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 elect regulated investment company status for the taxable year ending December 31, 2020.
This filing covers the quarter ended June 30, 2020 and, where applicable, the period from commencement of operations through June 30, 2020. Because operations began in January 2020, comparative prior-period financial statements are not presented.
Key financial metrics
| Metric | Three months ended June 30, 2020 | January 23–June 30, 2020 |
|---|---|---|
| Total investment income | $6.4 million | $7.9 million |
| Net expenses after management fee waiver | $2.8 million | $4.0 million |
| Net investment income | $3.6 million | $3.9 million |
| Net realized gains | $0.4 million | $0.6 million |
| Net change in unrealized gains or losses | $27.9 million gain | $6.1 million loss |
| Net increase (decrease) in net assets from operations | $31.9 million | $(1.6) million |
| Net investment income per share | $0.30 | $0.40 |
| Net increase (decrease) in net assets per share | $2.65 | $(0.16) |
Interest income was the principal revenue source, totaling $6.4 million for the quarter and $7.6 million for the period since commencement. The quarter’s earnings were significantly affected by a $27.9 million net unrealized appreciation, while the inception-to-date period included a $6.1 million net unrealized depreciation.
At June 30, 2020, total assets were $623.7 million, investment assets at fair value were $618.9 million, net assets were $231.7 million, and net asset value was $18.82 per share. The portfolio included 230 debt and private investments in 199 portfolio companies with aggregate fair value of approximately $584.6 million, excluding short-term investments.
The portfolio consisted primarily of first-lien senior secured debt, with fair value of $562.3 million, followed by second-lien senior secured debt of $11.0 million, corporate bonds of $2.3 million, CLO-related debt of $9.1 million and short-term investments of $34.3 million. Weighted-average total yield to maturity on debt and income-producing securities was 5.28% at fair value and 5.09% at amortized cost.
Debt, liquidity and cash flow
- The company had $335.0 million of principal outstanding under a revolving credit facility with a $400.0 million commitment and approximately $65.0 million available, subject to borrowing-base limitations.
- The credit facility matures on February 18, 2023; borrowing availability is scheduled to terminate on February 11, 2023. Borrowings bear interest at applicable base rates or LIBOR plus 1.30%.
- Credit facility carrying value was $334.1 million, net of $1.2 million of deferred financing costs. Average debt outstanding since commencement was $104.3 million.
- The asset coverage ratio was 169%, compared with the statutory minimum of 150% applicable to the company’s borrowings.
- Cash and cash equivalents were $0.7 million at June 30, 2020. Cash flow from operating activities was negative $566.5 million, principally reflecting $626.0 million of portfolio investment purchases. Financing activities provided $567.2 million, primarily from $335.2 million of credit facility borrowings and $233.5 million of common stock issuance proceeds.
- The company had no unfunded commitments to portfolio companies or limited partnerships and no material off-balance-sheet financing arrangements.
Material changes and unusual items
- The company moved from an initial net asset balance of approximately $1,500 at December 31, 2019 to $231.7 million at June 30, 2020, reflecting $233.5 million of common stock issuance proceeds, $335.0 million of borrowings, rapid portfolio deployment and operating results.
- During the quarter, the company funded $267.5 million of investments and sold or received repayments of $31.0 million. Since commencement, it funded $626.0 million and sold or received repayments of $35.3 million.
- Approximately 98.7% of new debt investment commitments during the quarter were floating-rate investments. The weighted-average interest rate on new commitments was 4.21%, with a weighted-average spread over LIBOR of 3.62%.
- All investments were income-producing and no loans were on non-accrual status at June 30, 2020.
- The investment adviser waived $132,380 of management fees during the quarter and $191,715 for the period since commencement. Before a national exchange listing, the adviser has agreed to waive management fees in excess of 1.75% of total net assets.
- The company declared $488,608 of distributions during the period, of which $285,545 was reinvested and $203,063 was paid in cash.
- On July 1, 2020, the company issued 5,313 shares for $100,000.
Guidance, outlook, management commentary and risks
The company did not provide quantitative earnings or portfolio guidance. It intends to distribute quarterly dividends when income is available and expects to qualify as a RIC annually, subject to meeting applicable income, diversification and distribution requirements.
Management stated that the portfolio is focused on industries expected to be relatively resilient to COVID-19, including healthcare providers and services, software, insurance, professional services and diversified financial services. However, the portfolio also has exposure to sectors such as hotels, restaurants and leisure, leisure products, oil and gas, specialty retail and apparel that may be more adversely affected by the pandemic.
- COVID-19 may cause borrower liquidity stress, covenant amendments or waivers, defaults, refinancing difficulty, market volatility and lower fair values.
- The company uses leverage, and declining portfolio values or asset coverage below 150% could restrict additional borrowing and distributions or require asset sales.
- Interest-rate changes affect both investment income and borrowing costs. Management estimated that a 100-basis-point increase in base rates would increase annual net investment income by approximately $2.7 million, while a 25-basis-point decrease would reduce it by approximately $0.7 million, based on the June 30 balance sheet.
- Most portfolio investments are valued using market quotations or observable inputs, but valuation uncertainty, market illiquidity and changing credit spreads could materially affect net asset value.
- The company is non-diversified and concentrated by industry, and its investments are generally illiquid private-credit positions.
- The company’s ability to qualify as a BDC and RIC, maintain financing, raise capital and retain its external investment adviser remains important to future operations.
Important facts for investors to verify
- Confirm the company’s subsequent operating results, NAV changes and realized or unrealized portfolio performance after June 30, 2020.
- Monitor COVID-19 effects on portfolio-company credit quality, covenant compliance, non-accrual investments and valuation marks.
- Verify credit facility availability, borrowing-base capacity, maturity terms, covenant compliance and asset coverage, including the effect of unsettled purchases.
- Assess whether investment income and cash collections support stated distribution intentions without excessive leverage or reliance on asset sales.
- Review the company’s progress toward RIC qualification and the tax consequences of cash and stock distributions.
- Evaluate the adviser’s management fee waiver, related-party arrangements and the potential future incentive fee after a listing.
- Review portfolio concentration, floating-rate exposure, LIBOR transition implications and the reliability of fair-value estimates.