Executive Summary / Key Takeaways

• Kayne Anderson BDC, Inc. (KBDC) is executing a focused strategy in middle-market private credit, emphasizing senior secured loans to sponsor-backed companies, aiming for consistent current income and portfolio growth.
• The first quarter of 2025 demonstrated robust origination activity, significantly outpacing the prior year, positioning the company to achieve its target leverage range of 1.0x to 1.25x debt-to-equity by Q2 or Q3 2025.
• While Q1 2025 net investment income saw a slight decrease due to the expiration of fee waivers and lower reference rates, the underlying portfolio yield remains healthy, and increased leverage is expected to benefit NII going forward.
• The company is strategically rotating out of lower-yielding broadly syndicated loans into core middle-market private credit, a move anticipated to enhance future portfolio spreads relative to peers.
• Despite market uncertainties and an increase in non-accruals to 1.6% of fair value, KBDC's conservative underwriting, diversified portfolio, and high proportion of first-lien, floating-rate loans with financial covenants provide a defensive posture.

Setting the Scene: A Focused Approach in Middle Market Private Credit

Kayne Anderson BDC, Inc. (KBDC) operates as an externally managed business development company, specializing in providing debt financing to U.S. middle-market companies. Launched in February 2021 and becoming publicly traded on the NYSE in May 2024, KBDC's core objective is to generate current income and, secondarily, capital appreciation for its investors. This is primarily achieved through investments in first lien senior secured loans, with a targeted allocation of at least 90% of its portfolio, including leverage, to these senior debt instruments, alongside a smaller focus on unitranche, split-lien, and opportunistic equity co-investments.

The company defines its target market as businesses generally generating between $10 million and $150 million in annual EBITDA, with a particular emphasis on the "core" middle market segment ($10 million to $50 million EBITDA). This focus allows KBDC to operate in a less competitive segment than larger syndicated markets, often negotiating more favorable terms and structures directly with borrowers and their private equity sponsors. KBDC benefits significantly from its affiliation with KA Credit Advisors, LLC, its external manager, which is part of Kayne Anderson's established middle market private credit platform (KAPC). KAPC, with approximately $7.3 billion in relevant AUM as of March 31, 2025, brings extensive sourcing channels, underwriting expertise, and a broad network built over more than a decade, having invested over $13 billion across hundreds of transactions.

In the competitive landscape of BDCs, KBDC positions itself as a conservative lender focused on credit quality and downside protection. While larger peers like Ares Capital (ARCC) and Owl Rock Capital (OBDC) command significantly larger market shares and AUM, offering broader investment strategies including more junior debt, KBDC differentiates through its emphasis on senior secured positions and stringent underwriting. KBDC's portfolio generally exhibits lower leverage and higher interest coverage ratios compared to many peers, a key structural advantage in a higher interest rate environment. While KBDC may trail some competitors in terms of overall portfolio yield due to its senior focus, its strategy aims for potentially lower default rates and greater principal protection. The company's operational approach relies on the Advisor's established processes for due diligence, valuation, and portfolio monitoring, including monthly financial reviews and a quantitative risk rating system. Information does not detail proprietary or unique technological differentiators for KBDC compared to other BDCs; its competitive edge appears to stem more from its established platform, underwriting discipline, and market focus rather than a specific technological moat providing quantifiable cost or performance advantages.

Strategy in Action: Portfolio Growth and Yield Management

KBDC's strategic execution is evident in its recent investment activity. The first quarter of 2025 marked a period of significant deployment, with $340 million in total commitments across 16 new businesses, a substantial 113% increase in commitments compared to Q1 2024. This robust origination led to $264 million in fundings from new commitments and an additional $30 million from existing unfunded commitments, resulting in approximately $181 million of net funded deployment for the quarter after accounting for repayments. This level of activity underscores the Advisor's ability to source and close deals even amidst evolving market conditions.

The new private middle market loans originated in Q1 2025 maintained an average spread over SOFR of 5.49% and a weighted average net senior leverage ratio of 4.0x, consistent with the company's conservative underwriting approach. This contrasts with some market compression observed in broader lending markets. As of March 31, 2025, the total portfolio comprised 116 companies with a fair value of $2.167 billion and total commitments exceeding $2.4 billion, including $236 million in unfunded commitments. The portfolio remains highly concentrated in first-lien securities (98.1% at fair value) and is 100% floating rate, aligning with the company's liability structure.

A notable element of KBDC's current strategy is the planned rotation out of its broadly syndicated loan portfolio. These investments, totaling $226 million in principal amount as of March 31, 2025, were acquired around the time of the IPO and final capital call. Management intends to wind down this portfolio over the coming quarters to reinvest in higher-yielding private middle market loans. This strategic shift is expected to enhance the portfolio's overall spread profile relative to competitors who may have larger or more persistent allocations to broadly syndicated credit. As of March 31, 2025, the weighted average yield on private middle market loans was 10.8% at fair value, significantly higher than the 6.9% yield on broadly syndicated loans, illustrating the potential yield enhancement from this rotation.

Financial Performance and Capital Structure

KBDC's financial results for the first quarter of 2025 reflect both the benefits of portfolio growth and the impact of planned transitions. Net investment income per share was $0.40, a decrease from $0.48 in the prior quarter. This decline was primarily attributed to the expiration of the income-based incentive fee waiver at the end of 2024, which had a $4.5 million impact on expenses. Total investment income also saw a slight decrease to $55.2 million from $56.3 million in the prior quarter, mainly due to a reduction in the SOFR reference rate and the impact of placing one investment, Siegel Egg, on non-accrual status, which accounted for $0.6 million of the decrease. PIK interest remained a small component of income, representing only 0.6% of interest income in Q1 2025.

The company reported a net decrease in net assets resulting from operations of $22.2 million for the quarter. This was influenced by net unrealized losses of $6.5 million on the investment portfolio, primarily related to fair value changes in investments like Sundance, Siegel Egg, and the broadly syndicated loan portfolio. The net asset value per share decreased from $16.70 at December 31, 2024, to $16.51 at March 31, 2025. This change was primarily driven by the payment of a $0.10 per share special dividend and the impact of net realized gains and unrealized losses ($0.09 per share).

Financially, KBDC maintains a solid capital structure, supported by its credit facilities and senior unsecured notes. As of March 31, 2025, total debt outstanding was $1.016 billion, resulting in a debt-to-equity ratio of 0.86x, an increase from 0.72x at the end of 2024. This leverage remains below the company's target range of 1.0x to 1.25x, providing significant capacity for future investment. The asset coverage ratio stood at a healthy 216% as of March 31, 2025, well above the regulatory requirement of 150%. Recent amendments to the corporate credit facility and both SPV credit facilities in late 2024 and early 2025 have extended maturities, increased capacity, and reduced borrowing costs, enhancing financial flexibility and expected to benefit net investment income as leverage increases.

Outlook, Risks, and Competitive Dynamics

Management is optimistic about achieving its target leverage range of 1.0x to 1.25x debt-to-equity in the second or third quarter of 2025, driven by the strong origination momentum seen thus far in the year. This increased leverage, combined with lower borrowing costs from recently amended facilities and the strategic shift towards higher-yielding middle market loans, is expected to be beneficial to net investment income over the balance of 2025. The company plans to opportunistically issue unsecured notes as leverage increases to further enhance funding capacity.

KBDC's dividend strategy includes a regular quarterly dividend of $0.40 per share. In addition, the company distributed two special dividends of $0.10 per share in December 2024 and March 2025, with a final $0.10 special dividend scheduled for June 2025. These special distributions were intended to manage spillover income from 2024 and support the stock price around lockup release dates. As of March 31, 2025, KBDC had approximately $0.22 per share in undistributed net investment income spillover, with the remaining balance after the June special dividend expected to be paid out in Q4 2025. Management anticipates relatively modest excess NII above the base dividend for the remainder of 2025 as the portfolio ramps up and the BSL rotation occurs, with total dividend yield and coverage expected to better reflect steady-state operations once target leverage and portfolio composition are achieved.

The company also extended its $100 million share repurchase plan through May 2026, allowing for repurchases below NAV, signaling confidence and a commitment to shareholder value.

Despite the positive outlook on portfolio growth and leverage, KBDC faces risks inherent to the BDC model and the current economic climate. These include valuation risk due to the illiquid nature of private investments, interest rate risk impacting net investment income (though largely mitigated by the floating-rate portfolio and liabilities), and credit risk within the portfolio companies. While KBDC's portfolio generally exhibits lower leverage and higher interest coverage than peers, the increase in non-accruals to 1.6% of fair value (4 positions) as of March 31, 2025, highlights ongoing credit monitoring needs. Macroeconomic uncertainties, including potential impacts from tariff policies, also pose risks, although management's analysis suggests most portfolio companies have sufficient pricing power to mitigate direct effects. Competition for private credit deals remains intense, potentially influencing future spreads and terms, although KBDC's focus on the core middle market and established sponsor relationships provide some insulation.

In the competitive landscape, KBDC's conservative, senior-focused strategy differentiates it from peers pursuing higher-yield, higher-risk investments. While this may result in slightly lower headline yields compared to some competitors, it aims for greater stability and capital preservation. The company's ability to leverage the broader Kayne Anderson platform and maintain disciplined underwriting standards are key competitive strengths. However, its smaller scale relative to market leaders could present challenges in accessing the largest or most competitive deals. The strategic rotation out of broadly syndicated loans is a deliberate move to enhance its competitive positioning by focusing on its core strength in private middle market lending.

Conclusion

Kayne Anderson BDC is executing a clear and disciplined strategy focused on generating current income through senior secured lending to U.S. middle-market companies. The strong origination activity in early 2025 positions the company well to achieve its target leverage, which, combined with favorable financing terms and a strategic shift towards core private credit, is expected to enhance future net investment income. While the expiration of fee waivers impacted recent results and market uncertainties persist, KBDC's conservative underwriting, diversified portfolio, and experienced management team provide a solid foundation.

The investment thesis for KBDC centers on its ability to leverage the Kayne Anderson platform to source high-quality, senior secured loans in the less competitive middle market, delivering attractive risk-adjusted yields. Key factors for investors to monitor include the successful execution of the leverage ramp and BSL rotation, the trajectory of portfolio credit quality (particularly non-accruals), and the impact of broader economic conditions and competitive dynamics on future origination volumes and spreads. KBDC appears well-positioned to deliver consistent income and prudently grow its portfolio in the current environment.