Palmer Square Capital BDC Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Palmer Square Capital BDC Inc. is an externally managed, non-diversified business development company regulated under the Investment Company Act of 1940 and taxed as a regulated investment company. Its objective is to maximize total return through current income and capital appreciation, primarily by investing in corporate debt securities and, to a lesser extent, CLO debt and equity.
The filing covers the fiscal year ended December 31, 2021. Comparisons are against the period from January 23, 2020, the commencement of operations, through December 31, 2020; therefore, the prior-period comparison is not a full-year comparison.
As of December 31, 2021, the Company held 240 debt and private fund investments across 212 portfolio companies with aggregate fair value of approximately $1.1 billion. Major industry exposures included healthcare providers and services, software, IT services, professional services and insurance. Palmer Square Capital Management reported approximately $20.6 billion of assets under management.
Financial performance and key metrics
| Metric | FY2021 | Prior comparable period |
|---|---|---|
| Total investment income | $39.7 million | $25.5 million |
| Net expenses | $16.9 million | $10.8 million |
| Net investment income | $22.8 million | $14.7 million |
| Net realized gains/(losses) | $4.8 million | $(1.0) million |
| Net unrealized gains/(losses) | $(8.5) million | $13.1 million |
| Net increase in net assets from operations | $19.1 million | $26.7 million |
| Net investment income per share | $1.47 | $1.32 |
| Net increase in net assets per share | $1.23 | $2.40 |
| Net asset value per share | $20.06 | $20.15 |
| Total return | 8.10% | 4.29% |
| Net investment income to average net assets, including waiver | 7.17% | 7.43% |
Net investment income represented approximately 57.5% of total investment income. Net expenses included $8.6 million of interest and debt financing expenses, $6.4 million of management fees, $2.6 million of other operating expenses and $75,000 of directors’ fees, partially offset by a $796,000 management-fee waiver. No incentive fee was payable because the Company’s common stock was not listed on a national securities exchange.
The portfolio’s weighted-average total yield to maturity increased to 5.77% at fair value from 4.96% at December 31, 2020; the weighted-average interest rate increased to 4.80% from 4.73%, and the weighted-average spread over LIBOR for floating-rate investments increased to 4.31% from 4.14%.
Liquidity, capital and leverage
- Total assets were $1.217 billion and net assets were $452.8 million at December 31, 2021, compared with $667.5 million and $253.1 million, respectively, at December 31, 2020.
- Investment fair value increased to $1.194 billion from $653.2 million. Debt investments were primarily first-lien senior secured loans, with $1.007 billion of fair value, plus $64.7 million of second-lien senior secured debt.
- Cash and cash equivalents were $1.1 million, supplemented by $78.1 million of short-term money-market investments.
- Debt outstanding totaled approximately $652 million principal: $552 million under the Bank of America facility and $100 million under the Wells Fargo facility. Net carrying value was $649.9 million.
- The Bank of America facility had $173 million of available commitments and the Wells Fargo facility had $50 million available at year-end. Both facilities were in compliance with applicable covenants.
- The Company’s asset coverage ratio was 170%, above the statutory 150% minimum.
- Net cash used in operating activities was $438.0 million, principally reflecting $926.4 million of portfolio investment funding, partly offset by $406.8 million of investment sale proceeds. Net cash provided by financing activities was $438.4 million.
- The Company issued 10.0 million common shares for aggregate proceeds of approximately $206.6 million, including shares issued through distribution reinvestment.
Material changes versus the prior comparable period
- Portfolio scale expanded substantially: investments at fair value increased approximately 83%, from $653.2 million to $1.194 billion, while the number of portfolio companies increased from 181 to 212.
- New investments funded increased to $926.4 million from $854.5 million, while investments sold or repaid increased to $401.8 million from $268.3 million.
- Average debt outstanding increased to approximately $447 million from $247.5 million, increasing interest expense to $8.6 million from $4.7 million.
- Total investment income and net investment income increased, but net realized and unrealized investment performance weakened because the Company recorded an $8.5 million net unrealized loss compared with a $13.1 million net unrealized gain in the prior period.
- Net asset value per share declined modestly to $20.06 from $20.15 despite substantial capital growth.
- Distributions declared increased to $26.0 million from $12.2 million. FY2021 distributions included $22.2 million from ordinary income and $3.8 million from capital gains; no return of capital was reported.
- Non-qualifying investments declined to 13.3% of total assets from 15.5%, remaining below the 30% maximum implied by the BDC qualifying-asset requirement.
- The Company implemented ESG screening policies effective March 1, 2021, while noting that certain previously held investments may not satisfy the new guidelines.
Guidance, outlook, risks and unusual items
Management did not provide quantitative earnings or distribution guidance. The Company expects to continue making quarterly distributions when income and legally available assets permit, but cautions that distributions may vary and are subject to asset-coverage requirements, borrowing-facility covenants, portfolio performance and RIC distribution requirements.
Key risks include leverage, rising borrowing costs, credit losses, defaults by leveraged portfolio companies, illiquidity and valuation uncertainty for private investments, exposure to covenant-lite loans and highly leveraged CLO equity and junior debt, competition for investments, reliance on Palmer Square personnel and relationships, conflicts of interest, and the possibility that the Company may not maintain BDC or RIC status.
Most portfolio investments are floating-rate, while the Company’s borrowings are also floating-rate. Management’s sensitivity analysis indicated that a 100-basis-point increase in base rates would reduce annualized net investment income by approximately $285,000 based on year-end exposures, while a 200-basis-point increase would increase it by approximately $4.3 million. The filing highlights uncertainty from the transition away from LIBOR, although the credit facilities contain fallback language.
The Company had no loans on non-accrual status at December 31, 2021 and reported no material legal proceedings. Unfunded commitments to portfolio companies totaled $11.3 million, up from $1.3 million, and were generally subject to borrower compliance with specified conditions.
Subsequent to year-end, the Company issued additional common stock, fully funded a $2.14 million commitment to PT Intermediate Holdings III LLC, partially funded the RSC Acquisition commitment, and drew an additional $14 million under the Bank of America facility and $16 million under the Wells Fargo facility through March 11, 2022. The Board re-approved the Advisory and Administration Agreements through January 13, 2023.
Most important facts for an investor to verify
- Confirm the audited financial statements and the effect of the $8.5 million net unrealized investment loss on NAV and total return.
- Review portfolio-company credit quality, valuation methodology and any subsequent non-accruals or impairments, particularly among the largest healthcare, software and IT-services exposures.
- Monitor the approximately $652 million of debt, facility maturities in 2025, borrowing-base availability and compliance with covenants and the 150% asset-coverage requirement.
- Assess cash distribution coverage, including the distinction between distributions from ordinary income, realized gains and any potential return of capital.
- Evaluate the $11.3 million of unfunded portfolio commitments and the Company’s liquidity after pending investment settlements and post-year-end credit-facility draws.
- Review sensitivity to interest rates and the operational and economic effects of the LIBOR-to-SOFR transition.
- Consider conflicts arising from external management, fee arrangements, valuation involvement by the Investment Advisor and allocation of investment opportunities among Palmer Square-affiliated accounts.
- Verify the Company’s continued qualification as a BDC and RIC and its ability to satisfy required distributions without adversely timed asset sales or additional borrowing.