Kayne Anderson BDC, Inc 10-Q, filed Aug 16, 2021
Kayne Anderson BDC, Inc. (KBDC)
About this 10-Q
Kayne Anderson BDC, Inc filed this 10-Q on August 16, 2021, covering the quarter ended June 30, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-56201
Kayne Anderson BDC, Inc.
| Delaware | 83-0531326 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 811 Main Street, 14th Floor, Houston, TX | 77002 | |
| (Address of principal executive offices) | (Zip Code) |
(713) 493-2020
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☐ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 13, 2021, the registrant had 12,101,184 shares of common stock, $0.001 par value per share, outstanding. As of August 13, 2021, there was no public market for the registrant’s shares.
Table of Contents
i
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve substantial known and unknown risks, uncertainties and other factors. Undue reliance should not be placed on such statements. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the company, current and prospective portfolio investments, the industry, beliefs and assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond control of the Company and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including:
| ● | future operating results; |
| ● | business prospects and the prospects of portfolio companies; |
| ● |
changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including changes from the impact of the novel coronavirus (SARS-CoV-2) and related respiratory disease pandemic (“COVID-19 pandemic”); |
| ● | the ability of KA Credit Advisors, LLC (our “Advisor”) to locate suitable investments and to monitor and administer investments; |
| ● | the ability of the Advisor and its affiliates to attract and retain highly talented professionals; |
| ● | risk associated with possible disruptions in operations or the economy generally; |
| ● | the timing of cash flows, if any, from the operations of the companies in which the Company invests; |
| ● | the ability of the companies in which the Company invests to achieve their objectives, including as a result of the current COVID-19 pandemic; |
| ● | the ability of the Company to continue to effectively manage the business due to the disruptions caused by the current COVID-19 pandemic; |
| ● | the dependence of the future success on the general economy and its effect on the industries in which the Company invests; |
| ● | the ability to maintain qualification as a business development company (“BDC”) and as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”); |
| ● | the use of borrowed money to finance a portion of the Company’s investments; |
| ● | the adequacy, availability and pricing of financing sources and working capital for the Company; |
| ● | actual or potential conflicts of interest with the Advisor and its affiliates; |
| ● | contractual arrangements and relationships with third parties; |
| ● | the current economic downturn, interest rate volatility, loss of key personnel, and the illiquid nature of investments of the Company; and |
| ● | the risks, uncertainties and other factors the Company identifies under “Item 1A. Risk Factors” and elsewhere in this quarterly report on Form 10-Q. |
Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, any of the assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Item 1A. Risk Factors” and elsewhere in this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q. Moreover, the Company assumes no duty and does not undertake to update the forward-looking statements.
ii
Item 1. Consolidated Financial Statements.
Consolidated Statements of Assets and Liabilities
(amounts in 000’s, except share and per share amounts)
| June 30, 2021 (Unaudited) | December 31, 2020 | |||||||
| Assets: | ||||||||
| Investments, at fair value: | ||||||||
| Long-term investments (amortized cost of $215,680) | $ | 219,701 | $ | - | ||||
| Short-term investments (amortized cost of $4,622) | 4,622 | - | ||||||
| Cash and cash equivalents | 3,596 | 10 | ||||||
| Deferred offering costs | 180 | 231 | ||||||
| Receivable for sales of investments | 2,208 | - | ||||||
| Interest receivable | 902 | - | ||||||
| Prepaid expenses and other assets | 109 | 177 | ||||||
| Total Assets | $ | 231,318 | $ | 418 | ||||
| Liabilities: | ||||||||
| Loan and Security Agreement (Note 6) | $ | 50,000 | $ | - | ||||
| Unamortized Loan and Security Agreement issuance costs | (306 | ) | - | |||||
| Subscription Credit Facility (Note 6) | 31,000 | - | ||||||
| Unamortized Subscription Credit Facility issuance costs | (163 | ) | - | |||||
| Accrued organizational and offering costs | 7 | 141 | ||||||
| Payable for investments purchased | 4,109 | - | ||||||
| Payables to affiliates (Note 3) | - | 1,075 | ||||||
| Management fee payable | 422 | - | ||||||
| Accrued expenses and other liabilities | 761 | - | ||||||
| Accrued other general and administrative expenses | 462 | - | ||||||
| Total Liabilities | $ | 86,292 | $ | 1,216 | ||||
| Commitments and contingencies (Note 8) | ||||||||
| Net Assets: | ||||||||
| Common Shares, $0.001 par value; 100,000,000 shares authorized; 9,201,129 as of June 30, 2021 issued and outstanding | $ | 9 | $ | - | ||||
| Additional paid-in capital | 140,022 | - | ||||||
| Total distributable earnings (deficit) | 4,995 | - | ||||||
| Total member’s capital (deficit) | - | (798 | ) | |||||
| Total Net Assets | $ | 145,026 | $ | (798 | ) | |||
| Total Liabilities and Net Assets | $ | 231,318 | $ | 418 | ||||
| Net Asset Value Per Common Share | $ | 15.76 | n/a | |||||
See accompanying notes to financial statements.
1
Consolidated Statements of Operations
(amounts in 000’s, except share and per share amounts)
(Unaudited)
| For the three months ended | For the six months ended | |||||||
| June 30, 2021 | June 30, 2021 | |||||||
| Income: | ||||||||
| Investment income from investments: | ||||||||
| Interest income | $ | 3,818 | $ | 5,555 | ||||
| Total Investment Income | 3,818 | 5,555 | ||||||
| Expenses: | ||||||||
| Interest expense | 928 | 1,389 | ||||||
| Management fees | 422 | 598 | ||||||
| Professional fees | 185 | 293 | ||||||
| Directors fees | 80 | 145 | ||||||
| Offering costs | 67 | 106 | ||||||
| Initial organization costs | - | 175 | ||||||
| Other general and administrative expenses | 166 | 264 | ||||||
| Total Expenses | 1,848 | 2,970 | ||||||
| Net Investment Income (Loss) | 1,970 | 2,585 | ||||||
| Realized and unrealized gains (losses) on investments | ||||||||
| Net realized gains (losses): | ||||||||
| Investments | 15 | 47 | ||||||
| Total net realized gains (losses) | 15 | 47 | ||||||
| Net change in unrealized gains (losses): | ||||||||
| Investments | 1,223 | 4,021 | ||||||
| Total net change in unrealized gains (losses) | 1,223 | 4,021 | ||||||
| Total realized and unrealized gains (losses) | 1,238 | 4,068 | ||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 3,208 | $ | 6,653 | ||||
| Per Common Share Data: | ||||||||
| Basic and diluted net investment income per common share | $ | 0.24 | $ | 0.35 | ||||
| Basic and diluted net increase in net assets resulting from operations | $ | 0.38 | $ | 0.91 | ||||
| Weighted Average Common Shares Outstanding - Basic and Diluted | 8,346,491 | 7,337,219 | ||||||
See accompanying notes to financial statements.
2
Consolidated Statements of Changes in Net Assets
(amounts in 000’s)
(Unaudited)
| For the three months ended |
For the six months ended |
|||||||
| June 30, 2021 |
June 30, 2021 |
|||||||
| Increase (Decrease) in Net Assets Resulting from Operations: | ||||||||
| Net investment income (loss) | $ | 1,970 | $ | 2,585 |
||||
| Net realized gains (losses) on investments | 15 | 47 | ||||||
| Net change in unrealized gains (losses) on investments | 1,223 |
4,021 |
||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | 3,208 | 6,653 | ||||||
| Decrease in Net Assets Resulting from Stockholder Distributions | ||||||||
| Dividends and distributions to stockholders | (850 | ) | (850 | ) | ||||
| Net Decrease in Net Assets Resulting from Stockholder Distributions | (850 | ) | (850 | ) | ||||
| Increase in Net Assets Resulting from Capital Share Transactions | ||||||||
| Issuance of common shares | 55,000 | 140,000 | ||||||
| Reinvestment of distributions | 21 | 21 | ||||||
| Net Increase in Net Assets Resulting from Capital Share Transactions | 55,021 | 140,021 | ||||||
| Total Increase (Decrease) in Net Assets | 57,379 | 145,824 | ||||||
| Net Assets, Beginning of Period | 87,647 | (798 | ) | |||||
| Net Assets, End of Period | $ | 145,026 | $ | 145,026 | ||||
See accompanying notes to financial statements.
3
Consolidated Statements of Cash Flows
(amounts in 000’s)
(Unaudited)
| For the six months ended | ||||
| June 30, 2021 | ||||
| Cash Flows from Operating Activities: | ||||
| Net increase (decrease) in net assets resulting from operations | $ | 6,653 | ||
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: | ||||
| Net realized (gains)/losses on investments | (47 | ) | ||
| Net change in unrealized (gains)/losses on investments | (4,021 | ) | ||
| Net accretion of discount on investments | (467 | ) | ||
| Purchases of short-term investments | (4,622 | ) | ||
| Purchases of portfolio investments | (225,182 | ) | ||
| Proceeds from sale of portfolio investments | 10,095 | |||
| Paid-in-kind interest from portfolio investments | (79 | ) | ||
| Amortization of deferred financing cost | 86 | |||
| Increase/(decrease) in operating assets and liabilities: | ||||
| (Increase)/decrease in receivable for sales of investments | (2,208 | ) | ||
| (Increase)/decrease in interest and dividends receivable | (902 | ) | ||
| (Increase)/decrease in deferred offering costs | 51 | |||
| (Increase)/decrease in prepaid expenses and other assets | 68 | |||
| Increase/(decrease) in payable for investments purchased | 4,109 | |||
| Increase/(decrease) in management fees payable | 422 | |||
| Increase/(decrease) in payable to affiliate | (1,075 | ) | ||
| Increase/(decrease) in accrued organizational and offering costs, net | (134 | ) | ||
| Increase/(decrease) in accrued expense and other liabilities | 761 | |||
| Increase/(decrease) in accrued other general and administrative expenses | 462 | |||
| Net cash used in operating activities | (216,030 | ) | ||
| Cash Flows from Financing Activities: | ||||
| Borrowings on Loan and Security Agreement, net | 50,000 | |||
| Borrowings on Subscription Credit Facility, net | 31,000 | |||
| Payments of debt issuance costs | (555 | ) | ||
| Distributions paid in cash | (829 | ) | ||
| Proceeds from issuance of common shares | 140,000 | |||
| Net cash provided by financing activities | 219,616 | |||
| Net increase in cash and cash equivalents | 3,586 | |||
| Cash and cash equivalents, beginning of period | 10 | |||
| Cash and cash equivalents, end of period | $ | 3,596 | ||
| Supplemental and Non-Cash Information: | ||||
| Interest paid during the period | $ | 429 | ||
| Non-cash financing activities not included herein consisted of reinvestment of dividends | $ | 21 | ||
See accompanying notes to financial statements.
4
Consolidated Schedule of Investments
As of June 30, 2021
(amounts in 000’s)
(Unaudited)
| Maturity | Principal / | Amortized | Fair | Percentage | ||||||||||||||||||
| Portfolio Company(1) | Investment | Interest Rate | Date | Par | Cost(2)(3) | Value | of Net Assets | |||||||||||||||
| Debt Investments | ||||||||||||||||||||||
| Private Credit Investments(4) | ||||||||||||||||||||||
| Automobiles & components | ||||||||||||||||||||||
| Speedstar Holding LLC | First Lien Senior Secured Loan | 8.00% (L + 7.00%) | 1/22/2027 | $ | 5,031 | $ | 4,924 | $ | 5,081 | 3.5 | % | |||||||||||
| First Lien Senior Secured Delayed Draw Loan | 8.00% (L + 7.00% | 1/22/2027 | - | - | - | 0.0 | % | |||||||||||||||
| 5,031 | 4,924 | 5,081 | 3.5 | % | ||||||||||||||||||
| Capital goods | ||||||||||||||||||||||
| Broder Bros., Co. | First Lien Senior Secured Loan | 9.75% (L + 8.50%) | 12/2/2022 | 5,430 | 5,020 | 5,430 | 3.7 | % | ||||||||||||||
| Eastern Wholesale Fence | First Lien Senior Secured Loan | 7.50% (L + 6.50%) | 10/30/2025 | 3,325 | 3,261 | 3,325 | 2.3 | % | ||||||||||||||
| Fastener Distribution Holdings, LLC | First Lien Senior Secured Delayed Draw Loan | 8.00% (L + 7.00%) | 4/1/2022 | 2,215 | 2,200 | 2,215 | 1.5 | % | ||||||||||||||
| First Lien Senior Secured Loan | 8.00% (L + 7.00%) | 4/1/2022 | 1,950 | 1,937 | 1,950 | 1.3 | % | |||||||||||||||
| Friedrich Air Conditioning Co., LTD | First Lien Senior Secured Loan | 7.00% (L + 6.00%) | 2/7/2023 | 1,387 | 1,377 | 1,387 | 1.0 | % | ||||||||||||||
| GEON Performance Solutions | First Lien Senior Secured Loan | 7.88% (L + 6.25%) | 10/25/2024 | 4,123 | 4,085 | 4,123 | 2.8 | % | ||||||||||||||
| First Lien Senior Secured Revolving Loan | 7.88% (L + 6.25%) | 10/25/2024 | - | - | - | 0.0 | % | |||||||||||||||
| Refrigeration Sales Corp. | First Lien Senior Secured Loan | 7.50% (L + 6.50%) | 6/22/2026 | 6,963 | 6,841 | 6,963 | 4.8 | % | ||||||||||||||
| 25,393 | 24,721 | 25,393 | 17.4 | % | ||||||||||||||||||
| Commercial & professional services | ||||||||||||||||||||||
| Advanced Environmental Monitoring | First Lien Senior Secured Loan | 7.50% (L + 6.50%) | 1/29/2026 | 7,372 | 7,137 | 7,372 | 5.1 | % | ||||||||||||||
| Gusmer Enterprises, Inc. | First Lien Senior Secured Delayed Draw Loan | 6.50% (L + 5.50%) | 5/7/2027 | 1,368 | 1,293 | 1,368 | 0.9 | % | ||||||||||||||
| First Lien Senior Secured Revolving Loan | 6.50% (L + 5.50%) | 5/7/2027 | 840 | 789 | 840 | 0.6 | % | |||||||||||||||
| First Lien Senior Secured Loan | 6.50% (L + 5.50%) | 5/7/2027 | 3,518 | 3,449 | 3,518 | 2.4 | % | |||||||||||||||
| PMFC Holding, LLC | First Lien Senior Secured Delayed Draw Loan | 8.50% (L + 7.50%) | 7/31/2023 | 2,862 | 2,838 | 2,862 | 2.0 | % | ||||||||||||||
| First Lien Senior Secured Loan | 8.50% (L + 7.50%) | 7/31/2023 | 5,704 | 5,658 | 5,704 | 3.9 | % | |||||||||||||||
| First Lien Senior Secured Revolving Loan | 8.50% (L + 7.50%) | 7/31/2023 | - | - | - | 0.0 | % | |||||||||||||||
| 21,664 | 21,164 | 21,664 | 14.9 | % | ||||||||||||||||||
| Consumer durables and apparel | ||||||||||||||||||||||
| BEL USA, LLC | First Lien Senior Secured Loan | 9.50% (L + 8.00%) | 11/2/2023 | 149 | 148 | 147 | 0.1 | % | ||||||||||||||
| First Lien Senior Secured Loan | 9.50% (L + 8.00%) | 11/2/2023 | 8,951 | 8,761 | 8,817 | 6.1 | % | |||||||||||||||
| MacNeill Pride Group | First Lien Senior Secured Delayed Draw Loan | 7.50% (L + 6.50%) | 4/22/2026 | - |
- | - | 0.0 | % | ||||||||||||||
| First Lien Senior Secured Revolving Loan | 7.50% (L + 6.50%) | 4/22/2026 | 952 | 929 | 952 | 0.7 | % | |||||||||||||||
| First Lien Senior Secured Loan | 7.50% (L + 6.50%) | 4/22/2026 | 8,750 | 8,608 | 8,750 | 6.0 | % | |||||||||||||||
| New Era Cap Company, Inc. | First Lien Senior Secured Loan | 7.50% (L + 6.50%) | 9/10/2023 | 12,789 | 12,680 | 12,917 | 8.9 | % | ||||||||||||||
| YS Garments, LLC | First Lien Senior Secured Loan | 7.00% (L + 6.00%) | 8/9/2024 | 8,051 | 7,866 | 8,051 | 5.6 | % | ||||||||||||||
| 39,642 | 38,992 | 39,634 | 27.4 | % | ||||||||||||||||||
5
Kayne Anderson BDC, Inc.
Consolidated Schedule of Investments
As of June 30, 2021
(amounts in 000’s)
(Unaudited)
| Maturity | Principal / | Amortized | Fair | Percentage | ||||||||||||||||||
| Portfolio Company(1) | Investment | Interest Rate | Date | Par | Cost(2)(3) | Value | of Net Assets | |||||||||||||||
| Diversified financials | ||||||||||||||||||||||
| Atria Wealth Solutions, Inc. | First Lien Senior Secured Loan | 7.00% (L + 6.00%) | 11/30/2022 | 5,218 | 5,163 | 5,218 | 3.6 | % | ||||||||||||||
| 5,218 | 5,163 | 5,218 | 3.6 | % | ||||||||||||||||||
| Food, beverage & tobacco | ||||||||||||||||||||||
| Pretzels, LLC | First Lien Senior Secured Loan | 7.00% (L + 6.00%) | 10/22/2024 | 3,238 | 3,209 | 3,238 | 2.2 | % | ||||||||||||||
| First Lien Senior Secured Delayed Draw Loan | 7.00% (L + 6.00%) | 10/22/2024 | 3,361 | 3,213 | 3,361 | 2.3 | % | |||||||||||||||
| WhiteBridge Pet Brands, LLC | First Lien Senior Secured Loan | 6.25% (L + 5.25%) | 1/24/2025 | 7,905 | 7,724 | 7,905 | 5.5 | % | ||||||||||||||
| 14,504 | 14,146 | 14,504 | 10.0 | % | ||||||||||||||||||
| Healthcare equipment & services | ||||||||||||||||||||||
| OMH-HealthEdge Holdings, LLC | First Lien Senior Secured Loan | 6.25% (L + 5.25%) | 10/24/2025 | 12,437 | 12,175 | 12,437 | 8.6 | % | ||||||||||||||
| Smile Doctors, LLC | First Lien Senior Secured Revolving Loan | 7.00% (L + 6.00%) | 10/6/2022 | - | - | - | 0.0 | % | ||||||||||||||
| First Lien Senior Secured Loan | 7.00% (L + 6.00%) | 10/6/2022 | 2,166 | 2,150 | 2,166 | 1.5 | % | |||||||||||||||
| 14,603 | 14,325 | 14,603 | 10.1 | % | ||||||||||||||||||
| Household & personal products | ||||||||||||||||||||||
| DRS Holdings III, Inc. (Dr. Scholl’s) | First Lien Senior Secured Revolving Loan | 7.25% (L + 6.25%) | 11/1/2025 | - | - | - | 0.0 | % | ||||||||||||||
| First Lien Senior Secured Loan | 7.25% (L + 6.25%) | 11/1/2025 | 12,190 | 12,069 | 12,190 | 8.4 | % | |||||||||||||||
| PH Beauty Holdings III, Inc. | First Lien Senior Secured Loan | 5.14% (L + 5.00%) | 9/28/2025 | 9,691 | 9,292 | 9,352 | 6.5 | % | ||||||||||||||
| 21,881 | 21,361 | 21,542 | 14.9 | % | ||||||||||||||||||
| Materials | ||||||||||||||||||||||
| Cyalume Technologies Holdings, Inc. | First Lien Senior Secured Loan | 7.50% (L + 6.00%) | 8/30/2024 | 1,893 | 1,876 | 1,893 | 1.3 | % | ||||||||||||||
| Drew Foam Companies, Inc. | First Lien Senior Secured Loan | 7.50% (L + 6.50%) | 11/5/2025 | 7,488 | 7,381 | 7,488 | 5.2 | % | ||||||||||||||
| Fralock Buyer LLC | First Lien Senior Secured Loan | 6.50% (L + 5.50%) | 4/17/2024 | 9,251 | 9,060 | 9,251 | 6.4 | % | ||||||||||||||
| First Lien Senior Secured Revolving Loan | 6.50% (L + 5.50%) | 4/17/2024 | - | - | - | 0.0 | % | |||||||||||||||
| First Lien Senior Secured Loan | 6.50% (L + 5.50%) | 4/17/2024 | 2,465 | 2,417 | 2,465 | 1.7 | % | |||||||||||||||
| Meridian Adhesives Group, Inc. | First Lien Senior Secured Loan | 6.50% (L + 5.50%) | 9/25/2023 | 5,712 | 5,663 | 5,712 | 3.9 | % | ||||||||||||||
| First Lien Senior Secured Loan | 6.50% (L + 5.50%) | 3/31/2027 | 4,287 | 4,198 | 4,287 | 3.0 | % | |||||||||||||||
| First Lien Senior Secured Loan | 6.50% (L + 5.50%) | 9/25/2023 | 2,469 | 2,427 | 2,469 | 1.7 | % | |||||||||||||||
| 33,565 | 33,022 | 33,565 | 23.2 | % | ||||||||||||||||||
| Pharmaceuticals, biotech & life sciences | ||||||||||||||||||||||
| Foundation Consumer Brands | First Lien Senior Secured Loan | 7.38% (L + 6.38%) | 2/12/2027 | 9,200 | 9,111 | 9,200 | 6.3 | % | ||||||||||||||
| First Lien Senior Secured Revolving Loan | 7.38% (L + 6.38%) | 2/12/2027 | - | - | - | 0.0 | % | |||||||||||||||
| 9,200 | 9,111 | 9,200 | 6.3 | % | ||||||||||||||||||
| Retailing | ||||||||||||||||||||||
| Sundance Holdings Group, LLC | First Lien Senior Secured Loan | 7.00% (L + 6.00%) | 5/1/2024 | 9,522 | 9,098 | 9,426 | 6.5 | % | ||||||||||||||
| 9,522 | 9,098 | 9,426 | 6.5 | % | ||||||||||||||||||
| Telecommunication services | ||||||||||||||||||||||
| Network Connex (f/k/a NTI Connect, LLC) | First Lien Senior Secured Loan | 6.00% (L + 5.00%) | 4/5/2026 | 5,329 | 5,227 | 5,329 | 3.7 | % | ||||||||||||||
| 5,329 | 5,227 | 5,329 | 3.7 | % | ||||||||||||||||||
| Total Private Credit Investments | 205,552 | 201,254 | 205,159 | 141.5 | % | |||||||||||||||||
6
Kayne Anderson BDC, Inc.
Consolidated Schedule of Investments
As of June 30, 2021
(amounts in 000’s)
(Unaudited)
| Maturity | Principal / | Amortized | Fair | Percentage | ||||||||||||||||||
| Portfolio Company(1) | Investment | Interest Rate | Date | Par | Cost(2)(3) | Value | of Net Assets | |||||||||||||||
| Liquid Credit Investments(5) | ||||||||||||||||||||||
| Automobiles & components | ||||||||||||||||||||||
| Clarios Global LP (4) | First Lien Senior Secured Loan | 3.35% (L + 3.25%) | 4/30/2026 | 407 | 407 | 403 | 0.3 | % | ||||||||||||||
| 407 | 407 | 403 | 0.3 | % | ||||||||||||||||||
| Capital goods | ||||||||||||||||||||||
| Aegion Corporation (4) | First Lien Senior Secured Loan | 5.50% (L + 4.75%) | 5/17/2028 | 736 | 736 | 742 | 0.5 | % | ||||||||||||||
| Columbus McKinnon Corporation (4) | First Lien Senior Secured Loan | 3.25% (L + 2.75%) | 5/14/2028 | 138 | 138 | 138 | 0.1 | % | ||||||||||||||
| Kodiak Building Partners Foundation (4) | First Lien Senior Secured Loan | 4.00% (L + 3.25%) | 3/12/2028 | 672 | 669 | 671 | 0.5 | % | ||||||||||||||
| LSF11 Skyscraper HoldCo S.a.r.l. (4)(6)(7) | First Lien Senior Secured Loan | 4.25% (L + 3.50%) | 9/29/2027 | 191 | 190 | 192 | 0.1 | % | ||||||||||||||
| TAMKO Building Products LLC (4) | First Lien Senior Secured Loan | 3.10% (L + 3.00%) | 5/29/2026 | 442 | 439 | 441 | 0.3 | % | ||||||||||||||
| Tiger Acquisition, LLC (d/b/a Sabre Industries, Inc.) (4) | First Lien Senior Secured Loan | 3.75% (L + 3.25%) | 6/1/2028 | 345 | 341 | 344 | 0.2 | % | ||||||||||||||
| 2,524 | 2,513 | 2,528 | 1.7 | % | ||||||||||||||||||
| Chemicals | ||||||||||||||||||||||
| Tronox Holdings plc | Senior Unsecured Bond | 4.63 | % | 3/15/2029 | 100 | 100 | 101 | 0.1 | % | |||||||||||||
| 100 | 100 | 101 | 0.1 | % | ||||||||||||||||||
| Commercial & professional services | ||||||||||||||||||||||
| USIC Holdings, Inc. (4) | First Lien Senior Secured Loan | 4.25% (L + 3.50%) | 5/14/2028 | 193 | 192 | 193 | 0.1 | % | ||||||||||||||
| 193 | 192 | 193 | 0.1 | % | ||||||||||||||||||
| Consumer durables & apparel | ||||||||||||||||||||||
| Conair Holdings, LLC (4)(6) | First Lien Senior Secured Loan | 4.25% (L + 3.75%) | 5/17/2028 | 517 | 514 | 518 | 0.3 | % | ||||||||||||||
| Hayward Industries, Inc. (4)(6) | First Lien Senior Secured Loan | 3.25% (L + 2.75%) | 5/28/2028 | 258 | 257 | 258 | 0.2 | % | ||||||||||||||
| Hunter Fan Company (4) | First Lien Senior Secured Loan | 5.75% (L + 5.00%) | 5/8/2028 | 764 | 756 | 764 | 0.5 | % | ||||||||||||||
| 1,539 | 1,527 | 1,540 | 1.0 | % | ||||||||||||||||||
| Consumer services | ||||||||||||||||||||||
| Hilton Grand Vacations Borrower LLC (4)(6) | Senior Unsecured Bond | 5.00 | % | 6/1/2029 | 91 | 91 | 93 | 0.1 | % | |||||||||||||
| First Lien Senior Secured Loan | 3.50% (L + 3.00%) | 7/31/2028 | 417 | 415 | 417 | 0.3 | % | |||||||||||||||
| Nielsen Holdings plc | Senior Unsecured Bond | 4.75 | % | 7/15/2031 | 276 | 276 | 277 | 0.2 | % | |||||||||||||
| Park Intermediate Holdings, LLC | First Lien Senior Secured Bond | 4.88 | % | 5/15/2029 | 275 | 275 | 285 | 0.2 | % | |||||||||||||
| 1,059 | 1,057 | 1,072 | 0.8 | % | ||||||||||||||||||
| Energy | ||||||||||||||||||||||
| Blackstone CQP Holdco LP (4)(6) | First Lien Senior Secured Loan | 4.25% (L + 3.50%) | 6/5/2028 | 1,300 | 1,293 | 1,294 | 0.9 | % | ||||||||||||||
| DT Midstream, Inc. | Senior Unsecured Bond | 4.38 | % | 6/15/2031 | 248 | 248 | 253 | 0.2 | % | |||||||||||||
| 1,548 | 1,541 | 1,547 | 1.1 | % | ||||||||||||||||||
| Healthcare equipment & services | ||||||||||||||||||||||
| Boncura Health Solutions (fka, Midwest Physician Administrative Services) (4) | First Lien Senior Secured Loan | 4.00% (L + 3.25%) | 3/13/2028 | 231 | 229 | 230 | 0.2 | % | ||||||||||||||
| Pacific Dental Services, LLC (4) | First Lien Senior Secured Loan | 4.25% (L + 3.50%) | 5/5/2028 | 228 | 227 | 229 | 0.2 | % | ||||||||||||||
| Pathway Vet Alliance LLC (4) | First Lien Senior Secured Loan | 3.85% (L + 3.75%) | 3/31/2027 | 227 | 225 | 227 | 0.2 | % | ||||||||||||||
| 686 | 681 | 686 | 0.6 | % | ||||||||||||||||||
7
Kayne Anderson BDC, Inc.
Consolidated Schedule of Investments
As of June 30, 2021
(amounts in 000’s)
(Unaudited)
| Maturity | Principal / | Amortized | Fair | Percentage | ||||||||||||||||||
| Portfolio Company(1) | Investment | Interest Rate | Date | Par | Cost(2)(3) | Value | of Net Assets | |||||||||||||||
| Materials | ||||||||||||||||||||||
| PQ Performance Chemicals (4)(6) | First Lien Senior Secured Loan | 4.25% (L + 3.50%) | 4/28/2028 | 362 | 360 | 362 | 0.2 | % | ||||||||||||||
| 362 | 360 | 362 | 0.2 | % | ||||||||||||||||||
| Media & entertainment | ||||||||||||||||||||||
| Univision Communications Inc. | First Lien Senior Secured Bond | 4.50 | % | 5/1/2029 | 225 | 225 | 227 | 0.2 | % | |||||||||||||
| 225 | 225 | 227 | 0.2 | % | ||||||||||||||||||
| Software & services | ||||||||||||||||||||||
| Atlas CC Acquisition Corp. (4)(6) | First Lien Senior Secured Loan | 5.00% (L + 4.25%) | 5/25/2028 | 929 | 919 | 931 | 0.6 | % | ||||||||||||||
| First Lien Senior Secured Loan | 5.00% (L + 4.25%) | 5/25/2028 | 189 | 187 | 189 | 0.1 | % | |||||||||||||||
| Imola Merger Corp. | First Lien Senior Secured Bond | 4.75 | % | 5/15/2029 | 188 | 188 | 193 | 0.1 | % | |||||||||||||
| Ingram Micro Inc. (4)(6) | First Lien Senior Secured Loan | 4.00% (L + 3.50%) | 7/2/2028 | 180 | 179 | 181 | 0.1 | % | ||||||||||||||
| Orion Advisor Solutions, Inc. (4) | First Lien Senior Secured Loan | 4.50% (L + 3.75%) | 9/24/2027 | 137 | 137 | 137 | 0.1 | % | ||||||||||||||
| RealPage, Inc. (4) | First Lien Senior Secured Loan | 3.75% (L + 3.25%) | 4/22/2028 | 962 | 960 | 959 | 0.7 | % | ||||||||||||||
| 2,585 | 2,570 | 2,590 | 1.7 | % | ||||||||||||||||||
| Technology hardware & equipment | ||||||||||||||||||||||
| Vocus Group Limited (f/k/a Vocus Communications) (4)(6)(7) | First Lien Senior Secured Loan | 4.00% (L + 3.50%) | 7/26/2028 | 108 | 107 | 108 | 0.1 | % | ||||||||||||||
| 108 | 107 | 108 | 0.1 | % | ||||||||||||||||||
| Telecommunication services | ||||||||||||||||||||||
| Cable One, Inc. (4) | First Lien Senior Secured Loan | 2.11% (L + 2.00%) | 5/3/2028 | 816 | 812 | 812 | 0.5 | % | ||||||||||||||
| Lumen Technologies, Inc. | Senior Unsecured Bond | 5.38 | % | 6/15/2029 | 137 | 137 | 139 | 0.1 | % | |||||||||||||
| 953 | 949 | 951 | 0.6 | % | ||||||||||||||||||
| Transportation | ||||||||||||||||||||||
| American Airlines, Inc. | First Lien Senior Secured Bond | 5.50 | % | 4/20/2026 | 298 | 298 | 316 | 0.2 | % | |||||||||||||
| First Lien Senior Secured Bond | 5.75 | % | 4/20/2029 | 99 | 99 | 107 | 0.1 | % | ||||||||||||||
| Brown Group Holding, LLC (Signature Aviation US Holdings, Inc.) (4) | First Lien Senior Secured Loan | 3.25% (L + 2.75%) | 6/7/2028 | 1,334 | 1,324 | 1,327 | 0.9 | % | ||||||||||||||
| United Airlines Holdings, Inc. (4) | First Lien Senior Secured Loan | 4.50% (L + 3.75%) | 4/21/2028 | 479 | 476 | 484 | 0.3 | % | ||||||||||||||
| 2,210 | 2,197 | 2,234 | 1.5 | % | ||||||||||||||||||
| Total Liquid Credit Investments | 14,499 | 14,426 | 14,542 | 10.0 | % | |||||||||||||||||
| Total Debt Investments | 220,051 | 215,680 | 219,701 | 151.5 | % | |||||||||||||||||
8
Kayne Anderson BDC, Inc.
Consolidated Schedule of Investments
As of June 30, 2021
(amounts in 000’s)
(Unaudited)
| Number of | Fair | Percentage | ||||||||||||||
| Shares | Cost | Value | of Net Assets | |||||||||||||
| Short-Term Investments | ||||||||||||||||
| First American Treasury Obligations Fund - Institutional Class Z, 0.01% (8) | 937 | 937 | 937 | 0.7 | % | |||||||||||
| First American U.S. Treasury Money Market Fund - Institutional Class Z, 0.01% (8) | 3,685 | 3,685 | 3,685 | 2.5 | % | |||||||||||
| Total Short-Term Investments | 4,622 | 4,622 | 4,622 | 3.2 | % | |||||||||||
| Total Investments | $ | 220,302 | $ | 224,323 | 154.7 | % | ||||||||||
| Liabilities in Excess of Other Assets | (79,297 | ) | (54.7 | )% | ||||||||||||
| Net Assets | $ | 145,026 | 100.0 | % | ||||||||||||
| (1) | As of June 30, 2021, all investments are non-controlled, non-affiliated investments. Non-controlled, non-affiliated investments are defined as investments in which the Company owns less than 5% of the portfolio company’s outstanding voting securities and does not have the power to exercise control over the management or policies of such portfolio company. |
| (2) | The amortized cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method. |
| (3) | As of June 30, 2021, the tax cost of the Company’s investments approximates their amortized cost. |
| (4) | Loan contains a variable rate structure, that may be subject to an interest rate floor. Variable rate loans bear interest at a rate that may be determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) (which can include one-, two-, three- or six-month LIBOR) or an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate). |
| (5) | Liquid credit investments are traded corporate bonds, loans or loan participations that are valued using the bid price provided by an independent pricing service, by an independent broker, the agent bank, syndicate bank or principal market maker. See Note 5 – Fair Value. |
| (6) | Investments or a portion of such investments have yet to settle as of June 30, 2021. |
| (7) | Non-qualifying investment as defined by Section 55(a) of the Investment Company Act of 1940. The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. As of June 30, 2021, 0.1% of the Company’s total assets were in non-qualifying investments. |
| (8) | The indicated rate is the yield as of June 30, 2021. |
See accompanying notes to financial statements.
9
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Note 1. Organization
Organization
Kayne Anderson BDC, Inc. (the “Company”) is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, the Company intends to qualify as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
The Company was formed as a Delaware limited liability company in May 2018. Prior to February 5, 2021, the Company was devoting substantially all of its efforts to establishing the business and conducted organizational and marketing efforts. The Company began incurring costs related to these activities in the third quarter of 2020. The Company was formed to make investments in middle-market companies and commenced operations on February 5, 2021. On this same date, prior to the Company’s election to be regulated as a BDC under the 1940 Act, the Company completed a conversion from a Delaware limited liability company into a Delaware corporation and Kayne Anderson BDC, Inc. succeeded to the business of Kayne Anderson BDC, LLC. The Company has entered into subscription agreements with investors for an aggregate capital commitment of $285,355 to purchase shares of the Company’s common stock. See Note 11 – Subsequent Events.
KA Credit Advisors, LLC (the “Advisor”) is an indirect subsidiary of Kayne Anderson Capital Advisors, L.P. (“KACALP” or “Kayne Anderson”). The Advisor is registered with the Securities and Exchange Commission (“SEC”) as an investment advisor under the Investment Advisory Act of 1940. Subject to the overall supervision of the Company’s board of directors (the “Board”), the Advisor is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring investments and monitoring its investments and portfolio companies on an ongoing basis. The Board consists of five directors, three of whom are independent (including the Board’s chairperson).
The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through debt investments in middle-market companies.
The Company conducts private offerings of its Common Stock to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). At the closing of any private offering, each investor will make a capital commitment (a “Capital Commitment”) to purchase shares of its Common Stock (“Shares”) pursuant to a subscription agreement entered into with the Company. Investors will be required to fund drawdowns to purchase Shares up to the amount of their respective Capital Commitments each time the Company delivers a notice to the investors. Following the initial closing of the private offering (the “Initial Closing”) on February 5, 2021 and prior to any Liquidity Event (as defined below), the Advisor may, in its sole discretion, permit one or more additional closings of the private offering. A “Liquidity Event” is defined as (a) an initial public offering of Shares (the “Initial Public Offering”) or the listing of Shares on an exchange (together with the Initial Public Offering, an “Exchange Listing”), (b) the sale of the Company or (c) a disposition of the Company’s investments and distribution of the net proceeds (after repayment of borrowed funds or other forms of leverage) to the Company’s investors.
10
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Note 2. Significant Accounting Policies
A. Basis of Presentation—the accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company is an investment company and follows accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946 — “Financial Services — Investment Companies.” In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair statement of the consolidated financial statements for the periods presented, have been included.
B. Consolidation—As provided under Regulation S-X and ASC Topic 946 – “Financial Services – Investment Companies”, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company or controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the accounts of the Company’s wholly-owned subsidiary, Kayne Anderson BDC Financing, LLC, (“KABDCF”), in its consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
C. Use of Estimates—the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ materially from those estimates.
D. Cash and Cash Equivalents—cash and cash equivalents include short-term, liquid investments with an original maturity of three months or less and include money market fund accounts.
E. Investment Valuation, Fair Value—the Company conducts the valuation of its investments consistent with GAAP and the 1940 Act. The Company’s investments will be valued no less frequently than quarterly, in accordance with the terms of Topic 820 of the Financial Accounting Standards Board’s Accounting Standards Codification, Fair Value Measurement and Disclosures (“ASC 820”).
Traded Investments (Level 1 or Level 2)
Investments for which market quotations are readily available will typically be valued at those market quotations. Traded investments such as corporate bonds, preferred stock, bank notes, loans or loan participations are valued by using the bid price provided by an independent pricing service, by an independent broker, the agent bank, syndicate bank or principal market maker. When price quotes for investments are not available, or such prices are stale or do not represent fair value in the judgment of the Company’s Advisor, fair market value will be determined using the Company’s valuation process for investments that are privately issued or otherwise restricted as to resale.
The Company may also invest, to a lesser extent, in equity securities purchased in conjunction with debt investments. While the Company anticipates these equity securities to be issued by privately held companies, the Company may hold equity securities that are publicly traded. Equity securities listed on any exchange other than the NASDAQ Stock Market, Inc. (“NASDAQ”) are valued, except as indicated below, at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and ask prices on such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing price. Equity securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Equity securities traded in the over-the-counter market, but excluding securities admitted to trading on the NASDAQ, are valued at the closing bid prices.
11
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Non-Traded Investments (Level 3)
Investments that are privately issued or otherwise restricted as to resale, as well as any security for which (a) reliable market quotations are not available in the judgment of the Company’s Advisor, or (b) the independent pricing service or independent broker does not provide prices or provides a price that in the judgment of the Company’s Advisor is stale or does not represent fair value, shall each be valued in a manner that most fairly reflects fair value of the security on the valuation date. The Company expects that a significant majority of its investments will be Level 3 investments. Unless otherwise determined by the Board, the following valuation process is used for the Company’s Level 3 investments:
| ● | Investment Team Valuation. The applicable investments are valued by senior professionals of Kayne Anderson who are responsible for the portfolio investments. The value of each portfolio company or investment will be initially reviewed by the investment professionals responsible for such portfolio company or investment and, for non-traded investments (i.e., illiquid securities/instruments), a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs will be used to determine a preliminary value. The investments will be valued no less frequently than quarterly, with new investments valued at the time such investment was made. |
| ● | Investment Team Valuation Documentation. Preliminary valuation conclusions will be determined by the Company’s executive officers. Such valuation and supporting documentation is submitted to the Audit Committee (a committee of the Board) and the Board on a quarterly basis. |
| ● | Audit Committee. The Audit Committee meets to consider the valuations submitted by our executive officers at the end of each quarter. Between meetings of the Audit Committee, the executive officers of the Company are authorized to make valuation determinations. All valuation determinations of the Audit Committee are subject to ratification by the Board at its next regular meeting. | |
| ● | Valuation Firm. Quarterly, third-party valuation firms engaged by the Board review the valuation methodologies and calculations employed for each of the Company’s investments that the Company has placed on the “watch list” and approximately 25% of its remaining investments. These third-party valuation firms will review all of the Level 3 investments at least once per year, on a rolling twelve-month basis. The Company expects the quarterly report issued by these third-party valuation firms will assist the Board in determining the fair values of the investments reviewed. | |
| ● | Board Determination. The Company’s Board meets quarterly to consider the valuations provided by the Company’s executive officers and the Audit Committee and ratify valuations for the applicable investments. The Company’s Board considers the report provided by the third-party valuation firms in reviewing and determining in good faith the fair value of the applicable portfolio investments. |
The Board of Directors will be ultimately responsible for the determination, in good faith, of the fair value of our portfolio investments. Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
F. Interest Income Recognition— Interest income is recorded on an accrual basis and includes the accretion of discounts, amortization of premiums and payment-in-kind (“PIK”) interest. Discounts from and premiums to par value on investments purchased are accreted/amortized into interest income over the life of the respective security using the effective yield method. To the extent loans contain PIK provisions, PIK interest, computed at the contractual rate specified in each applicable agreement, is accrued and recorded as interest income and added to the principal balance of the loan. PIK interest income added to the principal balance is generally collected upon repayment of the outstanding principal. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends for the year the income was earned, even though the Company has not yet collected the cash. The amortized cost of investments represents the original cost adjusted for any accretion of discounts, amortization of premiums and PIK interest.
12
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon the Company’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid or there is no longer any reasonable doubt that such principal or interest will be collected in full and, in the Company’s judgment, are likely to remain current. The Company may make exceptions to this policy if the loan has sufficient collateral value (i.e., typically measured as enterprise value of the portfolio company) or is in the process of collection.
G. Debt Issuance Costs—Costs incurred by the Company related to the issuance of its debt (credit facilities) are capitalized and amortized over the period the debt is outstanding. The Company has classified the costs incurred to issue its credit facilities as a deduction from the carrying value of the credit facilities on the Statement of Assets and Liabilities. For the purpose of calculating the Company’s asset coverage ratios pursuant to the 1940 Act, deferred issuance costs are not deducted from the carrying value of debt or preferred stock.
H. Dividends to Common Stockholders—Distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Company’s board of directors each quarter and is generally based upon the earnings estimated by management and considers the level of undistributed taxable income carried forward from the prior year for distribution in the current year. Net realized capital gains, if any, are generally distributed, although the Company may decide to retain such capital gains for investment.
I. Organizational Costs—organizational expenses include costs and expenses relating to the formation and organization of the Company. The Company has agreed to reimburse the Advisor for these costs which are expensed as incurred.
J. Offering Costs—offering costs include costs and expenses incurred in connection with the offering of the Company’s common stock. These initial costs are capitalized as deferred offering expenses and included in prepaid expenses and other assets on the Statement of Assets and Liabilities. These costs are amortized over a twelve-month period beginning with the commencement of operations. These expenses consist primarily of legal fees and other costs incurred in connection with the Company’s share offerings, the preparation of the Company’s registration statement and registration fees. The Company has agreed to reimburse the Advisor for these costs.
K. Income Taxes—it is the Company’s intention to continue to be treated as and to qualify each year for special tax treatment afforded a RIC under the Code. As long as the Company meets certain requirements that govern its sources of income, diversification of assets and timely distribution of earnings to stockholders, the Company will not be subject to U.S. federal income tax.
The Company must pay distributions equal to 90% of its investment company taxable income (ordinary income and short-term capital gains) to qualify as a RIC and it must distribute all of its taxable income (ordinary income, short-term capital gains and long-term capital gains) to avoid federal income taxes. The Company will be subject to federal income tax on any undistributed portion of income. For purposes of the distribution test, the Company may elect to treat as paid on the last day of its taxable year all or part of any distributions that are declared after the end of its taxable year if such distributions are declared before the due date of its tax return, including any extensions (September 15th).
All RICs are subject to a non-deductible 4% excise tax on income that is not distributed on a timely basis in accordance with the calendar year distribution requirements. To avoid the tax, the Company must distribute during each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income for the calendar year, (ii) 98.2% of its net capital gains for the one-year period ending on December 31, the last day of our taxable year, and (iii) undistributed amounts from previous years on which the Company paid no U.S. federal income tax. A distribution will be treated as paid during the calendar year if it is paid during the calendar year or declared by the Company in October, November or December, payable to stockholders of record on a date during such months and paid by the Company during January of the following year. Any such distributions paid during January of the following year will be deemed to be received by stockholders on December 31 of the year the distributions are declared, rather than when the distributions are actually received.
The Company does not currently qualify as a “publicly offered regulated investment company,” as defined in the Code. A “publicly offered regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market, or (iii) held by at least 500 persons at all times during the taxable year. The Company cannot determine when it will qualify as a publicly offered RIC. If the Company does not qualify as a publicly offered RIC during the tax year, a non-corporate shareholder’s allocable portion of the Company’s affected expenses, including its management fees, will be treated as an additional distribution to shareholders. A non-corporate shareholder’s allocable portion of these expenses are treated as miscellaneous itemized deductions that are not currently deductible by such shareholders.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.
13
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
L. LIBOR Transition — The U.K. Financial Conduct Authority (“FCA”) has announced that certain London Interbank Offered Rate (“LIBOR”) tenors in certain currencies will cease to be provided at the end of 2021 with all remaining tenors ceasing in June 2023. Alternatives to LIBOR have been established, or are in development, in most major currencies including the Secured Overnight Financing Rate (“SOFR”) that is intended to replace U.S. dollar LIBOR. Markets are slowly developing in response to these new reference rates. Uncertainty exists related to the liquidity impact of the change in rates, and how to appropriately adjust these rates at the time of transition. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Company or its investments.
M. Commitments and Contingencies—in the normal course of business, the Company may enter into contracts that provide a variety of general indemnifications. Any exposure to the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise and, accordingly, the Company has not accrued any liability in connection with such indemnifications.
Note 3. Agreements and Related Party Transactions
A. Administration Agreement—on February 5, 2021, the Company entered into an Administration Agreement with its Advisor, which serves as its Administrator and will provide or oversee the performance of its required administrative services and professional services rendered by others, which will include (but not limited to), accounting, payment of our expenses, legal, compliance, operations, technology and investor relations, preparation and filing of its tax returns, and preparation of financial reports provided to its stockholders and filed with the SEC.
The Company will reimburse the Administrator for its costs and expenses incurred in performing its obligations under the Administration Agreement, which may include its allocable portion of office facilities, overhead, and compensation paid to or compensatory distributions received by its officers (including our Chief Compliance Officer and Chief Financial Officer) and its respective staff who provide services to the Company. As the Company reimburses the Administrator for its expenses, the Company will indirectly bear such cost. The Administration Agreement may be terminated by either party with 60 days’ written notice.
B. Investment Advisory Agreement—on February 5, 2021, the Company entered into an Investment Advisory Agreement with its Advisor. Pursuant to the Investment Advisory Agreement with its Advisor, the Company will pay its Advisor a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The Advisor may, from time-to-time, grant waivers on the Company’s obligations, including waivers of the base management fee and/or incentive fee, under the Investment Advisory Agreement. The Investment Advisory Agreement may be terminated by either party with 60 days’ written notice.
The Company has agreed to reimburse the Advisor and its affiliates for the third-party costs incurred on its behalf in connection with the formation and the offering of shares of the Company’s common stock. Amounts shown as payables to affiliates on the Statement of Assets and Liabilities represent organizational expenses and offering costs of the Company that were paid by the Advisor and its affiliates on behalf of the Company.
Base Management Fee
Prior to an Exchange Listing, the base management fee will be calculated at an annual rate of 0.90% of the fair market value of the Company’s investments including, in each case, assets purchased with borrowed funds or other forms of leverage, but excluding cash, U.S. government securities and commercial paper instruments maturing within one year of purchase. After an Exchange Listing, the base management fee will be calculated at an annual rate of 1.50% of the fair market value of the Company’s investments. However, following an Exchange Listing, if borrowed funds or other forms of leverage utilized to finance the Company’s investments is greater than a debt-to-equity ratio of 1.0x, the base management fee will be 1.00% of the fair market value of the portion of the Company’s investments financed with borrowed funds or other forms of leverage above a 1.0x debt-to-equity ratio.
The base management fee will be payable quarterly in arrears and calculated based on the average of the Company’s fair market value of investments, at the end of the two most recently completed calendar quarters, including, in each case, assets purchased with borrowed funds or other forms of leverage, but excluding cash, U.S. government securities and commercial paper instruments maturing within one year of purchase. Base management fees for any partial quarter will be appropriately pro-rated.
For the three and six months ended June 30, 2021 the Company incurred base management fees of $422 and $598, respectively.
Incentive Fee
The Company will also pay the Advisor an incentive fee. The incentive fee will consist of two parts—an incentive fee on income and an incentive fee on capital gains. Described in more detail below, these components of the incentive fee will be largely independent of each other with the result that one component may be payable even if the other is not.
14
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Incentive Fee on Income
The incentive fee based on income (the “income incentive fee”) is determined and paid quarterly in arrears in cash. The Company’s quarterly pre-incentive fee net investment income must exceed a preferred return of 1.50% of the Company’s NAV (6.0% annualized but not compounded) (the “Hurdle Amount”) in order for the Company to receive an income incentive fee. The income incentive fee is calculated as follows:
| ● | Prior to an Exchange Listing: 100% of our pre-incentive fee net investment income for the immediately preceding calendar quarter in excess of 1.50% of the Company’s NAV until the Advisor has received 10% of the total pre-incentive fee net income for that calendar quarter and, for pre-incentive fee net investment income in excess of 1.6667%, 10% of all remaining pre-incentive fee net investment income for that quarter. |
| ● | After an Exchange Listing: 100% of the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter in excess of 1.50% of the Company’s NAV until the Advisor has received 15% of the total pre-incentive fee net income for that calendar quarter and, for pre-incentive fee net investment income in excess of 1.7647%, 15% of all remaining pre-incentive fee net investment income for that quarter. |
Incentive Fee on Capital Gains
The incentive fee on capital gains (the “capital gains incentive fee”) will be calculated and payable in arrears in cash as follows:
| ● | Prior to an Exchange Listing: 10.0% of the Company’s realized capital gains, if any, on a cumulative basis from formation through (a) the day before an Exchange Listing, (b) upon consummation of a Liquidity Event or (c) upon the termination of the Investment Advisory Agreement, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For the purpose of computing the capital gain incentive fee, the calculation methodology will look through derivative financial instruments or swaps as if the Company owned the reference assets directly. |
| ● | After an Exchange Listing: 15.0% of the Company’s realized capital gains, if any, on a cumulative basis from formation through the end of a given calendar year or upon termination of the Investment Advisory Agreement, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. |
Payment of Incentive Fees
Prior to an Exchange Listing, any incentive fees earned by the Advisor shall accrue as earned but only become payable in cash to the Advisor upon consummation of an Exchange Listing. To the extent the Company does not complete an Exchange Listing, the incentive fees will be payable to the Advisor (a) upon consummation of a sale of the Company or (b) once substantially all the proceeds from a Company Liquidation payable to the Company’s stockholders have been distributed to such stockholders.
For the three and six months ended June 30, 2021, the Company did not incur any incentive fee on income or capital gains.
C. Other—KACALP, an affiliate of the Advisor, made an equity contribution of $10 to the Company on December 18, 2018.
On February 5, 2021, the Company purchased its initial portfolio of investments for $103,031 from an affiliate of the Company’s Advisor (the “Warehousing Entity”). This purchase of its initial portfolio of investments was funded with a portion of the proceeds from the sale of the Company’s common stock on this same date (5,666,667 shares of our common stock to investors at a price of $15.00 per share for an aggregate offering price of $85,000) to investors and with borrowings under the Company’s credit facility.
The initial portfolio purchased from the Warehouse Entity consisted of 18 loans, with an average outstanding balance of $5,876, an average purchase price of 97.4% of principal value and an average yield on that date of 8.8%. None of these loans in the initial portfolio were in default or non-accrual status. All of the loans are senior secured and the borrowers are middle and upper middle market companies. The purchase of the initial portfolio was completed before the Company elected to be treated as a business development company under the 1940 Act. This initial acquisition and all related transactions are referred to as the “Formation Transactions.”
15
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Note 4. Investments
The following table presents the composition of the Company’s investment portfolio at amortized cost and fair value as of June 30, 2021:
| June 30, 2021 | ||||||||
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| First-lien senior secured debt investments | $ | 214,828 | $ | 218,838 | ||||
| Senior unsecured debt investments | 852 | 863 | ||||||
| Short-term investments | 4,622 | 4,622 | ||||||
| Total Investments | $ | 220,302 | $ | 224,323 | ||||
As of June 30, 2021, $300 of the Company’s total assets were in non-qualifying assets as defined by Section 55(a) of the 1940 Act. These were liquid credit investments in LSF11 Skyscraper HoldCo S.a.r.l. and Vocus Group Limited (f/k/a Vocus Communications).
The industry composition of long-term investments based on fair value as of June 30, 2021 was as follows:
| June 30, 2021 | ||||
| Consumer durables and apparel | 18.7 | % | ||
| Materials | 15.4 | % | ||
| Capital goods | 12.7 | % | ||
| Commercial & professional services | 9.9 | % | ||
| Household & personal products | 9.8 | % | ||
| Healthcare equipment & services | 7.0 | % | ||
| Food, beverage & tobacco | 6.6 | % | ||
| Retailing | 4.3 | % | ||
| Pharmaceuticals, biotech & life sciences | 4.2 | % | ||
| Telecommunication services | 2.9 | % | ||
| Automobiles & components | 2.5 | % | ||
| Diversified financials | 2.4 | % | ||
| Software & services | 1.2 | % | ||
| Transportation | 1.0 | % | ||
| Energy | 0.7 | % | ||
| Consumer services | 0.5 | % | ||
| Media & entertainment | 0.1 | % | ||
| Technology hardware & equipment | 0.1 | % | ||
| Chemicals | 0.0 | % | ||
| Total | 100.0 | % | ||
16
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Note 5. Fair Value
The Fair Value Measurement Topic of the FASB Accounting Standards Codification (ASC 820) defines fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants under current market conditions at the measurement date. As required by ASC 820, the Company has performed an analysis of all investments measured at fair value to determine the significance and character of all inputs to their fair value determination. Inputs are the assumptions, along with considerations of risk, that a market participant would use to value an asset or a liability. In general, observable inputs are based on market data that is readily available, regularly distributed and verifiable that the Company obtains from independent, third-party sources. Unobservable inputs are developed by the Company based on its own assumptions of how market participants would value an asset or a liability.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.
Level 1 — Valuations based on quoted unadjusted prices for identical instruments in active markets traded on a national exchange to which the Company has access at the date of measurement.
Level 2 — Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. Assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
The following table presents the fair value hierarchy of investments as of June 30, 2021. Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the underlying investment.
| Fair Value Hierarchy as of June 30, 2021 | ||||||||||||||||
| Investments: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| First-lien senior secured debt investments | $ | - | $ | 13,679 | $ | 205,159 | $ | 218,838 | ||||||||
| Senior unsecured debt investments | - | 863 | - | 863 | ||||||||||||
| Short-term investments | $ | 4,622 | $ | - | $ | - | $ | 4,622 | ||||||||
| Total Investments | $ | 4,622 | $ | 14,542 | $ | 205,159 | $ | 224,323 | ||||||||
For the six months ended June 30, 2021, the Company did not recognize any transfers to or from Level 3.
17
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
The following table presents changes in the fair value of investments for which Level 3 inputs were used to determine the fair value as of and for the three and six months ended June 30, 2021:
| For the three months ended | ||||
| June 30, 2021 | ||||
| Fair value, beginning of period | $ | 151,957 | ||
| Purchases of investments | 55,122 | |||
| Proceeds from principal payments and sales of investments | (3,344 | ) | ||
| Net change in unrealized gain (loss) | 1,126 | |||
| Net accretion of discount on investments | 298 | |||
| Transfers into (out of) Level 3 | - | |||
| Fair value, end of period | $ | 205,159 | ||
| For the six months ended | ||||
| June 30, 2021 | ||||
| Fair value, beginning of period | $ | - | ||
| Purchases of investments | 204,434 | |||
| Proceeds from principal payments and sales of investments | (3,649 | ) | ||
| Net change in unrealized gain (loss) | 3,908 | |||
| Net accretion of discount on investments | 466 | |||
| Transfers into (out of) Level 3 | - | |||
| Fair value, end of period | $ | 205,159 | ||
The increase in unrealized gain (loss) relates to investments that were held during the period. The Company includes these unrealized gains and losses on the Statement of Operations – Net Change in Unrealized Gains (Losses).
18
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Valuation Techniques and Unobservable Inputs
Non-traded debt investments are typically valued using either a market yield analysis or an enterprise value analysis. For debt investments that are not determined to be credit impaired, the Company uses a market yield analysis to determine fair value. If the debt investment is credit impaired (which is determined by performing an enterprise value analysis), the Company will use the enterprise value analysis or a liquidation basis analysis to determine fair value. As of June 30, 2021, none of the Company’s non-traded debt investments were determined to be credit impaired, and the Company used a market yield analysis to determine fair value on these investments.
To determine the estimated market yield for our debt investments, the Company analyzes changes in the risk/reward (measured by yields and leverage) of middle market indices as compared to changes in risk/reward for the underlying investment (the “Market Approach”) and estimates the appropriate credit spread for such debt investment. In this context, the fair market value of the investment is impacted by the structure and pricing of the security relative to current market yields and credit spreads for similar investments in similar businesses as well as the financial performance of such business. In performing this analysis, the Company considers data sources including, but not limited to: (i) industry publications, such as S&P Global’s High-End Middle Market Lending Review; Thomson Reuter’s Refinitiv Middle Market Monthly Stats; CapitalIQ; Pitchbook News; The Lead Left, and other data sources; (ii) comparable investments reviewed or completed by affiliates of the Advisor, and (iii) information obtained and provided by the Advisor’s independent valuation managers.
To determine if a debt investment is credit impaired, the Company estimates the enterprise value of the business and compares such estimate to the outstanding indebtedness of such business. The Company utilizes the following valuation methodologies to determine the estimated enterprise value of the company: (i) analysis of valuations of publicly traded companies in a similar line of business (“public company analysis”), (ii) analysis of valuations of M&A transaction valuations for companies in a similar line of business (“precedent transaction analysis”), (iii) discounted cash flows (“DCF analysis”) and (iv) other valuation methodologies.
In determining the non-traded debt investment valuations, the following factors are considered, where relevant: the nature and realizable value of any collateral; the company’s ability to make interest payments, amortization payments (if any) and other fixed charges; call features, put features and other relevant terms of the debt security; the company’s historical and projected financial results; the markets in which the company does business; changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be valued; and other relevant factors.
Under all of these valuation techniques, the Company estimates operating results of the companies in which we invest, including earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) and free cash flow. These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on operating assumptions for such company. Investment performance data utilized will be the most recently available as of the measurement date which in many cases may reflect up to a one quarter lag in information. These estimates will be sensitive to changes in assumptions specific to such company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: discounts for lack of marketability, selection of publicly traded companies, selection of similar precedent transactions, selected ranges for valuation multiples and expected required rates of return (discount rates).
Quantitative Table for Valuation Techniques
| As of June 30, 2021 | ||||||||||||||||
| Fair | Valuation | Unobservable | Weighted | |||||||||||||
| Value | Technique | Input | Range | Average | ||||||||||||
| First-lien senior secured debt investments | $ | 205,159 | Market Yield Analysis | Credit Spreads | 5.00% - 8.50% | 6.19% | ||||||||||
Note 6. Debt
Loan and Security Agreement
On February 5, 2021, Kayne Anderson BDC Financing, LLC (“KABDCF”), a newly-formed, wholly-owned, special purposes financing subsidiary, entered into a Loan and Security Agreement (the “LSA”) with certain lenders party thereto, administrative agent, and the Advisor as collateral manager. The maximum commitment of the LSA is up to $150,000, and, subject to certain conditions, may be increased by $50,000 up to two times not to exceed $250,000. The Company did not pay an upfront fee for entering into the LSA. Advances under the facility bear an interest rate of LIBOR plus 4.25% (subject to a 1.00% LIBOR floor). In addition, if the Company terminates the LSA prior to February 5, 2022, there will be a 2.00% prepayment fee. The facility has a term of three years.
For the six months ended June 30, 2021, the average amount of borrowings outstanding under the LSA was $45,568 with a weighted average interest rate of 5.25%. As of June 30, 2021, the Company had $50,000 outstanding under the LSA at a weighted average interest rate of 5.25%.
19
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Credit Agreement
On February 5, 2021, the Company entered into a $75,000 credit agreement (the “Credit Agreement”) with certain lenders party thereto. The Credit Agreement is comprised of two sub-facilities: (i) a capital call facility (the “Subscription Facility”) and (ii) a treasury facility (the “Treasury Facility”). The interest rate under the Subscription Facility is equal to LIBOR plus 1.90% (subject to a 0.35% LIBOR floor) and the interest rate under the Treasury Facility is equal to LIBOR plus 0.20% (with no LIBOR floor). The Subscription Facility will expire on December 31, 2022, and the Treasury Facility will expire on September 30, 2021.
The Credit Agreement allows the Company to transfer the commitment amount under the Treasury Facility to the Subscription Facility. On March 2, 2021, $15,000 was transferred from the Treasury Facility to the Subscription Facility. As of June 30, 2021, the Subscription Facility and Treasury Facility had commitments of $40,000 and $35,000, respectively.
For the six months ended through June 30, 2021, the average amount of borrowings outstanding under the Credit Agreement was $15,911 with a weighted average interest rate of 2.26%. As of June 30, 2021, the Company had $31,000 outstanding under the Credit Agreement at a weighted average interest rate of 2.25%.
Debt obligations consisted of the following as of June 30, 2021:
| June 30, 2021 | ||||||||||||||||
| Aggregate Principal Committed | Outstanding Principal | Amount Available(1) | Net Carrying Value(2) | |||||||||||||
| Loan and Security Agreement (LSA) | $ | 150,000 | $ | 50,000 | $ | 100,000 | $ | 49,694 | ||||||||
| Credit Agreement | 75,000 | 31,000 | 44,000 | 30,837 | ||||||||||||
| Total debt | $ | 225,000 | $ | 81,000 | $ | 144,000 | $ | 80,531 | ||||||||
| (1) | The amount available reflects any limitations related to the Credit Facility’s borrowing base. |
| (2) | The carrying value of the LSA and Credit Agreement are presented net of deferred financing costs totaling $469. |
For the three and six months ended June 30, 2021, the components of interest expense were as follows:
| For the three months ended | For the six months ended | |||||||
| June 30, 2021 | June 30, 2021 | |||||||
| Interest expense | $ | 877 | $ | 1,303 | ||||
| Amortization of debt issuance costs | 51 | 86 | ||||||
| Total interest expense | $ | 928 | $ | 1,389 | ||||
| Average interest rate | 5.6 | % | 5.6 | % | ||||
| Average borrowings | $ | 66,407 | $ | 61,479 | ||||
Note 7. Share Transactions
On February 5, 2021, the Company sold 5,666,667 shares of its common stock to investors at a price of $15.00 per share for an aggregate offering price of $85,000.
On April 23, 2021, the Company sold 3,532,434 shares of its common stock to investors at a price of $15.57 per share for an aggregate offering price of $55,000. As of June 30, 2021, the Company had subscription agreements with investors for an aggregate capital commitment of $285,355 to purchase shares of common stock ($145,355 of the commitments are undrawn). See Note 11 – Subsequent Events.
On May 14, 2021, the Company paid its first distribution of $0.15 per share to each common stockholder of record as of April 20, 2021. Pursuant to the Company’s dividend reinvestment plan, $21 (1,361 shares of common stock), was reinvested into shares of the Company. See Note 11 – Subsequent Events.
20
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Note 8. Commitments and Contingencies
The Company had an aggregate of $21,552 of unfunded commitments to provide debt financing to its portfolio companies as of June 30, 2021. Such commitments are generally subject to the satisfaction of certain financial and nonfinancial covenants and certain operational metrics; involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of assets and liabilities, and are not reflected in the Company’s consolidated statements of assets and liabilities. These amounts may remain outstanding until the commitment period of an applicable loan expires, which may be shorter than its maturity.
A summary of the composition of the unfunded commitments as of June 30, 2021 is shown in the table below:
| As of | ||||
| June 30, 2021 | ||||
| DRS Holdings III, Inc. (Dr. Scholl’s) | $ | 310 | ||
| Foundation Consumer Brands | 577 | |||
| Fralock Buyer LLC | 749 | |||
| GEON Performance Solutions | 517 | |||
| Gusmer Enterprises, Inc. | 6,765 | |||
| MacNeill Pride Group | 2,798 | |||
| PMFC Holding, LLC | 684 | |||
| Pretzels, LLC | 8,402 | |||
| Smile Doctors, LLC | 56 | |||
| Speedstar Holding LLC | 694 | |||
| Total unfunded commitments | $ | 21,552 | ||
From time to time, the Company may become a party to certain legal proceedings incidental to the normal course of its business. As of June 30, 2021, management was not aware of any material pending or threatened litigation that would require accounting recognition or financial statement disclosure.
Note 9. Earnings Per Share
In accordance with the provisions of ASC Topic 260, Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. As of June 30, 2021, there were no dilutive shares.
The following table sets forth the computation of basic and diluted earnings per share of common stock for the three and six months ended June 30, 2021:
| For the three months ended | For the six months ended | |||||||
| June 30, 2021 | June 30, 2021 | |||||||
| Net increase (decrease) in net assets resulting from operations | $ | 3,208 | $ | 6,653 | ||||
| Weighted average shares of common stock outstanding - basic and diluted | 8,346,491 | 7,337,219 | ||||||
| Earnings (loss) per share of common stock - basic and diluted | $ | 0.38 | $ | 0.91 | ||||
21
Kayne Anderson BDC, Inc.
Notes to Consolidated Financial Statements
(amounts in 000’s, except share and per share amounts)
(Unaudited)
Note 10. Financial Highlights
The following per share of common stock data has been derived from information provided in the unaudited financial statements. The following is a schedule of financial highlights for the six months ended June 30, 2021:
| For the six months ended | ||||
| June 30, 2021 | ||||
| Per Common Share Operating Performance (1) | ||||
| Net Asset Value, Beginning of Period(2) | $ | 14.86 | ||
| Results of Operations: | ||||
| Net Investment Income | 0.35 | |||
| Net Realized and Unrealized Gain (Loss) on Investments(3) | 0.70 | |||
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1.05 | |||
| Distributions to Common Stockholders | ||||
| Distributions from Net Investment Income | (0.15 | ) | ||
| Net Decrease in Net Assets Resulting from Distributions | (0.15 | ) | ||
| Net Asset Value, End of Period | $ | 15.76 | ||
| Shares Outstanding, End of Period | 9,201,129 | |||
| Ratio/Supplemental Data | ||||
| Net assets, end of period | $ | 145,026 | ||
| Weighted-average shares outstanding | 7,337,219 | |||
| Total Return(4) | 6.1 | % | ||
| Portfolio turnover | 6.3 | % | ||
| Ratio of operating expenses to average net assets(5) | 6.8 | % | ||
| Ratio of net investment income (loss) to average net assets(5) | 6.4 | % | ||
| (1) | The per common share data was derived by using weighted average shares outstanding. |
| (2) | The initial offering price of $15.00 per share less $0.14 per share of organizational costs. |
| (3) | Realized and unrealized gains and losses per share in this caption are balancing amounts necessary to reconcile the change in net asset value per share for the period, and may not reconcile with the aggregate gains and losses in the Consolidated Statement of Operations due to share transactions during the period. |
| (4) | Total return is calculated as the change in net asset value (“NAV”) per share during the period, plus distributions per share (if any), divided by the beginning NAV per share. The calculation also assumes reinvestment of dividends at actual prices pursuant to the Company’s dividend reinvestment plan. Total return is not annualized. |
| (5) | The ratios reflect an annualized amount, except in the case of non-recurring expenses (e.g. initial organizational expense of $175 for the six months ended June 30, 2021). |
Note 11. Subsequent Events
The Company’s management has evaluated subsequent events through the date of issuance of the financial statements included herein. There have been no subsequent events that require recognition or disclosure in these financial statements except for the following:
On July 23, 2021, the Company sold 2,862,595 shares of its common stock at a price of $15.72 per share for an aggregate offering price of $45,000. Just prior to the issuance of shares, the Company entered into subscription agreements with investors for $82,375 of additional capital commitments. Following this capital close, the Company has subscription agreements with investors for an aggregate capital commitment of $367,730 to purchase shares of common stock ($182,730 of the commitments are undrawn). Under the terms of the subscription agreements, stockholders are required to fund drawdowns to purchase shares of common stock up to the amount of their respective capital commitments on an as-needed basis with a minimum of ten days’ prior notice to stockholders.
On July 27, 2021, the Company paid a distribution of $0.22 per share to each common stockholder of record as of July 20, 2021. The total distribution was $2,024 and $584 was reinvested into the Company through the purchase of 37,640 shares of common stock.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise specified, references to “we,” “us,” “our,” or the “Company” refer to Kayne Anderson BDC, Inc.
Overview
Kayne Anderson BDC, LLC was formed in May 2018 as a Delaware limited liability company. We were formed to make investments in middle-market companies and commenced operations on February 5, 2021. On this same date, prior to our election to be regulated as a BDC under the 1940 Act, we completed a conversion from a Delaware limited liability company into a Delaware corporation and Kayne Anderson BDC, Inc. succeeded to the business of Kayne Anderson BDC, LLC. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. In addition, for U.S. federal income tax purposes, we intend to qualify, annually, as a RIC under Subchapter M of the Code.
We are managed by KA Credit Advisors, LLC (the “Advisor”) which is an indirect subsidiary of Kayne Anderson Capital Advisors, L.P. (“KACALP” or “Kayne Anderson”). The Advisor is registered with the Securities and Exchange Commission (“SEC”) as an investment advisor under the Investment Advisory Act of 1940. Subject to the overall supervision of the Company’s board of directors (the “Board”), the Advisor is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring investments and monitoring its investments and portfolio companies on an ongoing basis. The Board consists of five directors, three of whom are independent.
Our investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through debt investments in middle-market companies. We define “middle-market companies” as U.S.-based companies that, in general, generate between $10 million and $150 million of annual earnings before interest, taxes, depreciation and amortization, or EBITDA. We refer to companies that generate between $10 million and $50 million of annual EBITDA as “core middle-market companies” and companies that generate between $50 million and $150 million of annual EBITDA as “upper middle-market companies.”
We intend to achieve our investment objective by investing primarily in first lien senior secured, unitranche and split-lien loans to privately held middle-market companies. Similar to first lien senior secured loans, unitranche loans typically have a first lien on all assets of the borrower, but provide leverage at levels similar to a combination of first lien and second lien and/or subordinated loans. Split-lien loans are generally loans that otherwise satisfy the criteria of a first lien loan but which have been structured with a credit facility that is senior in right of payment with respect to working capital assets of the borrower. Depending on market conditions, we expect that between 80% and 90% of our portfolio (including investments purchased with proceeds from borrowings) will be invested in first lien senior secured, unitranche and split-lien term loans. We expect that most of these investments will be in core middle market companies, with the remainder in upper middle market companies. The remaining 10% to 20% of our portfolio will be invested in higher-yielding investments, including, but not limited to, second lien loans, last-out or subordinated loans, non-investment grade broadly syndicated first and second lien loans (commonly referred to as “leveraged loans”), high-yield bonds, structured products (including CLO liabilities), real estate related debt securities, equity securities purchased in conjunction with debt investments and other opportunistic investments (collectively “Opportunistic Middle Market Investments”). We expect that the debt we invest in will generally have state terms of five to six years.
We intend to implement our investment objective by (1) accessing the established loan sourcing channels developed by Kayne Anderson, which includes an extensive network of private equity firms, other middle-market lenders, financial advisors and intermediaries, and experienced management teams, (2) selecting investments within our middle-market company focus, (3) implementing Kayne Anderson’s middle market private credit team’s disciplined underwriting process, and (4) drawing upon the experience and resources of our Advisor’s investment team and the broader Kayne Anderson network.
We believe our Advisor’s disciplined approach to origination, credit analysis, portfolio construction and risk management should allow us to achieve attractive risk-adjusted returns while preserving investor capital. We anticipate the portfolio will be comprised of a broad mix of loans, with diversity among investment size, industry focus and geography. The Advisor’s team of professionals will conduct in-depth due diligence on prospective investments during the underwriting process and will be heavily involved in structuring the loan’s terms. Once an investment has been made, our Advisor will closely monitor portfolio investments and take a proactive approach identifying and addressing sector or company specific risks. The Advisor maintains a regular dialogue with portfolio company management teams (as well as their financial sponsors), reviews detailed operating and financial results on a regular basis (typically monthly or quarterly) and monitors current and projected liquidity needs, in addition to other portfolio management activities. We believe this approach will help us generate more consistent results.
Recent Developments
On July 23, 2021, we sold 2.9 million shares of common stock at a price of $15.72 per share for an aggregate offering price of $45 million. Just prior to the issuance of shares, we entered into subscription agreements with investors for $82.4 million of additional capital commitments. Following this capital close, we have subscription agreements with investors for an aggregate capital commitment of $367.7 million to purchase shares of common stock ($182.7 million of the commitments are undrawn).
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On June 14, 2021, Michael J. Levitt notified our Board of Directors (the “Board”) of his decision to resign, effective immediately, from his position as our Chief Executive Officer. Mr. Levitt will continue to serve in his role as an interested director of the Company. Mr. Levitt’s decision to resign was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
On June 14, 2021, in connection with Mr. Levitt’s resignation, the Board appointed Mr. James C. Baker as Chief Executive Officer, effective immediately.
Portfolio and Investment Activity
As of June 30, 2021, we had 82 debt investments in 61 portfolio companies with an aggregate fair value of approximately $219.7 million and an amortized cost of $215.7 million consisting of first lien senior secured (99.6%) and senior unsecured (0.4%) debt investments.
As of June 30, 2021, our weighted average total yield to maturity of debt and income producing securities at fair value was 7.7%, and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 7.8%.
Our investment activity for the three months ended June 30, 2021 is presented below (information presented herein is at par value unless otherwise indicated).
| For the three months ended | ||||
| June 30, 2021 ($ in millions) | ||||
| New investments: | ||||
| Gross investments | $ | 86.8 | ||
| Less: sold investments | (5.1 | ) | ||
| Total new investments | 81.7 | |||
| Principal amount of investments funded: | ||||
| Private credit investments | $ | 56.2 | ||
| Liquid credit investments | 12.2 | |||
| Total principal amount of investments funded | 68.4 | |||
| Principal amount of investments sold: | ||||
| Private credit investments | (3.3 | ) | ||
| Liquid credit investments | (1.8 | ) | ||
| Total principal amount of investments sold or repaid | (5.1 | ) | ||
| Number of new investment commitments | 47 | |||
| Average new investment commitment amount | $ | 1.8 | ||
| Weighted average maturity for new investment commitments | 4.8 years | |||
| Percentage of new debt investment commitments at floating rates | 98.0 | % | ||
| Percentage of new debt investment commitments at fixed rates | 2.0 | % | ||
| Weighted average interest rate of new investment commitments | 6.6 | % | ||
| Weighted average spread over LIBOR of new floating rate investment commitments | 5.6 | % | ||
| Weighted average interest rate on investment sold or paid down | 6.1 | % | ||
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The table below describes long-term investments by industry composition based on fair value as of June 30, 2021:
| June 30, 2021 | ||||
| Consumer durables and apparel | 18.7 | % | ||
| Materials | 15.4 | % | ||
| Capital goods | 12.7 | % | ||
| Commercial & professional services | 9.9 | % | ||
| Household & personal products | 9.8 | % | ||
| Healthcare equipment & services | 7.0 | % | ||
| Food, beverage & tobacco | 6.6 | % | ||
| Retailing | 4.3 | % | ||
| Pharmaceuticals, biotech & life sciences | 4.2 | % | ||
| Telecommunication services | 2.9 | % | ||
| Automobiles & components | 2.5 | % | ||
| Diversified financials | 2.4 | % | ||
| Software & services | 1.2 | % | ||
| Transportation | 1.0 | % | ||
| Energy | 0.7 | % | ||
| Consumer services | 0.5 | % | ||
| Media & entertainment | 0.1 | % | ||
| Technology hardware & equipment | 0.1 | % | ||
| Chemicals | 0.0 | % | ||
| Total | 100.0 | % | ||
Results of Operations
Comparative financial statement tables are not presented as we commenced operations on February 5, 2021. For the three and six months ended June 30, 2021, our total investment income was derived from our initial portfolio of investments during these periods. All investments were income producing, and there were no loans on non-accrual status as of June 30, 2021.
The following table represents the operating results for the three and six months ended June 30, 2021:
| For the three months ended | For the six months ended | |||||||
| June 30, 2021 | June 30, 2021 | |||||||
| ($ in millions) | ($ in millions) | |||||||
| Total investment income | $ | 3.8 | $ | 5.6 | ||||
| Less: Net expenses | 1.8 | 3.0 | ||||||
| Net investment income | 2.0 | 2.6 | ||||||
| Net realized gains (losses) on investments | 0.0 | 0.0 | ||||||
| Net change in unrealized gains (losses) on investments | 1.2 | 4.0 | ||||||
| Net increase (decrease) in net assets resulting from operations | $ | 3.2 | $ | 6.6 | ||||
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Investment Income
Investment income for the three and six months ended June 30, 2021 totaled $3.8 million and $5.6 million, respectively, and consisted primarily of interest income on our debt investments.
Expenses
Operating expenses for the three and six months ended June 30, 2021, were as follows:
| For the three months ended | For the six months ended | |||||||
| June 30, 2021 ($ in millions) | June 30, 2021 ($ in millions) | |||||||
| Interest and debt financing expenses | $ | 0.9 | $ | 1.4 | ||||
| Management fees | 0.4 | 0.6 | ||||||
| Other operating expenses | 0.3 | 0.6 | ||||||
| Initial organization | - | 0.2 | ||||||
| Deferred offering costs | 0.1 | 0.1 | ||||||
| Directors fees | 0.1 | 0.1 | ||||||
| Total expenses | $ | 1.8 | $ | 3.0 | ||||
Total expenses for the three and six months ended June 30, 2021 included zero and $0.2 million of initial organization expenses and $0.07 million and $0.1 million of deferred offering costs, respectively.
Net Unrealized Gains (Losses) on Investments
We fair value our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses. During the three and six months ended June 30, 2021, net unrealized gains (losses) on our investment portfolio were comprised of the following:
| For the three months ended | For the six months ended | |||||||
| June 30, 2021 ($ in millions) | June 30, 2021 ($ in millions) | |||||||
| Unrealized gains on investments | $ | 1.5 | $ | 4.0 | ||||
| Unrealized (losses) on investments | (0.3 | ) | - | |||||
| Net change in unrealized gains (losses) on investments | $ | 1.2 | $ | 4.0 | ||||
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The change in unrealized appreciation for the three months ended June 30, 2021 totaled $1.5 million, which primarily related to our investments in the following table:
| For the three months ended | ||||
| June 30, 2021 ($ in millions) | ||||
| Portfolio Company | ||||
| Gusmer Enterprises, Inc. | $ | 0.2 | ||
| MacNeill Pride Group | 0.2 | |||
| Broder Bros., Co. | 0.2 | |||
| DRS Holdings III, Inc. (Dr. Scholl’s) | 0.1 | |||
| Refrigeration Sales Corp. | 0.1 | |||
| Fralock Buyer LLC | 0.1 | |||
| Pretzels, LLC | 0.1 | |||
| Network Connex (f/k/a NTI Connect, LLC) | 0.1 | |||
| Eastern Wholesale Fence | 0.1 | |||
| Other portfolio companies | 0.3 | |||
| Total Unrealized Appreciation | $ | 1.5 | ||
The change in unrealized depreciation for the three months ended June 30, 2021 totaled $0.3 million, which was primarily attributable to accretion of discounts on investments.
The change in unrealized appreciation for the six months ended June 30, 2021 totaled $4.0 million, which primarily related to our investments in the following table:
| For the six months ended | ||||
| June 30, 2021 ($ in millions) | ||||
| Portfolio Company | ||||
| Broder Bros., Co. | $ | 0.4 | ||
| Sundance Holdings Group, LLC | 0.3 | |||
| OMH-HealthEdge Holdings, LLC | 0.3 | |||
| Fralock Buyer LLC | 0.2 | |||
| New Era Cap Company, Inc. | 0.2 | |||
| Advanced Environmental Monitoring | 0.2 | |||
| Gusmer Enterprises, Inc. | 0.2 | |||
| YS Garments, LLC | 0.2 | |||
| WhiteBridge Pet Brands, LLC | 0.2 | |||
| Meridian Adhesives Group, Inc. | 0.2 | |||
| Other portfolio companies | 1.6 | |||
| Total Unrealized Appreciation | $ | 4.0 | ||
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are generated primarily from the net proceeds of any offering of our Shares, proceeds from borrowing on our credit facilities and from cash flows from interest and fees earned from our investments and principal repayments and proceeds from sales of our investments. Our primary use of cash will be investments in portfolio companies, payments of our expenses, repayments of borrowed amounts and payment of cash distributions to our stockholders.
In accordance with the 1940 Act, we are required to meet a coverage ratio of total assets (less total liabilities other than indebtedness) to total borrowings and other senior securities (and any preferred stock that we may issue in the future) of at least 150%. If this ratio declines below 150%, we cannot incur additional leverage and could be required to sell a portion of our investments to repay some leverage when it is disadvantageous to do so. As of June 30, 2021, our asset coverage ratio was 279%. We currently intend to target asset coverage of 200% to 180% (which equates to a debt-to-equity ratio of 1.0x to 1.25x) but may alter this target based on market conditions.
As of June 30, 2021, we had $81 million borrowed under our credit facilities (the LSA and the Credit Agreement) and cash and cash equivalents of $8.2 million (including short-term investments).
As of August 12, 2021, we had $50 million borrowed under our LSA; no borrowings outstanding under our Credit Agreement, and cash and cash equivalents of $22.9 million (including short-term investments).
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Capital Contributions
During the six months ended June 30, 2021, we issued and sold 9,199,767 shares related to capital called at an aggregate purchase price of $140 million. As of August 13, 2021, we had aggregate capital commitments of $367.7 million and undrawn capital commitments from investors of $182.7 million ($185 million or 50.3% funded).
Credit Facilities
On February 5, 2021, Kayne Anderson BDC Financing, LLC, (“KABDCF”), our wholly owned, special purposes financing subsidiary, entered into a Loan and Security Agreement (the “LSA”) with certain lenders party thereto, administrative agent, and our Advisor as collateral manager. The maximum commitment of the LSA is up to $150 million, and, subject to certain conditions, may be increased by $50 million up to two times not to exceed $250 million. Advances under the facility bear an interest rate of LIBOR plus 4.25% (subject to a 1.00% LIBOR floor). The facility has a term of three years.
In addition, on February 5, 2021, we entered into a $75 million credit agreement (the “Credit Agreement”) with certain lenders party thereto. The Credit Agreement is comprised of two sub-facilities: (i) a capital call facility (the “Subscription Facility”) and (ii) a treasury facility (the “Treasury Facility”). The interest rate under the Subscription Facility will be equal to LIBOR plus 1.90% (subject to a 0.35% LIBOR floor) and the interest rate under the Treasury Facility will be equal to LIBOR plus 0.20% (with no LIBOR floor). The Subscription Facility will expire on December 31, 2022, and the Treasury Facility will expire on September 30, 2021.
The Credit Agreement allows us to transfer the commitment amount under the Treasury Facility to the Subscription Facility. On March 2, 2021, $15 million was transferred from the Treasury Facility to the Subscription Facility. As of June 30, 2021, the Subscription Facility and Treasury Facility had commitments of $40 million and $35 million, respectively.
Critical Accounting Policies
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are described below. The critical accounting policies should be read in conjunction with our risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in this Quarterly Report. See Note 2 to our consolidated financial statements for the six months ended June 30, 2021, for more information on our critical accounting policies.
Investment Valuation
We conduct the valuation of our investments consistent with GAAP and the 1940 Act. Our investments are valued no less frequently than quarterly, in accordance with the terms of Topic 820 of the Financial Accounting Standards Board’s Accounting Standards Codification, Fair Value Measurement and Disclosures (“ASC 820”).
ASC 820 establishes a hierarchal disclosure framework which ranks the observability of inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instruments and their specific characteristics. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, generally will have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.
Level 1 — Valuations based on quoted unadjusted prices for identical instruments in active markets traded on a national exchange to which the Company has access at the date of measurement.
Level 2 — Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. Assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
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Traded Investments (Level 1 or Level 2)
Investments for which market quotations are readily available will typically be valued at those market quotations. Traded investments such as corporate bonds, preferred stock, bank notes, loans or loan participations are valued by using the bid price provided by an independent pricing service, by an independent broker, the agent bank, syndicate bank or principal market maker. When price quotes for investments are not available, or such prices are stale or do not represent fair value in the judgment of our Advisor, fair market value will be determined using our valuation process for investments that are privately issued or otherwise restricted as to resale.
We may also invest, to a lesser extent, in equity securities purchased in conjunction with debt investments. While we anticipate these equity securities to be issued by privately held companies, we may hold equity securities that are publicly traded. Equity securities listed on any exchange other than the NASDAQ Stock Market, Inc. (“NASDAQ”) are valued, except as indicated below, at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and ask prices on such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing price. Equity securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Equity securities traded in the over-the-counter market, but excluding securities admitted to trading on the NASDAQ, are valued at the closing bid prices.
Non-Traded Investments (Level 3)
Investments that are privately issued or otherwise restricted as to resale, as well as any security for which (a) reliable market quotations are not available in the judgment of our Advisor, or (b) the independent pricing service or independent broker does not provide prices or provides a price that in the judgment of our Advisor is stale or does not represent fair value, shall each be valued in a manner that most fairly reflects fair value of the security on the valuation date. We expect that a significant majority of our investments will be Level 3 investments. Unless otherwise determined by the Board, the following valuation process is used for our Level 3 investments:
| ● | Investment Team Valuation. The applicable investments are valued by senior professionals of Kayne Anderson who are responsible for the portfolio investments. The value of each portfolio company or investment will be initially reviewed by the investment professionals responsible for such portfolio company or investment and, for non-traded investments (i.e., illiquid securities/instruments), a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs will be used to determine a preliminary value. The investments will be valued no less frequently than quarterly, with new investments valued at the time such investment was made. |
| ● | Investment Team Valuation Documentation. Preliminary valuation conclusions will be determined by our executive officers. Such valuation and supporting documentation is submitted to the Audit Committee (a committee of our Board) and our Board on a quarterly basis. |
| ● | Audit Committee. The Audit Committee meets to consider the valuations submitted by our executive officers at the end of each quarter. Between meetings of the Audit Committee, our executive officers are authorized to make valuation determinations. All valuation determinations of the Audit Committee are subject to ratification by our Board at its next regular meeting. |
| ● | Valuation Firm. Quarterly, third-party valuation firms engaged by our Board review the valuation methodologies and calculations employed for each of our investments that we have placed on the “watch list” and approximately 25% of our remaining investments. These third-party valuation firms will review all of the Level 3 investments at least once per year, on a rolling twelve-month basis. We expect the quarterly report issued by these third-party valuation firms will assist the Board in determining the fair values of the investments reviewed. |
| ● | Board Determination. Our Board meets quarterly to consider the valuations provided by our executive officers and the Audit Committee and ratify valuations for the applicable investments. Our Board considers the report provided by the third-party valuation firms in reviewing and determining in good faith the fair value of the applicable portfolio investments. |
The Board of Directors is ultimately responsible for the determination, in good faith, of the fair value of our portfolio investments.
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Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities for accounting purposes if we have reason to doubt our ability to collect such interest. OIDs, market discounts or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income.
Contractual Obligations
A summary of our significant contractual principal payment obligations related to the repayment of our outstanding indebtedness at June 30, 2021 is as follows:
| Payments Due by Period ($ in millions) | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||||
| Loan and Security Agreement (LSA) | $ | 50.0 | $ | - | $ | 50.0 | $ | - | $ | - | ||||||||||
| Credit Agreement | 31.0 | - | 31.0 | - | - | |||||||||||||||
| Total contractual obligations | $ | 81.0 | $ | - | $ | 81.0 | $ | - | $ | - | ||||||||||
Off-Balance Sheet Arrangements
As of June 30, 2021, we had an aggregate $21.6 million of unfunded commitments to provide debt financing to our portfolio companies. Such commitments are generally subject to the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in our financial statements. Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any other off-balance sheet financings or liabilities.
Related Party Transactions
Investment Advisory Agreement. On February 5, 2021, we entered into the Investment Advisory Agreement with our Advisor. Our Advisor will agree to serve as our investment advisor in accordance with the terms of our Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period will consist of the base management fee equal to a percentage of the fair market value of investments, including, in each case, assets purchased with borrowed funds or other forms of leverage, but excluding cash, U.S. government securities and commercial paper instruments maturing within one year of purchase as well as an incentive fee based on our performance.
For services rendered under the Investment Advisory Agreement, we will pay a base management fee quarterly in arrears to our Advisor based on the of the fair market value of our investments including, in each case, assets purchased with borrowed funds or other forms of leverage, but excluding cash, U.S. government securities and commercial paper instruments maturing within one year of purchase. We will also pay an incentive fee on income and an incentive fee on capital gains to our Advisor.
Prior to an Exchange Listing, any incentive fees earned by the Advisor shall accrue as earned but only become payable in cash to the Advisor upon consummation of an Exchange Listing. To the extent the Company does not complete an Exchange Listing, the incentive fees will be payable to the Advisor (a) upon consummation of a sale of the Company or (b) once substantially all proceeds from a Company Liquidation payable to the Company’s common stockholders have been distributed to such stockholders.
Administration Agreement. On February 5, 2021, we entered into an Administration Agreement with our Advisor, which serves as our Administrator pursuant to which the Administrator will furnish us with administrative services necessary to conduct our day-to-day operations. The Administrator will be reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such reimbursement may be made for our allocable portion (subject to the review and approval of our independent directors) of office facilities, overhead, and compensation paid to or compensatory distributions received by our officers (including our Chief Compliance Officer and Chief Financial Officer) and their respective staff who provide services to us. As we reimburse the Administrator for its expenses, we will indirectly bear such cost. The Administrator engaged U.S. Bank Global Fund Services under a sub-administration agreement to assist the Administrator in performing certain of its administrative duties. The Administrator may enter into additional sub-administration agreements with third-parties to perform other administrative and professional services on behalf of the Administrator.
On February 5, 2021, we purchased our initial portfolio of investments for $103 million from an affiliate of our Advisor (the “Warehousing Entity”) with a portion of the proceeds from the sale of common stock together with borrowings under our credit facility.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. Uncertainty with respect to the economic effects of the COVID-19 pandemic introduced significant volatility in the financial markets, and the effects of this volatility has materially impacted and could continue to materially impact our market risks, including those listed below.
Valuation Risk. The majority of our portfolio investments take the form of securities for which no market quotations are readily available. The fair value of securities and other investments that are not publicly traded may not be readily determinable, and we value these securities at fair value as determined in good faith by our Board of Directors, including to reflect significant events affecting the value of our securities. Most of our investments are classified as Level 3 under ASC Topic 820 which means that our portfolio valuations are based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. Inputs into the determination of fair value of our portfolio investments require significant management judgment or estimation. Because such valuations are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a liquid trading market for these instruments existed. Our net asset value (“NAV”) could be adversely affected if the determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such investments.
Interest Rate Risk. We will be subject to financial market risks, including changes in interest rates. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.
Assuming that the consolidated statement of assets and liabilities as of June 30, 2021 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact ($ in millions) of hypothetical base rate changes in interest rate (considering interest rate floors for floating rate instruments).
| Change in Interest Rates | Increase (Decrease) in Interest Income | Increase (Decrease) in Interest Expense | Net Increase (Decrease) in Net Investment Income | |||||||||
| Down 25 basis points | $ | - | $ | - | $ | - | ||||||
| Up 100 basis points | $ | 0.5 | $ | 0.3 | $ | 0.2 | ||||||
| Up 200 basis points | $ | 2.6 | $ | 1.1 | $ | 1.5 | ||||||
| Up 300 basis points | $ | 4.8 | $ | 2.0 | $ | 2.8 | ||||||
The data in the table is based on the Company’s current statement of assets and liabilities.
We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of June 30, 2021 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic United States Securities and Exchange Commission filings is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Neither we nor our Advisor is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Advisor.
From time to time, we, or our Advisor, may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
From time to time we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us.
In addition to the other information set forth in this report, you should carefully consider the risk factors described below and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, including risk factors related to the COVID-19 pandemic, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
For the six months ended June 30, 2021, the Company issued and sold 9,201,129 shares (including dividend reinvestment) of its common stock at an aggregate purchase price of $140 million. The issuance of the shares of common stock was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4 (a)(2) and Rule 506(b) of Regulation D thereof. The Company relied, in part, upon representations from the investors in the subscription agreements that each investor was an accredited investor as defined in Regulation D under the Securities Act. We did not engage in general solicitation or advertising, and did not offer securities to the public, in connection with such issuances and sales.
Item 3. Default Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
32
The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this Report.
Exhibit Index
| (1) | Incorporated by reference from the Company’s Amendment No. 2 to Form 10, as filed with the Securities and Exchange Commission on November 9, 2020. |
| (2) | Incorporated by reference from the Company’s Form 8-K, as filed with the Securities and Exchange Commission on February 9, 2021. |
| (3) | Incorporated by reference from the Company’s Form 10-K, as filed with the Securities and Exchange Commission on February 26, 2021. |
| * | Filed herewith. |
33
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Kayne Anderson BDC, Inc. | ||
| Date: August 16, 2021 | /s/ James C. Baker | |
| Name: | James C. Baker | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: August 16, 2021 | /s/ Terry A. Hart | |
| Name: | Terry A. Hart | |
| Title: | Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | ||
34
Exhibit 31.1
Certification of Chief Executive Officer
I, James C. Baker, Chief Executive Officer of Kayne Anderson BDC, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kayne Anderson BDC, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 16, 2021
| By: | /s/ JAMES C. BAKER | |
|
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
Certification of Chief Financial Officer
I, Terry A. Hart, Chief Financial Officer of Kayne Anderson BDC, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kayne Anderson BDC, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 16, 2021
| By: | /s/ TERRY A. HART | |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with the Quarterly Report on Form 10-Q for the three months ended June 30, 2021 (the “Report”) of Kayne Anderson BDC, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, James C. Baker, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| /s/ JAMES C. BAKER | ||
| Name: | James C. Baker | |
| Date: | August 16, 2021 |
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with the Quarterly Report on Form 10-Q for the three months ended June 30, 2021 (the “Report”) of Kayne Anderson BDC, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Terry A. Hart, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| /s/ TERRY A. HART | ||
| Name: | Terry A. Hart | |
| Date: | August 16, 2021 |