Q4 2024 Kayne Anderson BDC Inc Earnings Call
One 3% of fair value of our portfolio.
Speaker Change: Turning to market conditions broadly, we feel the market enjoyed relatively robust levels of activity in the fourth quarter of 2024 at least relative to the last six to eight quarters.
Speaker Change: Bonser middle market volumes were up 96% versus the fourth quarter of 2023 for.
Speaker Change: For 2020 for middle market sponsor loan volumes were up 86% versus fiscal year 2023.
Speaker Change: We believe a substantial driver in this uptick in activity.
Speaker Change: In the private equity community moving to transact rebounding from lower M&A volumes over the prior one to two years.
Speaker Change: K bdcs existing portfolio of private middle market investments has a weighted average spread over so far of approximately 609 basis points.
Speaker Change: While we've seen some market compression most of the new transactions. We're reviewing today have a spread over so for a five to 600 basis points and our private middle market investments in 2024 at an average spread of approximately 575 basis points.
Speaker Change: We are encouraged that as we sit here today, we continue to see very good risk adjusted lending opportunities in the upper half of that range.
Speaker Change: In addition, while no one can predict where spreads will go in the future. We've seen some signs but spreads have begun to stabilize driven in part by accelerating loan volumes.
Speaker Change: With that I'll turn it over to Terry it's hard to discuss key Bdc's fourth quarter 2024 financial results.
Terry: Thanks, Kim Let's first review results of operations.
Terry: During the fourth quarter, we earned net income per share of <unk> 50.
Terry: Compared to 53 during the third quarter and net investment income per share was <unk> 48.
Terry: Or <unk> 49.
Terry: <unk> excise taxes compared to <unk> 52 in the prior quarter.
Terry: Total investment income for the fourth quarter was $56 3 million as compared to $57 8 million in the prior quarter.
Terry: The decrease to investment income was primarily driven by the reduction to sofa.
Terry: And the $1 7 million impact of placing Sundance on non accrual status during the quarter.
Terry: These reductions were partially offset by a net additions to the portfolio during the fourth quarter.
Terry: It's worth noting that over 80% of the decrease to our portfolio yield was related to lower reference rates and that only one 1% of interest income for the quarter related to Pik interest.
Terry: Additionally, during the fourth quarter, we had approximately $1 1 million of accelerated amortization of OID as a result of realization activity.
Terry: Total expenses for the fourth quarter were $22 3 million compared to $28 million for the prior quarter.
Terry: The increase was primarily related to <unk> $8 million of excise tax expense on undistributed income and higher interest expense, resulting from additional borrowings on our credit facilities to fund investment activity during the quarter as.
Terry: As a reminder, in connection with our IPO Kayne Anderson instituted a 25 basis point fee waiver of our base management fee.
Terry: Through May 'twenty.
Terry: Right.
Terry: Okay.
Terry: Thank you.
Terry: Entities that expired on December 31, 2024.
Terry: During the fourth quarter, we had a realized gain of <unk> 7 million on the sale of an equity co investment and we had net unrealized gains on our portfolio of $1 4 million compared to unrealized gains of $5 million in the prior quarter.
Terry: The unrealized gains were a result of upfront fees on origination activity during the quarter, partially offset by quarterly amortization of original issue discounts and to a lesser extent changes in the fair value of some of our investments.
Terry: Additionally, we had <unk> 7 million of deferred income tax expense related to unrealized gains on equity investments held in our taxable subsidiary.
Terry: As of December 31, total assets were 2.08 billion and net assets were $1 2 billion.
Terry: As of that date, our net asset value was unchanged at $16 70 per share during.
Terry: During the fourth quarter results of operations, including realized and unrealized gains were 10% higher than our regular dividend of <unk> 40 per share and we paid our first of three special dividends of <unk> 10 per share, resulting in NAV per share being flat quarter over quarter.
Terry: At the end of the fourth quarter, we had debt outstanding of $858 million and our debt to equity ratio was <unk> 72 times, which is an increase from six six times at the end of the third quarter.
Terry: As Ken mentioned first quarter 2025 is shaping up to be one of the most robust origination quarter since inception, such that we will continue to grow our portfolio steadily and prudently.
Terry: With this level of activity, we target achieving the low end of our debt to equity range of one times to one and a quarter times in the second or third quarter of 2025.
Terry: During the fourth quarter of 2024, we continued to increase credit facility borrowings improving the utilization of our facilities and we amended our corporate credit facility to extend the maturity date and decreased pricing, so sofa plus two 1%.
Terry: In February we amended both SPV credit facilities to extend the maturity dates increased capacity and decreased the interest rate on each facility.
Terry: The reduction to our borrowing costs and higher utilization of our credit facilities.
Terry: <unk> from robust origination should be beneficial to net investment income over the balance of the year.
Terry: Looking forward as we increase leverage on our credit facilities and achieve the low end of our debt to equity target range. We plan to Opportunistically issue unsecured notes to provide additional credit facility capacity.
Terry: In closing I'd like to provide a few thoughts related to our distributions on.
Terry: On February 19th our board of directors declared a regular dividend.
Terry: For the first quarter of 2025, or <unk> 40 per share to shareholders of record on March 31 2025. In addition, we will also be distributing to previously declared special dividend of <unk> 10 per share in March of 2025 and June 2025.
Terry: These followed the distribution of our first 10 per share special distribution in December of 2024.
Terry: These special distributions were established to help support the stock price around share lockup release stage and pay out excess income earned in 2024 as of December 31, our undistributed net investment income was approximately <unk> 32 per share.
Terry: Of this amount 20 per share will be distributed to shareholders through the two remaining special dividends with the remainder expected to be paid out in the fourth quarter of 2025.
Terry: Further throughout 2025, we anticipate relatively modest excess net investment income above our base dividend, reflecting the timing of the continued ramp of our portfolio to achieve target leverage ranges and the strategic rotation out of our lower yielding broadly syndicated loan investment.
Terry: And to middle market loans.
Terry: We believe our total dividend yield and dividend coverage will more accurately reflect our steady state operations when K BDC is operating at its leverage target.
Terry: With the portfolio fully invested in middle market loans.
Terry: With that operator, please open the line for questions.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Speaker Change: If you are called upon to ask your question and our listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: We'll pause for just a moment.
Speaker Change: And again, if you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Yeah.
Speaker Change: Your first question today comes from the line of Derek Hewett from Bank of America. Your line is open.
Derek Hewett: Good morning, everyone in terms of the expectation that youll achieve your target leverage near the low end.
Derek Hewett: During the either the second quarter or third quarter of this year.
Speaker Change: Does that include the rotating the broadly syndicated loan portfolio.
Derek Hewett: Is that included in that forecast.
Doug: Derek This is Doug good really thank you for the question.
Speaker Change: That does not.
Speaker Change: It assumes that we're investing at the pace we are.
Speaker Change: That we've established thus far in Q1 to date I think as Ken mentioned in his presentation, we've funded over $200 million.
Speaker Change: Commitments and are in process.
Speaker Change: We're close to another 100 for just Q1.
Speaker Change: 2025, and so with that.
Speaker Change: The robust pipeline into Q2, we would expect.
Speaker Change: To achieve that target ratio.
Speaker Change: Towards the end of Q2 or at the latest early Q3.
Speaker Change: Okay. Thank you and then my follow up question is how do you assess.
Speaker Change: The risks are either kind of dose related.
Speaker Change: Types of exposure from your borrowers or.
Speaker Change: Tariffs, especially since the portfolio Scott.
Speaker Change: Okay.
Speaker Change: More kind of old economy.
Speaker Change: Types of Corp.
Speaker Change: Corporates.
Speaker Change: Yes.
Speaker Change: I think across.
Speaker Change: All portfolios.
Speaker Change: You need to assess those risks also obviously tariff risk.
Speaker Change: Moment.
Speaker Change: Obviously relevant today.
Speaker Change: We don't have many companies that are invested.
Speaker Change: With what we call stroke of the pen risk, so where theres a lot of government funding as a key element to the cash flow. So.
Speaker Change: For us I think that does risk is relatively minimal.
Speaker Change: And.
Speaker Change: We evaluate the portfolio again, there is very few companies where government funding.
Speaker Change: Key source.
Speaker Change: Yeah.
Speaker Change: And this is Frank I think just to address tariffs clearly I think for both of these topics uncertainty sort of feels like the name of the game, though.
Speaker Change: Obviously, some news in the last few days around moving forward with.
Speaker Change: Some of the previously communicated tariffs.
Speaker Change: Think about tariffs specifically in two ways.
Speaker Change: First clearly top of mind on new underwriting so we're being very careful there I will note that we have not seen much of the way much in the way of transactions that are let's say in <unk> orders from tariff impacted countries. I think the market is sort of pulling back a bit on if youre a seller right now hard to bring a business without sort of exposure to market.
Speaker Change: And then second.
Speaker Change: We did just complete an analysis on K bdc's portfolio looking at all of our borrowers and where they had substantial exposure. What we found is that something like a quarter of our portfolio imports more than 10% of Cogs, which again is a low bar of 10% of Cogs from.
Speaker Change: China and then another call it 20% imports more than 10% of Cogs again, a low bar from Canada or Mexico.
Speaker Change: These the vast majority nearly all have some reason about reasonable level of ability to flex pricing. They are not into fixed price contracts with large customers. For example, and we also saw this in 2018 very few of the businesses where were invested were impacted directly.
Speaker Change: Of course tariffs and trade wars create uncertainty and unpredictability, so hard to see all the way around the corner, but we do think that U S focused portfolio like ours in conservative senior secured loans is well positioned even if there is some lumpiness here and there.
Speaker Change: Eric.
Speaker Change: Sure.
Speaker Change: Don't want to be dismissive of the dose question does question at all.
Speaker Change: And I think I tried to hit it from.
Speaker Change: Head on in terms of.
Speaker Change: Funding into businesses that are reliant on.
Speaker Change: Directly and government funding there are kind of the second derivative that would be something like health care.
Speaker Change: Where Medicaid.
Speaker Change: And other government spending programs to fund healthcare come into question and I think for US we have roughly 8% of the portfolio in health care provider providers and services.
Speaker Change: Within that it typically is in companies that have relatively low <unk>.
Speaker Change: Reimbursement risk, but there is.
Speaker Change: As always going to be.
Speaker Change: Second level risk in any portfolio.
Speaker Change: When you get down to what those could potentially do and I think we're continuing to monitor that on a daily and monthly basis and assess our portfolio risks.
Speaker Change: The changes occur in Washington.
Speaker Change: Thank you.
Speaker Change: As a final reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: And there are no further.
Speaker Change: Do apologize we have a last minute question from the line of Paul Johnson from <unk>. Your line is open.
Paul Johnson: Hey, good morning, Thanks for taking my questions.
Paul Johnson: Okay.
Paul Johnson: Yes.
Paul Johnson: Leverage multiples held up as well as just kind of.
Paul Johnson: Covenants in the bands around those if those improved at all from kind of the more.
Paul Johnson: Refinancing heavy market last year or so.
Kind of continued pressure.
Paul Johnson: Pressure terms this year.
Paul Johnson: Thank you Paul This is Doug Goodwillie again, leverages its been relatively consistent for us.
Paul Johnson: We.
Speaker Change: We looked at 2024 still sub four times for our new investment activity as we look at the first quarter of this year Phil again.
Paul Johnson: Weighted average.
Paul Johnson: Right around four times, so leverages its been very consistent as you may recall for us that tends to be the case.
Paul Johnson: Vintage by vintage.
Paul Johnson: Okay.
Paul Johnson: Alright.
Paul Johnson: Got it.
Paul Johnson: What we do with our value lending strategy.
Paul Johnson: Where we've seen a bit of movement has been more on price I think the mid market has been pretty disciplined on leverage and structure as it relates to not just leverage but also LTV.
Paul Johnson: To give you a feel I think Ken mentioned it in his part.
Paul Johnson: The presentation earlier spreads were around <unk> 75 for the year in 2024.
Paul Johnson: What we've seen thus far in 2025 has been closer to $5 50 closing fees around 2% last year slightly below that.
Paul Johnson: In the first quarter of 2025, so where we've seen.
Paul Johnson: A bit of give if you will from the lending market has been more on price that said if you consider that.
Paul Johnson: Over a 12 to 18 month period, something to the effect of 50 to 75 basis points in our market, which is relatively muted to it I think you would have seen.
Paul Johnson: During that same time period in the upper mid market.
Paul Johnson: In the broadly syndicated market.
Paul Johnson: Thank you very much.
Paul Johnson: And that concludes our question and answer session I will now turn the call back over to Doug for closing remarks.
Paul Johnson: Thank you so with that I'd, just like to thank everyone on the call for their time and continued interest in <unk>. We look forward to a continued strong first quarter into our next earnings call in May.
Paul Johnson: Thank you very much.
Paul Johnson: This concludes today's conference call. Thank you for your participation you may now disconnect.
Paul Johnson: Okay.
Paul Johnson: Okay.
Paul Johnson: Yeah.