Item 7. Management’s Discussion and Analysis
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, Inc. was formed as a Delaware
corporation to make investments in middle-market companies and commenced operations on February 5, 2021. 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, determining the value of the investments and monitoring its investments and portfolio
companies on an ongoing basis. The Board consists of seven directors, four 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 execute on 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, 2023, our
Board of Directors (the “Board”) elected James (“Jim”) Robo as the Chairman of the Board. Mr. Robo will serve
as an interested director for us until he stands for re-election at our 2025 Annual Meeting of Stockholders.
On March 7, 2023, our Board declared a distribution of $0.47 per share
to each common stockholder of record as of March 31, 2023. The distribution will be paid on April 14, 2023.
As of March 9, 2023, we have subscription agreements with investors
for an aggregate capital commitment of $832,342 to purchase shares of common stock ($264,612 of the commitments are undrawn).
54
Portfolio and Investment Activity
As of December 31, 2022, we had 164 debt investments and 13 equity
investments in 67 portfolio companies with an aggregate fair value of approximately $1,165 million and an amortized cost of $1,148 million
consisting of first lien senior secured debt ($1,158 million fair value) and equity ($7.1 million fair value) investments.
Listed below are our top ten portfolio companies and industries represented as a percentage of total long-term investments as of December
31, 2022:
Portfolio Company
Industry
Fair
Value
($ in millions)
Percentage of
long-term
investments
1
AIDC Intermediate Co 2, LLC (Peak Technologies)
Software
$ 35.0
3.0 %
2
Genuine Cable Group, LLC
Trading companies & distributors
$ 34.5
3.0 %
3
American Soccer Company, Incorporated (SCORE)
Textiles, apparel & luxury goods
$ 33.3
2.9 %
4
American Equipment Holdings LLC
Commercial services & supplies
$ 32.1
2.8 %
5
CGI Automated Manufacturing, LLC
Trading companies & distributors
$ 31.6
2.7 %
6
BR PJK Produce, LLC (Keany)
Food products
$ 29.9
2.6 %
7
Guardian Dentistry Partners
Health care providers & services
$ 29.8
2.6 %
8
IF&P Foods, LLC (FreshEdge)
Food products
$ 29.6
2.5 %
9
Centerline Communications, LLC
Wireless telecommunication services
$ 29.4
2.5 %
10
Light Wave Dental Management LLC
Health care providers & services
$ 29.3
2.5 %
As of December 31, 2022, our weighted average
total yield to maturity of debt and income producing securities at fair value was 11.4%, and our weighted average total yield to
maturity of debt and income producing securities at amortized cost was 11.6%.
Our investment activity for the years ended
December 31, 2022 and 2021 is presented below (information presented herein is at par value unless otherwise indicated).
For the year ended
December 31,
2022
($ in millions)
2021
($ in millions)
New investments:
Gross new investments commitments
$ 771.1
$ 770.7
Less: investment commitments sold down, exited or repaid (1)
(125.9 )
(94.9 )
Net investment commitments
645.2
675.8
Principal amount of investments funded:
Private credit investments
$ 714.1
$ 640.9
Liquid credit investments
-
20.9
Preferred equity investments (2)
1.2
-
Common equity investments (2)
4.8
-
Total principal amount of investments funded
720.1
661.8
Principal amount of investments sold:
Private credit investments
(126.4 )
(74.0 )
Liquid credit investments
-
(20.9 )
Total principal amount of investments sold or repaid
(126.4 )
(94.9 )
Number of new investment commitments
85
115
Average new investment commitment amount
$ 9.1
$ 6.7
Weighted average maturity for new investment commitments (3)
4.1 years
4.3 years
Percentage of new debt investment commitments at floating rates
99.1 %
100.0 %
Percentage of new debt investment commitments at fixed rates
0.9 %
0.0 %
Weighted average interest rate of new investment commitments (4)
10.8 %
7.0 %
Weighted average spread over benchmark rate of new floating rate investment commitments (4)
6.6 %
6.0 %
Weighted average interest rate on investment sold or paid down (5)
9.4 %
6.4 %
(1) Does not include repayments on revolving loans, which may be redrawn.
(2) As of December 31, 2022, preferred equity investments and common equity investments were reported as equity investments.
(3) For undrawn delayed draw term loans, the maturity date used is that of the associated term loan.
(4) Based on the rate in effect at December 31, 2022 per our Consolidated Schedule of Investments for new commitments entered into during the year.
(5) Based on the underlying rate if still held at December 31, 2022. For those investments sold or paid down in full during the year, based on the rate in effect at the time of sale or paid down.
55
Beginning
with the three months ended March 31, 2022, we use Global Industry Classification Standards (GICS), Level 3 – Industry, for classifying
the industry groupings of its portfolio companies. As of December 31, 2021, we used GICS, Level 2 – Industry Group.
The table below describes long-term investments
by industry composition based on fair value as of December 31, 2022 and 2021:
December 31,
2022
Trading companies & distributors
12.9
%
Commercial services & supplies
11.9
%
Food products
10.9
%
Health care providers & services
9.8
%
Professional services
5.5
%
Containers & packaging
4.5
%
Aerospace & defense
4.1
%
Textiles, apparel & luxury goods
4.1
%
IT services
3.9
%
Building products
3.4
%
Software
3.0
%
Chemicals
2.9
%
Diversified telecommunication services
2.6
%
Wireless telecommunication services
2.5
%
Leisure products
2.3
%
Auto components
2.3
%
Machinery
2.2
%
Household durables
1.8
%
Healthcare equipment & supplies
1.8
%
Personal products
1.7
%
Household products
1.6
%
Insurance
1.3
%
Biotechnology
1.0
%
Specialty retail
0.7
%
Pharmaceuticals
0.6
%
Asset management & custody banks
0.4
%
Electronic equipment, instruments & components
0.3
%
Total
100.0
%
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 %
56
Results of Operations
For the years ended December 31, 2022 and
2021, our total investment income was derived from our portfolio of investments. All debt investments were income producing, and there
were no loans on non-accrual status as of December 31, 2022 or 2021.
The following table represents the operating
results for the years ended December 31, 2022 and 2021
For the years ended
December 31,
2022
2021
($ in millions)
($ in millions)
Total investment income
$
74.8
$
18.8
Less: Net expenses
34.6
8.6
Net investment income
40.2
10.2
Net realized gains (losses) on investments
0.1
0.3
Net change in unrealized gains (losses) on investments
5.5
11.8
Net increase (decrease) in net assets resulting from operations
$
45.8
$
22.3
Investment Income
Investment income for the years ended December
31, 2022 and 2021 totaled $74.8 million and $18.8 million, respectively, and consisted primarily of interest income on our debt investments.
Expenses
Operating expenses for the years ended December
31, 2022 and 2021, were as follows:
For the years ended
December 31,
2022
2021
($ in millions)
($ in millions)
Interest and debt financing expenses
$ 20.3
$ 4.4
Management fees
7.1
2.1
Incentive fees
4.7
0.1
Directors fees
0.5
0.3
Initial organization
-
0.2
Deferred offering costs
-
0.2
Other operating expenses
2.0
1.3
Total expenses
$ 34.6
$ 8.6
Total expenses for the years ended December
31, 2022 and 2021 included zero and $0.2 million of initial organization expenses, respectively, and $0.03 million and $0.2 million of
deferred offering costs, respectively.
Net Unrealized Gains (Losses) on Investments
We fair value our portfolio investments quarterly
and any changes in fair value are recorded as unrealized gains or losses. During the years ended December 31, 2022 and 2021, net unrealized
gains (losses) on our investment portfolio were comprised of the following:
For the years ended
December 31,
2022
2021
($ in millions)
($ in millions)
Unrealized gains on investments
$
15.1
$
11.8
Unrealized (losses) on investments
(9.6
)
-
Net change in unrealized gains (losses) on investments
$
5.5
$
11.8
57
The change in unrealized appreciation for
the years ended December 31, 2022 and 2021 totaled $15.1 million and $11.8 million, respectively, which primarily related to our investments
in the following tables:
For the
year ended
December 31,
2022
($ in millions)
Portfolio Company
AIDC Intermediate Co 2, LLC (Peak Technologies)
1.0
American Soccer Company, Incorporated (SCORE)
1.0
BC CS 2, L.P. (Cuisine Solutions)
0.9
IF&P Foods, LLC (FreshEdge)
0.8
CGI Automated Manufacturing, LLC
0.8
BR PJK Produce, LLC (Keany)
0.8
DISA Holdings Corp. (DISA)
0.7
Genuine Cable Group, LLC
0.7
LSL Industries, LLC (LSL Healthcare)
0.7
Gulf Pacific Holdings, LLC
0.6
FCA, LLC (FCA Packaging)
0.6
Improving Acquisition LLC
0.5
Basel U.S. Acquisition Co., Inc. (IAC)
0.5
Domain Information Services Inc. (Integris)
0.5
Allcat Claims Service, LLC
0.5
Universal Marine Medical Supply International, LLC (Unimed)
0.4
Fastener Distribution Holdings, LLC
0.4
BCDI Meteor Acquisition, LLC (Meteor)
0.4
Drew Foam Companies, Inc.
0.4
Alcami Corporation (Alcami)
0.4
PVI Holdings, Inc
0.4
BLP Buyer, Inc. (Bishop Lifting Products)
0.2
Light Wave Dental Management LLC
0.2
Other portfolio companies
1.7
Total Unrealized Appreciation
$
15.1
58
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
The change in unrealized depreciation for the year ended December 31,
2022 total $9.6 million, which primarily related to our investments in the following table. There was no change in unrealized depreciation
for the year ended December 31, 2021.
For the
year ended
December 31,
2022
($ in millions)
Portfolio Company
Arborworks Acquisition LLC
(2.9 )
Trademark Global LLC
(1.0 )
PH Beauty Holdings III, Inc.
(0.5 )
Curio Brands, LLC
(0.5 )
4 Over International, LLC
(0.4 )
Pavion Corp., f/k/a Corbett Technology Solutions, Inc.
(0.4 )
MacNeill Pride Group
(0.3 )
USALCO, LLC
(0.3 )
DRS Holdings III, Inc. (Dr. Scholl’s)
(0.3 )
Sundance Holdings Group, LLC
(0.2 )
Other portfolio companies
(2.8 )
Total Unrealized Depreciation
$ (9.6 )
59
Financial Condition, Liquidity and Capital
Resources
Our liquidity and capital resources are generated
primarily from the net proceeds of any offering of our Shares, proceeds from borrowing on our credit facilities and from cash flows from
interest and fees earned from our investments and principal repayments and proceeds from sales of our investments. Our primary use of
cash will be investments in portfolio companies, payments of our expenses, repayments of borrowed amounts and payment of cash distributions
to our stockholders.
In accordance with the 1940 Act, we are required to meet a coverage
ratio of total assets (less total liabilities other than indebtedness) to total borrowings and other senior securities (and any preferred
stock that we may issue in the future) of at least 150%. If this ratio declines below 150%, we cannot incur additional leverage and could
be required to sell a portion of our investments to repay some leverage when it is disadvantageous to do so. As of December 31, 2022 and
2021, our asset coverage ratios were 203% and 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 to conduct anticipated investment activities. 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, 2022, we had $577 million
borrowed under our credit facilities and cash and cash equivalents of $18.4 million (including short-term investments). As of March 9,
2023, we had $644 million borrowed under our credit facilities and cash and cash equivalents of $11.6 million (including short-term investments).
Capital Contributions
During the years ended December 31, 2022 and
2021, we issued and sold 16,305,034 and 19,132,622 shares of our common stock, respectively, related to capital called at an aggregate
purchase price of $268.2 million and $299.5 million, respectively. As of March 9, 2023, we had aggregate capital commitments of $832.3
million. As of March 9, 2023, we had undrawn capital commitments of $264.6 million from investors ($567.7 million or 68.2% funded).
Credit Facilities
Corporate Credit Facility : As of December
31, 2022, we are party to a senior secured revolving credit facility (the “Corporate Credit Facility”), that has a total commitment
of $400 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 (a forward-looking rate based on SOFR futures) plus an applicable spread of 2.35% per annum 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: As of December 31, 2022, we and
our wholly owned, special purpose financing subsidiary, Kayne Anderson BDC Financing, LLC (“KABDCF”), are party to a senior
secured revolving funding facility (the “Revolving Funding Facility”), that has a total commitment of $350 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 2.75% 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: As of December 31, 2022, 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 elect the commitment amount each quarter to borrow up to $125 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 $150 million and the interest rate under the facility is equal to Term
SOFR plus 1.975% (subject to a 0.275% floor). We are also required to pay a commitment fee of 0.25% per annum on the unused portion of
the Subscription Credit Agreement. We also pay an extension fee of 0.05% per quarter on the elected commitment amount on the first day
of each calendar quarter. The Subscription Credit Agreement will expire on December 31, 2023.
60
Contractual Obligations
A summary of our significant contractual principal
payment obligations related to the repayment of our outstanding indebtedness at December 31, 2022 is as follows:
Payments Due by Period ($ in millions)
Total
Less than
1 year
1-3 years
3-5 years
After 5 years
Corporate Credit Facility
$ 269.0
$ -
$ -
$ 269.0
$ -
Revolving Funding Facility
200.0
-
-
200.0
-
Subscription Credit Agreement
108.0
108.0
-
-
-
Total contractual obligations
$ 577.0
$ 108.0
$ -
$ 469.0
$ -
Off-Balance Sheet Arrangements
As of December 31, 2022 and 2021, we had an aggregate $149.3 million
and $97.8 million, respectively, 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 years ended December 31, 2022 and 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.
61
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 Advisor,
the following valuation process is used for our Level 3 investments:
●
Valuation Designee . The applicable investments will be valued no less frequently than quarterly by the Advisor, with new investments valued at the time such investment was made. The value of each Level 3 investment will be initially reviewed by the persons responsible for such portfolio company or investment. The Advisor will use a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs to determine a preliminary value. The Advisor will specify the titles of the persons responsible for determining the fair value of Company investments, including by specifying the particular functions for which they are responsible, and will reasonably segregate fair value determinations from the portfolio management of the Company such that the portfolio manager(s) may not determine, or effectively determine by exerting substantial influence on, the fair values ascribed to portfolio investments.
●
Valuation Firm . Quarterly, third-party valuation firms engaged by the Advisor review the valuation methodologies and calculations employed for each of our investments that the Advisor has placed on the “watch list” and approximately 25% of our remaining investments. The third-party valuation firms will review and independently value all of the Level 3 investments at least once per year, on a rolling twelve-month basis. The quarterly report issued by these third-party valuation firms will provide positive assurance on the fair values of the investments reviewed.
●
Oversight .
The Board has appointed the Advisor as the valuation designee for the Company for purposes of making determinations of fair value as
permitted by Rule 2a-5 under the 1940 Act. The Audit Committee shall aid the Board in overseeing the Advisor’s fair valuation
of securities that are not publicly traded or for which current market values are not readily available. The Audit Committee shall
meet quarterly to review the fair value determinations, processes and written reports of the Advisor and third-party valuation firms
as part of the Board’s oversight responsibilities.
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.
62
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.
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