Kayne Anderson BDC, Inc. (KBDC) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Kayne Anderson BDC, Inc.'s Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to turn the call over to Andy Wedderburn-Maxwell, Managing Director.

Good morning, and welcome to Kayne Anderson BDC, Inc.'s Second Quarter 2026 Earnings Call. Today, I'm joined by Ken Leonard and Doug Goodwillie, co-CEOs of KBDC; Frank Karl, President; and Terry Hart, CFO. Following our prepared remarks, we'll be available to take your questions. Today's call may include forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the company, our current and prospective portfolio investments, our industry, our beliefs and our opinions and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict. Actual results may differ materially from those expressed or forecasted in the forward-looking statements. We ask that you are refer to the company's most recent filings with the SEC for important risk factors. Any forward-looking statements made today do not guarantee future performance and undue reliance should not be placed on them. The company assumes no obligation to update any forward-looking statements at any time. Our earnings release, 10-Q and supplemental earnings presentation are available on the financial section of our website at kaynebdc.com. Now I'd like to turn the call over to Ken Leonard.

Good morning, everyone. I'm pleased to report that Kayne Anderson BDC delivered another quarter of solid performance. demonstrating the continued resilience of our value-adding approach in what remains a challenging and bifurcated market environment. I'll provide an overview of KBDC's performance this quarter. Frank Karl will then provide a more detailed overview of our portfolio with some relevant market commentary, and Terry Hart will conclude with KBDC's financial results. For the second quarter of 2026, we generated net investment income of $0.42 per share. Our Board of Directors has declared a regular quarterly dividend of $0.40 per share for the third quarter. This represents our annualized dividend yield of approximately 10% based on our current NAV per share. The dividend will be payable on October 16 to shareholders of record as of September 30. This payout represents a dividend coverage ratio of 105%. Our annualized return on equity based on net investment income was 10.5%, reflecting the attractive risk-adjusted returns we have continued to generate for our shareholders. As communicated in our last 2 earnings calls, we remain confident in our ability to sustain this dividend through 2026. Net asset value per share as of June 30 was $16, representing a decline of $0.23 per share or approximately 1.4% from the prior quarter's $16.23. We experienced realized and unrealized losses totaling $0.26 per share during the quarter, driven primarily by fair market value adjustments on certain portfolio positions and our completion of our strategic rotation out of our remaining broadly syndicated loan positions. These losses were partially offset by net investment income exceeding the dividend combined with the impact of accretive share repurchases. Our overall credit quality remains strong. KBDC's nonaccrual rate was 2.7%, up just 20 basis points from last quarter. In terms of specific companies, we added 4 over and diversifies last out tranche to nonaccrual status and took Sundance off nonaccrual as the position was fully realized during the quarter. Turning to investment activity. We closed $138.7 million in new private credit commitments during the quarter, demonstrating our continued ability to source attractive opportunities that meet our rigorous underwriting standards. The pricing environment for new originations remains favorable with our new floating rate loans averaging 566 basis points over SOFR during the quarter, which was 17 basis points wider than in the first quarter. The current pricing environment reflects sustained demand for private credit amongst middle market borrowers, slowing capital formation in non-traded and private vehicles and a general increase in risk premiums. Regardless, we remain disciplined and passed on numerous opportunities during the second quarter, where either risk-adjusted returns fell short of our standards, sector exposure raise concern or leverage profiles exceeded our comfort levels. We continue to see quality deal flow from sponsors who value our consistency, our ability to move quickly on transactions that fit our criteria and our track record is constructive partners. Our fundings for the quarter totaled $146.4 million, which included both new investments and draws existing unfunded commitments from our portfolio companies. On the repayment side, we saw $67.9 million of activity including $38.1 million of private credit repayments and $29.8 million from the sale of our remaining broadly syndicated loan positions, which we have discussed in our prior calls. Turning to our balance sheet strength and liquidity position. We ended the quarter with a debt-to-equity ratio of 1.17x, comfortably within our target range of 1 to 1.25. This positioning gives us flexibility to be opportunistic when we see compelling investment opportunities while maintaining conservative leverage. Our total liquidity position as of June 30 was $476.7 million, consisting of $39.7 million in cash and cash equivalents and $437 million in undrawn committed debt capacity under our credit lines. M&A activity in our core middle market segment shows encouraging signs. After muted activity in late 2025 and in the first half of 2026, deal flow has picked up modestly in recent months. Private equity sponsors are more active and financing markets while selective remain open for quality business. We continue to see opportunities in our target sectors and win our fair share of pursued deals based on reputation and execution capabilities. For the second half of 2026, we expect to maintain this disciplined approach deploying capital that meets our return and credit standards while preserving defensive positioning and sector diversification. In closing, we are encouraged that investors are increasingly differentiating BDCs based on portfolio composition, sector exposure, credit performance and track record rather than treating the sector as homogenous. We expect this trend to continue as performance divergence among managers becomes more pronounced. Our conviction in our value lending strategy has never been stronger, and we remain fully committed to delivering sustainable value for our shareholders. I will now pass the call over to Frank Karl to discuss our portfolio.

Thanks, Ken. As of June 30, our portfolio includes 104 companies with a fair value of $2.3 billion plus $293 million of unfunded commitments. Since quarter end, we have closed or are finalizing $69 million of new commitments as we've seen volumes remain relatively robust over the summer months. We do expect some realizations in third quarter, including some that slipped from second quarter to the third quarter. As such, we are not expecting a significant change in leverage in the third quarter. Investments in KBDC's portfolio, excluding those on our watch list and opportunistic investments have a weighted average leverage of 4.5x, interest coverage of 2.4x and loan to enterprise value of approximately 43%. Weighted average EBITDA of our private middle-market portfolio companies is $53.7 million, reflecting our focus on established middle-market businesses with meaningful scale. Company count declined by 1, reflecting our exit from the broadly syndicated loan portfolio and some realizations in the quarter. The portfolio remains highly diversified, aversion size of approximately 1% of fair value, and our top 10 investments are only approximately 20% of the portfolio. Our top 5 industry sectors, health care, commercial services and supplies distributors, food products and containers and packaging account for approximately 55% of the portfolio and have remained consistent quarter-over-quarter as we focus on avoiding sector concentration risk. Approximately 95% of our debt investments are floating rate, matched [indiscernible], predominantly float-rate liability stack, early material fixed rate investment is the SG credit loan and an 11% coupon. The SG credit platform continues to perform very well in the lower middle market asset-backed financing space. Credit performance remained strong with 2.7% of debt investments at fair value on nonaccrual versus 2.5% last quarter. As previewed on our last call, Sundance came off nonaccrual in the second quarter. However, regimen sale process is still ongoing while the company's performance continues to improve. We look forward to providing an update on regimen next quarter. As Ken mentioned, we moved over and diversified last out tranche to nonaccrual this quarter, which did move our nonaccruals up 20 basis points. Total PIK income for the quarter dropped to 4.5%, down 300 basis points from last quarter. Given last quarter, we had elevated PIK income due to a onetime catch-up on Arborworks. Terry will provide more specifics. Weighted average yield was 10.2% on fair value, excluding nonaccruals, up slightly from 10.1% last quarter. As we continue to invest and manage our portfolio, we remain focused on the geopolitical and macroeconomic risks that require our constant attention. This reinforces our focus on borrowers, strong interest coverage and conservative leverage, providing meaningful cushion against continued rate pressure. We remain willing to be patient and wait for opportunities that meet our standards rather than deploy capital industry. Broader market sentiment has kept BDC valuations depressed for several quarters. headlines around redemption pressures at large nontraded BDCs creates a disconnect with higher-quality public BDCs, delivering strong operational performance, consistent dividend coverage, stable credit metrics and disciplined capital deployment. We believe that the higher quality managers will be able to close the price that have discounts as market will increasingly reward BDC like KBDC that demonstrate consistent returns disciplined and defensive market positioning. With that, I'll turn it over to Terry.

Thanks, Frank. I'll begin by reviewing our financial results. During the second quarter, we earned net income per share of $0.16 and net investment income per share of $0.42 compared to $0.43 the prior quarter and $0.02 above our dividend. Total investment income for the second quarter was $55.7 million as compared to $57.3 million in the prior quarter. The decrease in investment income was primarily a result of $2 million less PIK interest income related to our investment in Arborworks, which moved to accrual status in the first quarter and recognized income that had been deferred since the fourth quarter of 2023. Interest income was also lower due to American soccer being on nonaccrual status during the second quarter but was offset by income from new investments and the rotation out of the remaining broadly syndicated loans. Accelerated amortization of OID related to realization activity was approximately $0.3 million during the quarter and PIK interest represented 4.5% of total investment income for the quarter. Additionally, the 10 basis point increase in our portfolio yield was primarily a result of rotating out of our remaining positions into higher-yielding private credit investments. Total expenses for the second quarter were $28.2 million compared to $28.4 million in the prior quarter. The decrease was primarily a result of $1.2 million lower incentive fees, partially offset by a $0.7 million increase in interest expense on higher average credit facility borrowings during the second quarter. During the quarter, our incentive management fees were reduced by the 12-quarter incentive fee cap. During the second quarter, we had realized losses of $12.2 million related to the liquidation of our investment in Sundance that resulted in realized loss of $9.4 million, the restructure of our debt investment in diversify that resulted in a $0.9 million realized loss, and we recognized $1.9 million in realized losses as we rotated out of our remaining broadly syndicated lumps. During the quarter, we had net unrealized losses on the portfolio of $4.6 million compared to unrealized losses of $9 million in the prior quarter. The unrealized losses were largely the result of negative fair value changes to our investment in American Soccer 4 Over and Regiment Security, partially offset by the reversal of unrealized losses related to Sundance, Diverzify and the remaining broadly syndicated loans that were realized this quarter. As of June 30, total assets were $2.3 billion and net assets were $1.1 billion. As of that date, our net asset value was $16 per share. The decrease of $0.23 from $16.23 per share as of March 31, was comprised of $0.26 per share related to net realized and unrealized losses partially offset by $0.02 of net investment income in excess of our dividend and $0.01 related to accretive share repurchases during the second quarter. At the end of the second quarter, we had debt outstanding of $1.238 billion and our debt-to-equity ratio was 1.17x, which is an increase from 1.05x at the end of the first quarter. The increase in leverage during the second quarter was largely a result of expected realizations being delayed rather than a deliver move higher. We plan to operate around the midpoint of our debt-to-equity target range with some quarters being higher or lower depending on realization activity. Now turning to our distributions. On August 5, our Board of Directors declared a regular dividend for the third quarter of $0.40 per share to shareholders of record on September 30. As of June 30, our undistributed net investment income was approximately $0.26 per share. And finally, for the remainder of 2026, we plan to stay focused on our value lending strategy, which we believe will continue to differentiate us from our competitors. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Kenneth Lee with RBC Capital Markets.

Wondering about prepayment activity, and I realize it's difficult to predict. But any kind of outlook around where or what level of prepayment activities could trend over the new trend there?

Thanks, Ken. This is Frank. I think you said it right. It is very hard to predict. We had a couple of names push from expected realizations in second quarter to third quarter. And I think we have for second half of the year something around 5% of the portfolio scheduled as maturities. So I think broadly, something in line with that would be a reasonable expectation, absent some material pickup in exit activity inside the portfolio.

Got you. Very helpful there. And then one follow-up, if I may. Just on the investment portfolio itself. Could you talk about any sort of watch list that you may have and perhaps where that's trending over the last few quarters?

Sure. And again, this is Frank. Watch list right now is at, call it, 5.5% of fair market value of the debt portfolio. that's been relatively consistent over a pretty extended period of time. I think we generally think something in that mid-single-digit range. Again, this is inclusive of nonaccrual investments, which should make that clear. But something in that range is, I'd say, are typical over, call it, the last decade plus speaking at the platform level more broadly. Obviously, there are periods where you're a little bit lower than that, a little bit higher than that. But I think we look at watch list broadly -- I'm sorry, watch list specifically credit more broadly and think that we're sort of in a period where I think it would be disingenuous to say that there's no credit noise out there, right? I think every call we've listened to this quarter, and you can see it in our reporting, right? There is a little bit of signs of increased stress more nonaccruals, more restructurings, picking comes up a little bit, et cetera, as down across the board. But I think we're seeing something of sort of a shallow slow slowdown, I would characterize it. And I think you're seeing that in a relatively stable watch list number.

Your next question comes from the line of Paul Johnson with KBW.

So it sounds like the watch list is relatively stable quarter-over-quarter. But I mean, in terms of like the nonaccrual marks this quarter, I think most of them were pretty much most of them are marked lower quarter-over-quarter the lower 50% or so, call it, a fair value. I mean what does that, I guess, suggest about your expectation over recoveries on those assets? And maybe how does that line up with the -- Kayne Anderson platform historically? And are you also just kind of leaving -- I guess, they're building in some level of conservatism there potentially for better-than-expected, I guess, recoveries.

Yes. Thanks, Paul. And again, this is Frank. Yes, I think we certainly saw some downward moves on the watch list broadly. I would call out that Regiment, the last out piece there. Yes, there was a markdown in the second quarter. We're expecting an exit in the third quarter that has a little bit of upside to that current mark. So not all negative, broadly speaking. But as far as where these things are marked, I mean, I think we try to be conservative in our process, and it's the same process for the BDC portfolio as it is for all investments across our entire loan book, and that's almost 100% overlap between the private funds and separate accounts, et cetera and BDC. So I don't think we want to get super specific about any of these situations other than to say we historically have thought of ourselves and try to act as conservatively as possible in situations that are sort of stressed then with some unknowns by their very nature.

Got it. Very helpful. My last question would just be on the BSL rotation this quarter. When you're rotating -- I guess maybe just speaking about this quarter, but the rotation there, what is kind of like the spread like roughly what's the spread pickup there in terms of what's going into the 566 direct lending origination spread this quarter. And I guess, the reason for the timing on that, just more so not necessarily to draw down additional leverage on the portfolio and kind of access to monetize these assets or just more of an opportunistic sale that you saw during the quarter?

Yes. So we're out of all the broadly syndicated loans at this point. Those were ballpark, silver plus 300 directionally. So you're picking up 250 basis points, plus or minus on a rotation out of those names. I don't think we were we were not looking to time the market specifically on an exit. I think we had opportunities to invest that capital in the core of our business, these middle market loans. And the BSL book was remaining names. And just to be clear, right, I think we were down to 3 or 4 of those names last quarter. Timing was right to move on as we've been communicating to you all and investors since our IPO, that, that was a temporary position for us.

Your next question comes from the line of Finian O'Shea with Wells Fargo Securities.

So part of the story line were getting this quarter is competition in the sort of core lower middle market is continuing to pick up. A lot of the players there are still raising private funds and such. And then maybe more looking at your sort of focus in the value sector. So seeing if you could give us some feel on what the competition is like, how much sort of wallet is showing up for the deals that you prefer?