Kayne Anderson BDC, Inc. 2026 Q2 Earnings Call

Good morning, and welcome to Kayne Anderson BDC Inc.'s second quarter 2026 earnings call. Today, I'm joined by Ken Leonard and Doug Goodwillie, Co-CEOs of KBDC, Frank Carl, President, and Terry Hart, CFO. Following our prepared remarks, we'll 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 our 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.

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 kaynebdc.com. Now I'd like to turn the call over to Ken Leonard.

Good morning, everyone. I'm pleased to report that Kayne Anderson BDC delivered another quarter of solid performance, demonstrating the continued resilience of our value-adding approach in what remains a challenging and bifurcated market environment. I'll provide an overview of KBDC's performance this quarter. Frank Carl will then provide a more detailed overview of our portfolio with some relevant market commentary, and Terry Hart will conclude with KBDC's financial results. For the second quarter of 2026, we generated net investment income of $0.42 per share. Our board of directors has declared a regular quarterly dividend of $0.40 per share for the third quarter. This represents our annualized dividend yield of approximately 10%, based on our current NAV per share. The dividend will be payable on October 16th to shareholders of record as of September 30th. This payout represents a dividend coverage ratio of 105%.

Our annualized return on equity based on net investment income was 10.5%, reflecting the attractive risk-adjusted returns we have continued to generate for our shareholders. As communicated in our last two earnings calls, we remain confident in our ability to sustain this dividend through 2026. Net asset value per share as of June 30th was $16, representing a decline of $0.23 per share, or approximately 1.4% from the prior quarter's $16.23. We experienced realized and unrealized losses totaling $0.26 per share during the quarter, driven primarily by fair market value adjustments on certain portfolio positions and our completion of our strategic rotation out of our remaining broadly syndicated loan positions. These losses were partially offset by net investment income exceeding the dividend combined with the impact of creative share repurchases. Our overall credit quality remains strong.

KBDC's non-accrual rate was 2.7%, up just 20 basis points from last quarter. In terms of specific companies, we added 4over and Diverzify Intermediate LLC's last out tranche to non-accrual status and took Sundance off non-accrual as the position was fully realized during the quarter. Turning to investment activity, we closed $138.7 million in new private credit commitments during the quarter, demonstrating our continued ability to source attractive opportunities that meet our rigorous underwriting standards. The pricing environment for new originations remains favorable, with our new floating-rate loans averaging 566 basis points over SOFR during the quarter, which was 17 basis points wider than in the first quarter. The current pricing environment reflects sustained demand for private credit amongst middle-market borrowers, slowing capital formation in non-traded and private vehicles, and a general increase in risk premiums.

Regardless, we remain disciplined and passed on numerous opportunities during the second quarter where either risk-adjusted returns fell short of our standards, sector exposure raised concern, or leverage profiles exceeded our comfort levels. We continue to see quality deal flow from sponsors who value our consistency, our ability to move quickly on transactions that fit our criteria, and our track record as constructive partners. Our fundings for the quarter totaled $146.4 million, which included both new investments and draws on existing unfunded commitments from our portfolio companies. On the repayment side, we saw $67.9 million of activity, including $38.1 million of private credit repayments and $29.8 million from the sale of our remaining broadly syndicated loan positions, which we have discussed in our prior calls.

Turning to our balance sheet strength and liquidity position, we ended the quarter with a debt-to-equity ratio of 1.17 times, comfortably within our target range of one to one and a quarter. This positioning gives us flexibility to be opportunistic when we see compelling investment opportunities while maintaining conservative leverage. Our total liquidity position as of June 30th was $476.7 million, consisting of $39.7 million in cash and cash equivalents and $437 million in undrawn committed debt capacity under our credit lines. M&A activity in our core middle market segment shows encouraging signs. After muted activity in late 2025 and in the first half of 2026, deal flow has picked up modestly in recent months. Private equity sponsors are more active, and financing markets, while selective, remain open for quality business.

We continue to see opportunities in our target sectors and win our fair share of pursued deals based on our reputation and execution capabilities. For the second half of 2026, we expect to maintain this disciplined approach, deploying capital that meets our return and credit standards while preserving defensive positioning and sector diversification. In closing, we are encouraged that investors are increasingly differentiating BDCs based on portfolio composition, sector exposure, credit performance, and track record, rather than treating the sector as homogenous. We expect this trend to continue as performance divergence among managers becomes more pronounced. Our conviction in our value-leading strategy has never been stronger, and we remain fully committed to delivering sustainable value for our shareholders. I will now pass the call over to Frank Carl to discuss our portfolio.

Thanks, Ken. As of June 30th, our portfolio includes 104 companies with a fair value of $2.3 billion, plus $293 million of unfunded commitments. Since quarter end, we have closed or are finalizing $69 million of new commitments, as we've seen volumes remain relatively robust over the summer months. We do expect some realizations in third quarter, including some that slipped from second quarter to third quarter. As such, we are not expecting a significant change in leverage in the third quarter. Investments in KBDC's portfolio, excluding those on our watchlist and opportunistic investments, have a weighted average leverage of 4.5 times, interest coverage of 2.4 times, and loan to enterprise value of approximately 43%. Weighted average EBITDA of our private middle market portfolio companies is $53.7 million, reflecting our focus on established middle market businesses with meaningful scale.

Company count declined by one, reflecting our exit from the broadly syndicated loan portfolio and some realizations in the quarter. The portfolio remains highly diversified. Average position size is approximately 1% of fair value, and our top 10 investments are only approximately 20% of the portfolio. Our top five industry sectors, healthcare, commercial services and supplies, distributors, food products, and containers and packaging, account for approximately 55% 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 a predominantly floating-rate liability stack. Our only material fixed rate investment is the SG Credit loan at an 11% coupon. The SG Credit platform continues to perform very well in the lower middle market asset-backed financing space.

Credit performance remains strong with 2.7% of debt investments at fair value on non-accrual versus 2.5% last quarter. As previewed on our last call, Sundance came off non-accrual in the second quarter. However, Regiment's sale process is still ongoing while the company's performance continues to improve. We look forward to providing an update on Regiment next quarter. As Ken mentioned, we moved 4over and Diverzify's last out tranche to non-accrual this quarter, which did move our non-accruals up 20 basis points. Total PIK income for the quarter dropped to 4.5%, down 300 basis points from last quarter. Given last quarter, we had elevated PIK income due to a one-time catch-up on ArborWorks. Terry will provide more specifics. Weighted average yield was 10.2% on fair value, excluding non-accruals, up slightly from 10.1% last quarter.

As we continue to invest and manage our portfolio, we remain focused on the geopolitical and macroeconomic risks that require our constant attention. This reinforces our focus on borrowers with strong interest coverage and conservative leverage, providing meaningful cushion against continued rate pressure. We remain willing to be patient and wait for opportunities that meet our standards rather than deploy capital indiscriminately. Broader market sentiment has kept BDC valuations depressed for several quarters. Headlines around redemption pressures at large non-traded BDCs creates a disconnect with higher quality public BDCs, delivering strong operational performance, consistent dividend coverage, stable credit metrics, and disciplined capital deployment. We believe that the higher quality managers will be able to close the price and have discounts as the market will increasingly reward BDCs like KBDC that demonstrate consistent returns, discipline, and defensive market positioning. With that, I'll turn it over to Terry.

Thanks, Frank. I'll begin by reviewing our financial results. During the second quarter, we earned net income per share of $0.16 and net investment income per share of $0.42, compared to $0.43 in the prior quarter and $0.02 above our dividend. Total investment income for the second quarter was $55.7 million, as compared to $57.3 million in the prior quarter. The decrease in investment income was primarily a result of $2 million less PIK interest income related to our investment in ArborWorks, which moved to accrual status in the first quarter and recognized income that had been deferred since the fourth quarter of 2023. Interest income was also lower due to American Soccer being on non-accrual status during the second quarter, but was offset by income from new investments and the rotation out of the remaining broadly syndicated loans.