Palmer Square Capital BDC Inc. — 2023 First-Quarter Form 10-Q Summary
Business context and reporting period
Palmer Square Capital BDC Inc. is an externally managed, non-diversified business development company and regulated investment company. It primarily invests in corporate debt securities of private U.S. companies, with a smaller allocation to collateralized loan obligation investments. The report covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022 and balances as of December 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Comparable period or prior date |
|---|---|---|
| Total investment income | $26.2 million | $14.3 million in Q1 2022 |
| Net investment income | $13.6 million | $8.7 million in Q1 2022 |
| Net realized gains/(losses) | $(0.3) million | $(0.4) million in Q1 2022 |
| Net unrealized gains/(losses) | $14.8 million | $(11.7) million in Q1 2022 |
| Net increase in net assets from operations | $28.1 million | $(3.4) million in Q1 2022 |
| Net investment income per share | $0.55 | $0.38 in Q1 2022 |
| Net increase in net assets per share | $1.14 | $(0.15) in Q1 2022 |
| Net asset value per share | $16.12 | $14.96 at December 31, 2022 |
| Total assets | $1.060 billion | $1.057 billion at December 31, 2022 |
| Net assets | $402.6 million | $363.4 million at December 31, 2022 |
| Cash and cash equivalents | $6.2 million | $1.7 million at December 31, 2022 |
| Net expenses | $12.6 million | $5.6 million in Q1 2022 |
Net investment income represented approximately 52% of total investment income. Net expenses increased primarily because of higher borrowing costs. The filing does not present a conventional operating-profit margin because the company is an investment company; its principal profitability measure is net investment income plus realized and unrealized investment gains and losses.
Portfolio, cash flow, debt and liquidity
- Total investments at fair value were $1.043 billion, including $909.3 million of debt investments, $33.6 million of CLO and other equity investments, and $99.7 million of short-term investments.
- The long-term portfolio had 201 debt and equity investments across 169 portfolio companies, with an aggregate fair value of approximately $942.9 million. Software was the largest industry exposure at 12.9% of investment fair value, followed by healthcare providers and services at 9.4% and IT services at 7.9%.
- Weighted-average total yield to maturity was 11.25% at fair value and 8.67% at amortized cost. The weighted-average interest rate on debt and income-producing securities was 9.44%.
- Gross principal debt outstanding was $487.0 million under the Bank of America facility and $126.8 million under the Wells Fargo facility. Net carrying value of total credit facilities was $616.4 million.
- Available borrowing capacity was $238.0 million under the Bank of America facility and $23.25 million under the Wells Fargo facility, subject to borrowing-base limitations. The facilities mature in February 2025 and December 2025, respectively.
- The asset coverage ratio was 165%, above the 150% statutory requirement. Both facilities were reported to be in covenant compliance.
- Operating activities provided $27.9 million of cash, while financing activities used $23.4 million. Cash and cash equivalents increased by $4.6 million to $6.2 million.
- The company paid $6.9 million of cash distributions and issued 688,674 shares for aggregate proceeds of $11.1 million, including shares issued through reinvestment.
- Unfunded commitments to portfolio companies declined to $0.7 million from $2.6 million at year-end 2022. No portfolio investments were on non-accrual status at March 31, 2023.
Material changes versus the prior comparable period
- Investment income increased 84% to $26.2 million, driven primarily by higher interest income of $25.5 million versus $14.2 million.
- Net investment income increased 57% to $13.6 million despite a substantial rise in interest expense, which increased to $10.3 million from $3.2 million.
- The company moved from a $3.4 million net decrease in net assets from operations in Q1 2022 to a $28.1 million increase in Q1 2023, primarily because of a $14.8 million net unrealized gain compared with an $11.7 million net unrealized loss.
- Portfolio investment purchases declined to $63.5 million from $158.9 million, while investment sales and repayments declined to $102.1 million from $147.7 million. Net portfolio activity was a reduction of $38.7 million in Q1 2023.
- Average borrowing costs increased materially: the average rate was 5.90% for the Bank of America facility and 6.67% for the Wells Fargo facility, compared with 1.45% and 2.30%, respectively, in Q1 2022.
- Net asset value per share increased from $14.96 at year-end 2022 to $16.12 at March 31, 2023. Reported total return for the quarter was 7.75%.
Guidance, outlook, commentary, risks and unusual items
The filing provides no formal earnings or dividend guidance. Management states that it intends to continue distributing quarterly dividends to the extent income is available and expects to remain qualified as a BDC and RIC, subject to applicable requirements.
- Management expects future liquidity to come from operating cash flow, private equity offerings and borrowing capacity. Growth could be constrained if leverage or equity capital is unavailable on acceptable terms.
- Interest-rate changes affect both portfolio income and borrowing costs. Based on the disclosed sensitivity analysis, a 100-basis-point increase in rates would increase annualized net investment income by approximately $4.0 million, while a 25-basis-point decline would reduce it by approximately $1.0 million, assuming the balance sheet remains unchanged.
- The portfolio contains primarily floating-rate investments, while borrowings also bear floating rates. Higher rates increased both investment income and interest expense during the quarter.
- Fair values involve management judgment, and the filing notes that valuations may differ materially from amounts ultimately realized. Most investments were classified as Level 2 rather than Level 3.
- The company identified recent stress in the banking system as an additional risk, including potential effects on market liquidity, financing sources, counterparties and portfolio companies.
- On April 10, 2023, the Wells Fargo facility was amended to reference Daily Simple SOFR instead of LIBOR and to modify spreads to 2.00% for broadly syndicated loans and 2.50% for middle-market loans, with a 0.0% floor.
- After quarter-end, the company issued 68,238 shares for $1.1 million and reported approximately $5.1 million of additional share sales through May 1, 2023, with the final share count to be determined based on NAV.
- The filing reports no material litigation, no defaults on senior securities and no material changes to internal controls.
Most important facts for investors to verify
- Whether the $14.8 million unrealized gain and higher NAV are sustained or reverse as portfolio valuations change.
- The ability of portfolio companies to service predominantly floating-rate debt as economic conditions and borrowing costs evolve.
- Availability and borrowing-base capacity under the Bank of America and Wells Fargo facilities, including their 2025 maturities and covenant requirements.
- The sustainability of net investment income after the significant increase in interest expense.
- Compliance with the 150% asset coverage requirement and continued qualification as a BDC and RIC.
- Actual cash distributions, dividend coverage and the effect of share issuances and dividend reinvestment on NAV per share.
- Exposure to non-qualifying investments, which represented 13.8% of total assets at March 31, 2023, and to valuation, banking-system and market-liquidity risks.