Q3 2025 Kayne Anderson BDC Inc Earnings Call

Speaker #1: To withdraw your question, press star. If you would like one again, as a reminder, this conference call is being recorded. It is now my pleasure to turn the conference over to Andy Wetterburn Maxwell, Senior Vice President.

Speaker #2: Good morning and welcome to Kayne Anderson BDC, Inc.'s Third Quarter 2025 Earnings Call. Today, I'm joined by Doug Goodwillie and Ken Leonard, Co-CEOs of KBDC.

These fears have been exacerbated with a few high-profile bankruptcies that touched numerous financial institutions, and created splashy headlines regarding systemic risk in the private credit space. More broadly.

KBDC has no direct or indirect exposure to these situations. I would also like to highlight that, unlike most public BDCs, we have no exposure to highly levered financing in the software sector.

While Public Market sentiment is 1 Thing. Our perspective of the current credit Market landscape tells a different story,

1 of strong fundamentals and continued resilience in the core Middle Market.

We've been in regular dialogue with our portfolio companies, and our underwriting and credit monitoring teams.

And we do not see any signs of broad-based stress in our assets.

Our portfolio, remains high quality, senior secured, and well Diversified.

Importantly, our non-approval rate dropped from 1.6% of fair value to 1.4% and remains well below historical averages for the sector.

While Financial Rags regularly comment on the potential for a risk-reward dynamic in private credit, it has become less favorable than in years past.

We still see an environment where experienced investors in the middle market can earn near double-digit loan-level returns for senior debt risk.

That differently and a world of relative value. We continue to believe that our space offers a compelling value, proposition versus other investment asset classes.

Turned into a short, reminder, regarding our positioning and strategy at kbdc. We built a portfolio designed to perform across Market Cycles with approximately 94% of our investments. In first lean, senior secured loans. Where we are the agent or co-agent 80% of the time. We are structurally. Well, positioned to protect capital and generate consistent income, even in uncertain markets.

You will note that the percentage of first lean loans has declined from 98% in Prior quarters. This is due to our 11% fixed rate, investment in the SG. Credit asset back platform.

As a reminder that investment closed in early Q3 and is not included in first Lane senior debt.

With our strong originations Network, and ability to underwrite. And Lead Investments, we continue to find attractive deployment opportunities. Most importantly, we remain highly selective when deploying Capital, which we think is evident in our portfolio, statistics and credit performance.

During the third quarter of 2025 repayments of private credit loans totaled 74 million down from 83 million in the same period of 2024.

Consistent with our strategic focus and supported by continued strength. In the broadly syndicated loan markets. We further executed on our plan to reduce exposure to lower yielding BSL assets,

Specifically, we sold down 113 million of BSL positions in the quarter and have continued. This portfolio repositioning.

Our goal remains to actively wind down the small remaining, BSL portfolio of 67 million and redeploy that Capital into higher yielding, private credit opportunities in Q4 and potentially into early q1 2026.

When considering all new fundings and repayments in Q3 net investment activity, for the quarter was approximately 87 million,

This increase raised our debt to equity ratio to approximately 1.01 times above our second quarter of 2025 debt to equity ratio of 0.91 times.

As previously mentioned, our long-term Target leverage range is between 1 to 1 and a quarter times. So we have some balance sheet capacity there to be able to maximize earnings in future quarters.

Lastly.

In September, we closed a privately placed offering of $200 million of unsecured notes.

Given the strength and the private placement Market in Q3.

With spreads near their tightest levels. Compared to the public markets, we felt this was an opportune time to continue to diversify our sources of funding.

This will be discussed in the financial results section further.

I will now pass the call over to Frank Carl to discuss our portfolio.

Thank you, Doug turning to our portfolio composition as of September 30th. 2025 kbdc is portfolio. Included 108 individual portfolio companies representing. Fair market value of approximately 2.3 billion dollars of Investments. We have another approximately 277 million dollars of unfunded commitments, comprised of a mix of revolvers and delayed draw term loans for total commitments of approximately 2.6 billion dollars.

And market conditions previously touched on by Doug.

Investments in kbc's portfolio, excluding those on our watch list have weighted average leverage of 4.4 times interest coverage of 2.4 times and loaned, Enterprise value of approximately 43%.

Our portfolio did decline in number of companies by 6, mainly due to our rotation out of the broadly syndicated loan portfolio, which were generally smaller than average hold sizes, such that total investments still increased.

We continue to have a highly Diversified portfolio with an average position size of approximately 0.9% of fair value. And our top 10 Investments represent only approximately 20% of our portfolio.

Outside of the specific credit statistics associated with our portfolio, our investments are well-structured. Ninety-four percent of our portfolio is invested in first-lien securities. As Doug mentioned, this number declined from ninety-eight percent in prior quarters because of our classification of the SG credit investment.

99% of our private Middle Market Investments are backed by a private Equity sponsors. Additionally, all of our core first lean private Middle Market Investments have Financial Covenants.

96% of our debt Investments are floating rate, which mirrors our liabilities where the vast majority of our debt funding, utilizes floating rate, borrowings as well. The only fixed rate investment in our portfolio is the SG credit loan to close in early. Q3 that has an 11% fixed coupon.

Credit performance across the portfolio, remains strong to date with only 1.4% of total debt Investments at fair value on non acral representing only 5 positions out of those 108. Lastly we've built this conservative portfolio with a healthy weighted. Average yield of approximately 10.6% on fair value of Investments, excluding non-accruals

This yield has been achieved with borrower level leverage levels that are considerably lower than that of many of our peers. And while we continue our rotation out of bsl's and into higher spread private, credit loans,

At the end of the third quarter, we still had approximately 3% of our portfolio invested in broadband syndicated loans, which we intend to trade out of by year-end or shortly thereafter.

As Doug mentioned, there has been something of a wave of negative media coverage, surrounding private, credit and bdcs. Over the last few months, over time, we've seen headlines attempt to call the top of the cycle or identify. The next Canary in the coal. Mine,

Well, no lender gets every credit decision, right, we believe that deep experience is critical to consistently originating, loans that are repaid with interest.

Our strategy has remained steady investing in senior secured loans to Middle Market businesses. That consistency is rooted in the senior teams, 14 years of Kane Anderson, and more than 2 Decades of Prior experience across direct lending platforms. Making ours, 1 of the most tenured Partnerships in the Middle Market.

Signs of a bubble would show elevated leverage levels, lower investment quality, or deterioration in terms, none of which we have seen in our market to date.

by maintaining a consistent focus on core Middle Market companies with strong, free cash flows operating in resilient Industries. We believe we have mitigated certain credit risks, particularly in a higher rate, more challenging macro environment,

We view our current non-accruals as largely idiosyncratic, rather than indicative of broader credit issues. We continue to closely monitor potential impacts from tariffs and based on recent conversations with sponsors and management teams. Most of our portfolio companies again, which are domestically focused both in terms of Revenue and Supply chains have experienced minimal Financial impact from these tariff related policy changes,

Looking ahead, while we anticipate some continued Market volatility, we are encouraged by the notable increase in investment activity in the third quarter.

Although overall M&A activity has been somewhat slow to rebound, we've observed a meaningful, if anecdotal, uptick in M&A-related financing brought to investment committee since September, representing 72% of all investment opportunities reviewed.

our strong and long-standing private Equity relationships continue to support a healthy pipeline of opportunities, offering attractive risk, adjusted returns

We believe our portfolio is well positioned, to maximize earnings as we complete our rotation out of the remaining, broadly syndicated loans and modestly. Increase our leverage toward the middle to Upper bound of our target range of 1 to 1 and a quarter times in line with our peers.

Knew Terry Hart to discuss KBDC's third quarter 2025 financial results.

Thanks, Frank. Let's first review the results of operations.

During the third quarter, we earned net income per share of 35 cents and that investment income per share was 43 cents compared to 40 cents in the prior quarter and 3 cents above our dividend.

We were able to increase net investment income from the prior quarter through higher interest income resulting from rotation to out of lower yielding, broadly, syndicated loans into Middle Market. Loans and our investment in SG credit as well as interest income related to realization activity

Total investment income for the third quarter was 61.3 Million as compared to 57.3 million in the prior quarter.

As mentioned, the increase in investment income was primarily driven by portfolio rotations and the impact of net additions to the portfolio during the third quarter.

Our portfolio yield was then changed quarter over quarter, and the pick interest remained relatively low at 3.5% of interest income for the quarter. Additionally, during the third quarter, we had approximately $1.4 million of accelerated amortization of OID and prepayment fees related to realization activity.

Total expenses for the third quarter were $31.3 million compared to $28.6 million for the prior quarter.

The increase was primarily the result of higher average borrowings on our credit facilities and increased base management fees, as a partial fee waiver was in effect. During the second quarter,

During the quarter, our incentive management fee was reduced by the 12 quarter. Look back and send a fee cap.

During the third quarter, we had a small realized loss of approximately 22,000 mainly related to the sale of several broadly syndicated models and we had net unrealized losses on the portfolio of 5 million compared to unrealized losses of 3.5 million in the prior quarter.

The unrealized losses were largely the result of negative fair value changes related to our investments in scores for Seagull egg and trademark Global, partially offset by positive marks on Arbor Works and our broadly syndicated loan portfolio.

Additionally, we had $0.4 million of deferred income tax expense related to unrealized gains on equity investments held in our taxable subsidiary.

As of September 30th total assets were 2.3 billion and net assets were 1.1 billion as of that date. Our net asset value was $16.34 per share.

The decrease of 3 cents from $16.37 per share as of June 30th was comprised mainly of 8 cents per share related to net unrealized losses, partially offset by 3 cents of net investment income and excess of our dividend, and 2 cents related to share repurchases during the quarter.

At the end of the third quarter, we had debt outstanding of $1.153 billion, and our debt-to-equity ratio was 1.01 times, which is an increase from 0.91 times at the end of the second quarter. During the third quarter, we had higher utilization of our credit facilities resulting from robust origination and share repurchases of 13.9 million shares pursuant to our $100 million share repurchase program.

During the month of October kbdc repurchased. Its shares valued at approximately 17 million at an average price to NAD for share of 85%.

We expect that accretive share repurchases. Will be an additional use of Leverage moving us towards the middle, or upper end of our debt to equity, range of 1 times to 1 and a quarter times.

As Doug mentioned earlier on September 9th, we closed a 200 million offering of senior unsecured notes to provide kbdc additional liquidity, and credit facility, flexibility in connection with the transaction. We entered into interest rate swaps to more closely. Align the interest rates of the notes with our predominantly floating rate Investment Portfolio,

We were very pleased that the transaction was significantly over subscribed, which Titan final pricing, the notes were funded and issued on October 15th.

As of September 30th, our undistributed net investment income was approximately 16 cents per share.

for the fourth quarter, we anticipate modest excess net investment income above our base dividend reflecting, the continued strategic rotation out of our lower, yielding broadly, syndicated loan investments into Middle Market, loans, and additional accretive share repurchases,

With that operator, please open the line for questions.

On your telephone keypad.

Your first question comes from line of Douglas harder with UBS, please go ahead.

Uh, great. Hoping you could uh, talk a little bit more about the investment, um, in, in SG credit, you know, just, you know, kind of thoughts about whether there's potential for for growth in that investment and how to think about any upside beyond the uh, the coupon you mentioned.

Hey, Doug, this is Frank. Appreciate the question. Um, you know, part of the structure of our deal with those guys did include a unfunded delayed draw term, loan, commitment, um, which, you know, will be used to finance, new Investments, um, and grow

The book over time. So there's sort of a built-in, you know, we're expecting more funded dollars as part of that debt investment.

And then, um, we did disclose in the queue, you know, we do have a call option to purchase, um, the majority of the equity in that business going forward. Um, the terms are not disclosed, we won't discuss them here but I think the the, you know, short story is, um we think there's a lot of growth potential in asset back lending and particularly the types of assets. That lending that these guys are doing. So, you know, we are expecting it to be a, um, you know, a growth engine and a a larger piece of our business going forward. I think we talked about the last call. I mean, we're not expecting this to be a, um, huge portion of the portfolio, but, you know, larger than it is. Now certainly. And we think the growth prospects are there

And and Doug this is appreciated. Willie just appreciate.

This, this is Doug goodwillie, just adding 1 thing that, um, in addition to what Frank said, just to clarify, we do own, uh, you know, through our investment at closed, 22 and a half percent of the equity of SG credit as uh, it stands today.

Great, appreciate that. And then just uh, um, you mentioned that you saw kind of increased, you know, kind of fees related with uh, or or interest income related to the kind of repayments yet, repayments were down, just just hoping you could kind of Flushed, uh, flush that out a little bit for us.

Jerry, would you like to take it from here?

Yeah, sure. Um, you know, we had 2 uh, repayments that were driving uh, those additional um, interest income uh, from accelerated, oh idea. But we also had some prepayment, uh, penalties or fees that were associated with that. Um, realization as well. And so, the combination of those 2 items, um, whenever you, you know, whenever, uh, there's a realization prior to its stated maturity, you get to bring forward all of that, oid. So it was a combination of of those items that resulted in it was around 1.4 million of, uh, additional income related to those realizations alone this quarter.

Great. Thank you.

Your next question.

Kenneth Lee with RBC Capital Markets, please go ahead.

Hey, good morning. Thanks for taking my question. Um, 1 in 1 question, I had was, you mentioned in in the prepared remarks that that you're seeing some recovering, the m&a activity, but perhaps a little bit, uh, slower to, to recover. I wonder if you could just provide a little bit more color around that um, you know, any thoughts as to

Keep drivers at potentially holding back some of the the m&a activity you're seeing within and I assume this is within the core Middle Market segment. Thanks.

Broadly in terms of overall m&a activity which has been you know modest relative to court over a quarter increases but I think for the um the you know, K Anderson, private credit platform and kbdc. I think we've seen very nice activity in in addition, we've also seen spreads Elevate in the third quarter. Um, modestly over the first half. In addition, the pipeline we have for the fourth quarter looks very strong consists of all new platforms right now. And um those platforms are um have weighted average spreads that are consistent with what we've seen in the in the in this uptick in the third quarter. So you know, I think our our general feeling is, you know we're not um you know, making large macroeconomic predictions about the m&a market but we think is so for comes down, we'll continue to see an uptick um, but you know, we've been very pleased at from a platform perspective. You know, we'll be, you know, at or near a record year uh, in terms of volume.

Great, very helpful there and just 1 follow-up. Uh, if I may wonder, if you could just uh, share any of the latest thoughts that you may have about uh, dividend coverage. Uh, especially given the outlook for for rates there. Thanks. Yeah, sure. Ken, um, for the fourth quarter, we anticipate, um, you know, a modest excess, net income, net investment, and this reflects, the continued ramp of our portfolio and share repurchases. As we, you know, operate in our Target, leverage range of 1 to 1 and a quarter. We're also expecting to finish.

You know, that strategic rotation out of our lower yielding, uh, broadly syndicated investments into, you know, these core Middle Market higher, yielding loans, and that'll take place in the fourth quarter, or potentially roll over into that first quarter of 2026. Um, we believe our our dividend yield and dividend coverage, will more accurately reflect our steady state operations. Once kbdc, is operating within its, uh, Target leverage with uh, the portfolio, um, fully invested in male Market loans. You know, we also believe that we're well positioned to maintain our current based dividend rate for the foreseeable future. Um, despite the spread compression and reference uh rate headwinds that are affecting the broad Market uh while none of us are really immune to reference rate declines. We feel very good about the current spreads in our Market which have outperformed the upper middle Market in many of our competitors.

We um, we, you know, feel very good about that continuation into the fourth quarter. Um, additionally, I'll add that. Um, we've been active in our share repurchase program which we saw in the third quarter was a creative at these lower, um, price levels. And and that's going to continue into the fourth quarter. And then finally, um, we have spillover, uh, income of 16 cents to provide a buffer um to our dividends during 2026, you know, if needed. So we feel very good about our positioning here.

Great, very helpful there. Thanks again.

Thank you.

Sarah. No further questions at this time. I will now turn the call back over to Ken

closing remarks.

Thank you, everyone, for joining today. We appreciate it. We're pleased to have reported a strong quarter and are also pleased with the continued strong performance heading into the fourth quarter. We continue to think our value lending philosophy and our long tenure in the private credit sector will differentiate KBDC as a conservatively focused, strong risk-reward oriented BDC. Thanks again, everyone, for joining today.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.