Kayne Anderson BDC Q3 2026 Earnings Call Transcript

Kayne Anderson BDC (NYSE:KBDC) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Kayne Anderson BDC Inc. reported net investment income of $0.46 per share for Q3 2026, marking the highest level in five years and exceeding the dividend of $0.40 per share.

The company maintained a stable dividend despite market fluctuations and expects future rate increases to positively impact earnings; the dividend yield is 10.2%.

Net asset value per share decreased by $0.29 to $15.71, mainly due to net realized and unrealized losses from specific investments.

Non-accruals increased to 3.6% of the debt portfolio, primarily due to issues with Centerline Communications, but restructuring is expected to improve this by Q4.

Investment activity included $76.3 million in new commitments, while repayments led to a net funded investment decrease of $23 million.

Total liquidity at quarter-end was $508.7 million, and the debt-to-equity ratio remained stable at 1.17 times.

The company repurchased approximately 2.3 million shares for $3.6 million, aiming to capitalize on the discount to NAV.

Management expressed confidence in resolving current credit issues and maintaining dividend stability, supported by a strong and diversified portfolio.

Full Transcript

OPERATOR (Moderator)

Hello everyone. Thank you for joining us and welcome to Kayne Anderson BDC Inc.’s third quarter 2026 earnings call. As a reminder, this call is being recorded. It is now my pleasure to turn the call over to Andy Wedderburn-Maxwell, Senior Vice President.

Andy Wedderburn-Maxwell (Managing Director – BDCs)

Good afternoon and welcome to Kayne Anderson BDC Inc.’s third quarter 2026 earnings call. Today I’m joined by Goodwillie Doug and Leonard Ken, Co-Chief Investment Officers of KBDC, Frank P. Karl, 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 Goodwillie Doug.

Goodwillie Doug (Co-Chief Investment Officer)

Good afternoon everyone. I will begin with an overview of KBDC’s third quarter results and then turn it over to Frank Karl to provide a more detailed overview of our portfolio, and Terry Hart will conclude with KBDC’s financial results. For the third quarter of 2026 we generated net investment income of $0.46 per share, up from $0.42 per share in the second quarter and our highest level over the past five years. This represents a dividend coverage ratio of 115% and an annualized return on equity based on net investment income of 11.7%. Our Board of Directors has declared a regular quarterly dividend of $0.40 per share for the fourth quarter, payable on January 19, 2027 to shareholders of record as of December 31, 2026.

This represents an annualized dividend yield of approximately 10.2% based on our quarter-end NAV per share. In addition, as of September 30th we had undistributed net investment income of approximately $0.32 per share. As we communicated on each of our earnings calls this year, we have remained confident in our ability to sustain the $0.40 quarterly dividend through 2026, and we have now delivered on that commitment. The key reason for holding the dividend steady was to provide our shareholders with stability during an uncertain period in the interest rate cycle.

Just 12 months ago, the market broadly expected SOFR to decline to approximately 3%, which would have represented a headwind to earnings. Today, SOFR is over 4.1% with expectations to increase to over 4.5% in the coming quarters, which would represent a strong tailwind to earnings. Given this expectation, combined with our ability to consistently generate above-market spreads currently averaging 565 basis points over SOFR for the portfolio, we remain confident in our ability to maintain our base dividend going forward.

Net asset value per share as of September 30 was $15.71, a decline of $0.29 per share, or approximately 1.8% from $16.00 at the end of the second quarter. The decline was driven by net realized and unrealized losses of $0.36 per share, partially offset by net investment income in excess of our dividend of $0.06 per share and $0.01 per share from accretive share repurchases. More than 70% of the quarter’s net realized and unrealized losses came from three investments, American Soccer, Centerline Communications and Segal Lake.

I want to speak directly about the increase in non-accruals and these realized and unrealized losses, as well as the overall health of the KBDC portfolio. While our watch list is slightly elevated from historical norms, it still represents less than 6% of our overall portfolio at fair market value. Recent performance and outlook declines in the three previously mentioned borrowers are idiosyncratic and do not represent any sort of connected credit story that we can see.

We feel that we have done a very good job working through our troubled assets historically as evidenced by the recovery in both Arbor Works and Regiment. While credit events can be difficult to foresee with specificity and our current levels of non-accruals are somewhat elevated to our historical norms, we see overwhelmingly stable performance across the rest of our portfolio and expect that non-accruals will decrease to historical norms in the near future.

We will continue to work as hard as we possibly can to maximize value for our shareholders in each of these situations. Digging a little deeper, non-accruals increased to 3.6% of our debt portfolio at fair market value and 5.4% at amortized cost, up from 2.7% and 4.5% respectively last quarter. The increase was driven largely by a single new addition, Centerline Communications. We are currently in the process of restructuring this investment, which we expect to complete in the fourth quarter. Pro forma for the restructuring, we expect a sizable portion of our position to return to accrual status, which, all else being equal, should return our non-accrual rate back in line with last quarter’s level.

In total, our non-accrual investments are concentrated in eight borrowers across six different industries. In each case we see company-specific factors at work, not a common sector, macroeconomic or structural theme running through the portfolio. One point to note, we have very little restructured equity in our portfolio which includes only two such positions representing approximately 0.7% of KBDC’s amortized cost. We expect that this is substantially less than is present in most BDCs.

Said another way, non-accruals are only one way to measure stress in portfolios. As mentioned, our team has worked through challenged investments like these across multiple credit cycles. Our information rights, covenant packages and long-standing sponsor relationships allow us to engage early and actively, and we are working closely with sponsors and management teams at each of these companies. On a positive note, since quarter end we have completed the sale of Regiment which, all else being equal, will modestly reduce our non-accruals next quarter.

We are very pleased with the valuation we received for the business, which resulted in our debt being repaid at a value approximately 10 points higher than last quarter’s mark of 75.5% of par. Outside of these situations, the underlying health of the portfolio remains solid. Of our 100 portfolio companies, 92 are paying current interest with an average valuation mark of 99.3% of par value. Additionally, the portfolio remains highly diversified with an average position size of approximately 1% of fair value and our top 10 investments represent approximately 19% of the debt portfolio. Approximately 93% of the portfolio is first lien senior secured and the weighted average yield on our debt investments, excluding non-accruals, increased to 10.3% from 10.2%, and our exposure to software remains insignificant.

Frank will walk through our borrower leverage and interest coverage and covenant metrics in more detail, but these have remained broadly consistent with prior quarters, which reinforces our view that this quarter’s credit issues are isolated rather than systemic. Turning to investment activity, we made $76.3 million in new commitments across 10 private credit investments during the quarter. The pricing environment for new originations remains attractive, with our new floating-rate loans averaging 538 basis points over SOFR during the third quarter compared with 566 basis points in the second quarter. Core middle market spreads have remained in a tight band of approximately 500 to 550 basis points over SOFR this year.

The quarter-over-quarter spread tightening is more of a reflection of specific deals we approved rather than fundamental market tightening. Fundings for the quarter totaled $91.9 million, which included both new investments and draws on existing unfunded commitments, while repayments increased to $114.9 million, consistent with the pickup in realizations that Frank previewed on our last call. This resulted in a net funded investment decrease of $23 million.

Our balance sheet and liquidity position remain strong. We ended the quarter with a debt-to-equity ratio of 1.17 times, unchanged from the prior quarter and within our target range of one to one and a quarter times. Total liquidity as of September 30 was $508.7 million, consisting of $45.7 million in cash and cash equivalents and $463 million in undrawn committed debt capacity. We also continued to repurchase shares at a meaningful discount to NAV, buying back approximately 2,266,000 shares for $3.6 million during the quarter.

Across the BDC sector, credit outcomes are becoming more dispersed and investors are understandably focused on credit quality and NAV stability. We share that focus and we are not dismissive of this quarter’s credit results. However, we believe a handful of idiosyncratic situations within a diversified portfolio of 100 companies with an average position size of 1% of fair market value is fundamentally different from the broad-based pressure that can arise from concentrated sector exposures.

Our value lending approach of lending to established, private equity-backed core middle market companies in stable industries with conservative leverage and financial covenants is designed to limit the impact of any individual credit on the overall portfolio. We believe this quarter’s earnings, with net investment income comfortably exceeding our dividend, demonstrate that strategy at work. In closing, we remain focused on resolving the small number of challenged credits in the portfolio, deploying capital with discipline and delivering sustainable value for our shareholders. I will now pass the call over to Frank Karl to discuss our portfolio.

Frank P. Karl (President)

Thanks, Doug. As of September 30th our portfolio includes 100 companies with a fair value of $2.2 billion plus $281 million of unfunded commitments. Since quarter end we have closed or have visibility to nearly $50 million of new commitments. Traditionally the fourth quarter is busy as sponsors look to close transactions before the end of the year. We expect realizations to be similar to the third quarter and leverage remains largely unchanged. Underlying deal activity remains strong across the core middle market sectors that we focus on.

Pricing has remained range bound for most of this year between 500 to 550 basis points over SOFR while the upper middle market is seeing a greater degree of spread widening. Investments in Kayne Anderson BDC’s portfolio, excluding those on our watch list and opportunistic investments, have a weighted average leverage of 4.6 times, interest coverage is 2.4 times, and loan to enterprise value of approximately 43%. Broadly in line with last quarter, the weighted average EBITDA of our private middle market portfolio companies increased to 57.5 million from 53.7 million last quarter with a median of 38 million, reflecting our focus on established middle market businesses of meaningful scale. Company count declined by 4 to 100, reflecting realization activity during the quarter. The portfolio remains highly diversified with an average position size of approximately 1% of fair value and our top 10 investments representing approximately 19% of the debt portfolio.

Our top five industry sectors—healthcare, commercial services and supplies, distributors, food products, and containers and packaging—account for approximately 56% 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. The SG Credit platform continues to perform well and the equity position was marked up modestly this quarter. Non-accruals represented 3.6% of debt investments at fair value versus 2.7% last quarter. Centerline was the only new addition and represents approximately $28 million of the $78.4 million of non-accrual investment fair value.

During the quarter we completed the restructuring of American Soccer whereby a portion of our existing debt was exchanged for new debt and preferred equity. The position remains on non-accrual. Regiment was marked up by $1.9 million this quarter. As Doug mentioned, we completed the sale of Regiment after quarter end. This restructuring to sale over the course of five quarters shows the strength of our workout team and our commitment to producing positive outcomes in challenging situations.

PIK income represented 4.9% of total interest income for the quarter compared to 4.5% last quarter. Weighted average yield was 10.3% on fair value excluding non-accruals, up from 10.2% last quarter. While we are disappointed with the credit decline in a small subset of the portfolio this quarter, we view them as isolated situations. We continue to monitor every borrower closely through monthly financial reviews and weekly watch list discussions, and our focus on borrowers with strong interest coverage and conservative leverage continues to provide meaningful cushion across the broader portfolio.

We remain patient and disciplined in deploying capital and our long-standing sponsor relationships continue to provide us with attractive opportunities that meet our standards. We believe the market will increasingly reward BDCs like Kayne Anderson BDC that demonstrate consistent earnings discipline and defensive positioning. With that, I’ll turn it over to Terry.

Goodwillie Doug (Co-Chief Investment Officer)

Thank you, Frank.

Terry Hart (Chief Financial Officer)

I’ll begin by reviewing our financial results. During the third quarter we earned net income per share of $0.10 and net investment income per share of $0.46 compared to $0.42 in the prior quarter and $0.06 above our dividend. Total investment income for the third quarter was 59 million as compared to 55.7 million in the prior quarter. The increase in investment income was primarily the result of higher prepayment fees and accelerated accretion from realization activity during the quarter and higher average outstanding private credit investment balances.

Non-recurring interest income, which includes prepayment premiums and accelerated accretion of upfront fees from unscheduled paydowns, was approximately 1.7 million during the quarter. Additionally, our weighted average yield on debt investments at fair value excluding non-accruals increased 10 basis points to 10.3%. Total expenses for the third quarter were 28.8 million compared to 28.2 million for the prior quarter. The increase was primarily the result of a 1.1 million increase in interest expense on higher average borrowings during the third quarter, partially offset by 0.7 million of lower incentive fees during the quarter. Our incentive management fees were reduced by the 12-quarter lookback incentive fee cap. During the third quarter we had realized losses of 14.9 million related to the restructuring of our investment in American Soccer whereby a portion of our existing debt was exchanged for new debt and preferred equity.

During the quarter we had net unrealized losses on the portfolio of 8.5 million compared to unrealized losses of 4.6 million in the prior quarter. The unrealized losses were largely the result of negative fair value changes to our watch list investments including American Soccer, Centerline, Seagull, Egg and 4over, partially offset by a 1.9 million unrealized gain on Regiment and a reversal of a 14.9 million unrealized loss on American Soccer that was realized this quarter following its restructuring.

Additionally, we had deferred income tax expense of 0.2 million related to unrealized gains on equity investments held in our taxable subsidiary. As of September 30, total assets were 2.3 billion and net assets were 1.1 billion. As of that date, our net asset value was $15.71 per share. The decrease of $0.29 from $16.00 per share as of June 30 was comprised of $0.36 per share related to net realized and unrealized losses, partially offset by $0.06 of net investment income in excess of our dividend and $0.01 related to accretive share repurchases during the quarter. At the end of the third quarter, we had debt outstanding of 1,212,000,000 consisting of 937,000,000 drawn on our credit facilities and 275,000,000 of senior unsecured notes.

Our debt to equity ratio was 1.17 times, unchanged from the end of the second quarter, and our asset coverage ratio was 186%. We continue to manage leverage within our target debt to equity range of one times to one and a quarter times with some quarters higher or lower depending on realization activity. During the quarter, we repurchased 265,761 shares for 3.6 million at an average price of $13.61 per share pursuant to our 100 million share repurchase program.

Now turning to distributions, on November 4, our Board of Directors declared a dividend for 4Q of $0.40 per share, payable on January 19, 2027 to shareholders of record on December 31, 2026. As of September 30, our undistributed net investment income was approximately $0.32 per share. As we close out 2026, we plan to remain focused on our value lending strategy, the active management of a small number of challenged credits in our portfolio, and the disciplined management of our balance sheet.

With that, operator, please open the line for questions.

OPERATOR (Moderator)

We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q and A roster. A reminder that if you would like to ask a question, please press star one to raise your hand.

Your first question comes from the line of Melissa Weddle with UBS. Melissa, please go ahead.

Melissa Weddle (Analyst at UBS)

Good afternoon. Thanks for taking my questions today. I had a lot initially prepared to talk about sort of the near-term path you saw on some restructurings or recoveries, but I think you’ve addressed that quite a bit already. I think maybe we can pivot to sort of the opportunity in 4Q. It sounds like the repayment activity—reading between the lines, the repayment activity is likely to be similar to 3Q—but hearing that it could still be a net outflow order.

Is that fair to say?

Terry Hart (Chief Financial Officer)

Yeah. Thanks, Melissa. You know, our debt to equity ratio is currently at about 1.17, which is unchanged from the second quarter. And our target’s been in that one to one and a quarter range. Because we’re inside that range, we’re sizing new investments equivalent to portfolio runoff and we expect the fourth quarter to be roughly equivalent to realizations with leverage in that same range. So we do view share repurchases and new investments as different competing priorities.

We do have 500 million of liquidity and we can fund our pipeline and repurchases at a meaningful level to a discount to NAV, which is accretive to shareholders. We’re continuing to see good deal flow, but obviously the market’s been a little off this year. We saw an increase in third quarter over second quarter and the fourth quarter is generally a pretty big quarter, although we expect it to be down vis-à-vis prior years. So our strategy will be to continue to deploy assets as we have realizations.

Melissa Weddle (Analyst at UBS)

Okay, that’s really helpful. And then you mentioned the repurchase activity. You guys have had a few quarters here at roughly the three and a half million dollar level, four million dollar level, I would think. Is there any reason we shouldn’t be thinking that the appetite for share repurchases, given the balance sheet capacity and given your outlook for sort of the investment opportunities, that the appetite for repurchases would be any different than what we’ve seen more recently?

Terry Hart (Chief Financial Officer)

No, we’re still obviously very bullish on the company. We have roughly 93 million remaining available under our 10b5-1 plan, and so we’ll continue to support the stock per that programmatic repurchase program.

Melissa Weddle (Analyst at UBS)

Got it. Okay, great. Thank you.

OPERATOR (Moderator)

Your next question comes from the line of Paul Johnson with KBW. Paul, please go ahead.

Paul Johnson (Analyst at KBW)

Good afternoon. Thanks for taking my questions. In terms of the Regiment security sale post quarter end, or the exit, is that a full exit from that company, or does the debt essentially stay, port over with the new owner? Or how will that business be coming off of non-accrual?

Goodwillie Doug (Co-Chief Investment Officer)

Thanks, Paul. No, it’s a full exit with a small escrow left behind that should unravel over the next year. But it is a full exit and we’re very pleased with that exit given that it was above the last mark. We feel like we did a good job maximizing value on that asset.

Paul Johnson (Analyst at KBW)

Good, appreciate that. And then in terms of the remaining companies that are still on non-accrual that were not necessarily identified as potential removals next quarter, where do you think you are in terms of the pathway of removing those from non-accrual? Do you believe that there’s a restructuring path where those idiosyncratic issues can be fixed, or is it going to take just more time, more work to kind of search through the business? What can be done from the lender’s perspective to help rectify the situation?

Goodwillie Doug (Co-Chief Investment Officer)

Yeah, thanks, Paul. I mean, we tend to be very active in terms of our restructurings. Take Centerline, for instance. That’s 28 million of the 78.4 of nonaccruals at fair value. You know, we expect to complete a Centerline restructuring in the fourth quarter. And pro forma for that restructuring, we should expect a sizable portion of that to return to accrual status. And all things being equal, that should bring us back in line to last quarter. So that’s one example. And I would also add on Centerline, since it is the biggest chunk there, it still has substantial EBITDA and it still has sponsor involvement from a tier-one sponsor. And it has a strong competitive moat. So we do believe that situation, for instance, is more of a push to the right on revenues, and we remain very positive on the company fully recovering. And I think the story’s similar for many of the assets. There’s probably three assets that are sort of moving in one direction right now, but are stabilized, but we think are going to take a little more time.

But I think we’ve tended in the past to be very quick to try to exit situations we don’t think we can have recoveries on. So all the nonaccruals that we have, we believe in our ability to turn those assets, and some more than others. But we think the majority of those dollars we feel very constructive about.

Paul Johnson (Analyst at KBW)

Got it. Okay, thank you very much. I appreciate it all. For me,

OPERATOR (Moderator)

Your next question comes from the line of Derek Hewitt with Bank of America. Derek, please go ahead.

Derek Hewitt (Analyst at Bank of America)

Good afternoon, everyone. So could you provide some additional color on the dividend stability guide specifically, like what are some of the underlying assumptions? Whether you’re looking at the forward SOFR curve, are you just looking at new origination spreads, improving credit, or maybe just the willingness to dip into the spillover to cover any temporary shortfalls?

Terry Hart (Chief Financial Officer)

Sure, thanks. I mean, we’re looking at all those things you mentioned and, you know, we don’t have any approval or guidance from the board at this stage for 2027. But with the declaration of our fourth quarter dividend, we did deliver on our commitment to pay the base dividend throughout ’26. As you know, third quarter investment income came in at $0.46, so we had significant dividend coverage there. And even setting aside the 1.7 of nonrecurring income during the quarter, our net investment income comfortably exceeded the dividend.

So, you know, looking forward, our income-producing portfolio earns an average spread of 587 basis points over SOFR. That spread, combined with the recent increases in reference rates and overall health of the portfolio, you know, puts us in a position where we’re confident we can maintain our base rate going forward. And all the factors you mentioned are part of that. And we think we’re taking a relatively consistent, conservative approach there in terms of fees, in terms of spread, in terms of, you know, the future SOFR increases.

Derek Hewitt (Analyst at Bank of America)

Great. Thank you.

OPERATOR (Moderator)

There are no further questions at this time. I’ll now turn the call back to Ken Leonard for closing remarks.

Leonard Ken (Co-Chief Investment Officer)

Thank you, operator. We appreciate the continued support and engagement from all our shareholders and analysts. We feel very good about where the business is positioned today and our ability to have consistent, reliable earnings supported by a strong asset base that continues to support our dividend and growth. We have a clear strategy, a strong team and significant opportunities ahead of us. We know we will always be judged in execution and that, you know, is always our focus every day.

So thank you for joining us. We look forward to updating you again next quarter.

OPERATOR (Moderator)

This concludes today’s call. Thank you for attending. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.