Palmer Square Capital BDC Inc. — Q1 2021 Form 10-Q
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 privately held companies through corporate debt securities, with a smaller allocation to CLO structured credit. The filing covers the three months ended March 31, 2021. The prior comparable period is the abbreviated period from January 23, 2020, commencement of operations, through March 31, 2020; therefore, year-over-year comparisons are not fully comparable.
Key financial metrics
| Metric | Q1 2021 | Prior comparable period or year-end |
|---|---|---|
| Total investment income | $9.7 million | $1.5 million in the 2020 stub period |
| Net investment income | $6.0 million | $0.3 million in the 2020 stub period |
| Net realized gains | $1.1 million | $0.2 million in the 2020 stub period |
| Net unrealized losses | $(1.8) million | $(34.0) million in the 2020 stub period |
| Net increase in net assets from operations | $5.3 million; $0.42 per share | $(33.5) million; $(5.10) per share |
| Net asset value per share | $20.57 | $20.15 at December 31, 2020 |
| Total assets | $727.7 million | $667.5 million at December 31, 2020 |
| Total net assets | $262.8 million | $253.1 million at December 31, 2020 |
| Cash and cash equivalents | $1.2 million | $0.7 million at December 31, 2020 |
Net expenses were $3.6 million, including $1.9 million of interest and debt financing expense, $1.3 million of management fees and $0.6 million of other operating expenses. The investment adviser waived $161 thousand of management fees. Net investment income represented approximately 62% of total investment income.
At March 31, 2021, the portfolio included 208 debt and private investments in 188 portfolio companies with aggregate fair value of approximately $637.4 million. First-lien senior secured debt represented $601.7 million of fair value, second-lien debt $23.7 million and structured credit debt $11.9 million. Short-term money market investments totaled $55.5 million. The weighted average total yield was 5.22% at fair value and 5.70% at amortized cost. No investments were on non-accrual status.
Material changes versus the prior comparable period and year-end
- Compared with the 2020 commencement-period stub, investment income and net investment income increased substantially as the portfolio expanded; the prior period included a significant $34.0 million unrealized loss.
- Compared with December 31, 2020, fair value of debt and private investments increased from $600.1 million to $637.4 million, while total investments increased from $653.2 million to $692.8 million.
- Net asset value per share increased from $20.15 to $20.57, and net assets increased by $9.7 million, including $5.3 million from operations and $4.3 million from share transactions and distribution reinvestment.
- The company funded $173.1 million of investments and sold or received repayments of $135.4 million, producing net new investments of $37.7 million. It made 65 new investment commitments, all at floating rates, with a weighted average rate of 4.60%.
- Borrowings increased from $395.0 million principal outstanding at year-end to $415.0 million at March 31, 2021. Available capacity under the Bank of America facility declined from $80.0 million to $60.0 million.
- Industry exposure shifted modestly, with software increasing to 14.5% of investments at fair value from 13.3%, while insurance declined to 6.7% from 7.7% and hotels, restaurants and leisure declined to 2.8% from 3.6%.
Liquidity, debt and capital resources
Net cash used in operating activities was $20.1 million, primarily reflecting portfolio investment fundings, while financing activities provided $20.6 million, principally from $20.2 million of additional credit facility borrowings and $2.0 million of common stock issuance proceeds. Cash and cash equivalents increased by $0.5 million.
The Bank of America revolving credit facility had a $475.0 million commitment, $415.0 million outstanding principal and $60.0 million available capacity. It matures February 18, 2023, with draw availability scheduled to end February 11, 2023. The separate Wells Fargo facility had $150.0 million of available commitments and no principal outstanding; it matures December 18, 2025.
The asset coverage ratio was 164%, compared with the statutory minimum of 150%. Debt principal outstanding was approximately 1.6 times net assets. The company reported $56.6 million of cash and short-term investments, before considering receivables and available borrowing capacity.
Guidance, outlook, commentary and risks
Management did not provide quantitative earnings or distribution guidance. The company intends to distribute quarterly dividends to the extent income is available, with amounts determined by the board. The investment adviser waived management fees above 1.75% of net assets before a listing; no incentive fee is payable before a listing.
- Management expects future growth to depend on equity offerings, operating cash flows and access to leverage. Inability to obtain financing or raise capital on acceptable terms could constrain portfolio growth.
- Interest-rate sensitivity is material because both investments and borrowings are primarily floating rate. Management estimated that a 100-basis-point increase in rates would increase annualized net investment income by approximately $2.2 million, while a 25-basis-point decrease would reduce it by approximately $0.6 million, based on the March 31 balance sheet.
- COVID-19, economic conditions, interest-rate volatility, credit losses, portfolio-company performance, valuation uncertainty and the illiquid nature of private investments remain key risks.
- All investment securities other than short-term investments were classified as Level 2 rather than Level 3, but the filing notes that valuations may involve significant judgment and may differ materially from eventual realization values.
- The company had $1.9 million of unfunded commitments to portfolio companies, up from $1.3 million at year-end. No draw requests had been made as of March 31, 2021.
- There were no material pending legal proceedings, no defaults upon senior securities and no material changes to previously disclosed risk factors.
Subsequent to quarter-end, on April 1, 2021, the company issued 207,806 shares for aggregate proceeds of approximately $4.3 million. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the sustainability of $6.0 million of quarterly net investment income and the extent to which it depends on portfolio growth, fee income, management fee waivers or non-cash accruals.
- Review borrowing-base limitations, covenants, maturity dates and refinancing needs for the Bank of America and Wells Fargo facilities, particularly the 2023 Bank of America maturity.
- Monitor the 164% asset coverage ratio and the effect of additional borrowings, valuation declines or distributions on regulatory leverage capacity.
- Assess concentration and credit quality across software, healthcare providers and services, insurance, media and other private-company exposures.
- Reconcile portfolio purchases, sales, unsettled transactions and the $1.9 million of unfunded commitments with available liquidity.
- Evaluate the reliability of fair-value estimates and the potential impact of interest-rate changes, COVID-19 effects and portfolio-company defaults on NAV.
- Verify future dividend declarations and whether distributions will be paid in cash, reinvested in shares or constrained by RIC and asset-coverage requirements.