Kayne Anderson BDC, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Until the completion of an Exchange Listing, if any, our outstanding Shares will be offered and sold in private offerings exempt from registration under the Securities Act under Section 4(a)(2) and Regulation D. There is no public market for our Shares currently, nor can we give any assurance that one will develop. Because Shares are being acquired by investors in one or more transactions “not involving a public offering,” they are “restricted securities” and may be required to be held indefinitely. Our Shares may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) our consent is granted, and (ii) the Shares are registered under applicable securities laws or specifically exempted from registration (in which case the stockholder may, at our option, be required to provide us with a legal opinion, in form and substance satisfactory to us, that registration is not required). Accordingly, an investor must be willing to bear the economic risk of investment in the Shares until we are liquidated. No sale, transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of the Shares may be made except by registration of the transfer on our books. Each transferee will be required to execute an instrument agreeing to be bound by these restrictions and the other restrictions imposed on the Shares and to execute such other instruments or certifications as are reasonably required by us. Holders Please see “Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for disclosure regarding the holders. As of March 4, 2022, we had 258 holders of record of our common stock. Distributions The following table reflects the distributions declared and payable for the year ended December 31, 2021 (dollars in thousands, except per share amounts). Date Declared Record Date Payment Date Dividend per Share Total Dividend April 23, 2021 April 20, 2021 May 14, 2021 $ 0.15 $ 850 July 14, 2021 July 20, 2021 July 27, 2021 $ 0.22 $ 2,024 October 18, 2021 October 22, 2021 November 2, 2021 $ 0.25 $ 3,025 December 2, 2021 December 29, 2021 January 18, 2022 $ 0.24 $ 4,615 $ 0.86 $ 10,514 Dividend Reinvestment Plan The following table summarizes the amounts received and shares of common stock issued to shareholders pursuant to our dividend reinvestment plan during the year ended December 31, 2021 (dollars in thousands, except per share amounts). Dividend record date Dividend payment date DRIP shares issued DRIP value April 20, 2021 May 14, 2021 1,361 $ 21 July 20, 2021 July 27, 2021 37,460 $ 585 October 22, 2021 November 2, 2021 55,792 $ 886 94,613 $ 1,492 For the dividend declared on December 2, 2021 and paid on January 18, 2022, there were 55,590 shares issued with a DRIP value of $902. These shares are excluded from the table above, as the DRIP shares were issued after December 31, 2021. All of the dividends declared during the year ended December 31, 2021 were derived from ordinary income, determined on a tax basis. 52 Recent Sales of Unregistered Securities As set forth in the table below (dollars in thousands, except per share amounts), during the year ended December 31, 2021, we issued and sold 19,132,622 shares of common stock at an aggregate offering amount of approximately $299.5 million. The issuance of the shares of common stock was exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) and Rule 506(b) of Regulation D thereof and previously reported by us on our current reports on Form 8-K. Common stock issue date Offering price per share Common stock shares issued Aggregate offering amount February 5, 2021 $ 15.00 5,666,667 $ 85,000 April 23, 2021 $ 15.57 3,532,434 $ 55,000 July 23, 2021 $ 15.72 2,862,595 $ 45,000 October 28, 2021 $ 15.98 2,502,612 $ 40,000 December 2, 2021 $ 16.31 4,568,314 $ 74,501 Total common stock issued 19,132,622 $ 299,501 ITEM 6. [RESERVED] The selected financial data previously required by Item 301 of Regulation S-K has been omitted in reliance on SEC Release No. 33-10890, Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Overview and Investment Framework 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. 53 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 (collectively, “secured middle market 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 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 and a term loan that is collateralized by all other assets of the borrower. Depending on market conditions, we expect that at least 90% of our portfolio (including investments purchased with proceeds from borrowings) will be invested in secured middle market loans. It is anticipated that most of these investments will be in core middle market companies, with the remainder in upper middle market companies. The remaining 10% of our portfolio may be invested in higher-returning investments, including, but not limited to, equity securities purchased in conjunction with secured middle market loans and other opportunistic investments (collectively “Opportunistic Investments”), including junior debt, real estate debt and infrastructure credit investments. We expect that the secured middle market loans we invest in will generally have stated maturities of no more than six years. We intend to implement our investment objective by (1) accessing the established loan sourcing channels developed by Kayne Anderson’s middle market private credit team, which includes an extensive network of private equity firms, other middle-market lenders, financial advisors and intermediaries, and management teams, (2) selecting investments within our middle-market company focus, (3) implementing Kayne Anderson’s middle market private credit team’s proven 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 credit terms of each investment. 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, where applicable), 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. Recent Developments On January 24, 2022, we sold 4.2 million shares of common stock at a price of $16.36 per share for an aggregate offering amount of $68.6 million. As of the same date, we have subscription agreements with investors for an aggregate capital commitment of $701.5 million (including a $33.3 million capital commitment that is contingent on the Company meeting certain conditions) to purchase shares of common stock ($333.4 million of the commitments are undrawn). On January 31, 2022, we increased our Subscription Credit Agreement commitment amount from $150 million to $175 million. All other terms of the Subscription Credit Agreement remain substantially the same. On February 18, 2022, we and KABDCF refinanced the senior secured credit facility (the “Loan and Security Agreement” or “LSA”) with two new credit facilities – the Corporate Credit Facility and the Revolving Funding Facility. See “ Financial Condition, Liquidity and Capital Resources – Credit Facilities .” 54 Portfolio and Investment Activity As of December 31, 2021, we had 99 debt investments and one equity investment in 47 portfolio companies with an aggregate fair value of approximately $578.4 million and an amortized cost of $566.6 million consisting of first lien senior secured debt and equity investments. Listed below are our top ten portfolio companies and industries represented as a percentage of total long-term investments as of December 31, 2021: Portfolio Company Industry Fair Value ($ in millions) Percentage of long-term investments 1. 4 Over International, LLC Commercial & professional services $ 24.9 4.3 % 2. Corbett Technology Solutions, Inc. Telecommunication services $ 23.5 4.1 % 3. American Equipment Holdings LLC Commercial & professional services $ 23.3 4.0 % 4. Eastern Wholesale Fence Capital goods $ 22.7 3.9 % 5. Centerline Communications, LLC Telecommunication services $ 22.2 3.8 % 6. Arborworks Acquisition LLC Commercial & professional services $ 21.8 3.8 % 7. Home Brands Group Holdings, Inc. (ReBath) Household & personal products $ 21.0 3.6 % 8. USALCO, LLC Materials $ 19.6 3.4 % 9. I.D. Images Acquisition, LLC Capital goods $ 18.7 3.2 % 10. CGI Automated Manufacturing, LLC Capital goods $ 18.5 3.2 % As of December 31, 2021, our weighted average total yield to maturity of debt and income producing securities at fair value was 7.5%, and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 7.7%. Our investment activity for the year ended December 31, 2021 is presented below (information presented herein is at par value unless otherwise indicated). For the year ended December 31, 2021 ($ in millions) New investments: Gross investments $ 770.7 Less: sold investments (94.9 ) Total new investments 675.8 Principal amount of investments funded: Private credit investments $ 640.9 Liquid credit investments 20.9 Total principal amount of investments funded 661.8 Principal amount of investments sold: Private credit investments (74.0 ) Liquid credit investments (20.9 ) Total principal amount of investments sold or repaid (94.9 ) Number of new investment commitments 115 Average new investment commitment amount $ 6.7 Weighted average maturity for new investment commitments 4.3 years Percentage of new debt investment commitments at floating rates 100.0 % Percentage of new debt investment commitments at fixed rates 0.0 % Weighted average interest rate of new investment commitments 7.0 % Weighted average spread over LIBOR of new floating rate investment commitments 6.0 % Weighted average interest rate on investment sold or paid down 6.4 % 55 The table below describes long-term investments by industry composition based on fair value as of December 31, 2021: December 31, 2021 Commercial & professional services 19.6 % Capital goods 19.5 % Consumer durables & apparel 15.8 % Telecommunication services 8.8 % Health care equipment & services 8.5 % Household & personal products 7.4 % Materials 7.0 % Automobiles & components 4.1 % Food & beverage 2.9 % Software & services 2.4 % Retailing 1.6 % Pharmaceuticals, biotech & life sciences 1.5 % Diversified financials 0.9 % Total 100.0 % Results of Operations We commenced investment operations on February 5, 2021. For the year ended December 31, 2021, our total investment income was derived from our initial portfolio of investments. All investments were income producing, and there were no loans on non-accrual status as of December 31, 2021. The following table represents the operating results for the years ended December 31, 2021 and 2020: For the years ended December 31, 2021 December 31, 2020 ($ in millions) ($ in millions) Total investment income $ 18.8 $ - Less: Net expenses 8.6 0.8 Net investment income 10.2 (0.8 ) Net realized gains (losses) on investments 0.3 - Net change in unrealized gains (losses) on investments 11.8 - Net increase (decrease) in net assets resulting from operations $ 22.3 $ (0.8 ) Investment Income Investment income for the year ended December 31, 2021 totaled $18.8 million and consisted primarily of interest income on our debt investments. 56 Expenses We commenced investment operations on February 5, 2021. Operating expenses for the years ended December 31, 2021 and 2020, were as follows: For the years ended December 31, 2021 December 31, 2020 ($ in millions) ($ in millions) Interest and debt financing expenses $ 4.4 $ - Management fees 2.1 - Other operating expenses 1.3 - Directors fees 0.3 - Initial organization costs 0.2 0.8 Deferred offering costs 0.2 - Incentive fees 0.1 - Total expenses $ 8.6 $ 0.8 Total expenses for the years ended December 31, 2021 and 2020 included $0.2 million and $0.8 million of initial organization expenses, respectively, and $0.2 million and zero of deferred offering costs, respectively. Net Unrealized Gains (Losses) on Investments We fair value our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses. We commenced investment operations on February 5, 2021. As such, there are no unrealized gains or losses for the year ended December 31, 2020. During the year ended December 31, 2021, net unrealized gains (losses) on our investment portfolio were comprised of the following: For the year ended December 31, 2021 ($ in millions) Unrealized gains on investments $ 11.8 Unrealized (losses) on investments - Net change in unrealized gains (losses) on investments $ 11.8 The change in unrealized appreciation for the year ended December 31, 2021 totaled $11.8 million, which primarily related to our investments in the following table: For the year ended December 31, 2021 ($ in millions) Portfolio Company Eastern Wholesale Fence 0.6 4 Over International, LLC 0.6 USALCO, LLC 0.5 Corbett Technology Solutions, Inc. 0.5 Arborworks Acquisition LLC 0.5 American Equipment Holdings LLC 0.5 Curio Brands, LLC 0.5 EIS Legacy, LLC 0.5 CGI Automated Manufacturing, LLC 0.5 Centerline Communications, LLC 0.4 Home Brands Group Holdings, Inc. (ReBath) 0.4 SGA Dental Partners Holdings, LLC 0.4 Guardian Dentistry Partners 0.4 Sundance Holdings Group, LLC 0.4 PH Beauty Holdings III, Inc. 0.4 Siegel Egg Co., LLC 0.3 Vehicle Accessories, Inc. 0.3 BCI Burke Holding Corp. 0.3 Broder Bros., Co. 0.3 United Safety & Survivability Corporation (USSC) 0.3 Other portfolio companies 3.2 Total Unrealized Appreciation $ 11.8 57 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 or other senior securities) to total indebtedness and other senior securities 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 December 31, 2021, our asset coverage ratio was 217%. 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. Over the next twelve months, we expect that cash and cash equivalents, taken together with our undrawn capital commitments and available capacity under our credit facilities, will be sufficient for our investing activities to conduct our operations. In the long term beyond twelve months, we expect that our cash and liquidity needs will continue to be met by cash generated from our ongoing operations as well as financing activities. As of December 31, 2021, we had $267 million borrowed under our credit facilities and cash and cash equivalents of $5.7 million (including short-term investments). As of March 4, 2022, we had $235 million borrowed under our credit facilities and cash and cash equivalents of $4.5 million (including short-term investments). Capital Contributions As of March 4, 2022, we had aggregate capital commitments of $701.5 million (including a $33.3 million capital commitment that is contingent on us meeting certain conditions). As of March 4, 2022, we had undrawn capital commitments (excluding the $33.3 million capital commitment that is contingent on us meeting certain conditions) of $300.1 million from investors ($368.1 million or 55.1% funded). Credit Facilities From February 5, 2021 to February 17, 2022, Kayne Anderson BDC Financing, LLC, (“KABDCF”), our wholly owned, special purpose financing subsidiary, had a senior secured credit facility (the “Loan and Security Agreement” or “LSA”) with a maximum commitment amount of up to $200 million. On February 18, 2022, we and KABDCF refinanced the LSA with two new credit facilities described below (the Corporate Credit Facility and the Revolving Funding Facility). Corporate Credit Facility: We are party to a senior secured revolving credit facility (the “Corporate Credit Facility”), that has a total commitment of $275 million. The facility’s commitment termination date and the final maturity date are February 18, 2026 and February 18, 2027, respectively. The Corporate Credit Facility also provides for a feature that allows us, under certain circumstances, to increase the overall size of the Corporate Credit Facility to a maximum of $550 million. The interest rate on the Corporate Credit Facility is equal to Term SOFR plus an applicable spread of 2.35% per annum (which includes a SOFR adjustment spread of 0.10%) or an “alternate base rate” (as defined in the agreements governing the Corporate Credit Facility) plus an applicable spread of 1.25%. We are also required to pay a commitment fee of 0.375% per annum on any unused portion of the Corporate Credit Facility. Revolving Funding Facility: We and our wholly owned, special purpose financing subsidiary, KABDCF, are party to a senior secured revolving funding facility (the “Revolving Funding Facility”), that has a total commitment of $250 million. The Revolving Funding Facility is secured by all of the assets held by, and the membership interest in, KABDCF. The end of the reinvestment period and the stated maturity date for the Revolving Funding Facility are February 18, 2025 and February 18, 2027, respectively. The interest rate on the Revolving Funding Facility is equal to daily SOFR plus 2.35% per annum. KABDCF is also required to pay a commitment fee of between 0.50% and 1.50% per annum depending on the size of the unused portion of the Revolving Funding Facility. Subscription Credit Agreement: We are party to a senior secured revolving credit agreement that includes a capital call facility (the “Subscription Credit Agreement”). The Subscription Credit Agreement permits us to borrow up to $175 million, subject to availability under the borrowing base which is calculated based on the unused capital commitments of the investors meeting various eligibility requirements. The Subscription Credit Agreement has a maximum commitment of $175 million and the interest rate under the facility is equal to Term SOFR plus 1.975% (subject to a 0.275% floor). We are also required to pay a commitment fee of 0.25% per annum on the unused portion of the Subscription Credit Agreement. The Subscription Credit Agreement will expire on December 31, 2022. 58 Contractual Obligations A summary of our significant contractual principal payment obligations related to the repayment of our outstanding indebtedness at December 31, 2021 is as follows: Payments Due by Period ($ in millions) Total Less than 1 year 1-3 years 3-5 years After 5 years Loan and Security Agreement (LSA) $ 162.0 $ - $ 162.0 $ - $ - Subscription Credit Agreement 105.0 - 105.0 - - Total contractual obligations $ 267.0 $ - $ 267.0 $ - $ - Off-Balance Sheet Arrangements As of December 31, 2021, we had an aggregate $97.8 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. Critical Accounting Estimates 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 this Annual Report. See Note 2 to our consolidated financial statements for the year ended December 31, 2021, for more information on our critical accounting policies. Investment Valuation 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. 59 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. Refer to Note 5 – Fair Value – for more information on the Company’s valuation process. 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. 60 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. 61