Kayne Anderson BDC, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Kayne Anderson BDC commenced operations on February 5, 2021 and is an externally managed, non-diversified business development company that intends to qualify as a regulated investment company. Its objective is to generate current income and, to a lesser extent, capital appreciation primarily through debt investments in middle-market companies.
At September 30, 2021, the Company held 63 debt investments in 35 portfolio companies, all consisting of first-lien senior secured debt investments. There was no public market for its shares as of November 11, 2021.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
|---|---|---|
| Total investment income | $5.0 million | $10.5 million |
| Total expenses | $2.0 million | $5.0 million |
| Net investment income | $3.0 million | $5.6 million |
| Net realized gains | $0.1 million | $0.2 million |
| Net change in unrealized gains | $1.0 million | $5.0 million |
| Net increase in net assets from operations | $4.1 million | $10.8 million |
| Net investment income per share | $0.26 | $0.63 |
| Net increase in net assets per share | $0.36 | $1.21 |
Net asset value was $192.7 million, or $15.92 per share, at September 30, 2021. Net assets increased from a $0.8 million deficit at December 31, 2020, primarily because of $185.6 million in share issuances, $10.8 million of operating gains and $2.9 million of distributions.
Investments had a fair value of $262.6 million, including $260.7 million of long-term investments and $1.9 million of short-term investments. Long-term investments were carried at fair value above amortized cost by approximately $5.0 million. The weighted average total yield to maturity was 7.9% at fair value and 8.1% at amortized cost.
For the nine months, net cash used in operating activities was $251.8 million, principally reflecting $308.3 million of portfolio purchases, partly offset by $53.7 million of investment-sale proceeds and operating income. Financing activities provided $253.0 million, including $185.0 million of share issuances and $71.0 million of borrowings. Cash and cash equivalents were $1.2 million at period-end; including short-term investments, reported liquidity was approximately $3.2 million.
Outstanding debt totaled $71.0 million at September 30, 2021, consisting of $50.0 million under the Loan and Security Agreement and $21.0 million under the Credit Agreement. Net carrying value of debt was $70.4 million. The asset coverage ratio was 371%, compared with the statutory minimum of 150%.
The nine-month operating-expense ratio was 5.9% of average net assets, and the net investment income ratio was 6.8%, both annualized except for non-recurring expenses. The Company paid distributions of $2.9 million during the nine months, including $0.37 per share based on the financial highlights.
Material changes versus the prior comparable period
Direct comparative operating results are not available because the Company commenced operations on February 5, 2021. Compared with December 31, 2020, the Company moved from a nominal pre-operating balance sheet to a fully invested leveraged BDC, with investments, borrowings, share capital and net assets established during 2021.
- Investments increased from none reported at December 31, 2020 to $262.6 million at September 30, 2021.
- Debt increased from none reported at year-end 2020 to $71.0 million outstanding.
- The Company issued $185.0 million of common stock during the nine months and had aggregate capital commitments of $367.7 million at September 30, 2021, of which $182.7 million was undrawn.
- The portfolio was constructed predominantly through first-lien senior secured private credit investments across 13 industries. Consumer durables and apparel represented 20.9% of long-term investments by fair value, capital goods 17.6%, and commercial and professional services 11.8%.
Guidance, outlook, commentary, risks and unusual items
Management expects, depending on market conditions, approximately 80% to 90% of the portfolio to be invested in first-lien senior secured, unitranche and split-lien loans, with the balance in higher-yielding or opportunistic investments. The filing does not provide earnings or dividend guidance.
All investments were income-producing and no loans were on non-accrual status at September 30, 2021. However, substantially all investments were Level 3, requiring valuation models and significant unobservable inputs. The Board is ultimately responsible for determining fair value, and changes in credit spreads, operating performance or market conditions could materially affect NAV and results.
The Company had $39.3 million of unfunded commitments to portfolio companies at September 30, 2021. These commitments are generally subject to financial, nonfinancial and operational conditions and create potential funding and credit exposure not recorded as liabilities.
Key risks include COVID-19-related economic disruption, interest-rate volatility, credit losses, illiquidity of private investments, leverage, availability and pricing of financing, conflicts with the external Advisor, and maintaining BDC and RIC status. The portfolio and financing facilities are exposed to the transition from LIBOR to alternative reference rates, including SOFR.
After quarter-end, the Credit Agreement was amended to increase commitments from $75.0 million to $100.0 million and replace LIBOR with SOFR plus 1.975%, subject to a 0.275% floor. The Company also issued $40.0 million of common stock on October 28, 2021 and reported total capital commitments of approximately $608.0 million, including $383.0 million undrawn. On November 2, 2021, it paid a $0.25 per-share distribution.
Management reported effective disclosure controls and procedures, no material pending litigation, no defaults on senior securities and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether the largely Level 3 portfolio valuations remain supportable, particularly the 6.24% weighted average credit-spread input used in valuation.
- The ability of portfolio companies to fund or repay the $39.3 million of unfunded commitments and the absence of non-accrual investments.
- Debt maturities, borrowing-base availability and compliance with asset-coverage requirements as leverage increases.
- The effect of the October 2021 financing amendment, SOFR transition and subsequent increases in borrowings on interest expense and net investment income.
- Future distributions and whether taxable income, including accrued PIK interest, will require distributions without corresponding cash receipts.
- Execution of the stated investment strategy, portfolio concentration by industry and exposure to COVID-19, credit deterioration and illiquid markets.
- The terms and funding timing of the approximately $608.0 million of post-quarter-end capital commitments, including the contingent $64.2 million commitment.