Hello, and welcome to Kayne Anderson BDC, Inc.'s Third Quarter 2024 Earnings Call. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Frank Karl, Senior Vice President of KBDC.
Good morning, and welcome to Kayne Anderson BDC, Inc.'s 3rd Quarter 2024 Earnings Call. Today, I'm joined by Doug Goodwillie and Ken Leonard, Co-CEOs of KBDC, as well as Terry Hart, CFO and Treasurer of KBDC. 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. We ask that you refer to the company's most recent filings with the SEC for important risk factors. Undue reliance should not be placed thereon. 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. With that, I'd like to turn the call over to Doug.
Thank you, Frank. Before I provide an overview of our performance during the quarter, I want to provide a quick reminder on our strategy at KBDC. First, we believe that the core mid-market represents the most attractive risk-reward area in which to invest in direct lending. We define this market as including borrowers ranging in size from $10 million-$50 million in EBITDA. This market segment generally includes more lender-friendly documentation and the ability to lend at lower leverage while still maintaining strong yields in those investments. Within this segment of the mid-market, we focus on stable, slower-growing industries where the winners and losers have generally been decided, as you can see in our industry diversification chart summarized later. Within these industries, we identify companies that have specific attributes that have been shown to be present in companies that have successfully survived multiple cycles.
If an investment does not exhibit these attributes, we will not pursue it. From a structuring perspective, our portfolios have lower average leverage of approximately 4x , well below most other publicly traded BDCs. That leads to industry high weighted average interest coverage ratios with modest average loan-to-value below 45%. The combination of these factors results in a credit selection process that creates attractive risk-adjusted investment portfolios across all of the vehicles within our credit platform. We are the lead or co-lead agent in approximately 75% of our private middle market investments, with the vast remainder as part of a small club of lending groups. This puts us in a position to structure and manage these investments proactively, avoid large bank group consensus risk, and obtain the best economics.
We believe that the 3rd quarter of 2024 represents a continuation of this strategy, and I am pleased to provide an overview of our portfolio, recent investment activity, and then turn it back to Frank to discuss the market before Terry Hart covers KBDC's financial results for the 3rd quarter of 2024. As of September 30th, KBDC's portfolio includes 110 individual portfolio companies, representing approximately $1.94 billion of fair value funded investments. We have another approximate $179 million of unfunded commitments comprised of a mix of unfunded revolvers and delayed draw term loans for total commitments in excess of $2.1 billion.
Since September 30th of 2024, KBDC has closed or is in the final closing process on an additional $180 million plus of commitments, with another six weeks left in the quarter, evidencing continued strong origination volumes in 2024. The KBDC portfolio was purposefully constructed in a defensive manner in order to outperform in high interest rate environments and through periods of economic instability or uncertainty. Investments in KBDC's portfolio, excluding the handful on our watch list, have weighted average leverage of 4.2x, interest coverage of 3.1x, and loan-to-value of approximately 42%, again, evidencing our conservatism in loan structuring.
We think these credit statistics are a material positive factor for our favorable portfolio outlook, particularly in an elevated interest rate environment, and that these statistics compare favorably to virtually all other public BDCs of a scale similar to us. We also have built a diversified portfolio with an average position size of approximately 0.9% of fair value, and where our top 10 investments represent only 19% of our portfolio. Outside of the specific credit statistics associated with our portfolio, our investments are well-structured. 98% of our portfolio is invested in first lien securities, and 99% of our middle market investments are backed by private equity sponsors. Additionally, all of our core first lien private middle market investments have financial covenants.
We think that this combination of being in the lowest risk portion of the capital structure in businesses that are supported by committed private equity capital, with financial maintenance covenants, represents the most attractive way to invest in our market. We also believe that our portfolio is positioned appropriately for potential changes in the interest rate environment, with 100% of our debt investments being floating rate. This also mirrors our liabilities, where the vast majority of our debt funding utilizes floating rate bonds. Our portfolio has also performed very well to date, with only 1% of total debt investments at fair value on non-accrual, represented by only two positions out of 110. Lastly, we have built this conservative portfolio with a healthy weighted average yield of approximately 11.3% on fair value of investments.
This yield has been achieved with approximately 14% of our portfolio in broadly syndicated securities, such that we have positioned the portfolio for upside in spreads relative to our competitors over the next few quarters as we rotate out of these lower spread, broadly syndicated investments. Our portfolio is diversified by end market and industry with a focus on stable, slower-growing segments of the U.S. economy. As you can see in our earnings presentation, our largest industries are distribution, food products, business/industrial services, and containers and packaging, with the largest representing only 14.6% of the total portfolio. Financing businesses in these stable, lower growth industries with typical enterprise values in the 8x-10x range allows us to build portfolios with more conservative leverage and better interest coverages.
Turning to our private middle market investment activity in the third quarter of 2024, we made $183 million of total commitments across 14 different businesses during the period, of which $161 million was funded. In addition, $24 million of our existing unfunded commitments were funded or partially funded during the quarter, representing a combined gross fundings of $185 million. This was a meaningful uptick in activity relative to the third quarter of 2023, where gross fundings were $42 million. We did see a slight uptick in the amount of private middle market repayment activity totaling $83 million of gross repayments during the period, up from $41 million in Q2 2024, but still only 4.4% of average funded investments.
During the third quarter, our broadly syndicated loan portfolio experienced no new fundings and $2 million of repayments. We currently hold approximately $270 million in broadly syndicated loans across 22 borrowers. In coming quarters, we expect to generate enough privately originated mid-market loan volume to rotate out of these broadly syndicated loan investments while still maintaining leverage inside our target ratio of 1 - 1.25. Now I will turn it back to Frank to discuss the market.
Thanks, Doug. Turning to the market, since the second half of 2022, we have been operating in a lender-friendly environment when it comes to pricing and terms for middle market financings. That said, there were substantial declines in M&A activity during that period, leading to somewhat depressed financing volumes. That has changed somewhat over the last nine to 12 months as the macroeconomic picture continues to exhibit resiliency and M&A activity has increased somewhat. For the market as a whole, through the first three quarters of 2024, middle market sponsored loan volumes have increased substantially, with commitments increasing approximately 65% versus the same period in 2023. We believe a substantial driver in this uptick in activity has been the private equity community moving to transact after a period of lower M&A volumes over the prior one to two years.
Additionally, we see substantial transaction flow from our existing portfolio investments, both as part of supporting acquisition activity and in certain instances, financing the same company through a change of control with different private equity sponsors. Our portfolio of over 100 investments helps support new investment flow regardless of new platform investment activity. KBDC's existing portfolio of private middle market investments has an average spread over SOFR of approximately 625 basis points. While we've seen some market compression, most of the new transactions we are reviewing today have a spread over SOFR of approximately 550 basis points, and our private middle market investments in the year-to-date 2024 period have an average spread of approximately 590 basis points.
While we cannot predict where spreads will go in the future, we have seen signs that spreads have begun to stabilize, coupled with accelerating loan volumes. We still see expected yields on our new investments of nearly 11%, which remains incredibly healthy, particularly as compared to a longer-term historical view. We have always believed that our market represents an all-weather investment product, particularly for seasoned private credit platforms in lower risk portions of the capital structure, and we believe that remains the case today. With that, I'll turn it over to Terry Hart to discuss KBDC's third quarter 2024 financial results.
Thanks, Frank. Starting with our income statement, during the third quarter, we earned net income per share of $0.53 compared to $0.46 during the second quarter. Net investment income per share was $0.52 compared to $0.51 in the prior quarter. Total investment income for the third quarter was $57.8 million as compared to $52.5 million in the prior quarter. The increase to income was primarily driven by the additions to the portfolio during the third quarter, slightly offset by a decrease in our average portfolio yield. It's worth noting that substantially all of the decrease to the portfolio yield was related to lower reference rates. Total expenses for the third quarter were $20.8 million compared to $18.1 million for the prior quarter.
The increase was primarily from higher interest expense resulting from additional borrowings on our credit facilities to fund investment activity during the quarter. As a reminder, in connection with our IPO, Kayne Anderson instituted a 25 basis point fee waiver of our base management fee through May 23rd of 2025 and a full waiver on income-based incentive fees through the end of 2024. During the third quarter, we had unrealized gains on a portfolio of $0.5 million compared to unrealized losses of $3.1 million in the prior quarter. The unrealized gains were the result of origination activity during the quarter and to a lesser extent, changes in the fair value of some of our investments. There were no realized gains or losses recognized during the third quarter.
As of September 30th, total assets were $2.03 billion, and net assets were $1.2 billion. As of that date, our net asset value was $16.70 per share, an increase compared to $16.57 at the end of the second quarter. The $0.13 increase is attributable to generating net investment income in excess of our base dividend as well as the $0.01 increase related to unrealized gains during the quarter. At the end of the third quarter, we had debt outstanding of $788 million, and our debt-to-equity ratio was 0.66x , which is an increase from the 0.53x at the end of the second quarter.
We expect to continue the growth of our portfolio over the coming quarters to achieve our debt-to-equity target range of 1x to 1.25x . As Doug mentioned, the fourth quarter is off to a good start. During the third quarter, we continued to increase credit facility borrowings, improving the utilization of our facilities, and are in active dialogue with the lenders in our corporate credit facility to extend the maturity and improve pricing of that facility. Looking forward, as we increase leverage on our credit facilities over the balance of 2024 and into 2025, we'll be monitoring and evaluating the unsecured notes market and reviewing other opportunities to enhance our debt capital stack. I'll conclude with a few items related to our declared dividends.
On November 6th, our board of directors declared a regular dividend for the fourth quarter of $0.40 per share to shareholders of record on December 31st, 2024. The regular dividend represents a 9.6% dividend yield based on NAV per share at quarter end, and our dividend yield based on annualized net investment income for the quarter was 12.5%. As of September 30th, our estimated spillover of net investment income was $0.32 per share. As a reminder, just prior to our IPO, our board of directors declared three $0.10 per share special dividends to be paid in December 2024, March 2025, and June 2025. The first of these payments has a record date of December 5th, 2024.
Following the payment of these special dividends, it will be our dividend policy to distribute a portion of any excess earnings over and above our regular dividend on a quarterly basis. We plan to distribute excess earnings through an annual special dividend. With that, operator, please open the line for questions.
Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two, we will pause for a moment to allow questions to queue. We will take our first question from Finian O'Shea with Wells Fargo. Please go ahead.
Hey, everyone. Good morning. I wanted to ask about some of the opening remarks on the lower middle market being better. It looks like you're definitely getting enhanced spreads, OID, shorter tenor and so forth, even against your peer set. Are you going very lower middle market like $10 million? Or are perhaps some of the EBITDA sort of abstract or the companies maybe might go through a challenge and you'll work them out? Or how would you describe your flavor of higher returns? Thanks.
This is Ken Leonard. Thanks, Finian. I think, you know, if you look at how we stratify our average EBITDA is north of 50. The median is in the high 30s. The majority of what we're doing are, you know, by, you know, financing platform companies that are benefiting from buy- and- build strategies. Again, we are a platform that while we're significant in the middle market, we're nimble enough to be able to select what we wanna do. If you look at the broad scale of $50 million and below, you know, we're at, you know, platform wide, you know, below 3x in leverage and, you know, a turn below the market and commensurately priced. We do this by focusing on selectivity and not necessarily focusing on buying the market averages.
It's really a combination of our long-term strategy of being a value-oriented lender, being very selective in terms of the sponsors we work with, and then focusing on buy- and- builds where you tend to get less spread compression over time and benefit from a more diversified and larger business and continue to, you know, be able to scale up in an agency position. The other component is the fact that, you know, three-quarters of what we do, we are agent or co-agent, so we're in a better position to benefit from the highest fees being paid and to, you know, have an influence over how that deal is priced.
Okay, that's helpful. I guess just to press a little more here, there's one not asking you to go too far on a name, but M2S this quarter that was syndicated, you bought it at a big discount. That means like a lot of people looked at it and didn't want it at par. It is just, you know, is there some level of some area of complex? Is it just roll-up style complexity or how much, you know, deeper does it go?
Yeah. Ken, I can start on that, then Frank, you can hit that specific deal. This is Doug Goodwillie. Hey, Finn. I think really when it comes to the strategy, it's everything Ken mentioned, but it is what we call value lending. Again, staying in industries that are lower growth, stable, staple, maybe get looked over versus some of our competitors that focus on higher growth industries. Like Ken said, we're not an index fund, so we're doing 20-30 new platforms a year. We can stay very disciplined on price. We're not doing a ton of unitranche, so we're keeping leverage multiples low that way. We will, in certain instances, embrace complexity. By no means, Finn, is that looking at stressed companies at all.
If there is some complexity, we will dig into it in certain instances, and I think you can get paid for that as well. Frank, you can at a high level, maybe cover, you know, a specific instance that Finn brought up.
Yeah. I think just to cover that, Doug, you know, Finian, we, you know, think about, you know, a bell curve approach to how we look at pricing. The majority of things are going to be, you know, we think at or above market pricing. Then there's gonna be some things that we're gonna opportunistically do that are gonna be well above the market. There's gonna be some things we're gonna do for sponsor relationships or deals that we think have very strong risk-adjusted returns that we're gonna dip down below, you know, the 5- handle and go into the 4s. It's really just a sort of a bell curve approach.
We've always done it that way, and what you'll find if you look at the portfolio broadly in the BDC or any of our other vehicles is that's very consistent. You won't see us, dipping down to 4.75% in this market, very often. You know, we do want to take advantage of sponsor relationships, different opportunities, and also not passing up, you know, good, you know, well-priced deals, particularly as we're also trading, you know, planning to trade out of the BSL portfolio over the next few quarters.
Okay, thanks. I just one more. On a lot of these you're getting good OID. Is there also a meaningful call protection component?
Yeah, I would say in the majority of our transactions in the core middle market, we're seeing two in the first year and one in the second year. On occasion, we'll get three, two, and one. That's been less commonplace in, you know, recent quarters. I would say in almost all of our deals, we are getting two- in- one. If there's, if there's extensions, you know, we're renewing that call protection wherever we can.
How, like, above market is that right now? The two-in-one .
I'd say that's pretty much you know, on market. You know, I think it's a little hard to go off market on call protection. I think some sponsors are less sensitive to it. Some lenders are less aggressive about asking for it. On the margin, you know, I would say we're pretty aggressive about trying to obtain it. For the most part, that's what the market's giving when it's, when it's providing for it.
Great. Thanks so much.
Thank you.
Thank you. We will take our next question from Doug Harter with UBS. Please go ahead.
Thanks. Good morning. You talked about the fourth quarter being off to a good start. Can you just talk about your updated timeframe and when you think you can achieve target leverage?
Sure. Thanks, Doug. You know, I think as you're aware, the nature of the business is such that projecting and originating repayment activity with specificity, you know, in a given quarter is always a bit of a challenge. That said, we feel that on the whole, we've continued to execute on our origination plan, you know, following the IPO, and have increased our debt-to-equity ratio quarter- for- quarter in an environment where we're seeing, you know, continued upticks in total activity. Doug previously mentioned the fourth quarter is typically a seasonally active quarter for us, and we're already north of $180 million of gross new commitments closed or in closing for the fourth quarter. That's with a substantial pipeline of new opportunities beyond that, some of which we expect to fund in that fourth quarter.
Obviously, offsetting some of that would be realizations, which, while accelerating the recognition of fee income, will be, you know, an offset to that portfolio growth. I think in total, we feel really good about the current trajectory of portfolio growth without sacrificing, you know, our investment philosophy. Additionally, we really share the same bullish view on outlook you're hearing from others. We're very, very busy right now in terms of deals reviewed, screens at committee and deals in closing. We really don't see signs of that slowing in recent weeks, you know, given the activity we've seen and the dialogue with sponsors and investment bankers on our pipeline.
Our view, you know, right now and going into 2025 is that, this activity level is being driven by a combination of factors, including pent-up demand from a slower 2023. Lower rates and spreads, which drive M&A, a strong economy, a settling in the political outlook post-election, along with a potential capital gains expiration in 2026, which should drive some acceleration. We see this as a really nice setup for a robust 2025, you know, with. Additionally, all of that should put a floor under the spreads and the talk of spread compression that you're hearing. you know, without being too specific, you know, we feel, you know, bullish on being able to achieve that in the coming quarters.
Great. I appreciate that. Thank you.
Thank you. As a reminder, that is star and one to ask a question. We will move next to Kenneth Lee with RBC Capital Markets. Please go ahead.
Hey, good morning. Thanks for taking my question. Just one of the portfolio yields. You mentioned in the prepared remarks that most of the impact was due to lower base rates. Wondering if you could just remind us again what the typical lag or terms in terms of floating rate adjustments you have across the portfolio of debt investments there? Thanks.
Yeah. Thanks, Ken. You know, first of all, in terms of, like, proactive pricing changes outside of M&A, we've only had five out of 110. Feel very good about the stability of pricing. Obviously, nothing you can do about SOFR. Everyone's subject to that. In terms of spread compression, we, you know, I think we've commented on that and it's been, I think we've relatively modest compared to what's going on in the larger market and some others who have reported. I think in terms of, and then in terms of, you know, if your question was around SOFR, you know, CFOs are locking in.
you know, depending on whether they're locking in for one month, three months or six months, you know, there's gonna be a roll-off, as SOFR changes, and, you know, a slower decline to the new normal as those come off. you know, that's obviously a relatively complicated formula because within each loan they're maybe locking in, you know, some one month, some three months, some six months, some even laps if they don't lock into a prime rate to get the benefit there as well.
Gotcha. Very helpful there. Then in terms of the prepayment activity and obviously, more difficult to forecast, wonder if you could just remind us again how KBDC could benefit in terms of fee income as prepayments pick up potentially over the near term. Thanks.
Yeah. Terry, why don't you cover that, if you wouldn't mind?
Yeah, sure. Just the way that we account for those accelerations would be if there is any of that OID that's remaining at the time of the prepayment, then all of that's accelerated into current income. This quarter, in fact, there was a bit of that. We had two repayments in the portfolio. There was about $1 million of accelerated OID, or $0.014. Of that $1 million of accelerated, approximately $700,000 was due to those two exits and then one refi, and then the rest was just kind of normal course paydown activity.
Gotcha. Very helpful there. Thanks again.
You bet.
Thanks, Ken.
Thank you. We will take our next question from Derek Hewett with Bank of America. Please go ahead.
Good morning, everyone. Terry, you had mentioned in your opening remarks that you were exploring unsecured notes potentially in 2025. Any progress on obtaining a rating from one of the major agencies? How long do you think it would take to do an institutionally sized deal?
Yeah, sure. Derek, you know, as you know, we do have the rating from KBRA. I think, you know, we can move forward with one of those larger rating agencies at any time. But I do believe that the strategy that we would probably go forward with is an additional private placement. But as I said, we're still exploring this. You know, right now we have $75 million of notes outstanding. If we were to do another private placement, it would get us closer to that $300 million mark that you need to do a, you know, the institutional type of a deal and, or a public type of a deal. You know, I think we would likely leg into that size over time.
At that time, whenever we have that total amount of closer to $300 million, whenever that matures, then we would do a larger deal. That's our current thinking as to how we leg into that strategy.
Thank you.
Thank you. It appears that we have no further questions at this time. I will now turn the program back to Ken for additional closing remarks.
Great. Thank you. Well, we appreciate everybody participating in the call. We're very proud of the quarter and as the public here in 2024, and very excited about our progress, in particular, the strength of the portfolio, the low amount of [plurals], the velocity we're seeing from sponsors and new sponsors, as well as the stability in pricing and the minimal nature of the restructuring. We're, as we've mentioned before, we're very bullish about the current activity as well as activity going into 2025. We're excited to talk to you again next quarter and appreciate your support. Thank you very much.
Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.