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 that primarily invests in corporate debt securities, with a smaller allocation to collateralized loan obligation investments. The filing covers the quarter and six months ended June 30, 2022; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Total investment income | $16.5 million | $30.8 million |
| Net investment income | $9.5 million | $18.2 million |
| Net realized gains/(losses) | $(0.5) million | $(0.9) million |
| Net unrealized gains/(losses) | $(74.4) million | $(86.1) million |
| Net increase/(decrease) in net assets from operations | $(65.3) million | $(68.8) million |
| Net investment income per share | $0.42 | $0.80 |
| Net increase/(decrease) in net assets per share | $(2.85) | $(3.01) |
- Net assets were $385.4 million at June 30, 2022, compared with $452.8 million at December 31, 2021. NAV per share declined to $16.71 from $20.06.
- Investment income increased primarily because of a larger portfolio and higher yields. Net investment income represented approximately 58% of quarterly investment income and 59% for the six-month period.
- Fair value of investments was $1.07 billion, versus $1.19 billion at year-end 2021. The portfolio consisted primarily of first-lien senior secured debt, with fair value of $932.6 million, plus second-lien debt of $67.5 million.
- Weighted-average total yield to maturity on debt and income-producing securities was 10.07% at fair value and 8.16% at amortized cost, compared with 5.77% and 5.91%, respectively, at December 31, 2021.
- Cash and cash equivalents were $99 thousand. Short-term money market investments had fair value of $26.0 million.
- Net cash used in operating activities was $14.0 million. Net cash provided by financing activities was $13.0 million, resulting in a $994 thousand decrease in cash and cash equivalents.
- Debt outstanding consisted of $541.5 million under the Bank of America facility and $128.0 million under the Wells Fargo facility. Aggregate net carrying value was $668.3 million, with $205.5 million of stated borrowing capacity available, subject to borrowing-base limitations.
- The asset coverage ratio was 158%, above the 150% statutory minimum.
- Five unfunded portfolio-company commitments totaled $6.3 million. No capital calls or draw requests had been made as of June 30, 2022.
- The company issued 492,018 shares for aggregate proceeds of approximately $9.8 million during the six months, including shares issued through distribution reinvestment.
Material changes versus the prior comparable period
- Six-month investment income rose to $30.8 million from $17.5 million, while net investment income increased to $18.2 million from $10.2 million.
- Interest expense increased to $7.6 million from $3.8 million, and management fees increased to $4.5 million from $2.6 million, primarily reflecting increased leverage and a larger asset base.
- The company recorded an $86.1 million net unrealized investment loss, compared with a $3.7 million loss in the prior-year period. This drove a six-month net loss from operations of $68.8 million, compared with net income of $10.4 million in 2021.
- NAV per share declined 16.7% from December 31, 2021, and the six-month total return was negative 15.14%, compared with positive 5.61% in the prior-year period.
- Portfolio fair value decreased by approximately $121.7 million from year-end, while the number of debt and equity investments declined to 227 investments in 191 portfolio companies from 240 investments in 212 companies.
- Borrowings increased from $552.0 million under the Bank of America facility and $100.0 million under the Wells Fargo facility at year-end to $669.5 million in aggregate principal at June 30, 2022.
- The portfolio shifted toward higher floating-rate yields and greater exposure to software, which represented 13.0% of investments at fair value versus 10.2% at year-end.
Outlook, commentary, risks, contingencies and unusual items
- Management intends to continue pursuing total returns through current income and capital appreciation from corporate debt and CLO-related investments. The filing does not provide quantitative earnings or dividend guidance.
- The company expects to distribute quarterly dividends when income is available, but distributions remain subject to Board approval, legally available assets, RIC requirements and debt-related asset-coverage restrictions.
- All debt and short-term investments were income producing, and no loans were on non-accrual status at June 30, 2022.
- Approximately 15.0% of total assets were non-qualifying investments under the 1940 Act, compared with 13.3% at year-end. The company remained within the requirement that at least 70% of total assets be qualifying assets.
- Portfolio valuations are subject to management judgment, market conditions and independent valuation procedures. The filing identifies significant risks from interest-rate volatility, leverage, illiquid investments, economic downturns, COVID-19, geopolitical conditions including the Russia-Ukraine war, and the ability to maintain BDC and RIC status.
- The portfolio and credit facilities are predominantly exposed to floating interest rates. Management estimated that a 100-basis-point increase in rates would increase annual net investment income by approximately $4.3 million, assuming the balance sheet remained constant.
- As of June 30, 2022, $24.5 million of investment purchases had not settled. Debt facilities are secured by pledged assets and include covenants and acceleration provisions for specified defaults or changes involving the investment adviser.
- Management reported no pending or threatened material litigation, no defaults on senior securities and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the sustainability of the higher portfolio yields and net investment income as benchmark rates, funding costs and portfolio valuations change.
- Review the causes and persistence of the $86.1 million six-month unrealized loss and the valuation assumptions underlying the portfolio.
- Monitor the 158% asset coverage ratio, borrowing-base availability and refinancing or repayment requirements for the 2025 credit-facility maturities.
- Assess the effect of leverage and floating-rate exposure on net investment income under changing interest-rate scenarios.
- Verify future dividend declarations, taxable income, distribution-reinvestment effects and compliance with RIC distribution requirements.
- Review the $6.3 million of unfunded commitments and the company’s liquidity available to fund them.