Q3 2024 Kayne Anderson BDC Inc Earnings Call
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Speaker Change: Got it.
Speaker Change: [music].
Speaker Change: Hello, and welcome to Kayne Anderson BDC Inc's third quarter 2024 earnings call a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded it is now my pleasure to turn the conference over to Frank.
Frank: Carl Senior Vice President of J P D C.
Frank Carl: Good morning, and welcome to Kayne Anderson BDC Inc's third quarter 2024 earnings call today, I'm joined by Doug Goodwillie and Ken Leonard Co Ceos of KBC is well, it's Terry Hart, CFO and treasurer of kidney disease.
Frank Carl: Following our prepared remarks, we will be available to take your questions.
Today's call May include forward looking statements such statements involve known and unknown risks uncertainties and other factors and undue reliance should not be placed thereon.
Frank Carl: These forward looking statements are not historical facts, but rather are based on current expectations estimates and projections about the company, our current and prospective portfolio investments our industry, our beliefs and opinions and our assumptions.
Frank Carl: These statements are not guarantees of future performance and are subject to risks uncertainties and other factors some of which are beyond our control and difficult to predict.
Frank Carl: Actual results may differ materially from those expressed or forecasted in the forward looking statements.
Frank Carl: We ask that you refer to the company's most recent filings with the SEC for important risk factors.
Frank Carl: Any forward looking statements made today do not guarantee future performance and undue reliance should not be placed thereon.
Frank Carl: The company assumes no obligation to update any forward looking statements at any time, our earnings release 10-Q, and supplemental earnings presentation are available in the financial section of our website at Kayne BBC Dot com.
Speaker Change: I'd like to turn the call over to Doug.
Speaker Change: Thank you Frank.
Doug Goodwillie: Before I provide an overview of our performance during the quarter I want to provide a quick reminder, on our strategy of KBC.
First we believe that the core mid market represents the most attractive risk reward area in which to invest in direct lending.
We define this market as including borrowers ranging in size from 10% to $50 million in EBITDA.
Doug Goodwillie: This market segment generally includes more lender friendly documentation and the ability to lend at lower leverage while still maintaining strong yields in those investments within this segment of the mid market, we focus on stable slower growing industries, where the winners and losers are generally been decided as you can see in our industry diversification.
Doug Goodwillie: In chart summarize later.
Doug Goodwillie: Within these industries, we identify companies that has specific attribute that have been shown to be present and companies and have successfully survived multiple cycles.
In investment does not exhibit these attributes we will not pursue it.
Doug Goodwillie: From a structuring perspective, our portfolio has had lower average leverage of approximately four times well below most other publicly traded bdcs. Consequently that leads the industry high weighted average interest coverage ratios with modest average loan to value below 45%.
Combination of these factors resulted in a credit selection process that creates attractive risk adjusted investment portfolios across all of the vehicles within our credit platform.
Doug Goodwillie: Finally, we are the lead or co lead agent and approximately 75% of our private middle market investments with the vast remainder as part of a small club of lending groups.
Doug Goodwillie: This puts us in a position to structure and manage these investments proactively avoid large bank group consensus risks and obtain the best economics.
Doug Goodwillie: We believe that the third quarter of 2024 represents a continuation of this strategy and I am pleased to provide an overview of our portfolio recent investment activity.
Speaker Change: Ill turn it back to Frank to discuss the market before Terry Hart covers K Bdcs financial results for the third quarter of 2024.
Speaker Change: As of September 30th K Bdc's portfolio includes a 110 individual portfolio companies, representing approximately $1 94 billion of fair value fund investments we have.
Speaker Change: Another approximate $179 million of unfunded commitments comprised of a mix of unfunded revolvers and delayed draw term loans, our total commitments in excess of $2 1 billion.
Speaker Change: Since September 30 of 2024, K BDC is closed or is in the final closing process on an additional $180 million plus of commitments with another six weeks left in the quarter.
Speaker Change: Evidence of continued strong origination volumes in 2024.
Speaker Change: The K BDC portfolio was purposely constructed in a defensive manner in order to outperform and high interest rate environments and through periods of economic instability or uncertainty.
Speaker Change: Investments in K Bdc's portfolio, excluding a handful on our watch list have weighted average leverage of four two times interest coverage of three one times and loan to value of approximately 42% again, evidenced in our conservatism and loan structure.
Speaker Change: We think these credit statistics are material positive factor for our favorable portfolio outlook, particularly an elevated interest rate environment and that these statistics compare favorably to virtually all other public bdcs.
On a scale similar to us.
Speaker Change: We also built a diversified portfolio with an average position size of approximately <unk>, 9% of fair value and where our top 10 investments represented only 19% of our portfolio.
Speaker Change: Outside the specific credit statistics associated with our portfolio our investments are well structured 98% of our portfolio is invested in first lien securities and 99% of our middle market investments are backed by private equity sponsors.
Additionally, all of our core first lien private middle market investments.
Speaker Change: Actual covenants.
Speaker Change: We think that this combination of being in the lowest risk portion of the capital structure and businesses that are supported by committed private equity capital.
Speaker Change: With financial maintenance covenants represent the most attractive way to invest in our market.
We also believe that our portfolio is positioned appropriately for potential changes in the interest rate environment with 100% of our debt investments being floating rate. This also mirrors, our liabilities, where the vast majority of our debt funding utilizes floating rate borrowings. Our portfolio has also performed very well to date with only 1% of total.
Speaker Change: Debt investments at fair value on nonaccrual represented I only two positions out of 110 and.
Speaker Change: And lastly, we have built this conservative portfolio with a healthy weighted average yield of approximately 11, 3% on fair value of investments.
Speaker Change: This yields has been achieved with approximately 14% of our portfolio in broadly syndicated securities.
Speaker Change: We have positioned the portfolio for upside in spreads relative to our competitors over the next few quarters as we rotate out of these lower spread probably syndicated investments.
Speaker Change: Our portfolio is diversified by end market and industry with a focus on stable slower growing segments in the U S economy as you can see in our earnings presentation, our largest industries, our distribution food products business Slash industrial services and containers and packaging with the largest representing only <unk> 6%.
Speaker Change: Of the total portfolio.
Speaker Change: Financing businesses and the stable lower growth industries with typical enterprise values in the 8% to 10 times range allows us to build portfolios with more conservative leverage and better interest coverages.
Turning to our private middle market investment activity in the third quarter of 2024, we made $183 million of total commitments across 14 different businesses during the period of which $161 million was funded in.
Speaker Change: In addition, $24 million of our existing unfunded commitments were funded or partially funded during the quarter, representing a combined gross fundings of $185 million.
Speaker Change: This was a meaningful uptick in activity relative to the third quarter of 2023, where gross fundings were $42 million.
We did see a slight uptick in the amount of private middle market repayment activity totaling $83 million gross repayments during the period up from $41 million in Q2, 2024, but still only four 4% of average funded investments.
During the third quarter, our broadly syndicated loan portfolio experienced no new fundings and $2 million of repayments.
Speaker Change: Currently hold approximately $270 million in broadly syndicated loans across 22 borrowers in coming quarters, we expect to generate enough privately originated mid market loan volume to rotate out of these probably syndicated loan investments, while still maintaining leverage inside our target ratio of one to one in the quarter now I will turn it back to Frank to discuss.
Frank Carl: The market.
Frank Carl: Thanks, Doug and turning to the market since the second half of 2022, we have been operating in a lender friendly environment. When it comes to pricing and terms for middle market financings that said there were substantial declines in M&A activity during that period, leading to somewhat depressed financing volumes that has changed.
Frank Carl: What over the last nine to 12 months as the macroeconomic picture continues to exhibit resiliency and M&A activity has increased somewhat.
Frank Carl: For the market as a whole through the first three quarters of 2020 for middle market sponsored loan volumes have increased substantially with commitments, increasing approximately 65% versus the same period in 2023, we believe a substantial driver and this uptick in activity has been the private equity community moving to <unk>.
Frank Carl: <unk> after a period of lower M&A volumes over the prior one to two years. Additionally, we see substantial transaction flow from our existing portfolio of investments both as part of supporting acquisition activity and in certain instances financing the same company through a change of control with different private equity sponsors our portfolio.
Frank Carl: Over 100 investments help support new investment flow, regardless of new platform investment activity.
Frank Carl: <unk> existing portfolio of private middle market investments has an average spread over silver of approximately 625 basis points, while we've seen some market compression most of the new transactions. We are reviewing today have a spread over silver of approximately 550 basis points and our private middle market investments in the year to date 2024.
Period have an average spread of approximately 590 basis points, while we cannot predict where spreads will go in the future. We are seeing signs that spreads have begun to stabilize coupled with accelerating loan volumes.
Frank Carl: Regardless, we still see expected yields on our new investments of nearly 11%, which remains incredibly healthy, particularly as compared to our longer term historical view.
Frank Carl: We have always believed that our market represents an all weather investment products, particularly for seasoned private credit platforms and lower risk portions of the capital structure and we believe that remains the case today.
Speaker Change: With that I'll turn it over to Terry Hart to discuss <unk> third quarter 2024 financial results.
Speaker Change: Thanks Frank.
Terry Hart: Starting with our income statement during the third quarter, we earned net income per share of 53.
Compared to <unk> 46 cents during the second quarter and net investment income per share was <unk> 52 compared to 51 in.
Terry Hart: In the prior quarter total.
Terry Hart: Total investment income for the third quarter was $57 8 million as compared to $52 5 million in the prior quarter.
Terry Hart: The increase to income was primarily driven by the addition to the portfolio during the third quarter slightly offset by a decrease in our average portfolio yield is.
Terry Hart: Worth, noting that substantially all of the decrease to the portfolio yield was related to lower reference rates.
Terry Hart: Total expenses for the third quarter were $20 8 million compared to $18 1 million for the prior quarter. The increase was primarily from higher interest expense, resulting from additional borrowings on our credit facilities to fund investment activity during the quarter.
Terry Hart: As a reminder, in connection with our IPO Kayne Anderson instituted a 25 basis point fee waiver of our base management fee through may 23rd of 2025, and a full waiver on income based incentive fees through the end of 2024.
Terry Hart: During the third quarter, we had unrealized gains on our portfolio of <unk> 5 million compared to unrealized losses of $3 1 million in the prior quarter.
Terry Hart: The unrealized gains were the result of origination activity during the quarter and to a lesser extent changes in the fair value of some of our investments there were no realized gains or losses recognized during the third quarter.
Terry Hart: As of September 30th total assets were 2.03 billion and net assets were $1 2 billion as of that date, our net asset value was $16 70 per share an increase compared to $16 57 at the end of the second quarter. The 13th increase is attributable to generating net investment income.
Terry Hart: In excess of our base dividend as well as the one cent increase related to unrealized gains during the quarter at the end of the third quarter, we had debt outstanding of $788 million and our debt to equity ratio was <unk> 66 times, which is an increase from the five three times at the end of the second quarter, we expect to continue that.
Speaker Change: Growth of our portfolio over the coming quarters to achieve our debt to equity target range of one times to one and a quarter times and as Doug mentioned, the fourth quarter is off to a good start.
Speaker Change: During the third quarter, we continued to increase credit facility borrowings improving the utilization of our facilities.
Speaker Change: And are in active dialogue with our lenders and our corporate credit facility to extend the maturity and improved pricing of that facility looking forward as we increased leverage on our credit facilities over the balance of 2024 and into 2025, we will be monitoring and evaluating the unsecured notes market and reviewing other opportunities to enhance our debt <unk>.
Speaker Change: <unk> stack.
I'll conclude with a few items related to our declared dividends on November six our board of directors declared a regular dividend for the fourth quarter of <unk> 40 per share to shareholders of record on December 31, 2020 for the regular dividend represents a nine 6% dividend yield based on NAV per share at quarter.
Speaker Change: <unk> and our dividend yield based on annualized net investment income for the quarter was 12, 5%.
Speaker Change: As of September 30, our estimated spillover of net investment income was 32 per share.
Speaker Change: As a reminder, just prior to our IPO our board of directors declared $3 10 per share special dividends to be paid in December 2024 March 2025, and June 2025. The first of these payments has a record date of December five 2024, following the payment of these special dividends.
It will be our dividend policy to distribute a portion of any excess earnings over and above our regular dividend on a quarterly basis, and we plan to distribute excess earnings through an annual special dividend.
Speaker Change: With that operator, please open the line for questions.
Thank you and at this time, if you would like to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star two and we will pause for a moment to allow questions to queue.
And we will take our first question from Finian O'shea with Wells Fargo. Please go ahead.
Finian O'shea: Hey, everyone. Good morning.
Speaker Change: I wanted to ask about some of the opening remarks on the lower middle market being better.
Speaker Change: It looks like you're you're definitely getting enhanced spreads OID shorter tenor and so forth even even against your <unk>.
Speaker Change: Your peer set.
Speaker Change: Sure.
Speaker Change: Or are you going very lower middle market like like $10 million.
Speaker Change: Or is or perhaps some of the EBIT sort of abstract or.
Speaker Change: Companies, maybe might go through a challenging you'll work them out or how would you describe your your flavor of higher returns. Thanks.
Speaker Change: Yes. This is Ken Leonard they sit in I think.
Speaker Change: Well, if you look at how we stratify our average EBITDA.
Speaker Change: Is north of <unk> and is in the high Thirty's.
Speaker Change: But the majority of what we're doing are.
Speaker Change: Financing platform companies that are benefiting from buy and build strategies and again, we are a platform that while were significant in the middle market, we're nimble enough to be able to select what we wanted to do so if you look at the broad scale of $50 million and below.
Speaker Change: At.
Speaker Change: Platform wide below three times leverage and.
Speaker Change: Turning below the market and commensurately price and we do this by focusing on selectivity and not necessarily focusing on buying the market averages. So it's really a combination of our of our long term strategy of being a value oriented lender being very selective in terms of the sponsors we work with and then focusing on buy and bill.
Speaker Change: We tend to get less compression overtime and benefit from a more diversified and larger business and continue to.
Speaker Change: Able to scale up in an agency position and the other component is the fact that three quarters of what we do.
Speaker Change: Our agent or co agents, who are in a better position to benefit from.
Speaker Change: The highest.
Speaker Change: <unk> and <unk>.
Speaker Change: An influence over how that deal price.
Speaker Change: Okay. That's helpful. I guess just to press a little more here.
Speaker Change: Sure.
Speaker Change: There is one and then not asking you to go too far on a name, but <unk>. This quarter that was syndicated you bought it at a big discount that that means like a lot of people looked at it and didn't want it at par.
Speaker Change: Just.
Speaker Change: Are these.
Speaker Change: Is there some level of some areas.
Complex is it just roll up style complexity are or how much deeper does it go.
Kenneth I can start on that and then Frank you can hit that specific deal. This is Doug goodwill.
I think really when it comes to the strategy.
Speaker Change: Ken mentioned, but it is what we call value lending. So again staying in industries that are lower growth stable staple maybe get looked over versus some of our competitors that focus on higher growth industries.
And like Ken said, we're not an index fund so we're doing 20% to 30, new platforms a year, we can stay very disciplined on price.
Speaker Change: And we're not doing a ton of unit tranche, so we're keeping leverage multiples low that way.
Speaker Change: We will in certain instances embraced complexity by no means spin is that looking at stress companies at all.
Speaker Change: But if there is some complexity, we will dig into it in certain instances and I think you can get paid for that as well.
Speaker Change: And then Frank you can at a high level maybe cover.
Speaker Change: A specific instance that thin brought up yeah.
Speaker Change: Yes.
Speaker Change: I think just to cover that.
Speaker Change: Simeon we.
Think about a bell curve approach to how we look at pricing. So the majority of the things we are going to be we think at or above market pricing and then there's going to be some things that we're going to opportunistically do that are going to be well above the market and there's going to be some things we're going to do for sponsor relationships or deals that we think are very strong.
Risk adjusted returns that we're going to dip down below.
Speaker Change: The five handle and go into the fours and.
Speaker Change: It's really just sort of a bell curve approach and we've always done it that way in which you'll find if you look at the portfolio broadly in the BDC or any rather vehicles is that's very consistent so you won't see us dipping down to $4 75 in this market very often but we do want to take advantage of sponsor relationships.
Speaker Change: Current opportunities and also not passing up.
Speaker Change: Good well priced deals, particularly as we are also training.
Speaker Change: Tended to trade out of the the BSL portfolio over the next few quarters.
Speaker Change: Okay. Thanks, just one more.
Speaker Change: On a lot of these youre getting good.
Speaker Change: D is there also a.
Speaker Change: A meaningful.
Speaker Change: A meaningful call protection component.
Speaker Change: Yes, I would say in the majority of our transactions in the core middle market, we're seeing too in the first year and one in the second year.
Speaker Change: As you will get three two and one that's.
Speaker Change: The less commonplace in.
Speaker Change: Recent quarters, but I would say in almost all of our deals we are getting two in one and then and then if there is there is extensions.
Speaker Change: We're renewing that call protection that will recur.
Speaker Change: How like above market is that right now the two in one.
Speaker Change: Thats pretty much on market I think it's a little hard to go off market and call protection I think some sponsors are less sensitive to it some lenders are less aggressive about asking for it. So on the margin I would say were pretty aggressive about trying to obtain it.
Speaker Change: But for the most part that's what the market's giving when it's when it's providing for it.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you.
Thank you and we will take our next question from Doug Harter with UBS. Please go ahead.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: Thanks. Good morning, you talked about the fourth quarter being off to a good start can you just talk about your updated timeframe and when do you think you can achieve target leverage.
Speaker Change: Sure. Thanks, Doug.
I think as Youre aware the nature of the business is such that projecting in originating repayment activity with specificity.
Speaker Change: Any given quarter is always a bit of a challenge that said, we feel as a whole we've continued to execute on origination plan. Following the IPO and it increased our debt to equity ratio quarter over quarter in an environment, where we're seeing continued upticks.
Speaker Change: In total activity.
Speaker Change: Doug previously mentioned in the fourth quarter as.
Speaker Change: Typically a seasonally active quarter for us and we're already north of $180 million of gross new commitments closed or in closing for the fourth quarter and that's with a substantial pipeline of new opportunities beyond that some of which we expect to fund in that fourth quarter, obviously offsetting some of that would be realizations.
Speaker Change: Which while accelerating the recognition of fee income will be.
Speaker Change: Offset to that portfolio growth I think in total we feel really good about the current trajectory of portfolio growth without sacrificing.
Our investment philosophy.
Speaker Change: Additionally, we really share the same bullish view on outlook Youre hearing from others.
We're very very busy right now in terms of yields reviewed screens, a committee and deals and closing and we really don't see signs of that slowing in recent weeks.
Speaker Change: Given the activity, we've seen and in the dialogue with sponsors and investment bankers in our pipeline.
Our view right now and going into 2025 is that.
Speaker Change: This is all of this activity levels, driven by a combination of factors including tent.
Speaker Change: Pent up demand from a slower 2023, lower rates and spreads which should drive M&A a strong economy.
Settling in the political outlook post election, along with the potential cash gain exploration in 2026.
It should drive some acceleration we see this as a really nice setup for a robust 25.
Speaker Change: Additionally, all of that should put a floor under the spreads and the talk of spread compression that you are hearing so.
Speaker Change: Without being too specific we feel bullish on being able to achieve that and report in the coming quarters.
Speaker Change: Great I appreciate it thank you.
Speaker Change: Okay.
Speaker Change: Thank you and as a reminder, that is star one to ask a question and we will move next to Kenneth Lee with RBC capital markets. Please go ahead.
Kenneth Lee: Hey, good morning, Thanks for taking my question.
Speaker Change: I just wanted to portfolio yields you mentioned in the prepared remarks that.
Speaker Change: Most of the impact was due to lower base rates wondering if you could just remind us again, what's the typical lag or terms in terms of floating rate adjustments you crop do you have across the portfolio of debt investments there. Thanks.
Speaker Change: Yeah.
Yes, Thanks, Ken.
Speaker Change: First of all in terms of like proactive.
Speaker Change: Pricing changes outside of M&A, we've only had five out of 110, so feel very good about the stability of pricing. Obviously, nothing you do that so for everyone's subject to that in terms of spread compression.
Speaker Change: I think we've commented on that and it's been I think relatively.
Speaker Change: Relatively modest compared to what's going on in the larger market as some others who have reported.
Speaker Change: So I think in terms of.
Speaker Change: And in terms of a.
Speaker Change: If your question was around so for.
Cfos are locking in and so depending on whether you are locking in for one month three months or six months, there's going to be a roll off.
Speaker Change: So for changes.
Speaker Change: And.
Speaker Change: Slow slower decline.
Speaker Change: Due to the new normal as those come off.
Speaker Change: That's obviously.
Relatively complicated formula because within each loan there maybe locking in yes, what someone months three months six months.
Speaker Change: Some even.
Speaker Change: Laughs, if they don't lock into prime rate and you get the benefit there as well.
Speaker Change: Gotcha very helpful. There.
Speaker Change: And then in terms of the.
The prepayment activity and obviously.
Speaker Change: More difficult to forecast why don't you just remind us again, how <unk> could benefit in terms of fee income.
Prepayments pick up potentially over the near term. Thanks.
Speaker Change: Yes, Terry why don't you cover that won't mind.
Terry Hart: Yes sure.
Terry Hart: So just.
The way that we account for those acceleration would be if there is any of that OID that remaining at the time of the prepayment than all of that is accelerated into current income so.
This quarter in fact, there was a bit of that we had.
Terry Hart: Two.
Terry Hart: Repayments.
Terry Hart: And the portfolio there was about one.
Terry Hart: $1 million of accelerated OID or a $1.04 so of that million of accelerated approximately 700000 was due to those two exits and then one refined and the rest was just kind of normal.
Terry Hart: Of course Paydown activity.
Speaker Change: Got you very helpful. Thanks again.
Speaker Change: You bet. Thanks.
Speaker Change: Thanks, Ken.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Derek Hewett with Bank of America. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Good morning, everyone. So Terry you had mentioned in your opening remarks that you were exploring unsecured notes potentially in 2025 so.
Any progress on obtaining a rating from one of the major agencies and then how long do you think it would take to do institutionally size deal.
Speaker Change: Yeah sure Derik.
Speaker Change: As you know, we do have our rating from <unk> and so I think.
Speaker Change: We can move forward with one of those larger rating agencies at any time, but I do believe that the strategy that we would probably go forward with as an additional private placement.
Speaker Change: But as I said, we're still exploring this.
Speaker Change: You know right now we have $75 million of notes outstanding if we were to do another private placement it would get us closer to that three.
Speaker Change: $300 million Mark that you need.
Speaker Change: To do the institutional type of a deal.
Speaker Change: Our public.
Speaker Change: Public type of a deal and so I think we would likely leg into that size.
Speaker Change: Over time and that at that time whenever we have that.
Total amount.
Speaker Change: Of closer to 300 million whenever that matures then we would do a larger deal so thats our current thinking as to.
Speaker Change: How we leg into that strategy.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
And it appears that we have no further questions. At this time I will now turn the program back to Ken for additional or closing remarks.
Ken Leonard: Great. Thank you well.
Speaker Change: We appreciate everybody can stay in the call we will be.
Speaker Change: Very proud of the quarter.
Speaker Change: As.
Speaker Change: The public here in 2024, and very excited about our progress in particular.
Speaker Change: A strength of the portfolio.
Speaker Change: Low non accruals.
Philosophy, we're seeing from sponsors in new sponsors as well as the stability in pricing.
Speaker Change: Minimal nature of the restructuring so.
Speaker Change: We're as we've mentioned before.
Speaker Change: Very bullish about current activity as well as activity going into 2025.
Speaker Change: Yes.
Speaker Change: We're excited to talk to you again next quarter and I. Appreciate your support thank you very much.
Speaker Change: Thank you. This does concludes today's presentation. Thank you for your participation you may disconnect at anytime.
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