Business Context and Reporting Period
Palmer Square Capital BDC Inc. is an externally managed, non-diversified business development company focused primarily on lending to privately held companies through corporate debt securities, with a smaller CLO structured-credit strategy. The company commenced operations on January 23, 2020. This unaudited Form 10-Q covers the quarter ended March 31, 2020 and therefore does not provide a comparable prior-period operating statement.
The company intends to elect regulated investment company status for its taxable year ending December 31, 2020. As of May 11, 2020, 12,215,196 common shares were outstanding. The filing indicates that required Exchange Act reports had not been filed for the preceding 12 months.
Financial Metrics
| Metric | Period or date | Amount |
|---|---|---|
| Total investment income | January 23–March 31, 2020 | $1.45 million |
| Net investment income | January 23–March 31, 2020 | $250,590 |
| Net realized gain | January 23–March 31, 2020 | $218,390 |
| Net unrealized loss | January 23–March 31, 2020 | $(33.998) million |
| Net decrease in net assets from operations | January 23–March 31, 2020 | $(33.529) million |
| Net asset value | March 31, 2020 | $183.928 million |
| NAV per share | March 31, 2020 | $16.16 |
| Net investment income per share | January 23–March 31, 2020 | $0.04 |
| Net decrease in net assets per share | January 23–March 31, 2020 | $(5.10) |
| Cash and cash equivalents | March 31, 2020 | $165,366 |
| Debt outstanding, principal | March 31, 2020 | $85.0 million |
| Credit facility availability | March 31, 2020 | $315.0 million |
Investment income consisted of $1.270 million of interest income and $183,543 of dividend income. Net expenses were $1.203 million after a $59,335 management-fee waiver. Expense items included $474,678 of management fees, $239,866 of interest and financing expense, $122,199 of initial organization costs and $425,150 of other operating expenses.
At March 31, 2020, investments had amortized cost of $503.616 million and fair value of $469.618 million. Debt investments had fair value of $320.166 million, comprising first-lien senior secured debt of $308.027 million, second-lien senior secured debt of $7.767 million and CLO debt investments of $4.371 million. Short-term money-market investments totaled $149.453 million.
The portfolio included 146 debt and private investments in 131 portfolio companies. The weighted-average total yield was 7.39% at fair value and 5.54% at amortized cost; the weighted-average interest rate was 4.88%. Approximately 99.72% of new debt commitments were floating-rate investments.
Net cash used in operating activities was $301.155 million, primarily reflecting portfolio purchases. Financing activities provided $301.319 million, including $217.455 million from common-stock issuances and $85.178 million of credit-facility borrowings. Cash increased by $163,866 during the period.
Material Changes Versus the Prior Comparable Period
No meaningful prior-period comparison is available because operations began on January 23, 2020. From commencement through March 31, the company deployed substantial capital, issued 11,383,139 shares for $217.455 million and established a $400 million revolving credit facility.
NAV per share fell from the initial $20.00 to $16.16, primarily because of $33.998 million in net unrealized depreciation. The filing attributes $37.305 million of unrealized losses partly to Prairie ECI Acquiror LP, CLO positions, WaterBridge Midstream Operating LLC, NAB Holdings, LLC, Mohegan Tribal Gaming and other investments, partially offset by $3.307 million of unrealized gains.
Guidance, Outlook, Risks and Unusual Items
- The company did not provide quantitative earnings or NAV guidance. Management stated that the results for this short start-up period are not necessarily indicative of future periods.
- COVID-19 and related market disruption were identified as material risks, including borrower defaults, covenant amendments or waivers, refinancing difficulties, credit-market illiquidity, valuation declines, reduced investment originations and higher financing costs.
- The company’s $400 million credit facility matures February 18, 2023; borrowing availability terminates February 11, 2023. The facility bears interest at base rate plus 1.30% or LIBOR plus 1.30%, subject to stated terms, and is secured by pledged assets.
- The March 31, 2020 asset-coverage ratio was 316%, compared with the 150% statutory minimum. The company reported compliance with credit-facility covenants and no defaults.
- The company had no loans on non-accrual status, no unfunded commitments to portfolio companies and no material pending litigation at March 31, 2020.
- The investment adviser waived $59,335 of management fees and waived fees above 1.75% of total net assets before a national exchange listing. No incentive fee was payable before listing.
- On April 22, 2020, after quarter-end, the company issued 832,057 common shares for $14.5 million in a private offering.
- Interest-rate sensitivity was material: management estimated that a 100-basis-point increase in rates would increase annualized net investment income by approximately $2.772 million based on the March 31 balance sheet, while a 25-basis-point decrease would reduce it by approximately $693,000.
Important Facts for Investors to Verify
- Whether the substantial March 31 unrealized depreciation persisted or reversed in subsequent valuation periods, particularly amid COVID-19 market volatility.
- The quality, concentration and performance of the 131 portfolio companies, including exposures to healthcare, insurance, software, financial services and energy-related industries.
- Actual borrowing-base availability under the credit facility after unsettled purchases and changes in collateral values.
- Compliance with the 150% asset-coverage requirement and all credit-facility covenants as portfolio valuations and leverage change.
- Whether the company successfully maintains BDC and RIC tax status and can generate sufficient taxable income to support quarterly distributions.
- The impact of floating-rate assets and liabilities, LIBOR transition, interest-rate floors and future financing costs.
- The timing and terms of future capital raises, listings, distributions and any additional post-quarter-end share issuances.