KBDC Q3 2026 earnings call transcript, November 6, 2026

Given this expectation, combined with our ability to consistently generate above market spreads, currently averaging 565 basis points over SOFR for the portfolio. remain confident in our ability to maintain our base dividend going forward. Net asset value per share. As of September 30th was $15.71, a decline of 29 cents per share for approximately one. 0.8% from $16 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... ...from three investments. American Soccer, Centerline Communications, and Siegel 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... ...list is slightly elevated from historical norms, it still represents less than 6% of our overall portfolio at fair market. 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 that... ...refinanced by the recovery in both Arbor Works and Regiment. While credit events can be difficult to foresee with specificity and are currently...

...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 4.6%. ...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 on 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, macroeconomics, 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 KBDC's said in 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 credits. Our information rights, covenant packages, and long-standing sponsor relationships allow us to engage early and actively. 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 regimen, 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. Tired that 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. percent of the debt portfolio. approximately 93 percent of the portfolio is first lien senior secured, and the weighted average yield on our debt investments, excluding non-accruals, increased to 10.3 percent from 10.2 percent, and our exposure to software remains insignificant. Frank will walk through our borrower leverage, 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. The quarter over quarter spread tightening is more of a reflection of specific deals we approved rather than fundamental markets. Funding 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 and 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 remains 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 30th was $508.7 million, consisting of $45.7 million in cash. and cash equivalents, and $463 million in undrawn committed debt capacity.

We also continue to... Repurchase shares at a meaningful discount to NAV, buying back approximately 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 a hundred 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 and 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 focus on resolving the small number of challenge credits in the portfolio deploying capital with discipline and delivering sustainable value. for our shareholders. I will now pass the call over to Frank Carl to discuss our portfolio.

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 a 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. Pricing has remained range bound for most of this year between 500 to 550 basis points over silver while the upper middle market is seeing a greater degree of spread widening. Investments in KBDC's portfolio, excluding those on our watch list, and opportunistic investments. have a weighted average leverage of 4.6 times, interest coverage 2.4 times, and loan to enterprise value of approximately 43 percent. 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 four to 100 reflecting realization activity during the quarter. The portfolio remains highly diverse. With an average position size of approximately 1% of fair value and our top 10 investments representing approximately 19% of.

That 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. Our only material fixed rate investment is the SG credit loan at an 11% coupon. The SG credit platform continues. It continues to perform well and the equity position was marked up modestly this quarter. Non-accruals represented 3.6% of debt investment. Their value versus 2.7% last quarter. Centerline was the only new addition and represents approximately $28 million of the 70. $8.4 million of not accrual investments at 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 nonaccrual. Regiment was marked up by one. $2.9 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. Pick 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 nonaccruals, 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 watchlist discussions. 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 longstanding sponsor relationships continue to provide us with attractive opportunities that meet our standards. We believe the market will increasingly reward BDCs like KBDC. that demonstrate consistent earnings, discipline, and defensive positioning. With that, I'll turn it over to Terry.

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 pre- payment 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 nonaccruals, increased 10 basis points. to 10.3%. Total expenses for the third quarter were $28.8 million compared to $28.8 million. for the prior quarter. The increase was primarily the result of a $1.1 million increase in interest spent 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 look back incentive fee cap. In 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 center line. Segal egg and four over partially offset by 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. It was stated to unrealized gains on equity investments held in our taxable subsidiary. As of September 30, total assets were 2.3 million. And net assets were 1.1 billion. As of that date, our net asset value was $15.71 per share. The decrease of 29 cents from $16 per share. As of June 30th, was comprised of 36 cents per share related to net realized and unrealized losses, partially offset. By six cents of net investment income in excess of our dividend and one cent related to accretive share repurchases during the quarter. At the end of the third quarter, we had debt outstanding of one billion, two hundred and twelve million, consisting of nine hundred and thirty seven million. On our credit facilities and two hundred and seventy five million of senior unsecured notes, our debt to equity ratio was one point.

One seven times unchanged from the end of the second quarter and our asset coverage ratio was one hundred and eighty six percent. We continue to manage leverage with on 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 265,700. 61 shares for $3.6 million at an average price of $13.61 per share, pursuant to our $100 million share repurchase program. Now turn to the next slide. To distributions on November 4th, our board of directors declared a dividend for the fourth quarter of 40 cents per share pay. It was available 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 challenge credits and our

A reminder that if you would like to ask a question, please press star 1. To raise your hand.

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

with KBW. Paul, please go ahead.

Derek, please go ahead.

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 and reliable earnings supported by a strong asset base. that continues to support support our our 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 and 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.

thank you. for attending. you may now disconnect.