Palmer Square Capital BDC Inc. quarterly report, Q1 FY2022

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 and regulated investment company. It primarily lends to private U.S. companies through corporate debt investments and also invests in collateralized loan obligation securities. The filing covers the unaudited three months ended March 31, 2022, with comparisons to the three months ended March 31, 2021.

Key financial metrics

Metric	Q1 2022	Q1 2021
Total investment income	$14.3 million	$9.7 million
Net expenses	$5.6 million	$3.6 million
Net investment income	$8.7 million	$6.0 million
Net realized gains (losses)	$(0.4) million	$1.1 million
Net unrealized gains (losses)	$(11.7) million	$(1.8) million
Net increase (decrease) in net assets from operations	$(3.4) million	$5.3 million
Net investment income per share	$0.38	$0.47
Net increase (decrease) in net assets per share	$(0.15)	$0.42

Net investment income was approximately 60.8% of investment income, compared with 62.4% in the prior-year quarter. The filing does not present a GAAP operating margin.
Interest income increased to $14.2 million from $9.4 million, while dividend income was $4,646 and other income was $93,041.
Net asset value was $454.2 million, or $19.91 per share, at March 31, 2022, compared with $452.8 million, or $20.06 per share, at December 31, 2021.
Fair value of investments was $1.162 billion, versus $1.194 billion at December 31, 2021. The portfolio comprised 220 debt and equity investments in 187 portfolio companies.
Weighted-average total yield to maturity increased to 7.23% at fair value from 5.77% at December 31, 2021; the weighted-average interest rate increased to 5.10% from 4.80%.
Net cash used in operating activities was $8.3 million. Net cash provided by financing activities was $11.9 million, producing a $3.6 million increase in cash and cash equivalents to $4.7 million.
Debt outstanding consisted of $546.0 million under the Bank of America facility and $119.0 million under the Wells Fargo facility. Net carrying value of total debt was $662.8 million, with $210.0 million of stated availability before borrowing-base limitations.
The asset coverage ratio was 169%, above the 150% statutory minimum.

Material changes versus the prior comparable period

Investment income increased 47%, primarily because of a larger investment portfolio and higher investment yields.
Net investment income increased 44%, but higher interest expense and management fees reduced the benefit of higher income.
The company shifted from a $5.3 million increase in net assets from operations to a $3.4 million decrease. The principal driver was a $11.7 million net unrealized investment loss, compared with a $1.8 million loss in Q1 2021.
Interest expense increased to $3.2 million from $1.9 million, and management fees increased to $2.3 million from $1.3 million, reflecting increased leverage and a larger asset base.
Portfolio funding was $158.9 million, while investments sold or repaid totaled $147.7 million, resulting in $11.2 million of net new investments at amortized cost. The number of new investment commitments declined to 21 from 65, but the average commitment increased to approximately $5.1 million from $3.0 million.
Shares outstanding increased to 22.81 million from 12.78 million at March 31, 2021. The company issued 240,396 shares for $4.8 million during the quarter.
Unfunded commitments to portfolio companies declined to $8.2 million from $11.3 million at December 31, 2021. No capital calls or draw requests were outstanding.

Guidance, outlook, risks and unusual items

Management intends to continue operating as a BDC and RIC and generally intends to distribute quarterly dividends when legally available income permits. No specific earnings or dividend guidance was provided.
All debt and short-term investments were income-producing, and no loans were on non-accrual status at March 31, 2022.
The portfolio is concentrated in floating-rate investments, while borrowings also carry variable rates. Management estimated that a 100-basis-point increase in base rates would increase annualized net investment income by approximately $2.6 million, assuming the balance sheet remained unchanged.
The company identified risks from interest-rate volatility, leverage, liquidity and financing availability, portfolio-company performance, illiquid investments, valuation uncertainty, COVID-19, the Russia-Ukraine war, broader economic conditions, and the transition from LIBOR.
Approximately 14.0% of total assets were non-qualifying investments under the 1940 Act, compared with 13.3% at December 31, 2021. The company must maintain at least 70% of total assets in qualifying investments.
Portfolio investments are predominantly valued using Level 2 inputs. Management cautioned that fair values may differ materially from amounts ultimately realized, particularly during stressed market conditions.
There were no material legal proceedings, no defaults upon senior securities, no material changes to previously disclosed risk factors, and no subsequent events requiring recognition or disclosure.

Most important facts for investors to verify

Whether the substantial unrealized depreciation recorded in Q1 2022 persists or reverses in subsequent quarters.
The sustainability of the 7.23% weighted-average portfolio yield as benchmark rates, credit spreads and portfolio composition change.
Compliance with the 150% asset coverage requirement and the availability of borrowing capacity under both credit facilities.
Portfolio-company credit quality, including the status of investments with lower fair values, non-qualifying assets and the $8.2 million of unfunded commitments.
Future dividend declarations and whether taxable income, leverage restrictions or liquidity could limit cash distributions.
The impact of LIBOR replacement, rising interest rates, valuation assumptions and potential increases in borrowing costs on net investment income.