Kayne Anderson BDC, Inc. Q2 FY2025 earnings call

• Generated stable net investment income of $0.40 per share and net income of $0.35 per share in Q2 '25, representing 9.8% annual return on equity.
• Distributed $0.40 per share regular dividend and $0.10 per share special dividend. NAV at quarter end was $16.37, a 0.8% decline quarter-over-quarter.
• Had $129 million of gross new private credit investments in Q2 '25, with $101 million new investments and $28 million existing unfunded commitments funded. Net investment activity was $10 million.
• Portfolio has 98% first lien senior secured loans, 1.6% of fair value on nonaccrual, and a healthy weighted-average yield of approximately 10.4% on fair value of investments.
• Announced investment into SG Credit, an $80 million term loan structured inside NAV with a $34 million delayed draw facility, immediately accretive to earnings with a yield on funded debt north of 11%. KBDC made a $12 million equity investment for 22.5% ownership.
• Launched a private placement unsecured notes offering in August 5.

Kayne Anderson BDC, Inc. reported solid second quarter results with net investment income of $0.40 per share and net income of $0.35 per share. The portfolio consists of 98% first lien senior secured loans with an average loan-to-value of approximately 43%. Broadly syndicated loans make up 8% of the portfolio. Repayment of private credit loans totaled $72 million in Q2 '25, and net investment activity for the quarter was $10 million, raising the debt-to-equity ratio to 0.91x.

• Anticipate achieving the low end of the debt-to-equity range of 1x to 1.25x in Q3 '25.
• Plan to opportunistically issue unsecured notes to provide additional credit facility flexibility and capacity.
• Expect to operate over the long term in the leverage range of around 1.1% given investment activity and pipeline.

• Trade and policy related disruptions across markets.
• Likely continuation of tariff noise.
• Credit events as one-off but still a risk factor.

Q: Just wanted a quick point of clarification just to see if I heard this correctly. So I think you have about $180 million less in syndicated loans on the portfolio. Did you say that, you believe you'll be out of those loans by the end of the year?

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

Q: Just 1 on SG Credit. Could you talk a little bit more about how you view the relative risk and return profile for originations within that business versus the rest of your core middle-market investments?

A: I'll start on that. This is Doug, Ken. Thank you for the question. I think SG Credit, as Frank touched on, focuses on the commercial finance business, consumer ABL as well as the recurring revenue loan product. And they focus really in what we would consider the lower mid-market. If our average EBITDA is -- median is usually high 30s in our direct lending product. They're focused on a different subset of the market, typically somewhere between $0 to $10 million in EBITDA. And again, they're focused on the asset- base side of that in many of those companies. So they tend to be smaller growth-related businesses. So they have a great proprietary origination system that they sourced over 1,000 deals a year, and their return profile has been really strong, frankly, [ about ] gross returns in the 15% range supported by 2 family offices in the past. And obviously, our investment both in the term loan as well as in the equity will help grow that platform from a loan perspective as well as investing into the actual structure and people of the business.

Q: Just a few more on SG Credit. Maybe you can just kind of help us understand, I guess, what is the benefit of structuring the transaction with SG within the BDC versus maybe structuring something at more of the adviser level in sharing the benefits like a JV structure or just deal flow or something of the like? Is it just the economics are better? Or what makes it more, I guess, beneficial for the investment to be placed in the BDC?

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

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

A: I think we consider it similar to most of the investments we make into -- it's obviously a finance company versus a more typical operating company. It is an Illiquid loan into a privately owned business. That said, we think it's a very strong loan. And I think during this process, if their Chairman, [ Mack McNair ], he would say that there was a lot of interest in investing into the debt security here. And I think it was really a great fit between SG from the investment perspective, we want to be more active in the asset-backed category from a cultural perspective in terms of knowing the founders and the principles there for decades, and even having a shared path at Cerberus as well. So I think there is strong interest there. But to be clear, Paul, it is still an illiquid loan like any of the private credit investments that we make. That said, we expect to hold it and it to be a strong performer.

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

A: Yes, this is Frank. I think we said that -- so it's fixed rate, 11% stream rate. There were also fees associated with that, that will be amortized over the life of the loan. So on the debt side, that 11% plus is accretive to the book.