KBRA Affirms Ratings for Kayne Anderson BDC, Inc.
17 Jun 2024 | New York
KBRA affirms the issuer and senior unsecured debt ratings of BBB for Kayne Anderson BDC, Inc. (NYSE: KBDC) ("the company"). The rating Outlook is Stable.
Key Credit Considerations
The ratings are supported by KBDC’s diversified $1.8 billion investment portfolio consisting almost entirely of senior secured first lien debt (99%) across 33 industries with a strategy focused on investing in private, middle market companies with median EBITDA of $37 million as of March 31, 2024. The top four portfolio sectors were Trading Companies & Distributors (12.3%), Food Products (9.9%), Health Care Providers & Services (7.9%), and Commercial Services & Supplies (7.9%). KBDC's investment portfolio is conservative, with weighted average portfolio company leverage and interest coverage of 4.0x and 3.0x, respectively. KBDC benefits from exemptive relief to co-invest in all directly negotiated loans among Kayne Anderson Private Credit ("KAPC") vehicles. KAPC is a $6.5 billion AUM subsidiary of Kayne Anderson Capital Advisors, L.P. ("KACALP"), a $35 billion AUM investment platform with 150 investment professionals, and benefits from shared resources, including research, deal sourcing, and administrative services, including treasury management. Although unseasoned, the investment portfolio had just one portfolio company on non-accrual status accounting for 0.4% of investments at cost and fair value as of March 31, 2024. KAPC's solid underwriting and risk management practices of a highly granular investment portfolio have resulted in the credit platform's solid credit performance over its 12-year history.
As of March 31, 2024, the company's liquidity was solid with available credit lines and cash of $381.5 million set against no near-term unsecured debt maturities and unfunded portfolio company commitments of $169.1 million. Within days of quarter end, the company increased its commitment under the Wells Fargo Facility by $145 million. KBDC’s leverage was low at 0.81x as of March 31, 2024, reflecting the $118.7 million of called capital in February 2024 and conservative investment deployment. Furthermore, subsequent to quarter-end, the company made a final capital call of $269.9 million and listed on the NYSE, raising an additional $100 million of equity. The company’s target leverage range is 1x-1.25x and the company’s asset coverage ratio was 223%, providing a solid cushion to its 150% regulatory asset coverage to withstand additional market volatility in a less favorable economic environment.
These strengths are counterbalanced, in part, by KBDC’s mostly secured funding profile (~89%). Management intends to issue additional senior unsecured debt when economically viable with a target range of unsecured debt to total debt of 30%-40%, which would increase financial flexibility and unencumber assets for the benefit of the unsecured noteholders. In addition, ratings strengths are counterbalanced by potential risks related to KBDC’s business as a business development company ("BDC"), the illiquid nature of the assets, and retained earnings constraints as a regulated investment company ("RIC"), as well as an uncertain economic environment with high base rates, inflation, and geopolitical risk.
KBDC is an externally managed, closed-end, non-diversified investment management company that elected to be treated as a BDC under the Investment Company Act of 1940 and as an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company was formed as a Delaware limited liability company in 2020 and commenced operations on February 5, 2021, when it simultaneously converted to a Delaware corporation. On May 22, 2024, the company began trading on the New York Stock Exchange. The company is managed by KA Credit Advisors, LLC, an indirect subsidiary of KACALP.
Rating Sensitivities
The ratings are unlikely to be upgraded over the intermediate term. The Outlook could be revised to Negative, or the rating could be downgraded, if a prolonged downturn in the U.S. economy has a material impact on performance, including increased non-accruals and a significant rise in leverage. An increased focus on riskier investments or a change in the current management structure and/or a change in strategy and risk management that negatively impacts credit metrics could also pressure ratings.
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