Kayne Anderson BDC, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless stated otherwise, dollar amounts are in millions. Kayne Anderson BDC is an externally managed, non-diversified BDC focused primarily on secured lending to middle-market companies. Its shares were not publicly traded.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $40.7 | $13.0 | $77.1 | $24.9 |
| Net investment income | $21.7 | $7.1 | $41.0 | $13.4 |
| Net increase in net assets from operations | $21.0 | $7.5 | $40.4 | $13.2 |
| Interest expense | $13.0 | $3.0 | $24.5 | $5.8 |
| Net investment income per share | $0.56 | $0.30 | $1.10 | $0.58 |
- At June 30, total assets were $1,324.6, total investments at fair value were $1,299.0, liabilities were $677.7 and net assets were $646.9. NAV per share was $16.58, versus $16.50 at December 31, 2022.
- Principal debt outstanding totaled $641.0: $237.0 on the Corporate Credit Facility, $320.0 on the Revolving Funding Facility, $9.0 on the Subscription Credit Agreement and $75.0 of senior unsecured notes. Asset coverage was 201%, compared with 203% at year-end; reported availability under facilities was $295.4, subject to borrowing-base limits.
- Cash and cash equivalents were $12.9; short-term investments were $15.1. Six-month operating cash flow was negative $77.6, while financing activities provided $82.0.
- The portfolio comprised 157 debt and 13 equity investments across 73 companies. The weighted average yield to maturity on debt and income-producing securities was 12.3% at fair value and 12.5% at amortized cost. Almost all investments were first-lien senior secured debt; all debt investments were reported income-producing, with none on non-accrual.
- Six-month total return was 6.6%, versus 3.6% in 2022. The reported operating-expense ratio was 11.9%, versus 6.4%; the net-investment-income ratio was 13.5%, versus 7.4%.
Changes versus comparable periods
- Investment income and net investment income rose substantially year over year, reflecting a larger investment portfolio and higher investment yields. Fair-value investments increased from $1,175.0 at December 31, 2022 to $1,299.0 at June 30, 2023.
- Expenses also increased: six-month interest expense rose to $24.5 from $5.8, with the average borrowing rate increasing to 7.9% from 4.5%. Average borrowings were $629.4 versus $262.8.
- Six-month unrealized investment depreciation was $0.6, compared with $0.2 in the prior-year period. No realized gains or losses were reported for the 2023 period.
- The company issued $50.0 of shares during the first half, compared with $68.6 in the prior-year period. It declared distributions of $1.00 per share for the first half of 2023, versus $0.26 in the first half of 2022.
Outlook, risks and notable items
- Management expects cash, undrawn investor commitments and available facility capacity to support anticipated investment activity over the next 12 months. It provided no earnings or investment-return guidance. The stated asset-coverage target is 200% to 180%, subject to change with market conditions.
- Interest-rate sensitivity is material: based on the June 30 balance sheet, a 100-basis-point rate increase was estimated to raise annualized net investment income by $7.2; a 100-basis-point decrease was estimated to reduce it by $7.2.
- Most portfolio holdings are Level 3 valuations using significant unobservable inputs. Fair values are therefore judgmental and may differ from eventual realizations. The portfolio is also concentrated in trading companies and distributors, commercial services, and food products.
- Unfunded portfolio-company lending commitments were $116.1, down from $149.3 at year-end. These commitments are generally conditional but represent potential funding and credit exposure. Management reported no material pending or threatened litigation and no material claims under indemnification arrangements.
- The filing flags potential adverse effects from continued strain in the banking system, as well as risks from interest-rate volatility, economic downturns, inflation, leverage and illiquid investments. Non-qualifying investments were 5.3% of total assets, up from 3.8% at year-end; the filing states the applicable qualifying-asset requirement.
- Subsequent events: the company paid the $0.53-per-share June-quarter distribution on July 14 and declared another $0.53 per share for payment October 13. It sold 2,411,582 shares for $40.6 on August 8. CEO James C. Baker resigned effective August 16, with Douglas L. Goodwillie and Kenneth B. Leonard named co-CEOs; the filing says the resignation was not due to a disagreement.
Important facts for investors to verify
- Assess whether portfolio-company performance and credit quality support the 12.3% fair-value yield, particularly given higher borrowing costs and the portfolio’s Level 3 valuations.
- Review leverage, borrowing-base availability, facility covenants and the December 31, 2023 expiration of the Subscription Credit Agreement. The company reported compliance with the senior-note covenants at June 30.
- Confirm the distribution’s sustainability relative to cash earnings, including the effect of incentive fees and $1.0 of non-cash PIK interest in the first half.
- Review post-quarter capital activity: outstanding shares were 39.0 million at June 30 and 41.5 million as of August 10; undrawn capital commitments were $228.7 million as of August 10.
- Consider liquidity and marketability: as of the filing, there was no public market for the shares, and portfolio loans are predominantly private, illiquid investments.