Kayne Anderson BDC, Inc.

Hello and welcome to Kane Anderson BDC Inc's second quarter 2025 earnings call. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Andy Wedderburn-Maxwell, Managing Director. Please go ahead.

Good morning and welcome to Kane Anderson BDC Inc's second quarter 2025 earnings call. Today I'm joined by Doug Goodwill and Ken Leonard, co-CEOs of KBDC, Frank Karl, Senior Vice 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, 10Q, and supplemental earnings presentation are available on the financial section of our website at kanebdc.com. Now I'd like to turn the call over to Ken Leonard.

Thank you, Andy, and thank you everyone for joining us on the call today. I'd like to start with an overview of our financial results before discussing investment activity during the second quarter, current market conditions, and our recent investment in SG Credit, announced just after the quarter end. I'll then turn over the call to Frank Karl to go over our portfolio makeup and performance, and finally, Terry Hart will conclude with details on KBDC's financial results. As of the close yesterday, we reported solid second quarter results, generating stable net investment income of 40 cents a share and net income of 35 cents a share, representing .8% annual return on equity. During the quarter, we distributed 40 cents per share regular dividend and a 10 cents per share special dividend in conjunction with the final of three lockup releases occurring on May 21st. Our NAV at quarter end was $16.37, a .8% decline quarter over quarter, due in part to our final 10 cent special dividend payment coupled with some minor unrealized losses. At quarter end, our estimated spillover net investment income was 12 cents per share. Despite the trade and policy related disruptions across most markets during Q2 25, we had 129 million of gross new private credit investments. In the quarter, we also funded a total of 129 million, of which 101 million represented new investments and 28 million represented existing previously unfunded commitments. This is in line with private credit fundings from Q2 24 of 136 million. While Q2 25 generally represented something of a market wide slowdown, we remained quite active, particularly in the latter part of the quarter. We firmly believe that our ability to execute on our strategy, even in challenging market conditions, is representative of our value add to our private equity clients and shareholders alike. While Q2 25 was a slower quarter industry wide, we're seeing signs of improving market landscape for transaction activity. Our deal team has seen a noticeable uptick in market sentiment in recent weeks and we have seen a significant increase in total activity to match. We believe that this will lead to a solid second half of the year, anchored by a reasonably attractive macroeconomic backdrop, along with rate cut prospects, but tempered by the likely continuation of tariff noise. Transactions that we have reviewed recently and in Q2 25 mostly have average spreads over SOFR in the 500 to 600 basis point range. And our second quarter middle market loans had an average spread over SOFR of approximately 540 basis points. As always, we remain very selective and disciplined in our capital allocation. Repayment of private credit loans during the quarter totaled $72 million, up from $41 million in the second quarter of 2024, but down from $86 million in the first quarter of 2025. Given the continued relative strength of the broadly syndicated markets and our success and originations, we continued our previously stated strategy to reduce the size of our broadly syndicated loan portfolio and replace those lower yielding credits with higher yielding loans within our lending strategy. In the second quarter of 2025, we had repaid or sold out $47 million of broadly syndicated loans and have continued to strategically exit these investments in the third quarter. We remain focused on winding down our broadly syndicated loan portfolio and rotating into wider spread private credit loans over the balance of the year. When considering all funding and repayment activity, net investment activity for the quarter was $10 million. This increase raised our debt to equity ratio to .91 times above our first quarter 2025 debt to equity ratio of .86 times. The third quarter is off to a strong start, bolstered in part by our previously reported investment in SG credit, which we'll discuss later. We feel we're on pace to hit our target leverage range of one to one in a quarter in the third quarter, also continuing the execution of our arbitrage with respect to exiting our remaining broadly syndicated loans. Shifting to the portfolio, we are very pleased with the performance and health of our loan book, which remains conservatively positioned with 98% first lien senior secured loans with an average loan to value of approximately 43%. As a percentage of fair value, investments on non accrual were flat quarter over quarter at .6% of fair value. Although we did add one very small position in non accrual status in the quarter. Given the high proportion of investments where we are lead or co-lead, coupled with our highly experienced workout team, we believe we are well positioned to drive positive outcomes for our shareholders in these situations. Turning to events post quarter close, in mid-July we announced an investment into SG credit, a leading lower middle market credit platform. The investment, which is structured as an $80 million term loan structured inside of NAV, with a $34 million delayed draw facility, is immediately accretive to earnings with a yield on funded debt north of 11%. KBDC made a $12 million equity investment for .5% ownership of SG credit. Lastly, on August 5th, we launched a private placement unsecured notes offering and will provide further details post pricing. Given the recent strength in the private placement market, with spreads near their tightest levels compared to public markets, we felt this was an opportune time to continue to diversify our sources of funding. I will now pass the call over to Frank Karl to discuss our portfolio in more detail.

Thanks Ken. Turning to our portfolio composition, as of June 30th, 2025, KBDC's portfolio included 114 individual portfolio companies representing fair market value of approximately $2.2 billion of investments. We have another $251 million of unfunded commitments comprised of a mix of unfunded revolvers and delayed draw term loans for total commitments of approximately $2.5 billion. Since June 30th, KBDC has closed or is in the final closing process on an additional $176 million of fundings, highlighting the continued improvement in market conditions previously touched on by Ken. This number also includes the investment into SG credit. We have a number of other higher probability investments in process such that we think there is a reasonable amount of upside to third quarter 2025 originations relative to these amounts. As of June 30th, 2025, investments in KBDC's portfolio, excluding those on watch list, have weighted average leverage of 4.3 times, interest coverage ratio of 2.5 times, and loan to enterprise value of approximately 43%. We have also built a diversified portfolio with an average position size of .9% of fair value, and our top 10 investments represent only 18% of our portfolio. Outside of the specific credit statistics associated with our portfolio, our investments are well structured. 98% of our portfolio is invested in first-lane securities, and 99% of our private middle market investments are backed by private equity sponsors. Additionally, all of our core first-lane private middle market investments have financial covenants. 100% 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. Credit performance across our portfolio remains strong to date, with only .6% of total debt investments of fair value on non-accrual, represented by only five positions out of those 114. Lastly, we've built this conservative portfolio with a healthy weighted average yield of approximately .4% on fair value of investments. This yield has been achieved with approximately 8% of our portfolio still invested in broadly syndicated loans. While we have continued to rotate out of these positions, we still have some upside as we reinvest this capital into higher-yielding private middle market investments. I want to take this opportunity to provide some additional context around our recent investment into SG Credit. The company was founded in 2013 and has originated over $1 billion in commitments in more than 200 companies across its three lending verticals, commercial finance, consumer products, and software and technology. The core lending strategies are focused primarily on asset-backed facilities, recurring revenue loans, and some cash flow lending, all on what we would consider the lower middle market. Kane Anderson has a long history with many of the principles of SG Credit, including having overlapped at previous institutions. SG Credit has built a solid, diversified portfolio of loans to businesses in this smaller end of the market with an underwriting strategy and credit philosophy that mirrors much of what we do at KBDC. We believe that the investment we structured here represents a measured first step into this market where we can create indirect exposure for KBDC shareholders into a differentiated and attractive segment of the lower middle market via what is mostly a debt investment into a commercial finance company. The capital provided by KBDC to SG Credit will be used mostly for growth purposes on a fully funded basis. This investment will be approximately 5% of our portfolio. Switching gears to at least touch on the tariffs issue, we've continued to monitor our portfolio company's performance as tariff policies have evolved. Deal teams are in regular dialogue with management teams, and we still feel confident that most of our borrowers will be largely unaffected by the policies, since most are domestically focused, both in terms of revenue and sourcing, resulting in minimal direct tariff exposure. For those businesses that do have direct or indirect exposure through their stock, we believe that most have pricing power to pass these increased costs on to buyers. With only one new non-acrual representing .2% of our portfolio at fair value this quarter, we continue to see credit events as one-offs as opposed to at part of any meaningful trend. Looking ahead, while we expect some further volatility in markets, we're very happy with the increased level of investment activity so far in the third quarter. The strength of our originations, along with our extensive network of private equity relationships, means we can maintain a healthy pipeline of opportunities at attractive risk-adjusted returns. We believe our portfolio remains well positioned for continued earnings upside in the future as we finalize our rotation out of our remaining broadly syndicated loans and increase leverage to our stated target range of 1 to 1.25 times. With that, I'll turn it over to Terry Hart to discuss KBDC's second quarter 2025 financial results.

Thanks, Frank. Let's first review results of operations. During the second quarter, we earned net income per share of 35 cents and net investment income per share was 40 cents compared to 40 cents in the prior quarter and fully covering our dividend. We were able to maintain net investment income at this level through higher interest income resulting from rotations out of the lower-yielding broadly syndicated loans into middle market loans and despite the partial expiration of the base management fee waiver. As a reminder, in connection with our IPO, Kane Anderson instituted a 25 basis point fee waiver of our base management fee through May 23, 2025. Total investment income for the second quarter was $57.3 million as compared to $55.2 million the prior quarter. As mentioned, the increase to investment income was primarily driven by the portfolio rotations and the full quarter impact of net additions to the portfolio during the first quarter. These additions were partially offset by the .2 million impact of placing Bell USA on non-accrual status during the quarter. Our portfolio yield was unchanged quarter over quarter and PIC interest remains relatively low at 3.6 percent of interest income for the quarter. PIC income was elevated from prior quarters because -to-date interest income from centerline communications was converted to PIC during the second quarter. Additionally, during the second quarter, we had approximately .5 million of accelerated amortization of OID as a result of realization activity. Total expenses for the second quarter were $28.6 million compared to $26.5 million for the prior quarter. The increase was primarily related to higher average borrowings on our credit facilities and the partial expiration of the base management fee waiver. During the quarter, our incentive management fee was reduced by the 12 quarter look back incentive fee cap. During the second quarter, we had a small realized loss of approximately $10,000 primarily related to the sale of several broadly syndicated loans and we had net unrealized losses on the portfolio of $3.5 million compared to unrealized losses of $6.5 million in the prior quarter. The unrealized losses were primarily the result of negative fair value changes related to investments in Trademark Global, Sundance, and Seagull Egg, partially offset by positive marks on our broadly syndicated loan portfolio and Arbor Works. Additionally, we had .3 million of deferred income tax expense related to unrealized gains on equity investments held in our taxable subsidiary. As of June 30th, total assets were $2.3 billion and net assets were $1.2 billion. As of that date, our net asset value was $16.37 per share. The decrease of $0.14 from $16.51 per share as of March 31st was primarily a result of paying the final special dividend related to our IPO of $0.10 per share during the quarter and $0.06 per share related to net unrealized losses during the second quarter. Of note, during the quarter, we had one cent of accretion related to our share repurchase program. At the end of the second quarter, we had debt outstanding of $1 billion, $54 million, and our debt to equity ratio was .91 times, which was an increase from .86 times at the end of the first quarter. We anticipate achieving the low end of our debt to equity range of one times to one and a quarter times in the third quarter of 2025. During the second quarter, we continued to increase credit facility borrowings, improving the utilization of these facilities. The higher utilization of our credit facilities resulting from robust origination during the third quarter should be beneficial to net investment income over the balance of the year. As Ken mentioned earlier, during the third quarter, as we increase our leverage on our credit facilities and achieve the low end of our debt to equity range, we plan to opportunistically issue unsecured notes to provide additional credit facility flexibility and capacity. Now turning to our distributions. On August 5th, our board of directors declared a regular dividend for the third quarter of 2025 of $0.40 per share to shareholders of record on September 30th, 2025. As of June 30th, our undistributed net investment income was approximately $0.12 per share. For the balance of 2025, we anticipate relatively modest excess net investment income above our base dividend, reflecting the continued ramp of our portfolio to achieve target leverage ranges and the strategic rotation out of our lower yielding broadly syndicated loan investments into middle market loans. We believe our dividend yield and dividend coverage will more accurately reflect our steady state operations when KBDC is operating at its leverage target with the portfolio fully invested in middle market loans. With that operator, please open the line for questions.

We will now begin the question and answer session. In order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of Doug Carter with UBS. Please go ahead.

All right, this is Corey Johnson on for Doug Carter. Just wanted a quick point of clarification to see if I heard this correctly. So I think you have about 180 million less than syndicated loans on the portfolio. Did you say that you believe you'll be out of those loans by the end of the year?

Thanks, Corey. Yeah, this is Frank. Just to put a bit of a finer point on it, so in Q3, we've already exited an additional about $100 million of that book. I think the Q2 number was still remaining about $176 million. So we're down into call it lower mid $70 million of that portfolio. We'll look to strategically exit those throughout the rest of the year. Long way of saying yes.

Got it. Thank you. And this is one follow up. So you think you'll hit your target leverage as of the next quarter? Just thinking a little bit beyond that, once you hit that, where I guess do you expect it to sort of like hang out? Do you think you'll take it probably close to the midpoint of that range, or do you feel like you can operate at the higher end? Where do you think that'll wind up lying?

Yeah, Corey, this is Doug Goodwillie. Thank you for the question. Given the investment activity that we've seen in Q3 and that we're seeing in our immediate pipeline, we expect to hit one to one during this quarter, as Terry mentioned. We would expect to operate over the long term in that range of probably 1.1. Obviously, that will ebb and flow given investment activity. But we will expect to be in that range of 1.1 over the long term.

Great. Thank you. Again, to ask a question, press star followed by the number one on your telephone keypad. Our next question will come from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking my question. Just one on SG credit. Could you talk a little bit more about how you view the relative risk and return profile for originations within that business versus the rest of your core middle market investments? Thanks.

I'll start on that. This is Doug. Ken, thank you for the question. I think SG credit, as Frank touched on, focuses on the commercial finance business, consumer ADL, as well as the recurring revenue loan product. They focus really in what we would consider the lower mid-market. If our average EBITDA is median, it's usually high 30s in our direct lending product. They're focused on a different subset of the market, typically somewhere between zero to 10 million in EBITDA. Again, they're focused on the asset-based side of that in many of those companies. They tend to be smaller growth-related businesses. They have a great proprietary origination system. They source over 1,000 deals a year. Their return profile has been really strong, frankly, with gross returns in the 15% range, supported by two family offices in the past. Obviously, our investment, both in the term loan as well as in the equity, will help grow that platform from a loan perspective as well as investing into the actual structure and people of the business.

Gotcha. Very helpful there. Just one follow-up on that. It sounds like it's going to be structured. Obviously, there's a term loan component, but it's a strategic equity investment. I think in the prepared remarks, it sounds as if there could be some incremental capital allocations over time. How meaningful could the overall allocation to SG credit be over time? I just wanted to get a little bit more color on that.

Thanks. Yeah. Again, I'll start on that. Frank can weigh in as well. He worked on the deal with me on SG. I think we obviously have a significant delay draw term loan to help that business grow as well as we think it's a great platform and ultimately have the ability to invest more equity into the business to help it grow. We think it's an attractive investment on both the term loan side and clearly we don't do a lot of ... When we do equity, we're doing small equity co-invests alongside our sponsor-backed transactions, but here we believe it's a strategic long-term investment into SG. We think that a bit more equity is relevant and a good place to invest. Ultimately, Frank, I wouldn't see the investment being over 10% of the overall book. We think, again, it's a very attractive investment from both the debt and smaller equity investment as well.

Yeah. Only thing I'll add, and I mentioned it, and you fully funded our existing commitments to that vehicle, we'd be about 5% of the portfolio. To Doug's point, clearly there's some capacity above that number, but we're not expecting an outsized above something in that mid-high single digits percentage of the portfolio range, and that's ... It would take some time to get there. As we look at the immediate to medium term future, something in that 5% range is probably a reasonable assumption.

Gotcha. Very

helpful there.

Thanks again. Thank you.

Our next question will come from the line of Paul Johnson with KBW. Please go ahead.

Thank you. Good morning. Thanks for taking my questions. Just a few more on SG credit. Maybe you can just help us understand, I guess, what is the benefit of structuring the transaction with SG within the BDC versus maybe structuring something at more of the advisor level in sharing the benefits via like a JV structure or just deal flow or something of the like? Is it just the economics are better or what makes it more, I guess, beneficial for the investment to be placed in the BDC?

I'll start on that and then Terry and Frank can weigh in on maybe some of the non-consolidation issues. Paul, you've seen it in the past. Other BDCs have made investments into commercial finance companies. It's a pretty efficient way to invest. For us to be able to invest in a strong cash pay debt security we think is attractive within the actual NAB of SG and then actually invest $12 billion into the finance company to have a minority ownership there as well. From just a return perspective, we think it's a really attractive investment for the BDC and to have long-term ownership as well as a night-term loan, if you will, to help that business grow. Then Frank, Terry, you can comment a little bit more in terms of the structure and as a BDC and not facing consolidation issues. It makes it an attractive way to invest out of the BDC and how you consider leverage charges.

Yeah, I think that at a high level, structuring this through the BDC, none of this is necessarily simple and straightforward if you think about regulated vehicles, but for us as a platform, the most straightforward way to invest in a business that we see as clearly a creative was through the BDC, matched up for return targets, strategy, hold size, etc. Thought that the best place to house this was inside KBDC.

Yeah, and the only thing I would add, as Doug mentioned, we did structure this in a way that it won't be consolidated on the books of the BDC, and so it will look very much like any other investment that we have. We'll have additional disclosure just given the size of the investment, but yeah, pretty straightforward.

Appreciate that. How do you feel, I guess, longer term about the ability to basically refinance that loan, if that were ever something that you needed to do or get the loan paid off? You feel pretty good about the ability, if anything were to happen down the road where this partnership just didn't work out as planned, how do you feel about the refinancing of the debt investment?

I think we consider it similar to most of the investments we make into a, it's obviously a finance company versus a more typical operating company. It is in a liquid loan into a privately owned business. That said, we think it's a very strong loan, and I think during this process, if their chairman, Mac McNairon, he would say that there was a lot of interest in investing into the debt security here, and I think it was really a great fit between SG from the investment perspective, we wanted to be more active in the asset-back category from a cultural perspective in terms of knowing the founders and the principals there for decades, and even having a shared path that serve us as well. I think there was strong interest there, but to be clear, Paul, it is still in a liquid loan like any of the private credit investments that we make. That said, we expect to hold it and it to be a strong performer.

Thanks for that, Nick, I understood and appreciate that. Lastly, just on the accretive comment towards earnings from SG Credit, are you able to provide, I'm assuming that that means accretive in the sense that whatever the ROE or return generated on the aggregate investment is greater than what the portfolio on balance sheet is generating. Are you able to provide any kind of context around what the yield is on that debt investment at this point?

Yeah, this is Frank. I think we said that so it's fixed rate, 11 percent stream rate. There are also fees associated with that that will be amortized over the life of the loan. So on the debt side, that 11 percent plus is accretive to the book. Got

it. Appreciate it. Missed that part. Thank you very much. That's all for me. Thanks,

Paul. And that will conclude our question and answer session. I'll hand the call back over to Doug Goodwillie for any closing comments.

Thank you. And I want to thank everybody for joining us on the call today. We look forward to another strong quarter of KPTC investment activity in Q3 and also look forward to our next earnings call in mid-November. Thank you.

That concludes today's call. Thank you all for joining. You may now disconnect.