Business Context and Reporting Period
Palmer Square Capital BDC Inc. is an externally managed, non-diversified business development company and regulated investment company focused primarily on lending to private U.S. companies through corporate debt securities, with a smaller allocation to collateralized loan obligation investments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, filed August 10, 2023.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | Comparable Prior Period |
|---|---|---|---|
| Total investment income | $27.4 million | $53.6 million | $16.5 million and $30.8 million |
| Net investment income | $14.2 million | $27.8 million | $9.5 million and $18.2 million |
| Net realized gains/(losses) | $(0.003) million | $(0.3) million | $(0.5) million and $(0.9) million |
| Net unrealized gains/(losses) | $9.7 million | $24.6 million | $(74.4) million and $(86.1) million |
| Net increase/(decrease) in net assets from operations | $23.9 million | $52.0 million | $(65.3) million and $(68.8) million |
| Net investment income per share | $0.56 | $1.11 | $0.42 and $0.80 |
| Operations per share | $0.94 | $2.08 | $(2.85) and $(3.01) |
Investment income increased primarily because of higher interest income in a rising-rate environment. Six-month interest income was $51.6 million versus $30.5 million in the prior-year period. Net investment income represented approximately 52% of total investment income for both the quarter and six-month period.
- Net asset value increased to $426.5 million, or $16.55 per share, from $363.4 million, or $14.96 per share, at December 31, 2022.
- Cash and cash equivalents were $6.7 million at June 30, 2023, compared with $1.7 million at year-end 2022.
- The investment portfolio had fair value of $1.063 billion, compared with $1.017 billion at December 31, 2022. Long-term portfolio fair value was approximately $966.0 million, broadly unchanged from $966.9 million at year-end.
- The portfolio comprised 208 debt and equity investments across 177 portfolio companies. Software represented 12.9% of investments at fair value, healthcare providers and services 9.3%, and IT services 7.9%.
- Weighted-average total yield to maturity was 11.40% at fair value and 9.08% at amortized cost. Weighted-average interest rate was 9.82% and the weighted-average spread over reference rates was 4.59%.
- Operating expenses were $25.8 million for the six months, including $21.2 million of interest expense. The investment adviser waived $0.5 million of management fees.
- Six-month net cash provided by operating activities was $18.0 million. Net cash used in financing activities was $12.9 million, and cash increased by $5.1 million.
Debt, Liquidity and Capitalization
- Total credit facilities had net carrying value of $627.4 million at June 30, 2023, consisting of $491.6 million under the Bank of America facility and $135.7 million under the Wells Fargo facility.
- Bank of America principal outstanding was $490.0 million, with $235.0 million of available commitments. The facility matures February 18, 2025, with borrowing availability scheduled to terminate February 11, 2025.
- Wells Fargo principal outstanding was $134.25 million, with $15.75 million available. The facility matures December 18, 2025, with borrowing availability scheduled to terminate December 18, 2023.
- The asset coverage ratio was 168%, above the 150% statutory minimum. Debt represented approximately 1.47 times net assets based on reported carrying values.
- Six-month financing activity included $27.5 million of debt repayments and $10.5 million of borrowings. Common-stock issuances generated $17.3 million, and cash distributions paid were $13.2 million.
Material Changes Versus Prior Comparable Period
- Six-month total investment income rose 74% and net investment income rose 53% year over year, while interest expense increased 180% because of higher borrowing costs and rates.
- The company moved from a $68.8 million decrease in net assets from operations in the prior-year period to a $52.0 million increase, primarily due to the $24.6 million unrealized gain compared with an $86.1 million unrealized loss previously.
- Six-month total return improved to 14.11% from negative 15.14%; ending NAV per share was $16.55 versus $16.71 at June 30, 2022.
- New portfolio investments declined to $110.1 million from $221.4 million, while investment sales and repayments declined to $136.0 million from $204.2 million.
- The company issued 1.49 million shares for $24.2 million, compared with 492,018 shares for $9.8 million in the prior-year period.
- Unfunded commitments to portfolio companies declined to $1.5 million from $2.6 million at December 31, 2022. No portfolio company had made a capital call or draw request as of June 30, 2023.
Guidance, Outlook, Risks and Unusual Items
- Management intends to distribute quarterly dividends when income is available, but the filing does not provide specific forward dividend guidance. The company expects to maintain RIC and BDC status, subject to meeting applicable requirements.
- All debt and short-term investments were income-producing, and no portfolio investments were on non-accrual status at June 30, 2023.
- The portfolio is predominantly floating-rate, while borrowings also carry variable rates. Management estimates that a 100-basis-point increase in interest rates would increase annualized net investment income by approximately $4.1 million; a 100-basis-point decline would reduce it by approximately $1.0 million.
- On April 10, 2023, the Wells Fargo facility was amended to replace LIBOR references with SOFR and transfer collateral-agent responsibilities to U.S. Bank Trust Company.
- In July 2023, a Rodan & Fields investment was restructured into a new loan with a May 2027 maturity and a spread of SOFR plus 7.75%, with an option to PIK up to 40% of par at SOFR plus 8.50%.
- On July 1, 2023, the company issued 21,148 shares for $0.35 million. The filing states that 100% of the $0.35 million of unfunded investor commitments at June 30, 2023 were drawn in July.
- Key risks include leverage and borrowing-base restrictions, rising or volatile interest rates, valuation uncertainty, illiquidity of private investments, portfolio-company credit losses, banking-system stress, economic downturns, financing availability, conflicts of interest and the ability to retain RIC and BDC status.
- The company reported no material legal proceedings, no defaults upon senior securities and effective disclosure controls as of June 30, 2023.
Investor Verification Items
- Verify the sustainability of higher investment income after considering materially higher interest expense and the company’s sensitivity to future rate changes.
- Review the maturity and refinancing risk of the Bank of America and Wells Fargo facilities, particularly the December 2023 end of Wells Fargo borrowing availability and 2025 final maturities.
- Assess the quality, concentration and fair-value support for the predominantly private-credit portfolio, including second-lien, CLO mezzanine and CLO equity exposures.
- Confirm compliance with the 150% asset-coverage requirement and available borrowing-base capacity under both credit facilities.
- Evaluate whether realized and unrealized portfolio gains, distributions and NAV performance are repeatable, given that the six-month gain was substantially affected by unrealized appreciation.
- Review the July 2023 Rodan & Fields restructuring and any subsequent developments affecting portfolio credit quality or non-accrual status.