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. Except as otherwise specified, references to “we,” “us,” “our,” or
the “Company” refer to Kayne Anderson BDC, Inc.
Investment Objective, Principal Strategy
and Investment Structure
Kayne Anderson BDC, Inc. is a Delaware corporation
that 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, as amended. In addition, for U.S. federal income tax purposes, we intend
to qualify, annually, as a RIC under Subchapter M of the Code.
On May 24, 2024, we completed our initial public
offering (“IPO”), issuing 6,000,000 shares of our common stock at a public offering price of $16.63 per share. Net
of underwriting fees and offering expenses, we received net cash proceeds, before offering expenses, of $92.4 million. The Company’s
common stock began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “KBDC” on May 22, 2024.
Our investment activities are managed by KA Credit Advisors, LLC (the
“Advisor”), an indirect controlled subsidiary of Kayne Anderson Capital Advisors, L.P. (“Kayne Anderson”), and
the Advisor operates within Kayne Anderson’s middle market private credit platform (“KAPC” or “Kayne Anderson
Private Credit”). The Advisor is an investment advisor registered with the United States Securities and Exchange Commission (the
“SEC”) under the Investment Advisers Act of 1940, as amended. In accordance with the Investment Advisers Act of 1940, as amended,
our 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 our investments and portfolio
companies on an ongoing basis. The Advisor benefits from the scale and resources of Kayne Anderson and specifically KAPC.
Our investment objective is to generate current
income and, to a lesser extent, capital appreciation. We intend to have nearly all of our debt investments in private middle market companies.
We use “private” to refer to companies that are not traded on a securities exchange and define “middle market companies”
as companies that, in general, generate between $10 million and $150 million of annual earnings before interest, taxes, depreciation and
amortization, or EBITDA. Further, 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 typically adjust EBITDA for non-recurring and/or normalizing items to assess the financial performance of
our borrowers over time.
We intend to achieve our investment objective
by investing primarily in first lien senior secured loans, with a secondary focus on unitranche and split-lien loans to middle market
companies. Under normal market conditions, we expect at least 90% of our portfolio (including investments purchased with proceeds from
borrowings under credit facilities and issuances of senior unsecured notes) to be invested in first lien senior secured, unitranche and
split-lien loans. Our investment decisions are made on a case-by-case basis. We expect the remainder of our portfolio to be invested in
second-lien loans, subordinated debt or equity securities (including those purchased in conjunction with other credit investments). We
expect that a majority of these debt investments will be made in core middle market companies and will generally have stated maturities
of three to six years. We expect that the loans in which we principally invest will be to companies that are located in the United States.
We determine the location of a company as being in the United States by (i) such company being organized under the laws
of one of the states in the United States; or (ii) during its most recent fiscal year, such company derived at least 50%
of its revenues or profits from goods produced or sold, investments made, or services performed in the United States or has at least
50% of its assets in the United States.
The
Advisor executes on our investment objective by (1) accessing the established loan sourcing channels developed by KAPC, which includes
an extensive network of private equity firms, other middle market lenders, financial advisors, intermediaries and management teams, (2)
selecting investments within our middle market company focus, (3) implementing KAPC’s underwriting process and (4) drawing upon
its experience and resources and the broader Kayne Anderson network. KAPC was established in 2011 and manages (directly and through affiliates)
assets under management (“AUM”) of approximately $7.1 billion related to middle market private credit as of December 31,
2024.
65
Recent Developments
On January 15, 2025, we paid a regular dividend
of $0.40 per share to each common stockholder of record as of December 31, 2024. The total dividend was $28.4 million and, of this amount,
$3.9 million was DRIP.
On February 5, 2025, we and KABDCF II entered
into an amendment of our Revolving Funding Facility II (as defined below). Under the terms of the amendment, the lender increased its
commitment from $150 million to $250 million and decreased the interest rate on borrowings outstanding from 3-month term SOFR plus 2.70%
to 3-month term SOFR plus 2.25%. Additionally, the maturity date of the facility was extended one year to December 22, 2029. All other
terms of the Revolving Funding Facility II remain substantially the same.
On February 13, 2025, we and KABDCF entered into
an amendment of our Revolving Funding Facility (as defined below). Under the terms of the amendment, the lenders increased their commitments
from $600 million to $675 million and decreased the interest rate on borrowings outstanding from daily SOFR plus 2.375% - 2.50%, depending
upon the mix of loans, to daily SOFR plus 2.15%. Additionally, the maturity date of the facility was extended to February 13, 2030. All
other terms of the Revolving Funding Facility remain substantially the same.
On February 14, 2025, we reduced the size of our
Corporate Credit Facility from $475 million to $400 million. This commitment reduction was done in conjunction with the $75 million increase
to our Revolving Funding Facility from $600 million to $675 million.
On February 19, 2025, our Board of Directors declared
a regular dividend to common stockholders in the amount of $0.40 per share. The regular dividend of $0.40 per share will be paid on April
15, 2025 to stockholders of record as of the close of business on March 31, 2025, payable in cash or shares of our common stock pursuant
to our Dividend Reinvestment Plan, as amended.
Portfolio and Investment Activity
Our portfolio is currently comprised of a broad
mix of loans, with diversity among investment size and industry focus. The Advisor’s team of professionals conducts due diligence
on prospective investments during the underwriting process and is involved in structuring the credit terms of our private middle market
investments. Once an investment has been made, our Advisor closely monitors that portfolio investment and takes a proactive approach
to identify and address sector or company specific risks. The Advisor seeks to maintain a regular dialogue with portfolio company management
teams (as well as their owners, the majority of whom are private equity firms, 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. There are no assurances that we will achieve our investment objectives.
As of December 31, 2024, we had investments in
110 portfolio companies with an aggregate fair value of approximately $1,995 million, and unfunded commitments to these portfolio companies
of $186 million, and our portfolio consisted of 98.0% first lien senior secured loans, 0.9% subordinated debt and 1.1% equity investments.
As of December 31, 2024, we held investments
in broadly syndicated loans in 21 portfolio companies with an aggregate principal amount of $253 million. Our investments in broadly
syndicated loans were made in anticipation of the receipt of proceeds from our final capital call and our IPO which closed during the
second quarter of 2024. Prior to these investments, we had not held broadly syndicated loans since 2022. Consistent with our strategy
at that time, we expect to rotate out of these investments over coming quarters to invest in private middle market loans consistent with
our principal strategy. We have presented certain portfolio-related information below for our private middle market loans and broadly
syndicated loans separately and on a combined basis for ease of reference.
As of December 31, 2024, 100% of our debt investments
had floating interest rates. Our weighted average yields for debt investments were as follows:
●
private middle market loans at fair value and amortized cost weighted
average yields were 11.1% and 11.3%, respectively
●
broadly syndicated loans at fair value and amortized cost weighted
average yields were 7.1% and 7.1%, respectively; and
●
total debt investments at fair value and amortized cost weighted average yields were 10.6% and 10.7%, respectively
As of December 31, 2024, our portfolio was invested across 30 different
industries (Global Industry Classification “GICS”, Level 3 – Industry). The largest industries in our portfolio as of
December 31, 2024 were Trading Companies & Distributors, Commercial Services & Supplies, Food Products and Health Care Providers
& Services, which represented, as a percentage of our portfolio of long-term investments, 15.1%, 11.7%, 10.0% and 8.4%, respectively,
based on fair value. We are generalist investors and the mix of industries represented by our portfolio companies will vary over time.
As of December 31, 2024, our average position
size based on commitment of private credit investments (at the portfolio company level) was $20.0 million.
66
As of December 31, 2024, the weighted average
and median last twelve months (“LTM”) EBITDA of our portfolio companies were as follows:
●
private middle market loans were $58.1 million and $34.3 million, respectively, based on fair value 1
●
broadly syndicated loans were $2,138.3 million and $1,306.7 million, respectively, based on fair value; and
●
total investments were $335.0 million and $39.6 million, respectively, based on fair value 1
As of December 31, 2024, the weighted average loan-to-enterprise-value
(“LTEV”) of our debt investments at the time of our initial investment was as follows:
●
private middle market loans was 43.0%, based on par 1
●
broadly syndicated loans was 34.0%, based on par
●
total investments was 41.8%, based on par 1 ; and
●
LTEV represents the total par value of our debt investment relative to our estimate of the enterprise value of the underlying borrower
As of December 31, 2024, we had three debt investments on non-accrual
status, which represented 1.3% and 1.6% of total debt investments at fair value and cost, respectively.
As of December 31, 2024, our portfolio companies’
weighted average leverage ratios and weighted average interest coverage ratios (the calculations of which are based on the most recent
quarter end or latest available information from the portfolio companies) were as follows:
●
private middle market loans were 4.3x and 3.0x, respectively, based on fair value 1
●
broadly syndicated loans were 3.2x and 4.2x, respectively, based on fair value; and
●
total investments were 4.2x and 3.1x, respectively, based on fair value 1
As of December 31, 2024, the percentage of our
debt investments including at least one financial maintenance covenant was as follows:
●
private middle market loans was 100.0% based on fair value 2
●
broadly syndicated loans was 0%, based on fair value; and
●
total investments was 86.9%, based on fair value 2
1
Excludes investments on watch list, which represent 3.5% of the total fair value of debt investments as of December 31, 2024.
2
Excludes opportunistic deals, which represent 1.9% of the total fair value of debt investments as of December 31, 2024.
67
Listed below are our top ten portfolio companies and industries represented
as a percentage of total long-term investments as of December 31, 2024:
Portfolio Company
Industry
Fair Value
($ in millions)
Percentage of
long-term
investments
1
Silk Holdings III Corp. (Suave)
Personal care products
$ 41.0
2.0 %
2
Dusk Acquisition II Corporation (Motors & Armatures, Inc. – MARS)
Trading companies & distributors
$ 39.9
2.0 %
3
BR PJK Produce, LLC (Keany)
Food products
$ 39.5
2.0 %
4
M2S Group Intermediate Holdings, Inc.
Containers & packaging
$ 37.7
1.9 %
5
American Equipment Holdings LLC
Commercial services & supplies
$ 37.3
1.9 %
6
Vitesse Systems Parent, LLC
Aerospace & defense
$ 35.5
1.8 %
7
IF&P Foods, LLC (FreshEdge)
Food products
$ 35.1
1.7 %
8
AIDC Intermediate Co 2, LLC (Peak Technologies)
Trading companies & distributors
$ 34.1
1.7 %
9
Genuine Cable Group, LLC
Trading companies & distributors
$ 34.1
1.7 %
10
Improving Acquisition LLC
IT services
$ 33.6
1.7 %
$ 367.8
18.4 %
Our investment activity for the years ended December 31, 2024 and 2023
is presented below (information presented herein is at par value unless otherwise indicated).
For the years ended
December 31,
2024
($ in millions)
2023
($ in millions)
New investments:
Gross new investments commitments
$ 1,043.9
$ 329.2
Less: investment commitments sold down, exited or repaid (1)
(371.3 )
(123.0 )
Net investment commitments
$ 672.6
206.2
Principal amount of investments funded (2) :
Private credit investments
$ 673.0
$ 404.2
Broadly syndicated loans
328.1
-
Preferred equity investments
-
-
Common equity investments
3.8
0.6
Total principal amount of investments funded
$ 1,004.9
$ 404.8
Principal amount of investments sold / repaid (2) :
Private credit investments
$ (294.8 )
$ (196.6 )
Broadly syndicated loans
(74.7 )
-
Common equity investments
(0.3 )
-
Total principal amount of investments sold or repaid
$ (369.8 )
$ (196.6 )
Number of new private credit investment commitments
61
43
Average new private credit investment commitment amount
$ 11.7
$ 7.7
Number of new broadly syndicated loan commitments
26
-
Average new broadly syndicated loan commitment amount
$ 12.6
$ -
Weighted average maturity for new investment commitments (3)
4.3 years
3.9 years
Percentage of new debt investment commitments at floating rates
100.0 %
100.0 %
Percentage of new debt investment commitments at fixed rates
0.0 %
0.0 %
Weighted average interest rate of new private credit investment commitments (4)
10.1 %
11.7 %
Weighted average interest rate of new broadly syndicated loan commitments (4)
7.4 %
-
Weighted average interest rate on investments sold or paid down (5)
10.8 %
11.9 %
(1)
Does not include repayments on revolving loans, which may be redrawn.
(2)
Does not include restructured activity. For common equity investments, amount represents cost.
(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 st of each year 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 st of each year. 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.
68
Portfolio Internal Performance Ratings
In general, we employ a strategy designed to ensure
early detection of potential issues at underlying borrowers, including monthly financial reviews internal tracking memoranda, weekly “watch
list” discussions and other like activities. We have designed a risk rating system to aid in our portfolio management efforts where
each investment is rated level 1-9, where Level 1 is the “least risky” and Level 9 is the “most risky.” This risk-rating
system is quantitative in nature and aggregates criteria such as LTEV, leverage levels and fixed charge coverage ratios (“FCCR”)
(each measured at point-in-time and as relates to levels at the close of the investment).
The table below sets forth our fair value of debt
investments and number of portfolio companies, including percentage of each total, that are on watch list as of December 31, 2024 and
2023. This table excludes equity investments.
As of December 31, 2024
As of December 31, 2023
Fair Value
($ in millions)
%
Number of
Companies
%
Fair Value
($ in millions)
%
Number of
Companies
%
$ 69.4
3.5 %
5
4.5 %
$ 74.0
5.5 %
5
6.6 %
We use Global Industry Classification Standards
(GICS), Level 3 – Industry, for classifying the industry groupings of our portfolio companies. The table below describes long-term
investments by industry composition based on fair value as of December 31, 2024 and 2023:
December 31,
2024
December 31,
2023
Trading companies & distributors
15.1 %
15.3 %
Commercial services & supplies
11.7 %
9.4 %
Food products
10.0 %
11.5 %
Health care providers & services
8.4 %
7.4 %
Containers & packaging
7.5 %
7.2 %
Professional services
4.7 %
4.5 %
Aerospace & defense
4.4 %
6.3 %
Machinery
3.7 %
3.8 %
Personal care products
3.7 %
3.0 %
Automobile components
3.6 %
2.0 %
Leisure products
3.2 %
3.3 %
Building products
2.3 %
2.0 %
Textiles, apparel & luxury goods
2.1 %
3.3 %
Specialty retail
2.1 %
0.7 %
Insurance
2.0 %
2.2 %
Pharmaceuticals
1.8 %
0.5 %
IT services
1.7 %
3.8 %
Diversified telecommunication services
1.5 %
0.4 %
Wireless telecommunication services
1.5 %
2.1 %
Health care equipment & supplies
1.4 %
1.5 %
Hotels, restaurants & leisure
1.4 %
- %
Chemicals
1.1 %
3.1 %
Household durables
1.0 %
1.5 %
Media
0.8 %
- %
Household products
0.8 %
1.2 %
Construction materials
0.7 %
- %
Biotechnology
0.6 %
0.9 %
Semiconductors & semiconductor equipment
0.6 %
- %
Electrical equipment
0.5 %
- %
Diversified consumer services
0.1 %
- %
Software
- %
2.5 %
Capital markets
- %
0.6 %
100.0 %
100.0 %
69
Results of Operations
The comparison for the years ended December 31,
2023 and 2022 can be found in “ Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations ”
in our Form 10-K for the fiscal year ended December 31, 2023.
For the years ended December 31, 2024 and 2023,
our total investment income was derived from our portfolio of investments.
The following table represents the operating results
for the years ended December 31, 2024 and 2023.
For the years ended
December 31,
2024
2023
($ in millions)
($ in millions)
Total investment income
$ 213.1
$ 161.0
Less: Net expenses
(83.8 )
(76.2 )
Net investment income
129.3
84.8
Net realized gains (losses) on investments
0.5
(10.7 )
Net change in unrealized gains (losses) on investments
2.8
2.9
Deferred income tax expense
(0.7 )
-
Net increase (decrease) in net assets resulting from operations
$ 131.9
$ 77.0
Investment Income
Investment income for the years ended December
31, 2024 and 2023 totaled $213.1 million and $161.0 million, respectively, and consisted primarily of interest income on our debt investments.
For the years ended December 31, 2024 and 2023, we had $2.7 million and $1.7 million, respectively, of PIK interest included in interest
income. As of December 31, 2024, we had three debt investments on non-accrual status. As of December 31, 2023, we had one debt investment
on non-accrual status.
Expenses
Operating expenses for the years ended December
31, 2024 and 2023, were as follows:
For the years ended
December 31,
2024
2023
($ in millions)
($ in millions)
Interest and debt financing expenses
$ 61.5
$ 52.3
Management fees
17.5
11.4
Incentive fees
17.4
9.4
Directors fees
0.6
0.6
Excise taxes
0.8
0.1
Other operating expenses
3.7
2.4
Total expenses
101.5
76.2
Management fee waiver (Note 3)
(2.9 )
-
Incentive fee waiver (Note 3)
(14.8 )
-
Net expenses
$ 83.8
$ 76.2
70
Net Realized Gains (Losses) on Investments
During the year ended December 31, 2024, we had
realized gains of $0.5 million on our investments. I n November 2023, we completed a restructure
of our investment in Arborworks Acquisition LLC whereby the existing term loan and revolver were restructured to a new term loan and preferred
and common equity. The Company recognized a $10.7 million realized loss due to the debt restructure.
Net Unrealized Gains (Losses) on Investments
We fair value our portfolio investments quarterly
and any changes in fair value are recorded as unrealized gains or losses. During the years ended December 31, 2024 and 2023, net unrealized
gains (losses) on our investment portfolio were comprised of the following:
For the years ended
December 31,
2024
2023
($ in millions)
($ in millions)
Unrealized gains on investments
$ 19.2
$ 13.4
Unrealized (losses) on investments
(16.4 )
(10.5 )
Net change in unrealized gains (losses) on investments
$ 2.8
$ 2.9
For these years ended December 31, 2024 and 2023,
the top five largest contributors to the change in unrealized gains and change in unrealized losses on investments are presented in the
following tables.
For the year ended
December 31,
2024
($ in millions)
Portfolio Company
Arborworks Acquisition LLC
$ 1.8
M2S Group Intermediate Holdings, Inc.
1.3
American Soccer Company, Incorporated (SCORE)
1.1
CCFF Buyer, LLC (California Custom Fruits & Flavors, LLC)
1.0
WAM CR Acquisition, Inc. (Wolverine)
0.9
Other portfolio companies unrealized gains
13.1
Other portfolio companies unrealized (losses)
(9.0 )
LSL Industries, LLC (LSL Healthcare)
(0.6 )
Gulf Pacific Holdings, LLC
(0.7 )
Siegel Egg Co., LLC
(1.6 )
Trademark Global LLC (1)
(2.0 )
Sundance Holdings Group, LLC
(2.5 )
Total Change in Unrealized Gain (Loss), net
$ 2.8
(1) Portfolio company is non-controlled affiliated investment.
For the year ended
December 31,
2023
($ in millions)
Portfolio Company
Arborworks Acquisition LLC
$ 2.5
BLP Buyer, Inc. (Bishop Lifting Products)
0.9
Silk Holdings III Corp. (Suave)
0.9
Engineered Fastener Company, LLC (EFC International)
0.8
Vitesse Systems Parent, LLC
0.8
Other portfolio companies unrealized gains
7.5
Other portfolio companies unrealized (losses)
(4.6 )
Trademark Global LLC
(0.4 )
LSL Industries, LLC (LSL Healthcare)
(0.5 )
Siegel Egg Co., LLC
(1.4 )
American Soccer Company, Incorporated (SCORE)
(1.5 )
Centerline Communications, LLC
(2.1 )
Total Change in Unrealized Gain (Loss), net
$ 2.9
71
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are generated
primarily from the net proceeds of any offering of our shares of common stock, proceeds from borrowing on our credit facilities, proceeds
from the issuance of senior unsecured notes 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 borrowings under credit facilities and senior unsecured notes, and payment of cash distributions to our stockholders.
We finance our investments with leverage in the
form of borrowings under credit facilities and issuances of senior unsecured notes. We also intend to further borrow under credit facilities
and/or issue senior unsecured notes in the future in order to finance our investments. 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, 2024 and December 31, 2023, our asset coverage ratios were 238% and 198%, respectively. 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 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, 2024, we had $75 million Notes
outstanding, $783 million borrowed under our credit facilities and cash and cash equivalents of $71.1 million (including short-term investments).
As of that date, we had $442 million of undrawn commitments available on our credit facilities (subject to borrowing base restrictions
and other conditions). As of February 21, 2025, we had $75 million Notes outstanding, $882.5 million borrowed under our credit facilities
and cash and cash equivalents of $12.3 million (including short-term investments).
IPO and Capital Contributions
On May 24, 2024, we completed our IPO, issuing 6,000,000 shares
of our common stock at a public offering price of $16.63 per share. Net of underwriting fees and offering expenses, we received net cash
proceeds, of $92.4 million. The Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the
ticker symbol “KBDC” on May 22, 2024.
On April 2, 2024, we issued 16,232,415 shares
of our common stock related to capital called at an aggregate purchase price of $269.9 million. Following the final close on April 2,
2024, we had called all of our capital relating to our $1,046.9 million in existing subscription agreements that we had entered into with
investors through a private offering, and we do not have any remaining undrawn capital commitments.
Senior Unsecured Notes
As of December 31, 2024, we have $75 million of
senior unsecured notes outstanding, with $25 million of 8.65% Series A Notes due June 2027 (the “Series A Notes”) and $50
million of 8.74% Series B Notes due June 2028 (the “Series B Notes”, and collectively with the Series A Notes, the “Notes”).
Credit Facilities
Corporate Credit Facility: We are party
to a senior secured revolving credit facility (the “Corporate Credit Facility”), that has a total commitment of $400 million
with a maturity date of November 22, 2029. The facility’s commitment termination date and the final maturity date are November 22,
2028 and November 22, 2029, respectively. The Corporate Credit Facility also provided for a feature that allows us, under certain circumstances,
to increase the overall size of the Corporate Credit Facility to a maximum of $600 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 2.10% per annum or an “alternate
base rate” (as defined in the agreements governing the Corporate Credit Facility) plus an applicable spread of 1.00%. We are also
required to pay a commitment fee of 0.375% per annum on any unused portion of the Corporate Credit Facility.
72
Revolving Funding Facility: 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”). We and KABDCF have a commitment of $675 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 is
April 2, 2027 and the maturity date is February 13, 2030. The interest rate on the Revolving Funding Facility is daily SOFR plus 2.15%
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.
Revolving Funding Facility II: We and our
wholly owned, special purpose financing subsidiary, Kayne Anderson BDC Financing II, LLC (“KABDCF II”), are party to a senior
secured revolving credit facility (the “Revolving Funding Facility II”). The Revolving Funding Facility II has an initial
commitment of $250 million which, under certain circumstances, can be increased up to $500 million. The Revolving Funding Facility II
is secured by all of the assets held by KABDCF II and we have agreed that it will not grant or allow a lien on the membership interest
of KABDCF II. The end of the reinvestment period and the stated maturity date for the Revolving Funding Facility II are December 22, 2026,
and December 22, 2029, respectively. The interest rate on the Revolving Funding Facility II is equal to 3-month term SOFR plus 2.25% per
annum. KABDCF II is also required to pay a commitment fee of 0.75%.
Contractual Obligations
A summary of our significant contractual principal payment obligations
related to the repayment of our outstanding indebtedness at December 31, 2024 is as follows:
Payments Due by Period ($ in millions)
Total
Less than
1 year
1-3 years
3-5 years
After 5 years
Senior Unsecured Notes
$ 75.0
$ -
$ 25.0
$ 50.0
$ -
Corporate Credit Facility
250.0
-
-
250.0
-
Revolving Funding Facility
420.0
-
-
420.0
-
Revolving Funding Facility II
113.0
-
-
113.0
-
Total contractual obligations
$ 858.0
$ -
$ 25.0
$ 833.0
$ -
Off-Balance Sheet Arrangements
As of December 31, 2024 and 2023, we had an aggregate
$186.3 million and $147.9 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, 2024 and 2023, for more information on our critical accounting
policies.
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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,
broadly syndicated 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 Advisor’s
valuation process for investments that are privately issued or otherwise restricted as to resale.
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 the Company’s 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, a third-party valuation firm engaged by the Advisor reviews the valuation methodologies and calculations employed for each of the Company’s investments that the Advisor has placed on the “watch list” and approximately 25% of the Company’s remaining investments. The third-party valuation firm 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 the third-party valuation firm 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 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.
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Related Party Transactions
Investment Advisory Agreement. On February 5,
2021, we entered into the Investment Advisory Agreement with our Advisor. In addition, on March 6, 2024, the Board approved an amended
and restated investment advisory agreement (the “Amended Investment Advisory Agreement”) and a fee waiver agreement (the “Fee
Waiver Agreement”) between the Company and the Advisor, which became effective upon the completion of the initial public offering
of shares of common stock on May 24, 2024 (the “IPO Date”). On February 19, 2025, the Board approved an additional one-year
term of the Investment Advisory Agreement from March 15, 2025 to March 15, 2026.
For
services rendered under the Investment Advisory Agreement, we 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 borrowings under our credit facilities
and issuances of senior unsecured notes, but excluding cash, U.S. government securities and commercial paper instruments maturing within
one year of purchase. We also pay an incentive fee on income and an incentive fee on capital gains to our Advisor.
The Amended Investment Advisory Agreement is materially
the same as the Investment Advisory Agreement except, following the IPO Date, the base management fee is calculated at an annual rate
of 1.00% and the incentive fee on income is subject to a twelve-quarter lookback quarterly hurdle rate of 1.50% as opposed to
a single quarter measurement and is subject to an Incentive Fee Cap based on our Cumulative Pre-Incentive Fee Net Return. This lookback
feature provides that the Advisor’s income incentive fee may be reduced if our portfolio experiences aggregate write-downs or
net capital losses during the applicable Trailing Twelve Quarters. Pursuant to the Fee Waiver Agreement, commencing on the IPO Date, the
Advisor implemented waivers of (i) the income incentive fee for three calendar quarters commencing the quarter the initial public
offering was completed and (ii) a portion of the base management fee for one year following the completion of the initial public
offering. Amounts waived by the Advisor pursuant to the Fee Waiver Agreement are not subject to recoupment by the Advisor.
Administration Agreement. On February 5,
2021, we entered into the Administration Agreement with our Advisor, which serves as our Administrator and provides or oversees the performance
of its required administrative services and professional services rendered by others, which include (but are not limited to) accounting,
payment of our expenses, legal, compliance, operations, technology and investor relations, preparation and filing of its tax returns,
and preparation of financial reports provided to its stockholders and filed with the SEC. On February 19, 2025, the Board approved an
additional one-year term of the Administration Agreement through March 15, 2026.
We reimburse the Administrator for its costs and
expenses incurred in performing its obligations under the Administration Agreement, which may include its allocable portion of office
facilities, overhead, and compensation paid to or compensatory distributions received by its officers (including our Chief Compliance
Officer and Chief Financial Officer) and its respective staff who provide services to the Company. As the Company reimburses the Administrator
for its expenses, such costs (including the costs of sub-administrators) will be ultimately borne by common stockholders. The Administrator
does not receive compensation from us other than reimbursement of its expenses. The Administration Agreement may be terminated by either
party with 60 days’ written notice.
Since the inception of the Company, the Administrator
has engaged sub-administrators to assist the Administrator in performing certain of its administrative duties. During this period, the
Administrator has not sought reimbursement of its expenses other than expenses incurred by the sub-administrators. The Administrator has
engaged Ultimus Fund Solutions, LLC under a sub-administration agreement. Under the terms of the sub-administration agreement, Ultimus
Fund Solutions, LLC provides fund administration and fund accounting services. The Company pays fees to Ultimus Fund Solutions, LLC, which
constitute reimbursable expenses under the Administration Agreement. The Administrator may enter into additional sub-administration agreements
with third parties to perform other administrative and professional services on behalf of the Administrator.
Non-Controlled, Affiliated Investment .
We hold Trademark Global LLC and TG Parent Newco LLC (Trademark Global LLC), both non-controlled, affiliated investments, as defined in
the 1940 Act. See “Item 1. – Notes to Consolidated Financial Statements – Note 3. Agreements and Related Party Transactions”
for further details.
75