KBRA Assigns Rating to Kayne Anderson BDC, Inc.'s Senior Unsecured Notes Due 2027 and 2028
29 Jun 2023 | New York
KBRA assigns a rating of BBB to Kayne Anderson BDC, Inc.'s (“KABDC” or “the company”) $25 million 8.65% senior unsecured notes due 2027 and $50 million 8.74% senior unsecured notes due 2028. The rating Outlook is Stable. The proceeds will be used for general corporate purposes.
Key Credit Considerations
The ratings and Stable Outlook are supported by Kayne Anderson BDC’s ties to the $6.0 billion private credit lending platform of Kayne Anderson Capital Advisors, L.P. (KACALP), along with SEC exemptive relief to co-invest among affiliated companies. As of March 31, 2023, KABDC had a $1.3 billion well-diversified investment portfolio comprised almost exclusively of senior secured first lien loans (greater than 95%) to 71 middle market companies within 27 industries that are generally less cyclical. Average EBITDA was ~$51 million. KABDC focuses primarily on sponsor-backed companies that provide significant equity cushion, low LTVs, moderate leverage (average 4x), and solid interest coverage. At 1Q23, the top four portfolio sectors were Trading Companies & Distributors (14.1%), Commercial Services & Supplies (11.2%), Food Products (10.6%), and Healthcare Providers/Services (9.1%). The ratings also consider KABDC’s solid management team that has a long track record of working within the private debt markets with senior members each having at least 20 years of experience in leveraged finance. Additionally, the company raised approximately $875 million of equity since its inception with $257 million remaining uncalled and maintains appropriate leverage (debt/equity) of 1.12x with a prudent target range of 1.0x to 1.25x, which is comparable to peers. Asset coverage was 190% with sufficient cushion, allowing KABDC to absorb increased market volatility as well as a potential increase in non-accruals as we enter a recessionary period with rising rates and inflation. KABDC has no portfolio companies on non-accrual status; however, the company’s portfolio is seasoned only two years. Despite the potential for adverse credit headwinds in 2023, KBRA believes the company should weather a more difficult credit environment from management’s long-term experience, solid underwriting with 100% of its loans with at least one financial covenant, and approximately 75% of investments where KABDC is lead agent or co-agent.
The rating strengths are counterbalanced by the potential risks related to the company’s relatively illiquid investments; fully secured funding profile with the exception of its subscription line, which is secured by the company's capital commitments; retained earnings constraints as a Regulated Investment Company (RIC); and an uncertain macro-environment. The $75 million senior unsecured notes will diversify funding sources, increase financial flexibility, and unencumber assets for the benefit of the unsecured noteholders.
KABDC is an externally managed, closed-end, non-diversified investment management company that elected to be treated as a Business Development Company (BDC) under the 1940 Act and as a 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. The company is managed by KA Credit Advisors, LLC, an indirect subsidiary of KACALP, which had $32 billion of assets under management as of March 2023. The Kayne Anderson Private Credit platform is a subsidiary of KACALP and had $6.0 billion of assets under management as of March 2023.
Given the Stable Outlook, a rating upgrade is not expected in the next one-to two-year time frame. 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 impact credit metrics could also pressure the ratings.
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