KBDC Q1 2026 Earnings Call Transcript

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DATE

Tuesday, May 12, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Douglas L. Goodwillie
• President and Chief Investment Officer — Frank Karl
• Chief Financial Officer — Terry A. Hart

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TAKEAWAYS

• Net Investment Income per Share -- $0.43, representing 108% dividend coverage, with a $0.01 decrease sequentially from Q4 2025.
• Dividend -- $0.40 per share declared for the quarter, payable July 16, supported by management's stated confidence in ongoing dividend sustainability for 2026.
• Annualized Return on Equity -- 10.6%, highlighting management's view of portfolio effectiveness.
• Net Asset Value (NAV) per Share -- $16.23, down $0.09 from last quarter, attributed to net realized and unrealized losses partially offset by accretive share repurchases and excess net investment income over the dividend.
• Nonaccrual Debt Investments -- 2.5% of the debt portfolio at fair value, rising from 1.4% the prior quarter, with two new additions (Score and Regiment) and one removal (ArborWorks) this period.
• Credit Portfolio Exposure -- 93% first lien investments and 2% exposure to software and technology sectors, with management emphasizing defensive sector positioning versus peers.
• New Credit Commitments -- $93 million of new private credit committed and $99.1 million total fundings, balanced by $74.6 million in repayments and $17.4 million in broadly syndicated loan sales, yielding $7.1 million net funded investment activity.
• Weighted Average Portfolio Yield -- 10.1% on fair value, decreasing 20 basis points sequentially due to lower reference rates and tighter spreads.
• Leverage -- Debt to equity ratio of 1.05x, within the stated range of 1x-1.25x, with management indicating comfort at the current position and no intent to move toward the upper limit in the near term.
• Liquidity -- $569.7 million total liquidity, comprising $32.7 million in cash and $537 million in undrawn credit facility capacity.
• Share Repurchases -- $21.4 million repurchased at an average price to NAV of 86%, with the $100 million buyback program extended for another year starting May 25.
• Portfolio Composition -- 105 companies at quarter end with a $2.2 billion portfolio fair value and average position size of 1% of fair value; top 10 investments represent 20% of the portfolio.
• Industry Diversification -- Commercial services and supplies, health care, distributors, food products, and containers and packaging collectively account for just over 50% of investments.
• Loan Metrics -- Weighted average borrower leverage at 4.4x, interest coverage at 2.4x, and loan to enterprise value at 43% for core holdings.
• Remaining Broadly Syndicated Loan (BSL) Exposure -- $29.8 million at cost as of quarter end, with sales and rotation expected to largely complete in the current or following quarter.
• Portfolio PIK Interest -- Payment-in-kind interest comprised 7.5% of total interest income, with $2.2 million (3.9%) attributed to ArborWorks returning to accrual status.
• SG Credit Loan Exposure -- Increased commitment in Q1, position now approximately 5% of the portfolio, and yielding an 11% coupon.
• Unfunded Commitments -- $289 million as of quarter end, with notable new commitments and a pipeline described as "increasing" in Q2.
• Expenses -- $28.4 million for the quarter, a sequential decline, attributed to lower average borrowings, reduced incentive fees, and lack of excise taxes.
• Realized and Unrealized Losses -- $2.3 million of realized losses (primarily Regiment Security Partners) and $9 million of net unrealized losses, with $400,000 deferred tax expense tied to unrealized gains on equity investments.

SUMMARY

KBDC reported modest sequential declines in both net investment income and net asset value, with portfolio shifts reflecting continued sector resilience and disciplined capital deployment. The company accelerated its rotation out of legacy broadly syndicated loans and selectively expanded positions in higher-yielding private credits, including a notable add-on to SG Credit. Management highlighted increasing spreads and an uptick in middle-market investment pipeline, indicating a more favorable origination environment despite overall M&A activity lagging prior forecasts due to geopolitical headwinds.

• Management emphasized that 95% of debt investments are floating rate, aligning asset and liability structures.
• The top five industry sectors maintained portfolio stability quarter over quarter, with the largest exposures consistent and no material sector concentration risk reported.
• Management stated, "our minimal 2% exposure to the sector insulated us from this pressure," referencing general negative sentiment toward software loans in the marketplace.
• Company stated new loan originations averaged a spread of 549 basis points over SOFR, 20 basis points wider than the prior quarter, reflecting improving pricing for lenders.
• Pipeline activity in Q2 is described as "something of an uptick," with $150 million closed or near completion, and forecasted Q2 BDC commitments approaching $200 million.
• Portfolio company average EBITDA is $52.6 million, underscoring focus on established middle-market borrowers with scale.
• Management described the term extension and 20 basis point interest rate reduction on its largest credit facility, further reducing borrowing costs.

INDUSTRY GLOSSARY

• First Lien Investment: A senior secured loan with first priority claim on borrower assets in a default scenario.
• Broadly Syndicated Loan (BSL): Large corporate loan syndicated among multiple lenders, often with lower spreads than direct private credit.
• Delayed Draw Term Loan: Loan structure allowing borrowers to draw committed funds in tranches over time rather than upfront, commonly used for acquisition or growth capital pacing.
• Payment-in-Kind (PIK) Interest: Interest paid by increasing the principal balance of the loan rather than cash payment during the accrual period.
• SOFR: Secured Overnight Financing Rate, a widely used benchmark interest rate for U.S. dollar-denominated loans replacing LIBOR.
• Nonaccrual: Loan status indicating that contractual interest payments are unlikely to be collected, thus income recognition is suspended.

Full Conference Call Transcript

Douglas L. Goodwillie: Good morning, everyone. I am pleased to report another quarter of solid performance that demonstrates the resilience and consistency of our value lending approach despite the headwinds that the sector has faced this year. I will provide an overview of our quarter and share our thoughts around how KBDC's differentiated portfolio has managed to perform in a more challenging environment. Frank Karl will then provide a more detailed overview of our portfolio and performance, before Terry A. Hart concludes with KBDC's financial results. For the first quarter of 2026, we generated net investment income of $0.43 per share, which represents strong coverage of our $0.40 quarterly dividend at 108%.

While this was a slight decrease from the $0.44 per share we achieved in the fourth quarter, it reflects our disciplined approach to capital deployment in what continues to be an uncertain market environment. Our annualized return on equity for the quarter was a robust 10.6% underscoring the effectiveness of our investment strategy. Our net asset value per share ended the quarter $16.23, down 55 basis points from $16.32 in the last quarter. The small decline was due in part to some markdowns in the portfolio, and was offset in part by origination activity some positive portfolio marks and by accretive share repurchase activity.

I am pleased to announce that our Board of Directors has declared a regular quarterly dividend of $0.40 per share for the first quarter of 2026. This dividend will be payable on July 16, to stockholders of record as of June 30. Looking ahead, we remain confident in our ability to sustain our dividend throughout 2026. As we stated on our last earnings call. This confidence is grounded in several key factors our portfolio's defensive positioning with 93% in first lien investments our value lending philosophy that focuses on companies in stable and staple industries, which allows for a conservative average borrower leverage profile of just over 4x.

The weighted average yield on our portfolio of 10.1% provides a solid foundation for consistent income generation while our minimal exposure to volatile sectors like software and technology at just 2% positions us well relative to many of our peers. Our portfolio continues to demonstrate strong credit quality and resilience. Particularly relative to the broader private credit market. As of March 31, 2026, nonaccrual investments represented 2.5% of our debt portfolio at fair value, up from 1.4% in the prior quarter. In terms of specific companies, we added Score and Regiment last out tranches to the nonaccrual status during the quarter. We also moved ArborWorks off nonaccrual and we see a clear path to further improvement in the near term.

While many BDCs have significant exposure to software and technology companies, often 15% to 25% of their portfolios, our consistent adherence to underwriting standards that stress disciplined industry and loan level diversification, has proven prescient as we are witnessing the private credit market's first prolonged stress test since the early stages of the COVID era. We remain focused on traditional, stable industry sectors including industrial services, distribution, food products and business services. Companies with durable cash flows, substantial tangible enterprise value and disciplined leverage profiles. Turning to our investment activity for the quarter. We maintained our disciplined approach to capital deployment while continuing to find attractive opportunities that meet our stringent risk adjusted return criteria.

During the quarter, we made new private credit commitments totaling $93 million demonstrating our ability to source quality deals even in a more selective market environment. The pricing environment for new originations remains favorable, with our new floating rate loans averaging 549 basis points over SOFR during the first quarter which was 20 basis points wider than in the fourth quarter. Our total fundings for the quarter were $99.1 million which included both new investments and draws on existing unfunded commitments from our portfolio companies. We received $74.6 million in private credit repayments and $17.4 million in DSL sales during the quarter. Resulting in net funded investment activity of $7.1 million.

Our balance sheet remains exceptionally strong, and we continue to maintain a conservative risk profile. As of March 31, our debt to equity ratio stood at 1.05x positioning us comfortably within our target leverage range of 1x to 1.25x. Our total liquidity position of $569.7 million provides substantial capacity for accretive capital deployment. This includes $32.7 million in cash, and $537 million in undrawn debt capacity under our credit facilities. The private credit market is going through a period of bifurcation in terms of performance across different investment strategies and market segments. While presenting challenges for some participants it is creating opportunities for disciplined lenders.

Our selective approach means we are comfortable maintaining higher liquidity levels to be more tactically opportunistic as spreads widen. M&A activity has remained lower than forecasted at the start of the year, as geopolitical tensions have kept the cap on activity. However, we continue to see steady transaction flow in our core middle market segment with a noticeable uptick in activity over the past 4 to 6 weeks. The quality of deal flow remains solid, and spreads have started to widen in Q1.

I would be remiss if I did not mention 1 of the bigger clouds hanging over our set right now, the rapid advancement of AI and automation technologies has created significant uncertainty around business model durability, and competitive positioning for many software companies. We are seeing several managers report pressure on net investment income per share tighter dividend coverage and meaningfully declining NAV per share, as they grapple with softening credit performance. And increased markdowns on those positions. While we believe the general negative sentiment towards software loans is somewhat overblown, our minimal 2% exposure to the sector insulated us from this pressure.

Public BDC valuations have lagged business fundamentals, with many quality managers trading at discounts net asset value despite maintaining strong operational performance. As the market continues to differentiate between managers based on actual performance, rather than just asset growth we believe KBDC's consistent approach will be increasingly valued by both investors and the private equity sponsors who drive our deal flow. I will now pass the call over to Frank Karl, to discuss our portfolio.

Frank Karl: Thanks, Douglas. As of March 31, our portfolio includes 105 companies with a fair value of $2.2 billion plus $289 million of unfunded commitments. Since quarter end, we have closed or are finalizing $150 million of new commitments as we have seen something of an uptick in activity in Q2. Investments in KBDC's portfolio, excluding those on our watch list and opportunistic investments, have a weighted average leverage of 4.4x interest coverage ratio of 2.4x, and loan to enterprise value of approximately 43%. The weighted average EBITDA of our private middle market portfolio companies is $52.6 million, reflecting our focus on established middle market businesses with meaningful scale. Company count declined by 2, reflecting broadly syndicated loan rotation and realizations.

The portfolio remains highly diversified. Average position is approximately 1% of fair value, and top 10 investments are only 20% of the portfolio. Our top 5 industry sectors commercial services and supplies, health care, distributors, food products, and containers and packaging. Account for just over 50% 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, where we increased our commitment in Q1 given strong platform growth.

Credit performance remained strong with 2.5% of debt investments fair value on non accrual versus 1.4% last quarter. We do expect both Sundance and Regiment to come off nonaccrual over the next 1 to 2 quarters as Sundance is completing the final stages of its realization process and Regiment is currently going through a sale. We look forward to providing an update on those credits on our next earnings call. As Doug mentioned, we also moved ArborWorks off of nonaccrual this quarter, which did have the effect of increasing our total income rate for the quarter to 7.5%, up 10 basis points from last quarter. Given that we recognized some accrued interest associated with the name in income.

Carrie will provide more specifics. Weighted average yield was 10.1% on fair value, excluding nonaccruals, down slightly from 10.3% last quarter. We have achieved this with materially lower leverage than many peers, while continuing our rotation out of the BSL into higher spread private credit. Remaining BSL exposure was $29.8 million at quarter end, and the sell down is continuing in Q2. Activity has picked up in Q2, but we have stayed selective. Passing on deals where leverage asked pushed beyond our comfort. Or pricing was too aggressive. Against the backdrop of tariffs, AI risk, and geopolitical tensions, we are looking to remain disciplined as always.

We added a further $30 million delayed draw term loan to SC Credit now represents approximately 5% of the portfolio. That team has executed well. The position adds diversification, and the 11% coupon offers an attractive return. Overall, outlook for investment activity looks healthy. And our long standing sponsor relationships continue to generate preferred lender status on attractive opportunities. With that, I will turn it over to Terry.

Terry A. Hart: Thank you, Frank. Let's first review our financial results. During the first quarter, we earned net income per share of $0.26 and net investment income per share of $0.43, compared to $0.44 in the prior quarter and $0.03 above our dividend. Total investment income for the first quarter was $57.3 million, as compared to $61.9 million in the prior quarter. The decrease to investment income was primarily a result of lower average reference rates some spread compression, and $2.1 million less accelerated amortization of OID and prepayment fees related to realization activity. Partially offset by $2.2 million of PIK interest income related to our investment in ArborWorks which moved to accrual status during the first quarter.

Accelerated amortization of OID related to realization activity was approximately $500 thousand during the quarter and PIK interest represented 7.5% of total interest income for the quarter but it is worth noting that $2.2 million, or 3.9%, was related to PIK interest from Arbor Works that had not been accrued since 2023. Additionally, the 20 basis point decrease to our portfolio yield was split evenly between lower reference rates and lower spreads. Full expenses for the first quarter were $28.4 million, compared to $31.8 million for the prior quarter.

The decrease was primarily the result of lower reference rates on borrowings lower average borrowings during the first quarter, lower incentive fees, and $500 thousand of excise taxes incurred in the fourth quarter. During the quarter, our incentive management fees were reduced by the December look back incentive fee cap. During the first quarter, we had $2.3 million of realized losses mainly related to the restructure of our debt investments and Regiment Security Partners that resulted in a $2 million realized loss and we recognized a $300 thousand realized loss due to the rotation out of 1 of our broadly syndicated loans.

During the quarter, we had net unrealized losses on the portfolio of $9 million compared to unrealized losses of $7.2 million in the prior quarter. The unrealized losses were largely the result of negative fair value changes related to our investments in Score Siegel Egg, Tempo, and Trademark Global. Additionally, we had deferred income tax expense of $400 thousand related to unrealized gains on equity investments held in our taxable subsidiary. As of March 31, total assets were $2.3 billion, and net assets were $1.1 billion. As of that date, our net asset value was $16.23 per share.

The decrease of $0.09 from $16.32 per share as of December 31 was comprised of $0.17 per share related to net realized and unrealized losses partially offset by $0.03 of net investment income excess of our dividend and $0.05 related to accretive share repurchases during the first quarter. At the end of the first quarter, we had debt outstanding of $1.138 billion and our debt to equity ratio was 1.05x, which is a small increase from 1.02x at the end of the fourth quarter.

On February 20, we closed the term extension of our largest credit facility led by Wells Fargo, and reduced the interest rate on this facility by 20 basis points And as mentioned earlier, during the quarter, we had share repurchases of $21.4 million at an average price to NAV per share of 86%, pursuant to our $100 million share repurchase program. On May 5, the program was extended for 1 year and the $100 million program amount was renewed starting May 25. Now turning to our distribution. On May 5, our board of directors declared a regular dividend for the second quarter of $0.40 per share to shareholders of record on June 30.

As of March 31, our undistributed net investment income was approximately $0.25 per share. As we continue to execute during the remainder of 2026, we plan to complete the rotation out of our remaining lower yielding BSL positions. Gradually optimize our leverage within our target debt to equity range of 1x to 1.25x and stay focused on our value lending strategy. With that, operator, please open the line for questions.

Operator: Thank you. To withdraw any questions, press 1 again. Our first question comes from Cory Johnson from UBS. Please go ahead. Your line is open.

Analyst (Cory Johnson): Hi. Thanks for taking my question. So you mentioned you know, I guess, passing on some deals because perhaps the terms were not where you wanted them to be at. But I was just wondering, because I have heard from some of the other BDCs about how some of the terms on their--on their thing that they are looking at have actually strengthened so far. So I was just wondering, are you feeling any pressure possibly from upmarket? And I guess, similarly, are you seeing any opportunities given, you know, where you are at leverage wise.

And you know, I guess, coming with a little bit of a cleaner balance sheet, any opportunities for you to either go upstream or is there anything else that you are seeing in the market? You can take advantage of?

Douglas L. Goodwillie: Sure. Thanks, Cory. This is Douglas L. Goodwillie. I would say just in general as a backdrop, I think we always, you know, try to stay as disciplined as we can in any market in terms of leverage discipline as well as pricing discipline. And I think, you know, this quarter was, you know, not all that different for us in terms of that. I would say, the market in terms of M&A volumes continues to be on a mid-range, not fantastic given what we have talked about geopolitical and other pressures on the market. But the opportunities that we have seen has still been good quality.

And I think if you look at Q2, we have seen a slight uptick. I think we are tracking to almost $200 million of commitments for Q2 for the BDC. So we are, you know, using our balance sheet and liquidity to invest in what we think are attractive opportunities. In terms of the piece of the question regarding the upper mid market potentially kind of coming down into the core mid market. Not really the case at all, I think, at this point.

What we are seeing is the start of a dislocation where some of the upper mid market players, I think, given some of the redemptions on the private BDC side, you know, have not been putting as much capital to work. So the $400 and $500 million upper mid market deals are actually seeing some better pricing for the first time in a while, and we have seen some of those opportunities where, you can play in a $75 to $100 million EBITDA business. Get a covenant, and get some decent pricing. So I think that is been more of an opportunity at this point.

We have not seen enough stress around sell offs, software portfolios and we do believe that we are unlikely to see that over the long term. But, hopefully, that answers the question. Good. Thank you.

Operator: As a reminder to ask a question, please press star followed by the number 1. Our next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead. Your line is open.

Analyst (Kenneth Lee): Realize it is a little difficult to predict, but could you offer up any kind of outlook around prepayments over the near term? Could you see it trending either lower or higher than a more normalized kind of environment there?

Douglas L. Goodwillie: I will start, and maybe Frank, you can weigh in. as well. I think it is been a relatively slow prepayment year and probably 2 to 3 years, I think, just given the M&A market. So you have seen the average duration, which, you know, Kenneth and I have been doing this together 25 years. it is almost always over the long term around 3 years. And I think in a risk M&A environment, it is going to 2.5, and I think we are seeing it closer to 4. For this post COVID period. So this year, we are seeing--and I will toss it over to Frank Relatively kind of a normal first half And projecting a pickup in Q4.

But I would say that is a bit dependent on, the overall market.

Frank Karl: I think we have got to Douglas's point, we usually expect something of a back-half more transaction volume you would expect a little bit of a pickup That said, if you are in an environment where spreads are increasing, you know, 25 to 50 basis points, maybe higher than that, that generally leads to something of a slightly more muted refinancing and transaction, you know, period of time. So I would argue, we are probably expecting 2026 to look maybe a little bit of a step up from 2025.

Analyst (Kenneth Lee): Gotcha. Very helpful there. And just 1 more follow-up if I may. Just in terms of the ongoing portfolio ramp, Once again, just given the outlook the macro conditions, and, obviously, what you are seeing, do you think you would lean for portfolio leverage to be closer to the lower end or the higher end of your target range there? Over the near term? Thanks.

Douglas L. Goodwillie: Thank you. I think we are comfortable with where we are, you know, between 1x to 1.1x. I think our view is we are kind of yet to see where this dislocation goes and whether it will be prolonged. And we would like to certainly have a decent amount of liquidity. Going into the front end of a potential dislocation. And certainly do not want to be at the upper end at, you know, 1.2x, 1.25x. And kind of dealing with potential borrowing base and things like that can occur if you really go into a prolonged dislocation.

So I think we are pretty comfortable with where we are. and, you know, we are still seeing good opportunities, and we will still deploy capital but would not expect to get aggressive, towards the 1.2x, 1.5x side on the leverage. Side. Gotcha. Very helpful there. Thanks again. Thanks.

Operator: Our next question comes from Derek Hewitt from Bank of America. Please go ahead. Your line is open.

Analyst: Good morning. It was nice to see the 20 basis points of improvement in spreads on a quarter over quarter basis. But how are spreads trending today on deals that you are looking at? Thanks, Derek.

Douglas L. Goodwillie: And I will start and Kenneth and Frank, please weigh in. I think we have seen a slight uptick in the core mid market. But something along the lines of potentially 20 basis points in our opportunity set. And I think that is translating into the core mid market. I think you would hear that in the upper mid market, there is been slightly more than that. As I think you saw more of a the start of the dislocation occurring there. We expect with capital coming out of the market, fundraising to be harder with a lot of the you know, whether it is right or wrong, negative press around private credit.

So I think those factors bode well for spreads increasing both in the upper mid market, as well as the core midmarket over the near term.

Kenneth Leonard: Yeah. The other thing I would add is we have talked to investment bankers, and the pipeline seems to be increasing. that is always the front end of our investment process. And so as more volume comes in the market, we think there will be opportunity to take spreads up. And so we, you know, remain hopeful that is gonna continue as, that is generally a pretty good leading indicator.

Analyst: Okay. Thank you for that. And then in the prepared remarks, you guys had mentioned that the SG credit add on was on the delayed draw side. Due to just growth in that investment in general. So how should we think about maybe increasing your exposure on the equity side, just given that you are seeing strong growth overall in that vehicle?

Frank Karl: Yeah. I will start there. I mean, they are continuing to grow the book. Obviously, 1 good way to do that is over the long term will support, you know, the valuation of our equity investment is via the incremental debt investment You know, we have talked about in the past, we do have an option to purchase more equity in that vehicle. I think that is, you know, something that we will continually be discussing internally As that platform grows, you know, we are not going to be on the phone next quarter saying, hey, we have made a substantially increased equity commitment to SG Credit.

Analyst: Okay. Thank you. And then the last 1 for me is, in your prepared remarks, you guys had mentioned that you were continuing to monetize the BSL portfolio. Is that expected to be done in the first quarter, or are there maybe a couple of investments in that portfolio that may have experienced some dislocation over the past 3 to 5 months that might take a little bit longer to monetize.

Douglas L. Goodwillie: I will toss it to Frank who is a little closer on, the exact timing, but we are down to 4 credits. You know, 3 or I think the average leverage across those is mid twos. there is 1 that is slightly marked down, which Frank can hit on. But we do expect to monetize that Largely during this quarter, but, you know, some may slip into Q3.

Frank Karl: Not much to add. Right? there is 4 names, about $30 million of at cost. About $27 million at FMV, You know, I think it will just depend on, to Douglas's earlier point, around how we wanna manage leverage, what the opportunities look like, etcetera. But, you know, 3 of those are, you know, trading right around our cost basis. And then you mentioned Tempo. that is a light solutions. That business has gotten knocked by some AI related noise. Although, we do think it is more of a--you know, we do not think it is a fair characterization for that business. Very small position that we are looking to unwind sooner rather than later.

Analyst: Thank you. Thanks.

Operator: We have no further questions. I would like to turn the call back over to Douglas L. Goodwillie for closing remarks.

Douglas L. Goodwillie: Well, with that, I would like to thank everyone for joining us for this KBDC earnings presentation for your continued interest in KBDC and our platform. We look forward to speaking again in August at our next earnings call.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

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