Kayne Anderson BDC Q1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2026

Key Takeaways

  • Positive Sentiment: KBDC reported net investment income of $0.43 per share, covering its $0.40 quarterly dividend at 108%, and the board declared another $0.40 dividend for Q2 2026.
  • Neutral Sentiment: The portfolio remained defensive, with 93% in first-lien loans, a weighted average yield of 10.1%, and only 2% exposure to software/technology, which management said helped insulate results from sector stress.
  • Negative Sentiment: Non-accrual investments increased to 2.5% of the debt portfolio at fair value from 1.4% last quarter, driven by additions including Score and Regiment, although ArborWorks moved off non-accrual.
  • Positive Sentiment: The company ended the quarter with $569.7 million of liquidity and a conservative 1.05x debt-to-equity ratio, giving it flexibility to stay selective and deploy capital as spreads widen.
  • Neutral Sentiment: Management said market conditions are improving modestly, with new deal spreads widening and Q2 commitments already running higher, while the remaining broadly syndicated loan run-off is expected to be largely completed over the next quarter or two.
AI Generated. May Contain Errors.
Earnings Conference Call
Kayne Anderson BDC Q1 2026
00:00 / 00:00

There are 8 speakers on the call.

Speaker 6

Hello, welcome to Kayne Anderson BDC, Inc.'s fourth quarter 2025 earnings call. All lines are in a listen only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, you'll need to press star followed by 1 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Andy Wedderburn-Maxwell, Senior Vice President.

Operator

Good morning, and welcome to Kayne Anderson BDC, Inc.'s first quarter 2026 earnings call. Today, I'm joined by Doug Goodwillie and Ken Leonard, Co-CEOs of KBDC, Frank Karl, President, and Terry Hart, CFO. Following our prepared remarks, we will be available to take your questions. Today's call may include forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, and projections about the company, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict. Actual results may differ materially from those expressed or forecasted in the forward-looking statements.

Operator

We ask that you refer to the company's most recent filings with the SEC for important risk factors. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. The company assumes no obligation to update any forward-looking statements at any time. Our earnings release, 10-Q, and supplemental earnings presentation are available on the financial section of our website at kanebdc.com. Now I'd like to turn the call over to Doug Goodwillie.

Speaker 3

Good morning, everyone. I'm pleased to report another quarter of solid performance that demonstrates the resilience and consistency of our value lending approach despite the headwinds that the sector has faced this year. I will provide an overview of our quarter and share our thoughts around how KBDC's differentiated portfolio has managed to perform in a more challenging environment. Frank Carl will then provide a more detailed overview of our portfolio and performance before Terry Hart concludes with KBDC's financial results. For the first quarter of 2026, we generated net investment income of $0.43 per share, which represents strong coverage of our $0.40 quarterly dividend at 108%. While this was a slight decrease from the $0.44 per share we achieved in the fourth quarter, it reflects our disciplined approach to capital deployment in what continues to be an uncertain market environment.

Speaker 3

Our annualized return on equity for the quarter was a robust 10.6%, underscoring the effectiveness of our investment strategy. Our net asset value per share ended the quarter at $16.23, down 55 basis points from $16.32 in the last quarter. This small decline was due in part to some markdowns in the portfolio, which was offset in part by origination activity, some positive portfolio marks, and by accretive share repurchase activity. I'm pleased to announce that our board of directors has declared a regular quarterly dividend of $0.40 per share for the second quarter of 2026. This dividend will be payable on July 16th to stockholders of record as of June 30th. Looking ahead, we remain confident in our ability to sustain our dividend throughout 2026, as we stated on our last earnings call.

Speaker 3

This confidence is grounded in several key factors: our portfolio's defensive positioning with 93% in first lien investments, our value lending philosophy that focuses on companies in stable and staple industries, which allows for a conservative average borrower leverage profile of just over 4 times. The weighted average yield on our portfolio of 10.1% provides a solid foundation for consistent income generation while our minimal exposure to volatile sectors like software and technology at just 2% positions us well relative to many of our peers. Our portfolio continues to demonstrate strong credit quality and resilience, particularly relative to the broader private credit market. As of March 31, 2026, non-accrual investments represented 2.5% of our debt portfolio at fair value, up from 1.4% in the prior quarter.

Speaker 3

In terms of specific companies, we added Score and Regiments last out tranches to the non-accrual status during the quarter. We also moved ArborWorks off non-accrual, and we see a clear path to further improvement in the near term. While many BDCs have significant exposure to software and technology companies, often 15%-25% of their portfolios, our consistent adherence to underwriting standards that stress disciplined industry and loan level diversification has proven prescient as we're witnessing the private credit market's first prolonged stress test since the early stages of the COVID era. We remain focused on traditional, stable industry sectors, including industrial services, distribution, food products, and business services. Companies with durable cash flows, substantial tangible enterprise value, and disciplined leverage profiles.

Speaker 3

Turning to our investment activity for the quarter, we maintained our disciplined approach to capital deployment while continuing to find attractive opportunities that meet our stringent risk-adjusted return criteria. During the quarter, we made new private credit commitments totaling $93 million, demonstrating our ability to source quality deals even in a more selective market environment. The pricing environment for new originations remains favorable, with our new floating-rate loans averaging 549 basis points over SOFR during the first quarter, which was 20 basis points wider than in the fourth quarter. Our total fundings for the quarter were $99.1 million, which included both new investments and draws on existing unfunded commitments from our portfolio companies. We received $74.6 million in private credit repayments and $17.4 million in BSL sales during the quarter, resulting in net funded investment activity of $7.1 million.

Speaker 3

Our balance sheet remains exceptionally strong, we continue to maintain a conservative risk profile. As of March 31st, our debt-to-equity ratio stood at 1.05x, positioning us comfortably within our target leverage range of 1x-1.25x. Our total liquidity position of $569.7 million provides substantial capacity for accretive capital deployment. This includes $32.7 million in cash and $537 million in undrawn debt capacity under our credit facilities. The private credit market is going through a period of bifurcation in terms of performance across different investment strategies and market segments. While presenting challenges for some participants, it's creating opportunities for disciplined lenders. Our selective approach means we're comfortable maintaining higher liquidity levels to be more tactically opportunistic as spreads widen. M&A activity has remained lower than forecasted at the start of the year as geopolitical tensions have kept a cap on activity.

Speaker 3

However, we continue to see steady transaction flow in our core middle market segment with a noticeable uptick in activity over the past 4 to 6 weeks. The quality of deal flow remains solid and spreads have started to widen in Q1. I would be remiss if I didn't mention one of the bigger clouds hanging over our sector right now. The rapid advancement of AI and automation technologies has created significant uncertainty around business model durability and competitive positioning for many software companies. We're seeing several managers report pressure on net investment income per share, higher dividend coverage, and meaningfully declining NAV per share as they grapple with softening credit performance and increased markdowns on those positions. While we believe the general negative sentiment towards software loans is somewhat overblown, our minimal 2% exposure to the sector has insulated us from this pressure.

Speaker 3

Public BDC valuations have lagged business fundamentals, with many quality managers trading at discounts to net asset value despite maintaining strong operational performance. As the market continues to differentiate between managers based on actual performance rather than just asset growth, we believe KBDC's consistent approach will be increasingly valued by both investors and the private equity sponsors who drive our deal flow. I will now pass the call over to Frank P. Karl to discuss our portfolio.

Speaker 4

Thanks, Doug. As of March 31st, our portfolio includes 105 companies with a fair value of $2.2 billion plus $289 million of unfunded commitments. Since quarter end, we have closed or are finalizing $150 million of new commitments as we've seen something of an uptick in activity in 2Q. Investments in KBDC's portfolio, excluding those on our watch list and opportunistic investments, have a weighted average leverage of 4.4 times, interest coverage ratio of 2.4 times, and loan-to-enterprise value of approximately 43%. The weighted average EBITDA of our private middle market portfolio companies is $52.6 million, reflecting our focus on established middle market businesses with meaningful scale. Company count declined by two, reflecting broadly syndicated loan rotation and realizations. The portfolio remains highly diversified. Average position is approximately 1% of fair value, and top 10 investments are only 20% of the portfolio.

Speaker 4

Our top five industry sectors, commercial services and supplies, healthcare, distributors, food products, and containers and packaging, account for just over 50% of the portfolio and have remained consistent quarter-over-quarter as we focus on avoiding sector concentration risks. Approximately 95% of our debt investments are floating rate, matched by predominantly floating rate liabilities. Our only material fixed rate investment is the SG Credit loan at an 11% coupon, where we increased our commitment in Q1 given strong platform growth. Credit performance remains strong, with 2.5% of debt investments at fair value on non-accrual versus 1.4% last quarter. We do expect both Sundance and Regiment to come off non-accrual over the next one to two quarters as Sundance is completing the final stages of its realization process and Regiment is currently going through a sale.

Speaker 4

We look forward to providing an update on those credits on our next earnings call. As Doug mentioned, we also moved ArborWorks off of non-accrual this quarter, which did have the effect of increasing our total PIK income rate for the quarter to 7.5%, up 10 basis points from last quarter, given that we recognized some accrued interest associated with the name and income. Terry Hart will provide more specifics. Weighted average yield was 10.1% on fair value, excluding non-accruals, down slightly from 10.3% last quarter. We've achieved this with materially lower leverage than many peers while continuing our rotation out of the BSLs into higher spread private credit. Remaining BSL exposure was $29.8 million at quarter end, and the sell-down is continuing in Q2. Activity has picked up in Q2, but we have stayed selective, passing on deals where leverage gaps pushed beyond our comfort or pricing was too aggressive.

Speaker 4

Against the backdrop of tariffs, AI risk, and geopolitical tensions, we're looking to remain disciplined as always. We added a further $30 million delayed draw term loan to SG Credit, which now represents approximately 5% of the portfolio. That team has executed well. The position adds diversification, and the 11% coupon offers an attractive return. Overall, outlook for investment activity looks healthy, and our long-standing sponsor relationships continue to generate preferred lender status on attractive opportunities. With that, I'll turn it over to Terry.

Speaker 7

Thank you, Frank. Let's first review our financial results. During the first quarter, we earned net income per share of $0.26 and net investment income per share of $0.43 compared to $0.44 in the prior quarter and $0.03 above our dividend. Total investment income for the first quarter was $57.3 million as compared to $61.9 million in the prior quarter. The decrease to investment income was primarily a result of lower average reference rates, some spread compression, and $2.1 million less accelerated amortization of OID and prepayment fees related to realization activity, partially offset by $2.2 million of PIK interest income related to our investment in ArborWorks, which moved to accrual status during the first quarter.

Speaker 7

Accelerated amortization of OID related to realization activity was approximately $0.5 million during the quarter, and PIK interest represented 7.5% of total interest income for the quarter. It's worth noting that $2.2 million or 3.9% was related to PIK interest from ArborWorks that had not been accrued since the fourth quarter of 2023. Additionally, the 20 basis point decrease to our portfolio yield was split evenly between lower reference rates and lower spreads. Total expenses for the first quarter were $28.4 million compared to $31.8 million for the prior quarter. The decrease was primarily the result of lower reference rates on borrowings, lower average borrowings during the first quarter, lower incentive fees, and $0.5 million of excise taxes incurred in the fourth quarter.

Speaker 7

During the quarter, our incentive management fees were reduced by the 12-quarter look-back incentive fee cap. During the 1st quarter, we had $2.3 million of realized losses, mainly related to the restructure of our debt investment in Regiment Security Partners that resulted in a $2 million realized loss, and we recognized a $0.3 million realized loss due to the rotation out of one of our broadly syndicated loans. During the quarter, we had net unrealized losses on the portfolio of $9 million compared to unrealized losses of $7.2 million in the prior quarter. The unrealized losses were largely the result of negative fair value changes related to our investments in Score, Seagleg, Tembo, and Four Oaks. Additionally, we had deferred income tax expense of $0.4 million related to unrealized gains on equity investments held in our taxable subsidiary.

Speaker 7

As of March 31st, total assets were $2.3 billion, and net assets were $1.1 billion. As of that date, our net asset value was $16.23 per share. The decrease of $0.09 from $16.32 per share as of December 31st was comprised of $0.17 per share related to net realized and unrealized losses, partially offset by $0.03 of net investment income in excess of our dividend and $0.05 related to accretive share repurchases during the first quarter. At the end of the first quarter, we had debt outstanding of $1,138 million, and our debt-to-equity ratio was 1.05x, which is a small increase from 1.02x at the end of the fourth quarter.

Speaker 7

On February 20th, we closed the term extension of our largest credit facility led by Wells Fargo and reduced the interest rate on this facility by 20 basis points. As mentioned earlier, during the quarter, we had share repurchases of $21.4 million at an average price to NAV per share of 86% pursuant to our $100 million share repurchase program. On May 5th, the program was extended for 1 year, and the $100 million program amount was renewed starting May 25th. Now turning to our distribution. On May 5th, our board of directors declared a regular dividend for the 2nd quarter of $0.40 per share to shareholders of record on June 30th. As of March 31st, our undistributed net investment income was approximately $0.25 per share.

Speaker 7

As we continue to execute during the remainder of 2026, we plan to complete the rotation out of our remaining lower-yielding BSL positions, gradually optimize our leverage within our target debt-to-equity range of 1 times to 1.25 times, and stay focused on our value lending strategy. With that, operator, please open the line for questions.

Speaker 6

Thank you. As a reminder to ask a question, please press star followed by 1 on your telephone keypad. To withdraw any questions, press star 1 again. Our first question comes from Cory Johnson from UBS. Please go ahead. Your line is open.

Speaker 1

Hi. Thanks for taking my question. You mentioned, you know, I guess passing on some deals because perhaps the terms weren't where you wanted them to be at. I was just wondering, you know, 'cause I've heard from some of the other BDCs about how some of the terms on their things that they're looking at have actually strengthened so far. I was just wondering, are you feeling any pressure possibly from up market?

Speaker 1

I guess similarly, are you seeing any opportunities giving, you know, given where you're at, leverage-wise, and you know, I guess, coming with a little bit of a cleaner balance sheet, any opportunities for you to either go upstream or just anything else that you're seeing in the market that you can take advantage of?

Speaker 3

Sure. Thanks, Cory. This is Douglas L. Goodwillie. I would say just in general as a backdrop, I think we always, you know, try to stay as disciplined as we can in any market in terms of, you know, leverage discipline as well as pricing discipline. I think, you know, this quarter was, you know, not all that different for us in terms of that. I'd say the market in terms of M&A volumes continues to be, you know, on a mid-range, not fantastic, given what we've talked about, geopolitical and other pressures on the market. The opportunities that, you know, we have seen have still been good quality. I think, you know, if you look at Q2, we've seen a slight uptick.

Speaker 3

I think we're tracking to almost, you know, $200 million of commitments for Q2 for the BDC. We are, you know, using our balance sheet and liquidity to invest in what we think are attractive opportunities. In terms of the piece of the question regarding the upper mid-market potentially kind of coming down into the core mid-market, not really the case at all. I think at this point, what we're seeing is the start of a dislocation where some of the upper mid-market players, I think given some of the redemptions on the private BDC side, you know, haven't been putting as much capital to work. The $400 million-$500 million dollar upper mid-market deals are actually seeing some better pricing for the first time in a while.

Speaker 3

We've seen some of those opportunities where, you know, you can play in a 75 to $100 million EBITDA business, get a covenant and get some decent pricing. I think that's been more of an opportunity at this point. We haven't seen enough stress around sell-offs, around software portfolios and do believe that we're unlikely to see that over the long term. Hopefully that answers the question.

Speaker 1

Yes. Thank you.

Speaker 6

As a reminder to ask a question, please press star followed by the number 1. Our next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead, your line is open.

Speaker 5

Hey, good morning, thanks for taking my question. Realize it's a little difficult to predict, but could you offer up any kind of outlook around prepayments over the near term? Could you see it trending either lower or higher than a more normalized kind of environment there? Thanks.

Speaker 3

I'll start and maybe Frank, you can weigh in as well. I think it's been a relatively slow prepayment year and probably 2-3 years, I think, just given the M&A market. You've seen the average duration, which, you know, Ken and I have been doing this together 25 years. It's almost always over the long term, around 3 years. I think in a risk M&A environment, it's going to 2.5, and I think we're seeing it closer to 4 for this post-COVID period. This year we're seeing, and I'll toss it over to Frank, relatively kind of normal first half, and projecting a pickup in Q4, but I'd say that's a bit dependent on the overall market.

Speaker 4

Yeah. I think we've got, to Doug's point, you know, we usually expect something of a, you know, back half more transaction volume. You'd expect a little bit of a pickup. That said, you know, if you are in an environment where spreads are increasing, you know, 25, 50 basis points, maybe higher than that generally leads to something of a slightly more muted refinancing and transaction, you know, period of time. I would argue, you know, we're probably expecting 2026 to look maybe a little bit of a step up from 2025.

Speaker 5

Gotcha. Very helpful there. Just one more follow-up, if I may. Just in terms of the ongoing portfolio ramp, once again, just given the outlook, the macro conditions and obviously what you're seeing, do you think you would lean for a portfolio leverage to be closer to the lower end or the higher end of your target range there over the near term? Thanks.

Speaker 3

Thank you. I think we're comfortable with where we are. You know, between 1 to 1.1. I think our view is, yet to see where this dislocation goes and, you know, whether it will be prolonged. We'd like to certainly have a decent amount of liquidity going into the front end of a potential dislocation, and certainly don't want to be at the upper end at, you know, 1.2, 1.25, you know, and dealing with potential borrowing base and things like that that can occur if you really go into a prolonged dislocation.

Speaker 3

I think we're pretty comfortable with where we are, and, you know, we're still seeing good opportunities, and we'll still deploy capital, but would not expect to get aggressive towards the 1.2, 1.25 side on the leverage side.

Speaker 5

Gotcha. Very helpful there. Thanks again.

Speaker 3

Thanks.

Speaker 6

Our next question comes from Derek Hewitt from Bank of America. Please go ahead, your line is open.

Speaker 2

Good morning. It was nice to see the 20 basis points of improvement in spreads on a quarter-over-quarter basis. Like, how are spreads trending today on deals that you're looking at?

Speaker 3

Thanks, Derek. I'll start, and Ken and Frank, please weigh in. I think we've seen a slight uptick in the core mid-market, but something along the lines of potentially 20 basis points in our opportunity set, and I think that's translating into the core mid-market. I think you'd hear that in the upper mid-market, there's been slightly more than that, as I think you saw more of the start of the dislocation occurring there. We expect with capital coming out of the market, fundraising to be harder with a lot of the, you know, whether it's right or wrong, negative press around private credit. I think those factors bode well for spreads increasing both in the upper mid-market, as well as the core mid-market over the near term.

Speaker 4

Yeah, the other thing I would add is we've talked to investment bankers, and the pipeline seems to be increasing. That's always the front end of our investment process. As more volume comes in the market, we think there'll be opportunity to take spreads up. We, you know, remain hopeful that that's gonna continue as that's generally a pretty good leading indicator.

Speaker 2

Okay, thank you for that. In the prepared remarks, you guys had mentioned that, the SG Credit add-on was on the delayed draw side, due to just growth in that investment in general. How should we think about maybe increasing your exposure on the equity side, just given that you're seeing strong growth overall in that vehicle?

Speaker 3

Yeah, I'll start there. I mean, they're, you know, continuing to grow the book. Obviously, one good way to do that, and it's, you know, over the long term will support, you know, the valuation of our equity investment, is via the incremental debt investment. You know, we've talked about in the past, we do have an option to purchase the more equity in that vehicle. I think that that's a, you know, something that we will continually be discussing internally as that platform grows. You know, we're not gonna be on the phone next quarter saying, "Hey, we've made a substantially increased equity commitment to SG Credit.

Speaker 2

Okay. Thank you. Then the last one from me is, in your prepared remarks, you guys had mentioned that you were continuing to monetize the BSL portfolio. Is that expected to be done in the first quarter, or are there maybe a couple of investments in that portfolio that may have experienced some dislocation over the past three to five months?

Speaker 3

Yeah

Speaker 2

take a little bit longer to monetize?

Speaker 3

I'll toss it to Frank, who's a little closer on the exact timing, but we're down to 4 credits. You know, 3, I think the average leverage across those is mid 2s. There's 1 that's slightly marked down, which Frank can hit on. We do expect to monetize that largely during this quarter, but, you know, some may slip into Q3.

Speaker 4

Not much to add, right? There's four names, about $30 million of, at cost, about $27 million at FMV. You know, I think it'll just depend on, to Doug's earlier point, around how we wanna manage leverage, what the opportunities look like, et cetera. You know, three of those are, you know, trading right around our cost basis. You mentioned Tembo. That's a light solutions. That business has gotten knocked by some AI-related noise, although we do think it's more of a, you know, we don't think that's a fair characterization for that business. Very small position that we are looking to unwind sooner rather than later.

Speaker 2

Thank you.

Speaker 3

Thanks.

Speaker 6

We have no further questions. I'd like to turn the call back over to Doug Goodwillie for closing remarks.

Speaker 3

Well, with that, I would like to thank everyone for joining us for this KBDC earnings presentation for your continued interest in KBDC and our platform. We look forward to speaking again in August at our next earnings call.

Speaker 6

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Powered by Quartr