Valuation and Investment Strategy - The majority of the company's portfolio investments are classified as Level 3 under ASC Topic 820, indicating that valuations are based on unobservable inputs and significant management judgment [246]. - The company intends to use an independent valuation firm to review the fair value of certain instruments at least once annually, which may lead to fluctuations in valuations over short periods [247]. - Changes in fair value are recorded in the consolidated statement of operations as net change in unrealized appreciation or depreciation, reflecting quarterly adjustments [248]. - The SEC's new Rule 2a-5, effective September 1, 2022, designates the Advisor as the "valuation designee" for fair value determinations, with oversight from the Board of Directors [249]. - The Board of Directors has the authority to change investment objectives and strategies without prior notice, which could adversely affect business and stockholder value [257]. - The company may need to alter its investment strategy due to changes in laws and regulations, which could materially impact results and investment focus [251]. Regulatory and Compliance Risks - New or modified laws and regulations, including those from Dodd-Frank, may adversely affect the company's business operations and financial condition [250]. - The company anticipates incurring significant costs related to compliance with the Sarbanes-Oxley Act and other regulatory requirements, which may negatively impact financial performance [268]. - The company is classified as an "emerging growth company" until total annual gross revenues exceed $1.07 billion or other specified conditions are met [264]. - The SEC is working on proposals for mandatory disclosure of ESG-related matters, which could increase regulatory burdens and affect profitability [359]. Economic and Market Risks - Political uncertainty, including risks from global events, could lead to increased volatility and negatively impact the company's investments [256]. - Economic recessions could impair portfolio companies, leading to declines in revenue and cash flows, potentially increasing non-performing investments [274]. - The Federal Reserve raised the federal funds rate seven times in 2022 to a range of 4.25% to 4.50%, with further increases likely in 2023, which could adversely affect income-oriented investments [277]. - Rising interest rates may increase the difficulty for portfolio companies to service their debt obligations, potentially leading to defaults [303]. - The company is subject to financial market risks, including interest rate sensitivity, which can materially affect net investment income [431]. - A hypothetical 200 basis points decrease in interest rates could lead to a net decrease of $11.7 million in net investment income [433]. Investment Risks - The company may invest in highly leveraged companies, which could lead to significant risks and potential loss of investments [283]. - Investments in private middle-market companies are risky due to limited public information and potential difficulties in accessing capital markets [287]. - Defaults by portfolio companies could harm operating results and may lead to additional expenses for recovery efforts [282]. - The company may invest in "covenant-lite" loans, which provide fewer rights against borrowers and may increase the risk of loss [282]. - The company may invest in portfolio companies with second priority debt secured by the same collateral as senior debt, which may limit recovery in liquidation scenarios [289]. - Unsecured debt investments may not benefit from collateral, increasing the risk of insufficient proceeds to satisfy obligations [290]. - The company faces risks related to illiquidity in investments, which may hinder timely realization of investments and affect overall business performance [292]. - The company may lack control over portfolio companies, limiting its ability to influence management decisions that could affect investment value [311]. - There is no assurance that portfolio company management will operate in accordance with the company's expectations, which could adversely affect performance [314]. - The company may invest in second lien and subordinated loans, which carry a higher risk of default due to potential adverse changes in financial conditions [317]. - The company may make unsecured loans to portfolio companies, which do not benefit from any collateral, increasing the risk of loss [319]. - The company may engage in hedging transactions to mitigate risks, but these transactions could also introduce additional risks and may not fully protect against losses [325]. - The use of leverage increases the volatility of investments, magnifying potential gains or losses, and could negatively affect the ability to service debt or make distributions [330]. - If the ratio of total assets to total borrowings falls below 150%, the company may be required to sell investments to repay debt, potentially at a disadvantageous time [332]. Shareholder and Distribution Risks - There is no public market for the company's shares, which may limit liquidity and the ability to liquidate investments [333]. - The company intends to make periodic distributions to stockholders, but these may be affected by various risk factors and asset coverage tests [339]. - Distributions may include a return of capital, which could increase tax liabilities for stockholders upon future sales of shares [340]. - Stockholders may experience dilution in ownership percentage if additional equity interests are issued [342]. - The company is prohibited from issuing shares below NAV per share unless approved by the Board of Directors and stockholders, which may lead to dilution for existing stockholders [343]. - Subsequent closings after the Initial Closing will result in existing stockholders experiencing dilution due to Catch-up Purchases by new investors [344]. - Distributions declared in cash for stockholders participating in the DRIP will be automatically reinvested, potentially causing dilution for non-participants over time [345]. - The company may declare a large portion of dividends in shares instead of cash, with a minimum cash portion of 20%, impacting stockholders' tax obligations [346]. - The company does not currently anticipate issuing preferred stock, which could adversely affect the value of common stock [347]. Operational Risks - The Advisor and Administrator can resign with 60 days' notice, potentially disrupting operations and adversely affecting financial condition if suitable replacements are not found [260][263]. - The company may face increased operational risks due to remote working policies, which could strain technology resources and heighten cybersecurity risks [271]. - The company is highly dependent on information systems, and failures could significantly disrupt business operations and affect share value [269]. - The portfolio may be concentrated in a limited number of companies and industries, increasing exposure to significant losses if any of these companies default [308]. - Follow-on investments are at the company's discretion and failure to make them may jeopardize the value of initial investments [310]. Environmental, Social, and Governance (ESG) Risks - Environmental risks associated with portfolio companies could lead to significant liabilities and adversely impact investment performance [300]. - The company faces increasing scrutiny related to ESG activities, which could impact brand value and operational costs [357].
Kayne Anderson BDC, Inc.(KBDC) - 2022 Q4 - Annual Report