KBDC - NYSE

Hello, and welcome to Kayne Anderson BDC, Inc.'s Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to turn the conference over to Andy Wedderburn-Maxwell, Senior Vice President.

Good morning, and welcome to Kayne Anderson BDC, Inc.'s Third Quarter 2025 Earnings Call. Today, I'm joined by Doug Goodwillie and Ken Leonard, co-CEOs of KBDC; Frank Karl President; and Terry Hart, CFO. Following our prepared remarks, we will be available to take your questions. Today's call may include forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the company, our current and prospective portfolio investments, our industry, our beliefs and opinions and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict. Actual results may differ materially from those expressed or forecasted in the forward-looking statements. We ask that you refer to the company's most recent filings with the SEC for important risk factors. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. The company assumes no obligation to update any forward-looking statements at any time. Our earnings release, 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 Doug Goodwillie.

Thank you, Andy, and everyone for joining us on the call today. I'll begin by providing a high-level summary of our third quarter performance and share some thoughts on the broader market backdrop, both as it relates to the public market environment and what we're seeing in our private credit market generally. I will also walk through our strategic positioning and provide an update on our capital deployment activities. Before turning the call over to Frank Karl, to go over our portfolio makeup and performance. Finally, Terry Hart will conclude with details on KBDC's financial results. After the close yesterday, we reported another quarter of solid results as we continue to grow our portfolio and execute on our strategy. Net investment income rose $0.03 per share to $0.43 per share, representing a 10.5% annualized return on equity and net income was stable at $0.35 per share. During the quarter, we distributed our $0.40 per share regular dividend, resulting in a dividend coverage ratio of 108%. Our NAV at quarter end was $16.34, a small $0.03 decline quarter-over-quarter due in large part to a few marks in the portfolio. At quarter end, our estimated spillover net investment income was $0.16 per share. In the quarter, we had $296 million of gross new private credit investments. We funded a total of $274 million, of which $248 million represented new investments and $26 million represented existing previously unfunded commitments. This is an increase of 48% in private credit fundings over Q3 2024 fundings of $185 million. As highlighted on our last earnings call, the pickup in origination activity that we saw towards the end of Q2 has continued through Q3 and into Q4 of 2025. Our average spread on new floating rate loans in the quarter was 568 basis points over SOFR, a 28 basis point improvement over the second quarter. The majority of transactions reviewed in Q3 had spreads over SOFR in the 500 to 600 basis point range. M&A-related financings have also become more frequent in Q3 and Q4 as the health of the market improves. We believe that the spread compression that affected the middle market in late 2024 and early 2025 has plateaued. While we are not seeing broad-based spread widening yet, we continue to be pleased with the spread premium that our market broadly and especially our portfolio generates relative to the larger credit markets. Turning to the broader public market environment, BDC share prices saw notable pressure [indiscernible] as investors reevaluated their risk appetite over rising concerns regarding the potential pace of dividend rate cuts, continued spread compression in certain markets, concerns over credit quality and the potential negative impact that AI could have over the software sector. These fears have been exacerbated with a few high-profile bankruptcies that touched numerous financial institutions and created splashy headlines regarding systemic risk in the private credit space more broadly. For the sake of clarity, KBDC has no direct or indirect exposure to these situations. I would also like to highlight, unlike most public BDCs, we have no exposure to highly levered financings in the software sector. While public market sentiment is one thing, our perspective of the current credit market landscape tells a different story, one of strong fundamentals and continued resilience in the core middle market. We've been in regular dialogue with our portfolio companies and our underwriting and credit monitoring teams, and we do not see any signs of broad-based stress in our assets. Our portfolio remains high quality, senior secured and well diversified. Importantly, our nonaccrual rate dropped from 1.6% of fair value to 1.4% and remains well below historical averages for the sector. While financial regs regularly comment on the potential for a risk-reward dynamic in private credit that has become less favorable than in years past, we still see an environment where experienced investors in the middle market can earn near double-digit loan level returns for senior debt risk. Said differently, in a world of relative value, we continue to believe that our space offers a compelling value proposition versus other investment asset classes. Turning to a short reminder regarding our positioning and strategy. At KBDC, we've built a portfolio designed to perform across market cycles. With approximately 94% of our investments in first lien senior secured loans where we are the agent or coagent 80% of the time, we are structurally well positioned to protect capital and generate consistent income even in uncertain markets. You will note that the percentage of first lien loans has declined from 98% in prior quarters. This is due to our 11% fixed rate investment in the SG credit asset-backed platform. As a reminder, that investment closed in early Q3 and is not included in first lien senior debt. With our strong origination network and ability to underwrite and lead investments, we continue to find attractive deployment opportunities. Most importantly, we remain highly selective when deploying capital, which we think is evident in our portfolio statistics and credit performance. During the third quarter of 2025, repayments of private credit loans totaled $74 million, down from $83 million in the same period of 2024. Consistent with our strategic focus and supported by continued strength in the broadly syndicated loan markets, we further executed on our plan to reduce exposure to lower yielding BSL assets. Specifically, we sold down $113 million of BSL positions in the quarter and have continued this portfolio repositioning. Our goal remains to actively wind down the small remaining BSL portfolio of $67 million and redeploy that capital into higher-yielding private credit opportunities in Q4 and potentially into early Q1 2026. When considering all new fundings and repayments in Q3 net investment activity for the quarter was approximately $87 million. This increase raised our debt-to-equity ratio to approximately 1.01x, above our second quarter 2025 debt-to-equity ratio of 0.91x. As previously mentioned, our long-term target leverage range is between 1x to 1.25x, so we have some balance sheet capacity there to be able to maximize earnings in future quarters. Lastly, in September, we closed a privately placed offering of $200 million of unsecured notes. Given the strength in the private placement market in Q3, with spreads near their tightest levels compared to the public markets, we felt this was an opportune time to continue to diversify our sources of funding. This will be discussed in the financial results section further. I will now pass the call over to Frank Karl to discuss our portfolio.

Thank you, Doug. Turning to our portfolio composition. As of September 30, 2025, KBDC's portfolio included 108 individual portfolio companies, representing fair market value of approximately $2.3 billion of investments. We have another approximately $277 million of unfunded commitments comprised of a mix of revolvers and delayed draw term loans for total commitments of approximately $2.6 billion. Since September 30, 2025, KBDC has closed or is in the final closing process on $129 million of new commitments, highlighting the continued improvement in market conditions previously touched on by Doug. Investments in KBDC's portfolio, excluding those on our watch list, have weighted average leverage of 4.4x, interest coverage of 2.4x and loan to enterprise value of approximately 43%. Our portfolio did decline in a number of companies by 6%, mainly due to our rotation out of the broadly syndicated loan portfolio, which were generally smaller than average hold size such that total investments still increased. We continue to have a highly diversified portfolio with an average position size of approximately 0.9% of fair value, and our top 10 investments represent only approximately 20% of our portfolio. Outside of the specific credit statistics associated with our portfolio, our investments are well structured, 94% of our portfolio is invested in first lien securities, as Doug mentioned, this number declined from 98% in prior quarters because of our classification of the SG credit investment. 99% of our private middle market investments are backed by private equity sponsors, additionally, all of our core first lien private middle market investments have financial covenants. 96% of our debt investments are floating rate, which mirrors our liabilities where the vast majority of our debt funding utilizes floating rate borrowings as well. The only fixed rate investment in our portfolio is the SG credit loan to close in early Q3, that has an 11% fixed coupon. Credit performance across the portfolio remains strong to date with only 1.4% of total debt investments at fair value on nonaccrual, representing only 5 positions out of those 108. Lastly, we've built this conservative portfolio with a healthy weighted average yield of approximately 10.6% on fair value of investments excluding nonaccrual. This yield has been achieved with borrower level leverage levels that are considerably lower than that of many of our peers and while we continue our rotation out of BSLs and into higher spread private credit loans. At the end of the third quarter, we still had approximately 3% of our portfolio invested in broadly syndicated loans, which we intend to trade out of by year-end or shortly thereafter. As Doug mentioned, there has been something of a wave of negative media coverage surrounding private credit and BDCs over the last few months. Over time, we've seen headlines attempt to call the top of the cycle or identify the next canary in the coal mine. While no lender gets every credit decision right, we believe that deep experience is critical to consistently originating loans that are repaid with interest. Our strategy has remained steady, investing in senior secured loans to middle market businesses. That consistency is rooted in the senior teams, 14 years at Kayne Anderson and more than 2 decades of prior experience across direct lending platforms, making ours one of the most tenured partnerships in the middle market. Signs of a bubble would show elevated leverage levels, lower investment quality or deterioration in terms, none of which we have seen in our market to date. By maintaining a consistent focus on core middle market companies with strong free cash flows, operating and resilient industries, we believe we have mitigated certain credit risks, particularly in a higher rate, more challenging macro environment. We view our current nonaccrual as largely idiosyncratic rather than indicative of broader credit issues. We continue to closely monitor potential impacts from tariffs and based on recent conversations with sponsors and management teams, most of our portfolio companies, again, which are domestically focused, both in terms of revenue and supply chains have experienced minimal financial impact from these tariff-related policy changes. Looking ahead, while we anticipate some continued market volatility, we are encouraged by the notable increase in investment activity in the third quarter, although overall M&A activity has been somewhat slow to rebound. We've observed a meaningful, if anecdotal, uptick in M&A-related financings brought to investment committees in September representing 72% of all investment opportunities reviewed. Our strong and long-standing private equity relationships continue to support a healthy pipeline of opportunities, offering attractive risk-adjusted returns. We believe our portfolio is well positioned to maximize earnings as we complete our rotation out of the remaining broadly syndicated loans and modestly increased our leverage toward the middle to upper bound of our target range of 1x to 1.25x in line with our peers. With that, I'll turn it over to Terry Hart to discuss KBDC's third quarter 2025 financial results.

Thanks, Frank. Let's first review results of operations. During the third quarter, we earned net income per share of $0.35 and net investment income per share was $0.43 compared to $0.40 in the prior quarter and $0.03 above our dividend. We were able to increase net investment income from the prior quarter through higher interest income resulting from rotations out of lower-yielding broadly syndicated loans into middle market loans and our investment in SG Credit as well as interest income related to realization activity. Total investment income for the third quarter was $61.3 million, as compared to $57.3 million in the prior quarter. As mentioned, the increase to investment income was primarily driven by portfolio rotations and the impact of net additions to the portfolio during the third quarter. Our portfolio yield was unchanged quarter-over-quarter and PIK interest remained relatively low at 3.5% of interest income for the quarter. Additionally, during the third quarter, we had approximately $1.4 million of accelerated amortization of OID and prepayment fees related to realization activity. Total expenses for the third quarter were $31.3 million compared to $28.6 million for the prior quarter. The increase was primarily the result of higher average borrowings on our credit facilities and increased base management fees as a partial fee waiver was in effect during the second quarter. During the quarter, our incentive management fee was reduced by the 12-quarter look-back incentive fee cap. During the third quarter, we had a small realized loss of approximately $22,000 mainly related to the sale of several broadly syndicated loans, and we had net unrealized losses on the portfolio of $5 million compared to unrealized losses of $3.5 million in the prior quarter. The unrealized losses were largely the result of negative fair value changes related to our investments in Score Sports, Siegel Egg, and Trademark Global, partially offset by positive marks on ArborWorks and our broadly syndicated loan portfolio. Additionally, we had $0.4 million of deferred income tax expense related to unrealized gains on equity investments held in our taxable subsidiary. As of September 30, total assets were $2.3 billion and net assets were $1.1 billion, as of that date, our net asset value was $16.34 per share, a decrease of $0.03 from $16.37 per share as of June 30, was comprised mainly of $0.08 per share related to net unrealized losses, partially offset by $0.03 of net investment income in excess of our dividend and $0.02 related to accretive share repurchases during the quarter. At the end of the third quarter, we had debt outstanding of $1.153 billion and our debt-to-equity ratio was 1.01x which is an increase from 0.91x at the end of the second quarter. During the third quarter, we had higher utilization of our credit facilities resulting from robust origination and from share repurchases of $13.9 million pursuant to our $100 million share repurchase program. During the month of October, KBDC repurchased its shares valued at approximately $17 million at an average price to NAV per share of 85%. We expect that accretive share repurchases will be an additional use of leverage, moving us towards the middle or upper end of our debt-to-equity range of 1x to 1.25x. As Doug mentioned earlier, on September 9, we closed a $200 million offering of senior unsecured notes to provide KBDC additional liquidity and credit facility flexibility. In connection with the transaction, we entered into interest rate swaps to more closely align the interest rates of the notes with our predominantly floating rate investment portfolio. We were very pleased that the transaction was significantly oversubscribed, which tightened final pricing. The notes were funded and issued on October 15. Now turning to our distributions. On November 4, the Board of Directors declared the regular dividend for the fourth quarter of $0.40 per share to shareholders of record on December 31, 2025. As of September 30, our undistributed net investment income was approximately $0.16 per share. For the fourth quarter, we anticipate modest excess net investment income above our base dividend, reflecting the continued strategic rotation out of our lower-yielding broadly syndicated loan investments into middle market loans and additional accretive share repurchases. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Douglas Harter with UBS.

Great. I'm hoping you could talk a little bit more about the investment in SG credit, just kind of thoughts about whether there's potential for growth in that investment and how to think about any upside beyond the coupon you mentioned?

Thanks, Doug. This is Frank. I appreciate the question. Part of the structure of our deal with those guys did include an unfunded delayed draw term loan commitment, which will be used to finance new investments and grow the book over time. So there's sort of a built-in, we're expecting more funded dollars as part of that debt investment. And then we did disclose in the Q, we do have a call option to purchase the majority of the equity in that business going forward. The terms are not disclosed. We won't discuss them here, but I think the short story is we think there's a lot of growth potential in asset-backed lending and particularly the types of asset-backed lending that these guys are doing. So we are expecting it to be a growth engine and a larger piece of our business going forward. I think we talked about the last call, I mean we're not expecting this to be a huge portion of the portfolio, but larger than it is now, certainly. And we know the growth prospects are there.

And Doug this is Doug Goodwillie, just adding one thing. In addition to what Frank said, just to clarify, we do own through our investment at close, 22.5% of the equity of SG Credit as it stands today.

And then just you mentioned that you saw increased fees related with -- or interest income related to the repayments -- yet prepayments were down. Just hoping you could kind of flesh that out a little bit for us?

Terry, do you want to take the start there?

Yes, sure. We had 2 repayments that were driving those additional interest income from accelerated OID, but we also had some prepayment penalties or fees that were associated with that realization as well. And so the combination of those 2 items, whenever you -- whenever there's a realization prior to its stated maturity you get to bring forward all of that OID. So it was a combination of those items that resulted in. It was around $1.4 million of additional income related to those realizations alone this quarter.

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

One question I had was you mentioned in the prepared remarks that you're seeing some recovering the M&A activity, but perhaps a little bit slower to recover. I wonder if you could provide a little bit more color around that. Any thoughts as to key drivers that are potentially holding back some of the M&A activity you're seeing within? And I assume this is within the core middle market segment.

Yes. Thanks, Ken. I think for us, in the core middle market, in terms of the platform itself, we've seen pretty strong continued investment activity and are pleased with that. In addition, with rates lowering I think that's going to continue to help M&A activity as it goes forward. So we're sort of speaking broadly in terms of overall M&A activity, which has been modest relative to quarter-over-quarter increases. But I think for the Kayne Anderson Private Credit platform and KBDC, I think we've seen very nice activity. In addition, we've also seen spreads elevate in the third quarter modestly over the first half. In addition, the pipeline we have for the fourth quarter looks very strong, consists of all new platforms right now, and those platforms are -- have weighted average spreads that are consistent with what we've seen in this uptick in the third quarter. So I think our general feeling is we're not making large macroeconomic predictions about the M&A market, but we think is SOFR comes down, we'll continue to see an uptick. But we've been very pleased that from a platform perspective, we'll be at or near a record year in terms of volume.

And just one follow-up, if I may. I wonder if you could just share any of the latest thoughts you may have about dividend coverage, especially given the outlook for rates there?

Yes. Sure, Ken. For the fourth quarter, we anticipate a modest excess net income -- net investment income above our base dividend, and this reflects the continued ramp of our portfolio and share repurchases as we operate in our target leverage range of 1x to 1.25x. We're also expecting to finish that strategic rotation out of our lower-yielding broadly syndicated investments into these core middle market higher-yielding loans, and that will take place in the fourth quarter or potentially roll over into that first quarter of 2026. We believe our dividend yield and dividend coverage will more accurately reflect our steady state operations once KBDC is operating within its target leverage with the portfolio fully invested in middle-market loans. We also believe that we're well positioned to maintain our current base dividend rate for the foreseeable future despite the spread compression and reference rate headwinds that are affecting the broad market. While none of us are really immune to reference rate declines, we feel very good about the current spreads in our market, which have outperformed the upper middle market in many of our competitors. And we feel very good about that continuation into the fourth quarter. Additionally, I'll add that we've been active in our share repurchase program, which we saw in the third quarter was accretive at these lower price levels, and that's going to continue into the fourth quarter. And then finally, we have spillover income of $0.16 to provide a buffer to our dividends during 2026, if needed. So we feel very good about our positioning here.

There are no further questions at this time. I will now turn the call back over to Ken Leonard for closing remarks.

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