Kayne Anderson BDC, Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2022; filed August 15, 2022. Kayne Anderson BDC is an externally managed, non-diversified BDC that invests primarily in senior secured debt of middle-market companies and intends to qualify as a regulated investment company. The company commenced operations on February 5, 2021, so the prior-year comparison period covered an earlier stage of portfolio build-out.
Financial Position and Portfolio
- Total assets were $734.7 million, versus $586.5 million at December 31, 2021.
- Net assets were $389.8 million, versus $312.0 million; NAV per share increased to $16.55 from $16.22.
- Investments at fair value totaled $726.4 million, comprising $716.6 million of first-lien senior secured debt, $1.4 million of private equity and $8.4 million of short-term investments.
- The portfolio included 128 debt investments and five equity investments across 52 portfolio companies. Weighted-average yield to maturity was 8.4% at fair value and 8.5% at amortized cost.
- The largest industry exposures by fair value were commercial services and supplies at 17.9%, trading companies and distributors at 12.2%, and health care providers and services at 12.1%.
- All debt investments were income producing, and no loans were on non-accrual status at June 30, 2022.
Operating Results and Cash Flow
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total investment income | $13.0 million | $3.8 million | $24.9 million | $5.6 million |
| Total expenses | $5.9 million | $1.8 million | $11.5 million | $3.0 million |
| Net investment income | $7.1 million | $2.0 million | $13.4 million | $2.6 million |
| Net realized gains | $0.0 million | $0.0 million | $0.02 million | $0.05 million |
| Net unrealized gains/(losses) | $0.3 million | $1.2 million | $(0.2) million | $4.0 million |
| Net increase in net assets from operations | $7.5 million | $3.2 million | $13.2 million | $6.7 million |
- Net investment income per share was $0.30 for the quarter and $0.58 for the six months, compared with $0.24 and $0.35, respectively, in the prior-year periods.
- Net increase in net assets from operations per share was $0.32 for the quarter and $0.57 for the six months, compared with $0.38 and $0.91 in the prior-year periods. The lower six-month result reflected the decline in unrealized investment gains.
- Net investment income represented approximately 55% of quarterly investment income and 54% for the six-month period, compared with approximately 52% and 47%, respectively, in the prior-year periods.
- Operating cash flow was $(128.4) million for the six months, driven primarily by $181.5 million of portfolio investment purchases, partly offset by $43.8 million of sales and principal repayments.
- Financing activities provided $129.8 million, including $68.6 million from common stock issuance and net borrowings under the new credit facilities. Cash and cash equivalents ended at $3.4 million; cash plus short-term investments totaled approximately $11.8 million.
Debt, Liquidity and Capitalization
- Outstanding principal debt was $342.0 million at June 30, 2022, versus $267.0 million at December 31, 2021. Net carrying value was $337.1 million after deferred financing costs.
- Debt consisted of $78.0 million under the Corporate Credit Facility, $150.0 million under the Revolving Funding Facility and $114.0 million under the Subscription Credit Agreement.
- Amount available under the facilities was $288.0 million, subject to borrowing-base and other limitations. The Subscription Credit Agreement was scheduled to expire on December 31, 2022.
- The asset coverage ratio was 214%, compared with 217% at year-end, above the statutory minimum of 150%. Management stated a target asset coverage range of 200% to 180%, equivalent to approximately 1.0x to 1.25x debt-to-equity.
- Unfunded commitments to portfolio companies were $91.5 million, down from $97.8 million at December 31, 2021. Investor capital commitments totaled $761.7 million, including a contingent $13.3 million, with $393.6 million undrawn at quarter-end.
Material Changes Versus Prior Comparable Period
- Investment income increased substantially as the portfolio expanded, rising 241% for the quarter and 348% for the six months versus the prior-year periods.
- Net investment income increased 262% for the quarter and 417% for the six months, while management fees, interest expense and incentive fees also increased with portfolio size and leverage.
- The company funded $117.2 million of investments during the second quarter, compared with $68.4 million in the prior-year quarter. New commitments were predominantly floating-rate and had a weighted-average rate of 7.7%.
- Debt investments at fair value increased to $716.6 million from $578.2 million at year-end 2021. Industry classifications changed from GICS Level 2 to Level 3, limiting direct comparability of sector percentages.
- On February 18, 2022, the company refinanced the $150.0 million Loan and Security Agreement with the Corporate Credit Facility and Revolving Funding Facility.
- Common stock issued during the first six months totaled 4.2 million shares for $68.6 million, compared with 9.2 million shares for $140.0 million in the prior-year period.
Outlook, Risks and Unusual Items
- Management stated that cash, undrawn investor commitments and available credit capacity were expected to fund anticipated investment activities over the next twelve months.
- Subsequent to quarter-end, the company reduced the Subscription Credit Facility commitment to $150.0 million, increased the Corporate Credit Facility commitment to $350.0 million, and issued 7.7 million shares for $125.0 million at $16.30 per share.
- The company paid a July 2022 distribution of $0.30 per share; total distributions were $7.1 million, of which $1.4 million was reinvested.
- Interest-rate exposure is significant because both portfolio investments and borrowings are substantially floating-rate. Management estimated that a 100-basis-point increase in base rates would increase annualized net investment income by approximately $3.8 million, while a 200-basis-point increase would add approximately $7.6 million.
- Most investments are Level 3 and valued using models, market-yield analyses and unobservable inputs. Fair-value changes could materially affect NAV and reported earnings.
- Key risks include portfolio-company credit losses, leverage and covenant compliance, refinancing and borrowing-base risk, LIBOR transition, illiquidity, economic and market volatility, the COVID-19 pandemic, the Russia-Ukraine conflict, and the ability to maintain BDC and RIC status.
- Incentive fees on income and capital gains accrued in the first six months totaled $1.7 million. Before an exchange listing, accrued incentive fees generally become payable upon an exchange listing, sale or liquidation event.
- No material litigation, defaults on senior securities or changes materially affecting internal control were reported.
Important Facts for Investors to Verify
- Confirm the post-quarter-end debt balances, facility availability, borrowing-base capacity and the December 31, 2022 expiration or replacement of the Subscription Credit Agreement.
- Review Level 3 valuation assumptions, particularly credit spreads, portfolio-company performance and the reported unrealized depreciation in Arborworks, Trademark Global and United Safety & Survivability.
- Assess the effect of higher benchmark rates on both portfolio income and borrowing costs, including the company’s floating-rate floors and SOFR-linked facilities.
- Verify the sustainability of distributions relative to net investment income, including the impact of accrued but unpaid incentive fees and non-cash or PIK income.
- Evaluate unfunded portfolio commitments, investor capital-call capacity and the concentration of exposures in commercial services, trading companies and health care.
- Confirm the impact of the July 2022 $125.0 million equity issuance on NAV, leverage, portfolio growth and per-share earnings.