Earnings Call Transcript - KBDC Q1 2026

Operator, Operator

Hello, and welcome to Kayne Anderson BDC, Inc. Fourth Quarter 2025 Earnings Call. All lines are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Andy Wedderburn-Maxwell, Senior Vice President.

Andy Wedderburn-Maxwell, Senior Vice President

Good morning, and welcome to Kayne Anderson BDC, Inc. first quarter 2026 earnings call. Today, I am joined by Douglas L. Goodwillie and Kenneth Leonard, Co-CEOs of KBDC, Frank Karl, President, and Terry A. Hart, CFO. 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. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, projections about the company, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. 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. Actual results may differ materially from those expressed or forecasted in the forward-looking statements. We ask that you refer to the company's most recent filings with the SEC for important risk factors. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. The company assumes no obligation to update any forward-looking statements at any time. Our earnings release and our supplemental earnings presentation are available on the financial section of our website at kaynebdc.com. Now I would like to turn the call over to Douglas L. Goodwillie.

Douglas L. Goodwillie, Co-CEO

Good morning, everyone. I am pleased to report another quarter of solid performance that demonstrates the resilience and consistency of our value lending approach despite the headwinds that the sector has faced this year. I will provide an overview of our quarter and share our thoughts around how KBDC's differentiated portfolio has managed to perform in a more challenging environment. Frank Karl will then provide a more detailed overview of our portfolio and performance, before Terry A. Hart concludes with KBDC's financial results. For the first quarter of 2026, we generated net investment income of $0.43 per share, which represents strong coverage of our $0.40 quarterly dividend at 108%. While this was a slight decrease from the $0.44 per share we achieved in the fourth quarter, it reflects our disciplined approach to capital deployment in what continues to be an uncertain market environment. Our annualized return on equity for the quarter was a robust 10.6% underscoring the effectiveness of our investment strategy. Our net asset value per share ended the quarter $16.23, down 55 basis points from $16.32 in the last quarter. The small decline was due in part to some markdowns in the portfolio, and was offset in part by origination activity, some positive portfolio marks, and by accretive share repurchase activity. I am pleased to announce that our Board of Directors has declared a regular quarterly dividend of $0.40 per share for the first quarter of 2026. This dividend will be payable on July 16, to stockholders of record as of June 30. Looking ahead, we remain confident in our ability to sustain our dividend throughout 2026. As we stated on our last earnings call, this confidence is grounded in several key factors: our portfolio's defensive positioning with 93% in first lien investments; our value lending philosophy that focuses on companies in stable and staple industries, which allows for a conservative average borrower leverage profile of just over 4x; the weighted average yield on our portfolio of 10.1% provides a solid foundation for consistent income generation; and our minimal exposure to volatile sectors like software and technology at just 2% positions us well relative to many of our peers. Our portfolio continues to demonstrate strong credit quality and resilience, particularly relative to the broader private credit market. As of March 31, 2026, nonaccrual investments represented 2.5% of our debt portfolio at fair value, up from 1.4% in the prior quarter. In terms of specific companies, we added Score and Regiment last out tranches to nonaccrual status during the quarter. We also moved ArborWorks off nonaccrual and we see a clear path to further improvement in the near term. While many BDCs have significant exposure to software and technology companies, often 15% to 25% of their portfolios, our consistent adherence to underwriting standards that stress disciplined industry and loan-level diversification has proven prescient as we are witnessing the private credit market's first prolonged stress test since the early stages of the COVID era. We remain focused on traditional, stable industry sectors including industrial services, distribution, food products, and business services. Companies with durable cash flows, substantial tangible enterprise value and disciplined leverage profiles. Turning to our investment activity for the quarter, we maintained our disciplined approach to capital deployment while continuing to find attractive opportunities that meet our stringent risk-adjusted return criteria. During the quarter, we made new private credit commitments totaling $93 million, demonstrating our ability to source quality deals even in a more selective market environment. The pricing environment for new originations remains favorable, with our new floating rate loans averaging 549 basis points over SOFR during the first quarter, which was 20 basis points wider than in the fourth quarter. Our total fundings for the quarter were $99.1 million which included both new investments and draws on existing unfunded commitments from our portfolio companies. We received $74.6 million in private credit repayments and $17.4 million in DSL sales during the quarter, resulting in net funded investment activity of $7.1 million. Our balance sheet remains exceptionally strong, and we continue to maintain a conservative risk profile. As of March 31, our debt-to-equity ratio stood at 1.05x, positioning us comfortably within our target leverage range of 1x to 1.25x. Our total liquidity position of $569.7 million provides substantial capacity for accretive capital deployment. This includes $32.7 million in cash, and $537 million in undrawn debt capacity under our credit facilities. The private credit market is going through a period of bifurcation in terms of performance across different investment strategies and market segments. While presenting challenges for some participants, it is creating opportunities for disciplined lenders. Our selective approach means we are comfortable maintaining higher liquidity levels to be more tactically opportunistic as spreads widen. M&A activity has remained lower than forecasted at the start of the year, as geopolitical tensions have kept a cap on activity. However, we continue to see steady transaction flow in our core middle market segment with a noticeable uptick in activity over the past four to six weeks. The quality of deal flow remains solid, and spreads have started to widen in Q1. I would be remiss if I did not mention one of the bigger clouds hanging over our set right now: the rapid advancement of AI and automation technologies has created significant uncertainty around business model durability and competitive positioning for many software companies. We are seeing several managers report pressure on net investment income per share, tighter dividend coverage, and meaningfully declining NAV per share as they grapple with softening credit performance and increased markdowns on those positions. While we believe the general negative sentiment towards software loans is somewhat overblown, our minimal 2% exposure to the sector insulated us from this pressure. Public BDC valuations have lagged business fundamentals, with many quality managers trading at discounts to net asset value despite maintaining strong operational performance. As the market continues to differentiate between managers based on actual performance rather than just asset growth, we believe KBDC's consistent approach will be increasingly valued by both investors and the private equity sponsors who drive our deal flow. I will now pass the call over to Frank Karl to discuss our portfolio.

Frank Karl, President

Thanks, Douglas. As of March 31, our portfolio includes 105 companies with a fair value of $2.2 billion plus $289 million of unfunded commitments. Since quarter end, we have closed or are finalizing $150 million of new commitments as we have seen an uptick in activity in Q2. Investments in KBDC's portfolio, excluding those on our watch list and opportunistic investments, have a weighted average leverage of 4.4x, an interest coverage ratio of 2.4x, and loan-to-enterprise value of approximately 43%. The weighted average EBITDA of our private middle market portfolio companies is $52.6 million, reflecting our focus on established middle market businesses with meaningful scale. Company count declined by two, reflecting broadly syndicated loan rotation and realizations. The portfolio remains highly diversified. Average position is approximately 1% of fair value, and top 10 investments are only 20% of the portfolio. Our top five industry sectors—commercial services and supplies, health care, distributors, food products, and containers and packaging—account for just over 50% of the portfolio and have remained consistent quarter over quarter as we focus on avoiding sector concentration risks. Approximately 95% of our debt investments are floating rate, matched by predominantly floating rate liabilities. Our only material fixed-rate investment is the SG credit loan at an 11% coupon, where we increased our commitment in Q1 given strong platform growth. Credit performance remained strong with 2.5% of debt investments at fair value on nonaccrual versus 1.4% last quarter. We do expect both Sundance and Regiment to come off nonaccrual over the next one to two quarters as Sundance is completing the final stages of its realization process and Regiment is currently going through a sale. We look forward to providing an update on those credits on our next earnings call. As Doug mentioned, we also moved ArborWorks off of nonaccrual this quarter, which did have the effect of increasing our total interest income for the quarter to 7.5%, up 10 basis points from last quarter, given that we recognized some accrued interest associated with the name in income. Weighted average yield was 10.1% on fair value, excluding nonaccruals, down slightly from 10.3% last quarter. We have achieved this with materially lower leverage than many peers, while continuing our rotation out of the BSL into higher-spread private credit. Remaining BSL exposure was $29.8 million at quarter end, and the sell down is continuing in Q2. Activity has picked up in Q2, but we have stayed selective, passing on deals where leverage pushed beyond our comfort or pricing was too aggressive. Against the backdrop of tariffs, AI risk, and geopolitical tensions, we are looking to remain disciplined as always. We added a further $30 million delayed draw term loan to SG Credit that now represents approximately 5% of the portfolio. That team has executed well. The position adds diversification, and the 11% coupon offers an attractive return. Overall, outlook for investment activity looks healthy, and our long-standing sponsor relationships continue to generate preferred lender status on attractive opportunities. With that, I will turn it over to Terry.

Terry A. Hart, Chief Financial Officer

Thank you, Frank. Let's first review our financial results. During the first quarter, we earned net income per share of $0.26 and net investment income per share of $0.43, compared to $0.44 in the prior quarter and $0.03 above our dividend. Total investment income for the first quarter was $57.3 million, as compared to $61.9 million in the prior quarter. The decrease to investment income was primarily a result of lower average reference rates, some spread compression, and $2.1 million less accelerated amortization of OID and prepayment fees related to realization activity, partially offset by $2.2 million of PIK interest income related to our investment in ArborWorks which moved to accrual status during the first quarter. Accelerated amortization of OID related to realization activity was approximately $500 thousand during the quarter and PIK interest represented 7.5% of total interest income for the quarter, but it is worth noting that $2.2 million, or 3.9%, was related to PIK interest from ArborWorks that had not been accrued since 2023. Additionally, the 20 basis point decrease to our portfolio yield was split evenly between lower reference rates and lower spreads. Total expenses for the first quarter were $28.4 million, compared to $31.8 million for the prior quarter. The decrease was primarily the result of lower reference rates on borrowings, lower average borrowings during the first quarter, lower incentive fees, and $500 thousand of excise taxes incurred in the fourth quarter. During the quarter, our incentive management fees were reduced by the December look-back incentive fee cap. During the first quarter, we had $2.3 million of realized losses mainly related to the restructure of our debt investments and Regiment Security Partners that resulted in a $2 million realized loss and we recognized a $300 thousand realized loss due to the rotation out of one of our broadly syndicated loans. During the quarter, we had net unrealized losses on the portfolio of $9 million compared to unrealized losses of $7.2 million in the prior quarter. The unrealized losses were largely the result of negative fair value changes related to our investments in Score, Siegel Egg, Tempo, and Trademark Global. Additionally, we had deferred income tax expense of $400 thousand related to unrealized gains on equity investments held in our taxable subsidiary. As of March 31, total assets were $2.3 billion, and net assets were $1.1 billion. As of that date, our net asset value was $16.23 per share. The decrease of $0.09 from $16.32 per share as of December 31 was comprised of $0.17 per share related to net realized and unrealized losses, partially offset by $0.03 of net investment income excess of our dividend and $0.05 related to accretive share repurchases during the first quarter. At the end of the first quarter, we had debt outstanding of $1.138 billion and our debt-to-equity ratio was 1.05x, which is a small increase from 1.02x at the end of the fourth quarter. On February 20, we closed the term extension of our largest credit facility led by Wells Fargo, and reduced the interest rate on this facility by 20 basis points. And as mentioned earlier, during the quarter, we had share repurchases of $21.4 million at an average price to NAV per share of 86%, pursuant to our $100 million share repurchase program. On May 5, the program was extended for one year and the $100 million program amount was renewed starting May 25. Now turning to our distribution, on May 5, our Board of Directors declared a regular dividend for the second quarter of $0.40 per share to shareholders of record on June 30. As of March 31, our undistributed net investment income was approximately $0.25 per share. As we continue to execute during the remainder of 2026, we plan to complete the rotation out of our remaining lower-yielding BSL positions, gradually optimize our leverage within our target debt-to-equity range of 1x to 1.25x, and stay focused on our value lending strategy. With that, operator, please open the line for questions.

Operator, Operator

Thank you. To register a question, press star followed by the number 1. Our first question comes from Cory Johnson from UBS. Please go ahead. Your line is open.

Cory Johnson, Analyst, UBS

Hi. Thanks for taking my question. You mentioned passing on some deals because the terms were not where you wanted them to be. I was wondering, are you feeling any pressure possibly from the upper market? And similarly, are you seeing any opportunities given where you are leverage-wise and with a cleaner balance sheet for you to either go upstream or otherwise take advantage of market opportunities?

Douglas L. Goodwillie, Co-CEO

Sure. This is Douglas L. Goodwillie. As a general backdrop, we always try to stay as disciplined as we can in any market in terms of leverage discipline as well as pricing discipline. This quarter was not all that different in terms of that. The market in terms of M&A volumes continues to be mid-range, not fantastic given geopolitical and other pressures. But the opportunities we have seen have still been good quality. In Q2, we have seen a slight uptick. I think we are tracking to almost $200 million of commitments for Q2 for the BDC. We are using our balance sheet and liquidity to invest in what we think are attractive opportunities. Regarding the upper mid market potentially moving into the core mid market, that has not been the case overall. What we are seeing is the start of a dislocation where some upper mid market players, given redemptions on the private BDC side, have not been putting as much capital to work. So the $400 and $500 million upper mid market deals are actually seeing some better pricing for the first time in a while, and we have seen some opportunities where you can play in a $75 to $100 million EBITDA business, get a covenant, and get decent pricing. We have not seen enough stress around sell-offs in software portfolios that would change our view long term. I hope that answers the question.

Operator, Operator

As a reminder to ask a question, please press star followed by the number 1. Our next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead. Your line is open.

Kenneth Lee, Analyst, RBC Capital Markets

Realize it is a little difficult to predict, but could you offer up any kind of outlook around prepayments over the near term? Could you see it trending either lower or higher than a more normalized kind of environment there?

Douglas L. Goodwillie, Co-CEO

I will start, and Frank can weigh in as well. It has been a relatively slow prepayment environment for two to three years given the M&A market. Long-term average duration is about three years. In a constrained M&A environment, it tends to go out a bit. We have been seeing average durations closer to four in this post-COVID period. This year has been a relatively normal first half and we are projecting a pickup in Q4, though that is dependent on the overall market.

Frank Karl, President

I agree with Douglas. We usually expect a back-half pickup in transaction volume which would lead to more prepayments. That said, if spreads are increasing—25 to 50 basis points or more—that generally leads to a somewhat muted refinancing and transaction period. I would argue we are probably expecting 2026 to look like a step up from 2025.

Kenneth Lee, Analyst, RBC Capital Markets

Gotcha. Very helpful. One more follow-up if I may. Given the outlook and macro conditions, do you think you would lean for portfolio leverage to be closer to the lower end or the higher end of your target range over the near term?

Douglas L. Goodwillie, Co-CEO

We are comfortable where we are between 1x to 1.1x. We are monitoring the dislocation and would like to have a decent amount of liquidity going into the front end of a potential dislocation. We do not want to be at the upper end like 1.2x to 1.25x where potential borrowing-base and other issues could arise if a prolonged dislocation occurs. We are comfortable deploying capital but would not expect to get aggressive toward higher leverage levels.

Operator, Operator

Our next question comes from Derek Hewitt from Bank of America. Please go ahead. Your line is open.

Derek Hewitt, Analyst, Bank of America

Good morning. It was nice to see the 20 basis point improvement in spreads on a quarter-over-quarter basis. How are spreads trending today on deals that you are looking at?

Douglas L. Goodwillie, Co-CEO

I will start and Kenneth and Frank will weigh in. We have seen a slight uptick in the core mid market, roughly 20 basis points in our opportunity set. In the upper mid market, there has been slightly more widening as the start of a dislocation has occurred there. With capital coming out of the market and fundraising becoming harder amid negative press around private credit, these factors bode well for spreads increasing in both the upper mid market and the core mid market over the near term.

Kenneth Leonard, Co-CEO

The pipeline we hear from investment bankers seems to be increasing, which is always the front end of our investment process. As more volume comes into the market, there should be opportunity to widen spreads, and we remain hopeful that continues as that is a good leading indicator.

Derek Hewitt, Analyst, Bank of America

Thank you. In the prepared remarks you mentioned the SG credit add-on was a delayed draw due to growth in that investment. How should we think about increasing your exposure on the equity side given the strong growth overall in that vehicle?

Frank Karl, President

They are continuing to grow the book. One way to support the valuation of our equity investment over the long term is via incremental debt investment. We have an option to purchase more equity in that vehicle, and that is something we will continually discuss internally as the platform grows. We are not planning to make a substantially increased equity commitment next quarter.

Derek Hewitt, Analyst, Bank of America

Okay. Thank you. And then the last one for me is, in your prepared remarks you mentioned you were continuing to monetize the BSL portfolio. Is that expected to be done in the quarter, or are there a couple of investments that may have experienced some dislocation over the past three to five months that might take longer to monetize?

Douglas L. Goodwillie, Co-CEO

Frank is a little closer on the exact timing, but we are down to four credits. Three are trading around cost basis and one has been slightly marked down. We do expect to monetize largely during this quarter but some may slip into Q3.

Frank Karl, President

There are four names, about $30 million at cost and about $27 million at fair market value. It will depend on how we want to manage leverage and what opportunities look like. Three of those are trading right around our cost basis. The one you mentioned, Tempo, is a light solutions business that has been impacted by AI-related noise. We do not think that characterization is fair for that business. It is a very small position that we are looking to unwind sooner rather than later.

Derek Hewitt, Analyst, Bank of America

Thank you. Thanks.

Operator, Operator

We have no further questions. I would like to turn the call back over to Douglas L. Goodwillie for closing remarks.

Douglas L. Goodwillie, Co-CEO

Well, with that, I would like to thank everyone for joining us for this KBDC earnings presentation and for your continued interest in KBDC and our platform. We look forward to speaking again in August at our next earnings call.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.