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 invests primarily in corporate debt securities of privately held companies and, to a lesser extent, collateralized loan obligation structured credit. The company commenced operations on January 23, 2020 and intends to qualify as a regulated investment company beginning with the taxable year ending December 31, 2020.
This unaudited Form 10-Q covers the quarter ended September 30, 2020 and the period from January 23, 2020 through September 30, 2020. Comparative prior-period financial statements are not presented because the company had not commenced operations in the comparable prior period.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30, 2020 | January 23–September 30, 2020 |
|---|---|---|
| Total investment income | $7.9 million | $15.8 million |
| Net expenses after management fee waiver | $3.5 million | $7.5 million |
| Net investment income | $4.4 million | $8.3 million |
| Net realized gains (losses) | $(1.7) million | $(1.1) million |
| Net unrealized gains | $12.7 million | $6.6 million |
| Net increase in net assets from operations | $15.4 million | $13.8 million |
| Net investment income per share | $0.36 | $0.78 |
| Net increase in net assets per share | $1.24 | $1.29 |
- Interest income was $7.8 million for the quarter and $15.4 million for the operating period. Dividend income was $6 thousand for the quarter and $226 thousand for the operating period.
- Net investment income represented approximately 56% of quarterly investment income and 53% of investment income for the operating period.
- Management fees were $1.2 million for the quarter and $2.7 million for the operating period. The investment adviser waived $146 thousand and $338 thousand, respectively.
- Net asset value was $245.8 million at September 30, 2020, or $19.79 per share, compared with $(122 thousand) of net assets and a negative per-share value at December 31, 2019, before operations and capital raising began.
- The investment portfolio had a fair value of $660.2 million, compared with no investments at commencement of operations. The portfolio comprised 219 debt and private investments in 192 portfolio companies.
- First-lien senior secured debt represented $587.2 million of fair value, second-lien debt $21.3 million, corporate bonds $1.9 million, structured debt products $12.9 million and short-term investments $36.8 million.
- Weighted-average total yield to maturity was 5.43% at fair value and 6.30% at amortized cost. The weighted-average interest rate was 4.56%, and the weighted-average spread over LIBOR on floating-rate investments was 3.98%.
Cash Flow, Debt and Liquidity
- Net cash used in operating activities was $605.2 million, primarily reflecting $785.9 million of portfolio investment purchases, partially offset by $511.3 million of proceeds from short-term investment sales and $169.2 million of portfolio investment sale proceeds.
- Net cash provided by financing activities was $606.4 million, including $375.2 million of credit-facility borrowings and $233.6 million of common-stock issuance proceeds.
- Cash and cash equivalents were $1.2 million at September 30, 2020. The company also held $36.8 million in money-market investments.
- The credit facility had $400.0 million of commitments, $375.0 million of principal outstanding, and $25.0 million of available capacity at quarter-end. Its net carrying value was $374.2 million after deferred financing costs.
- The facility bears interest at the applicable base rate or LIBOR plus 1.30%, matures on February 18, 2023, and is secured by pledged assets. The asset coverage ratio was 166%, above the statutory 150% minimum.
- On October 12, 2020, after quarter-end, the credit facility commitment increased to $475.0 million.
- There were no unfunded commitments to portfolio companies or limited partnerships, no material off-balance-sheet liabilities, and no known pending or threatened material litigation.
Material Changes and Unusual Items
- The company transitioned from a pre-operational entity to a fully invested BDC during the period, funded by approximately $235.8 million of equity issuance and substantial credit-facility borrowings.
- Quarterly results benefited materially from $12.7 million of net unrealized appreciation, while realized investment losses were $1.7 million. Accordingly, reported earnings were not solely recurring investment income.
- All investments were income-producing and no loans were on non-accrual status at September 30, 2020.
- Approximately 16.5% of total assets were non-qualifying investments under Section 55(a) of the Investment Company Act. The portfolio was concentrated by industry, with software at 16.4% and healthcare providers and services at 12.8% of investment fair value.
- Prior to any listing, the investment adviser waived management fees above 1.75% of total net assets and was not entitled to an incentive fee. The stated base management fee is 2.00% of applicable net assets.
Guidance, Outlook, Commentary and Risks
Management did not provide formal earnings or portfolio guidance. The company intends to make quarterly distributions when income is available and intends to qualify as a RIC, which generally requires distribution of at least 90% of investment company taxable income.
- Management expects future growth to depend on additional equity offerings, borrowings and operating cash flow. Failure to obtain financing on acceptable terms could restrict portfolio growth.
- COVID-19 was identified as a significant risk to portfolio-company operations, credit quality, investment valuations, liquidity and access to capital markets. Management described software, healthcare, insurance, professional services and power generation as relatively more resilient exposures, while noting greater vulnerability in hospitality, leisure, energy, specialty retail and apparel.
- The portfolio and borrowings are predominantly floating-rate. Management estimated that a 100-basis-point increase in rates would increase annualized net investment income by approximately $2.6 million, while a 25-basis-point decrease would reduce it by approximately $650 thousand, based on quarter-end exposures.
- Investment fair values are generally based on market quotations or valuation models and may involve significant judgment. Actual realized values could differ materially from reported fair values.
- The credit facility includes covenants and events of default, including provisions relating to a change of control or the investment adviser ceasing to serve. A decline below the required asset coverage ratio could restrict additional borrowing and distributions.
- On November 10, 2020, the board declared a $0.36 per-share distribution, totaling approximately $4.5 million, payable November 17, 2020 to holders of record as of November 16, 2020.
Most Important Facts for Investors to Verify
- Whether the company maintains the 166% asset coverage ratio and sufficient borrowing capacity under the expanded $475.0 million facility.
- The sustainability of net investment income excluding quarterly unrealized appreciation and the effect of future realized losses or valuation declines.
- Portfolio-company credit performance, non-accrual status and COVID-19 effects, particularly in more exposed industries.
- The company’s ability to satisfy BDC and RIC qualification and distribution requirements.
- The valuation assumptions supporting the $660.2 million portfolio fair value and the impact of interest-rate, spread and liquidity changes.
- The extent to which distributions are funded by recurring investment income versus realized gains, return of capital or reinvested stock distributions.