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 that primarily lends to privately held companies through corporate debt securities and, to a lesser extent, CLO structured credit. The company seeks total returns through current income and capital appreciation and has elected regulated investment company tax treatment. The filing covers the unaudited three and six months ended June 30, 2021. The company commenced operations on January 23, 2020, so the six-month 2020 comparison represents the period from commencement through June 30, 2020.
Financial Highlights
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Total investment income | $7.9 million | $17.5 million |
| Net investment income | $4.2 million | $10.2 million |
| Net realized gains | $2.7 million | $3.8 million |
| Net unrealized gains (losses) | $(1.9) million | $(3.7) million |
| Net increase in net assets from operations | $5.0 million | $10.4 million |
| Net investment income per share | $0.32 | $0.79 |
| Net increase in net assets per share | $0.38 | $0.80 |
- Net investment income represented approximately 53% of total investment income for the quarter and 58% for the six-month period.
- Net asset value increased to $272.4 million, or $20.65 per share, from $253.1 million, or $20.15 per share, at December 31, 2020.
- The investment portfolio at fair value increased to $653.6 million from $600.1 million at year-end 2020. The portfolio comprised 197 debt and equity investments in 178 portfolio companies.
- Portfolio fair value was concentrated in software at 14.3% and healthcare providers and services at 12.6%; all investments were reported as income producing, with no loans on non-accrual status.
- Cash and cash equivalents were $1.0 million, supplemented by $77.4 million in short-term money market investments.
- Net cash used in operating activities was $25.1 million, while financing activities provided $25.4 million, resulting in a $0.3 million increase in cash.
- Outstanding principal under the Bank of America credit facility was $415.0 million, with $60.0 million available under its borrowing base. The separate Wells Fargo facility had no borrowings and $150.0 million available.
- The net carrying value of debt was $413.9 million, and the asset coverage ratio was 166%, above the statutory 150% minimum.
- Weighted-average total yield to maturity was 5.02% at fair value and 5.35% at amortized cost. The annualized net investment income ratio was 7.77% with the management-fee waiver and 7.52% without it.
Material Changes Versus Comparable Periods
- For the quarter, total investment income increased to $7.9 million from $6.4 million, and net investment income increased to $4.2 million from $3.6 million.
- Quarterly net increase in net assets from operations declined sharply to $5.0 million from $31.9 million because the prior-year period included a $27.9 million net unrealized gain; the 2021 quarter recorded a $1.9 million net unrealized loss.
- For the six months, total investment income rose to $17.5 million from $7.9 million and net investment income rose to $10.2 million from $3.9 million. The prior-year comparison covered only the company’s initial operating period.
- Six-month net increase in net assets from operations improved to $10.4 million from a $1.6 million decrease, despite a $3.7 million net unrealized loss in 2021 versus a $6.1 million loss in the prior-year start-up period.
- Debt investments funded during the six months totaled $277.4 million, partially offset by $224.1 million of sales or repayments. Net portfolio investment growth and short-term investment balances increased, while debt outstanding rose by $20.0 million from year-end.
- Shares issued during the six months totaled 632,597 for aggregate proceeds of approximately $13.0 million, including shares issued through dividend reinvestment.
- Unfunded commitments to portfolio companies increased to $5.3 million from $1.3 million at December 31, 2020. The filing states that 100% of unfunded investor capital commitments were drawn in July 2021.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide quantitative earnings or portfolio guidance. Management expects to continue investing in corporate debt and CLO-related opportunities, subject to market conditions, financing availability and investment selection.
- The company intends to make quarterly distributions when income is available. On August 12, 2021, it declared a $0.25-per-share distribution for holders of record on August 17, 2021, payable partly in cash and partly in common stock through the dividend reinvestment plan.
- The principal risks include credit losses, illiquidity and valuation uncertainty in private investments, leverage and asset-coverage requirements, interest-rate volatility, financing availability, COVID-19-related economic disruption, portfolio-company performance, conflicts of interest with the external adviser, and maintaining BDC and RIC status.
- Approximately 98% of new debt investment commitments during the six months were floating-rate, creating sensitivity to changes in benchmark interest rates. Management estimated that a 100-basis-point increase in rates would increase annualized net investment income by approximately $2.4 million, while a 25-basis-point decrease would reduce it by approximately $0.6 million.
- All portfolio assets held through Palmer Square BDC Funding I, LLC are pledged under the Bank of America facility. Credit agreements contain covenants and events of default that could permit acceleration, including certain changes in control or loss of the investment adviser.
- The company reported no material legal proceedings, no defaults on senior securities, no material changes to the risk factors in its 2020 Form 10-K, and effective disclosure controls as of June 30, 2021.
- Portfolio fair values involve management judgment and may differ materially from amounts ultimately realized. The filing text indicates all investments were classified as Level 1 or Level 2 at June 30, 2021, with no Level 3 investments reported.
Most Important Facts for Investors to Verify
- Reconcile the $415.0 million of principal debt, $60.0 million of Bank of America availability, $150.0 million of Wells Fargo availability, and the 166% asset coverage ratio.
- Assess whether the $10.2 million of six-month net investment income and the stated yield metrics support future distributions after interest expense and management fees.
- Review portfolio credit quality, valuation methodology and the effect of the $3.7 million six-month unrealized depreciation, including positions with declining fair values.
- Confirm the funding status and conditions of the $5.3 million of unfunded portfolio-company commitments and the subsequent drawdown of investor commitments.
- Evaluate refinancing and liquidity needs before the Bank of America facility’s February 2023 maturity and draw termination date, as well as the Wells Fargo facility’s later maturity.
- Review the tax consequences of distributions paid partly in stock, particularly where taxable income may exceed cash received.