million from an affiliate of the Advisor. The loans had an average outstanding balance of approximately $5.9 million, an average purchase price of 97.4% of principal value and an average yield of 8.8%. None were in default or on non-accrual status at acquisition.
- A wholly owned financing subsidiary entered into a three-year loan and security facility with commitments of up to $150 million, expandable to $250 million subject to conditions. Borrowings bear interest at LIBOR plus 4.25%, subject to a 1.00% LIBOR floor.
- The Company also entered into a $25 million subscription facility and a $50 million treasury facility. As of February 19, 2021, it had $35.0 million borrowed under the loan and security facility and no borrowings under the other two facilities; cash was $7.4 million.
Strategy, Fees, Liquidity and Outlook
The Company targets current income and, to a lesser extent, capital appreciation. Depending on market conditions, it expects 80% to 90% of its portfolio to consist of first-lien senior secured, unitranche and split-lien loans, with the remaining 10% to 20% invested in higher-yielding and opportunistic assets.
The Company expects to raise capital through private offerings and capital commitments. It was targeting $500 million of commitments and expected to complete the initial capital raise before November 30, 2021. It intends to seek an exchange listing within three to five years after completion of the initial capital raise. If no liquidity event occurs within five years, the Board generally expects to direct an orderly wind-down, subject to fiduciary and regulatory requirements.
- Before an exchange listing, the base management fee is 0.90% annually on the fair value of investments, including assets purchased with leverage, excluding specified cash and short-term instruments.
- Before an exchange listing, the income incentive fee is subject to a quarterly 1.50% NAV hurdle and is generally 10% above the applicable catch-up threshold.
- Before an exchange listing, the capital gains incentive fee is 10% of cumulative realized gains, net of realized losses and unrealized depreciation, subject to the agreement’s terms.
- The Company intends to elect RIC tax treatment and generally must distribute at least 90% of investment company taxable income to maintain that status.
Management Commentary and Principal Risks
Management emphasizes a credit-oriented strategy focused on capital preservation, direct origination and disciplined underwriting. The filing identifies COVID-19, economic downturns, credit-market disruption, interest-rate volatility and the transition away from LIBOR as significant uncertainties.
- The Company is newly formed and has no operating history as an investment company; historical performance of Kayne Anderson affiliates may not be replicated.
- Investments are expected to be primarily private, illiquid and below-investment-grade in credit quality. Defaults, restructurings, collateral deterioration and borrower leverage could reduce NAV and income.
- Most investments are expected to be Level 3 assets valued using significant management judgment and unobservable inputs. Actual realizations may differ materially from reported fair values.
- Leverage may magnify gains and losses, reduce distributions and create asset-coverage constraints. The Company must generally maintain at least 150% asset coverage for senior securities and currently targets 180% to 200% asset coverage.
- Floating-rate investments and borrowings create exposure to interest-rate changes. LIBOR cessation or replacement could affect investment income, borrowing costs and contract terms.
- The Advisor and its affiliates manage other accounts with potentially competing interests, creating risks relating to investment allocation, co-investments, valuation and fee incentives.
- There was no public market for the shares as of the filing date. Transfers are restricted, and investors may have limited liquidity until a future liquidity event, if any.
- Failure to qualify as a BDC or RIC could materially increase taxes, restrict operations and reduce distributions.
Important Facts for Investors to Verify
- Confirm that 2020 results represent a pre-operating development-stage entity and are not indicative of post-February 2021 investment performance.
- Review the February 2021 formation transactions, including the valuation, terms and affiliate relationship involved in the $103.0 million portfolio purchase.
- Verify actual borrowings, interest rates, covenants, asset coverage and remaining capacity under each financing facility.
- Assess the initial portfolio’s credit quality, industry concentration, non-accrual status, fair values and subsequent performance.
- Review the final capital commitments, additional private offerings, share issuance pricing and any dilution from subsequent closings or dividend reinvestment.
- Evaluate the fee structure, including management fees based on leveraged gross investment values and incentive fees on income and capital gains.
- Confirm the timing and feasibility of any exchange listing or other liquidity event; the filing provides no assurance that one will occur.