Kayne Anderson BDC, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with 2021, when the company had only recently commenced operations. The company is an externally managed BDC investing primarily in middle-market debt. Its objective is current income and, to a lesser extent, capital appreciation. There was no public market for its shares.
Financial and portfolio highlights
| Metric | FY 2022 / December 31, 2022 | FY 2021 / December 31, 2021 |
|---|---|---|
| Investment income | $74.8 million | $18.8 million |
| Net investment income | $40.2 million; $1.48 per share | $10.1 million; $0.94 per share |
| Total expenses | $34.7 million, including $20.3 million interest and financing expense | $8.6 million, including $4.5 million interest and financing expense |
| Net increase in net assets from operations | $45.8 million; $1.68 per share | $22.3 million; $2.08 per share |
| Net realized gains and change in unrealized gains | $0.1 million realized gain; $5.5 million net unrealized gain | $0.3 million realized gain; $11.8 million net unrealized gain |
| Net assets and NAV per share | $592.0 million; $16.50 | $312.0 million; $16.22 |
| Borrowings and asset coverage | $577.0 million principal; 203% coverage | $267.0 million principal; 217% coverage |
- Net investment income was about 53.7% of investment income in 2022, versus about 54.0% in 2021; these percentages are calculated from reported figures. The reported annualized ratio of operating expenses to average net assets was 7.9%, and net investment income to average net assets was 9.1%.
- Net cash used in operating activities was $541.8 million, largely reflecting investment purchases. Financing activities provided $548.3 million, including $469.0 million of net new facility borrowings, $268.2 million of share proceeds, and cash distributions paid.
- At year-end, investments had fair value of $1.175 billion, including $1.158 billion of first-lien senior secured debt and $7.1 million of equity investments; there were 164 debt and 13 equity investments across 67 companies. Weighted-average yield to maturity on debt and income-producing securities was 11.4% at fair value and 11.6% at amortized cost.
- Portfolio exposure was concentrated in trading companies and distributors (12.9%), commercial services and supplies (11.9%), food products (10.9%), and health care providers and services (9.8%). No debt investments were on non-accrual at year-end.
- Cash and cash equivalents were $8.5 million and short-term investments were $9.8 million. The filing reports $169.8 million of available facility capacity at year-end, subject to borrowing-base limitations. It expected cash, undrawn commitments, and facility capacity to support anticipated investment activity over the following 12 months.
- Unfunded commitments to portfolio companies were $149.3 million, compared with $97.8 million in 2021. The company also reported $240.5 million of uncalled investor commitments at year-end.
Material changes versus 2021
- Fair value of long-term investments approximately doubled, from $578.4 million to $1.165 billion, and net assets increased from $312.0 million to $592.0 million, supported by investment activity and capital raises.
- Investment income rose to $74.8 million, while interest expense increased to $20.3 million as average borrowings increased to $368.2 million from $91.4 million. Reported net investment income per share increased, but net increase in net assets from operations per share declined to $1.68 from $2.08, and total return declined to 10.3% from 14.2%.
- Net unrealized appreciation moderated to $5.5 million from $11.8 million; 2022 included $9.6 million of unrealized depreciation, led by Arborworks Acquisition and Trademark Global.
- Year-end debt increased to $577.0 million from $267.0 million, while asset coverage declined to 203% from 217%. The company’s stated target is 180%–200% asset coverage.
Outlook, risks, and unusual items
- No earnings or distribution guidance was provided. Management described higher benchmark rates and lender-favorable terms as supportive of private-credit opportunities, while also citing inflation, rate volatility, recession risk, supply-chain pressures, and geopolitical uncertainty.
- Most new debt commitments in 2022 were floating-rate (99.1%); the weighted-average interest rate on new investment commitments was 10.8%, versus 7.0% in 2021. Higher rates may lift loan income but also increase borrowing costs and pressure portfolio-company debt service. A hypothetical 100-basis-point rate increase was estimated to raise annualized net investment income by $5.8 million; a 100-basis-point decrease was estimated to reduce it by $5.8 million.
- The company is transitioning LIBOR-linked investments and borrowings to SOFR and said it did not expect the transition to have a material effect, while acknowledging remaining uncertainty. Its subscription credit agreement expires December 31, 2023.
- Substantially all long-term portfolio investments were Level 3 fair-value measurements using significant unobservable inputs. Valuations are inherently uncertain and may differ from proceeds ultimately realized.
- As of March 9, 2023, investor commitments totaled $832.3 million, with $264.6 million undrawn. The company was targeting approximately $900 million of commitments and intended to complete its initial raise in 2023. It intends to seek an exchange listing after substantially investing the raise, subject to market conditions; absent a liquidity event by December 31, 2026, the board is to direct an orderly wind-down, subject to applicable approvals and requirements.
- There is no public market for the shares, transfers are restricted, and a liquidity event is not assured. Other key risks include leverage, borrower defaults, portfolio concentration, illiquidity, investor commitment defaults, valuation uncertainty, RIC/BDC compliance, and conflicts of interest arising from the external adviser and its fee arrangements.
- Distributions declared for 2022 totaled $1.34 per share and were reported as ordinary income for tax purposes. A further $0.47-per-share distribution was declared in March 2023. A specific distribution level is not assured.
- The company reported no material pending or threatened legal proceedings. Management concluded disclosure controls were effective at a reasonable assurance level; the filing did not include management’s internal-control assessment or auditor attestation because of the transition period for newly public companies.
Investor facts to verify
- Review the full schedule of investments and valuation inputs, especially Level 3 marks, watch-list holdings, and the 2022 depreciation in Arborworks and Trademark Global.
- Confirm current borrowing-base availability, covenant headroom, facility pricing and maturities, and refinancing plans for the subscription facility expiring in 2023.
- Track portfolio-company payment performance, unfunded commitments, and any changes in non-accrual status as rates and economic conditions evolve.
- Assess the terms and progress of the capital raise and any exchange-listing or other liquidity plan; shares remained illiquid with no public market as of the filing.
- Review adviser fees, related-party expense reimbursements, incentive-fee accruals, and potential conflicts in investment allocation and valuation.