Kayne Anderson BDC, Inc. — 2021 Form 10-K Summary
Business context and reporting period
Kayne Anderson BDC, Inc. is an externally managed, non-diversified business development company that commenced investment operations on February 5, 2021. It invests primarily in first-lien senior secured, unitranche and split-lien loans to U.S. middle-market companies, with a target of at least 90% of the portfolio in secured middle-market loans. The Company also intends to qualify annually as a regulated investment company.
The filing covers the fiscal year ended December 31, 2021. The Company had no meaningful operating investment activity in 2020, so year-over-year comparisons are not representative.
Financial performance and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total investment income | $18.8 million | $0 |
| Total expenses | $8.6 million | $0.8 million |
| Net investment income | $10.1 million | $(0.8) million |
| Net realized gains | $0.3 million | $0 |
| Net unrealized appreciation | $11.8 million | $0 |
| Net increase in net assets from operations | $22.3 million | $(0.8) million |
| Net asset value per share, period end | $16.22 | Not applicable |
| Net assets, period end | $312.0 million | $(0.8) million |
| Net investment income per share | $0.94 | Not applicable |
| Total return | 14.2% | Not applicable |
Net investment income represented approximately 54% of investment income. The ratio of operating expenses to average net assets was 5.8%, while the ratio of net investment income to average net assets was 6.8%; these ratios include the Company’s start-up period and non-recurring costs.
At December 31, 2021, the portfolio comprised 99 debt investments and one equity investment across 47 portfolio companies. Portfolio investments had an aggregate fair value of $578.4 million and amortized cost of $566.6 million. The weighted average yield to maturity was 7.5% at fair value and 7.7% at amortized cost. All investments were income-producing, and no loans were on non-accrual status.
The Company funded $661.8 million of investments during 2021 and sold or received repayments of $94.9 million. New debt investment commitments were 100% floating rate, with a weighted average interest rate of 7.0% and weighted average maturity of 4.3 years.
Cash flow, debt and liquidity
- Operating activities used $559.1 million of cash, primarily reflecting $647.5 million of portfolio investment purchases.
- Financing activities provided $561.2 million, including $299.5 million from common stock issuances and $267.0 million of borrowings.
- Cash and cash equivalents were $2.0 million at December 31, 2021; including short-term investments, reported liquidity was approximately $5.7 million.
- Debt outstanding consisted of $162.0 million under the Loan and Security Agreement and $105.0 million under the Subscription Credit Agreement. Total debt had a net carrying value of $266.3 million.
- Asset coverage was 217% at year-end, above the statutory 150% minimum. Management targeted asset coverage of 180% to 200%, equivalent to a debt-to-equity ratio of approximately 1.0x to 1.25x.
- The Company had $97.8 million of unfunded portfolio-company debt commitments, generally subject to financial and nonfinancial conditions.
Material changes versus the prior comparable period
- The Company transitioned from a pre-operating entity in 2020 to a fully operating BDC in 2021, including the conversion from an LLC to a corporation and election to be regulated as a BDC.
- Common stock issuances totaled $299.5 million in 2021, increasing shares outstanding to 19.2 million at year-end and net assets to $312.0 million.
- The portfolio expanded from no investments at December 31, 2020 to $582.1 million of total investments at December 31, 2021, including short-term investments.
- The Company declared distributions totaling $0.86 per share, or $10.5 million, during 2021. All 2021 distributions were reported as ordinary income for tax purposes.
- Interest and debt financing expense became a significant expense at $4.5 million, while management fees were $2.1 million.
Guidance, outlook, management commentary and risks
Management expects cash, undrawn capital commitments and available credit capacity to support investment and operating needs over the next twelve months. The Company targeted an initial capital raise of $800 million and, as of March 4, 2022, had subscription agreements totaling $701.5 million, including a contingent $33.3 million commitment.
Subsequent to year-end, the Company raised $68.6 million through the issuance of 4.2 million shares, increased its Subscription Credit Agreement commitment to $175 million and refinanced its senior secured credit facility. The replacement facilities included a $275 million Corporate Credit Facility and a $250 million Revolving Funding Facility, both primarily priced over SOFR.
The principal risks include the Company’s limited operating history, illiquid and privately valued Level 3 investments, credit losses and defaults at leveraged middle-market borrowers, use of leverage, interest-rate volatility, LIBOR-to-SOFR transition risk, COVID-19 and broader economic disruption, competition for investments, conflicts of interest with the Advisor, and uncertainty regarding future distributions.
There was no public market for the Company’s shares at filing, and investors generally could not transfer shares without Company consent and an applicable securities-law exemption. The Company intends to seek an exchange listing when market conditions warrant, but provides no assurance that a liquidity event or public market will occur. If no liquidity event occurs by December 31, 2026, the Board may direct an orderly wind-down, subject to fiduciary duties and required approvals.
Most portfolio investments were valued using Level 3 inputs and market-yield analyses. Net unrealized appreciation of $11.8 million contributed materially to reported earnings and NAV growth, creating valuation sensitivity. The Company disclosed no material legal proceedings and stated that its disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Reconcile the $16.22 year-end NAV per share to the portfolio valuation, leverage and $11.8 million of unrealized appreciation.
- Review the composition, concentration and credit performance of the 47-issuer portfolio, including the absence of non-accruals at year-end and any subsequent developments.
- Assess the ability to fund the $97.8 million of unfunded portfolio commitments while maintaining required asset coverage.
- Confirm the terms, borrowing-base availability, covenants and interest costs of the post-year-end Corporate Credit Facility and Revolving Funding Facility.
- Evaluate the sustainability of the $0.86 per-share 2021 distribution relative to recurring cash investment income, leverage costs and taxable income.
- Review the impact of Advisor management and incentive fees, related-party arrangements, co-investment allocations and valuation-related conflicts.
- Consider the restrictions and uncertain timing associated with a future exchange listing or other liquidity event.
- Monitor the transition from LIBOR to SOFR and the effects of higher short-term interest rates on portfolio income, borrowing costs and borrower credit quality.