Kayne Anderson BDC, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Kayne Anderson BDC is an externally managed, non-diversified BDC investing primarily in middle-market company debt. Shares were not publicly traded as of the filing.
Financial performance and position
- Investment income: $36.4 million, versus $11.9 million in Q1 2022.
- Expenses: $17.1 million, versus $5.7 million. Interest expense rose to $11.5 million from $2.8 million; the average borrowing rate was 7.6%, compared with 4.7%.
- Net investment income: $19.3 million, or $0.54 per share, versus $6.2 million, or $0.28 per share. Net investment income was approximately 53% of investment income, versus approximately 52%.
- Net increase from operations: $19.4 million, or $0.54 per share, versus $5.7 million, or $0.26 per share. Net realized gains were zero; net unrealized gains were $0.1 million, versus a $0.5 million unrealized loss.
- Assets and NAV: Total assets were $1.295 billion and net assets were $595.5 million at quarter-end, compared with $1.194 billion and $592.0 million at year-end 2022. NAV per share was $16.57, up from $16.50.
- Portfolio: 180 debt and 13 equity investments across 71 portfolio companies; investment fair value was $1.270 billion, including $1.247 billion of first-lien senior secured debt. Weighted average yield to maturity on debt and income-producing securities was 11.9% at fair value and 12.0% at amortized cost. No loans were on non-accrual.
- Cash flow and liquidity: Cash used in operating activities was $76.9 million, versus $31.2 million used in Q1 2022, primarily reflecting portfolio investment purchases. Financing provided $79.6 million; ending cash and cash equivalents were $11.2 million. Cash plus short-term investments totaled $26.4 million.
- Debt: Outstanding principal was $664 million, up from $577 million at December 31, 2022; net carrying value was $659.1 million. Borrowing capacity available under the facilities was $155.8 million, subject to borrowing-base and other restrictions. Asset coverage was 190%, versus 203% at year-end; the statutory minimum is 150%.
- Distributions: The company declared $0.47 per share for Q1, paid April 14, 2023. On May 10, the Board declared $0.53 per share for holders of record June 30, payable July 14.
Material changes versus the comparable period
- Investment income, net investment income, and operating results increased substantially alongside a larger portfolio and higher interest rates. The company funded $105.0 million of private credit investments in Q1 2023, versus $66.9 million in Q1 2022; net new investment commitments were $76.1 million, versus $11.5 million.
- Higher rates also increased financing costs: average borrowings rose to $614.9 million from $241.6 million, and total interest expense increased to $11.5 million from $2.8 million.
- Debt investments’ fair value increased to $1.247 billion from $1.158 billion at year-end. Net unrealized gains were modest at $0.1 million; the portfolio had both appreciation and depreciation during the quarter.
- Unlike Q1 2022, the company declared a $0.47 per-share distribution in Q1 2023. NAV per share ended at $16.57 after the distribution accrual.
Outlook, risks, and unusual items
- Management expects cash, undrawn investor commitments, and available credit capacity to support anticipated investment activity over the next 12 months. It targets asset coverage of 180%–200%, but may change that target with market conditions. No earnings or investment-return guidance is provided.
- Interest-rate sensitivity is material: a hypothetical 100-basis-point rate decrease would reduce annualized net investment income by an estimated $5.9 million; a 100-basis-point increase would add an estimated $5.9 million, assuming the balance sheet remains unchanged.
- Most portfolio investments are Level 3 and valued using significant unobservable inputs. Fair value estimates are judgmental and may differ from realizable values. The portfolio also has credit, concentration, liquidity, and leverage risks; its largest industry exposures include trading companies and distributors (14.1%), commercial services (11.2%), and food products (10.6%).
- Management cited continued strain in the banking system as a risk because the business depends on bank relationships. Other disclosed risks include economic downturns, inflation, interest-rate volatility, illiquid investments, and the ability to maintain BDC and RIC status.
- The company had $135.7 million of unfunded portfolio-company debt commitments at quarter-end, generally subject to conditions. No material pending or threatened litigation was reported, and no investment was on non-accrual.
- Subsequent events: On April 4, the company issued 3.01 million shares for $50.0 million. As of May 10, investor commitments totaled $852.6 million, with $234.9 million undrawn. Incentive fees accrue but, before an exchange listing, generally are not payable in cash until a liquidity event.
Important facts for investors to verify
- Availability and terms of the reported $155.8 million borrowing capacity, including borrowing-base limits and facility covenants; $92 million of subscription-facility borrowings was due within one year, and that facility expires December 31, 2023.
- Portfolio credit quality and valuation assumptions, especially Level 3 marks, watch-list exposures, and the disclosed last-out positions that carry greater risk of loss.
- Whether investment income and distributions remain supported if interest rates fall, borrowing costs rise, or portfolio-company performance weakens.
- Funding requirements and conditions for the $135.7 million in unfunded portfolio commitments, as well as investor capital-call availability.
- The implications of the absence of a public market for shares, and the timing and potential payment of accrued incentive fees in a future liquidity event.