Palmer Square Capital BDC Inc. — 2022 Q3 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 lends to private U.S. companies through corporate debt securities and also invests in collateralized loan obligation securities. The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company had 23,062,349 common shares outstanding as of November 10, 2022 and had no publicly listed securities.
Key financial metrics
| Metric | Three months ended September 30, 2022 | Nine months ended September 30, 2022 | Comparable 2021 period |
|---|---|---|---|
| Total investment income | $20.0 million | $50.7 million | $8.9 million and $26.4 million |
| Net investment income | $10.5 million | $28.7 million | $4.9 million and $15.1 million |
| Net realized gains (losses) | $(0.5) million | $(1.4) million | $0.5 million and $4.3 million |
| Net unrealized gains (losses) | $(16.7) million | $(102.8) million | $(0.7) million and $(4.4) million |
| Net increase (decrease) in net assets from operations | $(6.8) million | $(75.5) million | $4.7 million and $15.1 million |
| Net investment income per share | $0.45 | $1.25 | $0.34 and $1.13 |
| Total return | Not separately reported | (16.69%) | 7.15% |
- Net asset value was $373.9 million at September 30, 2022, or $16.00 per share, versus $452.8 million and $20.06 per share at December 31, 2021.
- Investments at fair value totaled approximately $1.006 billion at quarter-end, compared with $1.194 billion at December 31, 2021. The portfolio comprised 211 debt and equity investments in 181 companies, versus 240 investments in 212 companies at year-end.
- The weighted average total yield to maturity on debt and income-producing securities was 11.18% at fair value and 8.65% at amortized cost, compared with 5.77% and 5.91%, respectively, at December 31, 2021.
- All debt and short-term investments were income-producing, and no loans were on non-accrual status at September 30, 2022.
- Net cash provided by operating activities was $26.6 million for the nine months, compared with $61.3 million of cash used in operating activities in the prior-year period. Cash and cash equivalents were $4.2 million at September 30, 2022.
- Cash distributions declared were $18.6 million for the nine months, including $10.4 million reinvested through the distribution reinvestment plan.
Debt, liquidity and portfolio structure
| Facility | Principal outstanding | Available commitment | Maturity |
|---|---|---|---|
| Bank of America credit facility | $511.0 million | $214.0 million | February 2025 |
| Wells Fargo credit facility | $126.8 million | $23.25 million | December 2025 |
| Total | $637.8 million principal; $637.1 million net carrying value | $237.25 million |
The company’s asset coverage ratio was 159%, compared with the 150% minimum generally applicable to BDC borrowings. Nine-month interest expense increased to $14.6 million from $5.7 million, reflecting higher leverage and higher borrowing costs. The portfolio was predominantly floating-rate debt, with 100% of new debt investment commitments during the nine months carrying floating rates.
Material changes versus the prior comparable period
- Investment income and net investment income increased substantially, primarily because of a larger portfolio and higher floating interest rates.
- Interest expense increased by $8.9 million for the nine months, while management fees increased by $2.3 million.
- The company recorded a $102.8 million net unrealized investment loss for the nine months, versus a $4.4 million net unrealized loss in 2021. Management attributed the 2022 loss primarily to depreciation in existing portfolio investments and depreciation on new investments.
- Net assets declined by $78.9 million during the nine months, after operations, stockholder distributions and capital share transactions.
- The company issued 803,456 shares for aggregate proceeds of $15.2 million, including shares issued through distribution reinvestment, compared with 2,551,012 shares and $52.5 million in the prior-year period.
- Unfunded commitments to portfolio companies declined to $4.1 million from $11.3 million at December 31, 2021. No capital calls or draw requests had been made.
- The portfolio shifted toward higher-yielding investments and a greater proportion of first-lien and second-lien debt was marked below amortized cost. Fair value of first-lien debt declined to $880.3 million from $1.007 billion.
Guidance, outlook, commentary and risks
The filing does not provide quantitative earnings or distribution guidance. Management expects to continue pursuing current income and capital appreciation through corporate debt and CLO-related investments, subject to market conditions, financing availability and investment opportunities. The company intends to distribute quarterly dividends to the extent it has income legally available for distribution and continues to seek qualification as a BDC and RIC.
- Interest-rate exposure is material. Management estimates that a 100-basis-point increase in base rates would increase annualized net investment income by approximately $4.0 million, while a 200-basis-point increase would increase it by approximately $7.9 million; a 25-basis-point decline would reduce it by approximately $1.0 million, based on the September 30 balance sheet.
- Higher rates benefit much of the floating-rate investment portfolio but also increase borrowing costs.
- Portfolio fair values are subject to market illiquidity, credit deterioration and valuation uncertainty. The majority of investments were classified as Level 2, and valuation changes drove the large 2022 net loss.
- Borrowings are secured by pledged portfolio assets and are subject to borrowing-base, covenant and asset-coverage requirements. A decline below required coverage could restrict additional borrowing or distributions and could require asset sales.
- Other identified risks include economic downturns, market volatility, COVID-19 effects, geopolitical instability including the Russia-Ukraine war, LIBOR transition, portfolio-company performance, illiquidity, conflicts of interest and the company’s ability to maintain BDC and RIC status.
- The company’s valuation designee changed effective August 11, 2022, when the Investment Advisor was designated to determine fair value subject to Board oversight.
- Management reported no material litigation, no defaults on senior securities, no subsequent events requiring disclosure and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether portfolio fair values and NAV stabilize after the $102.8 million nine-month unrealized loss.
- Current asset coverage, borrowing-base availability and covenant compliance under both credit facilities.
- The sustainability of net investment income as benchmark rates and borrowing costs change.
- The composition and credit performance of the 181-company portfolio, including non-accruals, watch-list investments and concentration by issuer and industry.
- Whether the company can continue distributions while maintaining RIC requirements, liquidity and required asset coverage.
- The impact of Level 2 valuation assumptions, illiquid holdings and CLO investments on reported NAV and future realized losses.