Palmer Square Capital BDC Inc. — Form 10-Q Summary
Business context and reporting period
Palmer Square Capital BDC Inc. is an externally managed, non-diversified business development company that invests primarily in privately held companies through corporate debt securities and, to a lesser extent, CLO structured credit. The company commenced operations on January 23, 2020 and has elected regulated investment company tax treatment. This filing covers the quarter and nine months ended September 30, 2021; comparative 2020 results include the period beginning January 23, 2020.
Financial position and key metrics
| Metric | Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
|---|---|---|
| Total investment income | $8.9 million | $26.4 million |
| Net expenses | $4.0 million | $11.3 million |
| Net investment income | $4.9 million | $15.1 million |
| Realized gains | $0.5 million | $4.3 million |
| Unrealized gains/(losses) | $(0.7) million | $(4.4) million |
| Net increase in net assets from operations | $4.7 million | $15.1 million |
| Net investment income per share | $0.34 | $1.13 |
| Net increase in net assets per share | $0.33 | $1.12 |
Investment-income coverage of net expenses was approximately 55.3% for the quarter and 57.3% for the nine months. Net asset value was $312.9 million, or $20.70 per share, at September 30, 2021, compared with $253.1 million, or $20.15 per share, at December 31, 2020.
- Total assets were $898.2 million, including investments at fair value of $877.1 million and cash and cash equivalents of $11.0 million.
- The portfolio comprised 209 debt and equity investments in 185 portfolio companies, with aggregate fair value of approximately $812.7 million excluding short-term investments.
- First-lien senior secured debt represented $776.9 million of fair value; second-lien debt represented $28.2 million. Software and healthcare providers and services were the largest industry exposures at 14.2% and 13.5% of investments, respectively.
- All debt and short-term investments were income producing, and no loans were on non-accrual status at September 30, 2021.
- Weighted-average total yield to maturity was 4.75% at fair value and 6.82% at amortized cost. The weighted-average spread over LIBOR for floating-rate investments was 4.14%.
Cash flow, debt and liquidity
- Operating activities used $61.3 million of cash during the first nine months, reflecting $521.9 million of portfolio investment fundings and $309.4 million of investment sale proceeds.
- Financing activities provided $71.6 million, including $33.0 million of borrowings and $45.5 million of net equity issuance proceeds.
- Cash and cash equivalents increased by $10.3 million to $11.0 million; the company also held $64.4 million in money market investments.
- The Bank of America credit facility had a $725.0 million commitment, $427.5 million of principal outstanding and $297.5 million available, subject to borrowing-base limitations. Its maturity date is February 18, 2025.
- The Wells Fargo credit facility had $150.0 million of available capacity and no principal outstanding; it matures on December 18, 2025.
- The reported asset coverage ratio was 173%, above the 150% statutory minimum. Average debt outstanding was $411.7 million for the nine months.
- Unfunded commitments to portfolio companies were $4.9 million, compared with $1.3 million at December 31, 2020. Management reported no pending or threatened material litigation.
Material changes versus the prior comparable period
- For the nine months, total investment income increased to $26.4 million from $15.8 million, while net investment income increased to $15.1 million from $8.3 million.
- Net realized results improved to a $4.3 million gain from a $1.1 million loss, but unrealized results declined to a $4.4 million loss from a $6.6 million gain.
- Quarterly net increase in net assets from operations was $4.7 million versus $15.4 million in the comparable 2020 quarter, primarily because 2020 included a $12.7 million unrealized gain while 2021 included a $0.7 million unrealized loss.
- Fair value of investments excluding short-term investments increased to approximately $812.7 million from $600.1 million at year-end 2020. First-lien debt increased to $776.9 million from $566.5 million.
- Total net assets increased to $312.9 million from $253.1 million, supported by $52.5 million of share issuance during the nine months, including reinvested distributions.
- Credit-facility commitments increased from $475.0 million at December 31, 2020 to $725.0 million at September 30, 2021, while outstanding principal increased from $395.0 million to $427.5 million.
- The portfolio’s non-qualifying investments declined to 10.4% of total assets from 15.5%, while foreign-domiciled or non-controlled investments declined to approximately 11.3% of amortized-cost investments from 17.0%.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or distribution guidance. Management intends to continue quarterly distributions when income is available, subject to board approval, legal availability and asset-coverage requirements. The company declared a $0.17-per-share distribution on November 12, 2021, payable partly in cash and partly through its dividend reinvestment plan.
- Management identifies risks from COVID-19, economic and industry conditions, interest-rate volatility, financing availability, leverage, portfolio-company performance, illiquidity, valuation uncertainty, conflicts of interest and maintaining BDC and RIC status.
- The portfolio is predominantly floating-rate, while borrowings also bear floating rates. A hypothetical 100-basis-point increase in rates was estimated to increase annualized net investment income by approximately $3.9 million; a 25-basis-point decline was estimated to reduce it by approximately $1.0 million.
- Portfolio investments are primarily valued using observable market inputs or models, but valuation estimates may differ materially from amounts ultimately realized.
- The company had $148.9 million of net investment purchases that had not settled at September 30, 2021, and the filing states that additional borrowing would be required after settlement.
- On October 14, 2021, the company issued approximately 5.7 million shares for aggregate proceeds of approximately $117.9 million. The filing text contains a likely unit or typographical error in describing this amount and should be verified against the filed financial statements.
- Disclosure controls were assessed as effective, and management reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported September 30 share count of 15.1 million with the 21.8 million shares outstanding reported as of November 15, 2021 and the October equity issuance.
- Verify the October 14, 2021 equity issuance amount and the filing’s stated “$117,921,245 million” wording.
- Review borrowing-base availability, collateral eligibility and covenants under the Bank of America and Wells Fargo facilities.
- Assess the effect of interest-rate changes on investment income, funding costs and net investment income after the unsettled purchases are funded.
- Evaluate fair-value assumptions and concentration in software, healthcare, professional services and other leveraged industries.
- Monitor the growth in unfunded portfolio commitments and the company’s capacity to fund them without breaching leverage or liquidity constraints.