Palmer Square Capital BDC Inc. — FY2023 Form 10-K Summary
Business context and reporting period
Palmer Square Capital BDC Inc. is an externally managed, non-diversified business development company and regulated investment company. It primarily invests in floating-rate corporate debt of private U.S. companies and, to a lesser extent, CLO debt and equity. The filing covers the fiscal year ended December 31, 2023; quarterly data includes the three months ended December 31, 2023.
At year-end, the Company held 227 debt and equity investments across 191 portfolio companies, with approximately $1.0 billion of portfolio investments at fair value and total assets of $1.1 billion. The portfolio was concentrated principally in software, healthcare providers and services, professional services, IT services and insurance.
The Company completed its IPO on January 22, 2024, issuing 5.45 million shares at $16.45 per share and receiving net proceeds of $89.7 million. Its common stock began trading on the NYSE under the symbol PSBD on January 18, 2024.
Financial performance and key metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total investment income | $112.2 million | $74.5 million |
| Net investment income | $58.0 million | $41.1 million |
| Net realized gains (losses) | $(2.7) million | $(8.1) million |
| Net unrealized gains (losses) | $52.6 million | $(107.4) million |
| Net increase (decrease) in net assets from operations | $107.8 million | $(74.5) million |
| Net investment income per share | $2.26 | $1.78 |
| Net asset value per share | $17.04 | $14.96 |
| Year-end net assets | $462.0 million | $363.4 million |
| Cash and cash equivalents | $2.1 million | $1.7 million |
| Net cash provided by operating activities | $19.5 million | $25.1 million |
FY2023 investment income was primarily interest income of $107.7 million, supplemented by $4.1 million of dividend income and $0.4 million of other income. Net expenses were $54.2 million, including $44.5 million of interest expense, $8.4 million of management fees and a $1.1 million management-fee waiver. No incentive fee was payable before the IPO.
For the fourth quarter of 2023, investment income was $29.8 million, net investment income was $15.4 million and net assets increased by $22.0 million from operations. Year-end weighted average total yield was 10.51% at fair value and 8.93% at amortized cost, compared with 11.47% and 8.70%, respectively, in 2022.
Portfolio, leverage and liquidity
- Total investments at fair value increased to $1.109 billion from $1.017 billion in 2022. First-lien senior secured debt represented $952.1 million, or approximately 86% of total investments at fair value.
- The Company funded $273.7 million of new investments and sold or received repayments of $247.1 million, producing net new investment activity of $26.7 million.
- All debt and short-term investments were income-producing, and no portfolio investments were on non-accrual status at December 31, 2023.
- Outstanding principal debt was $504.0 million under the Bank of America facility and $136.3 million under the Wells Fargo facility, for total principal debt of approximately $640.3 million. The net carrying value of credit facilities was $641.8 million.
- Total available commitments were $221.0 million under the Bank of America facility and $38.7 million under the Wells Fargo facility.
- The Company’s asset coverage ratio was 172%, above the 150% statutory minimum.
- The Bank of America facility matures February 18, 2025, with borrowing availability scheduled to terminate February 11, 2025. The Wells Fargo facility was amended in December 2023 to increase commitments to $175 million, extend maturity to December 18, 2028 and extend the reinvestment period to December 18, 2026.
- Unfunded commitments to portfolio companies increased to $20.1 million from $2.6 million; management stated that liquidity, including cash, receivables and borrowing capacity, was sufficient to fund them.
Material changes versus the prior comparable period
- Investment income increased 51% and net investment income increased 41%, primarily reflecting portfolio growth and higher investment yields.
- Results benefited from a $52.6 million net unrealized gain, compared with a $107.4 million net unrealized loss in 2022. Net realized losses improved to $2.7 million from $8.1 million.
- Net assets increased 27% to $462.0 million, while NAV per share rose 14% to $17.04.
- Investment fair value increased approximately 9%, and the number of portfolio companies increased from 176 to 191.
- Interest expense increased 90% to $44.5 million despite lower average debt outstanding of $629.6 million versus $667.5 million, reflecting higher borrowing costs. The weighted average effective interest rate on debt was 6.58%.
- Net cash provided by operating activities declined to $19.5 million from $25.1 million, while cash distributions declared increased to $56.1 million from $44.1 million.
- The Wells Fargo facility was amended as described above, and both credit facilities transitioned from LIBOR-related provisions to SOFR-based pricing during 2023.
Outlook, management commentary, risks and unusual items
Management characterized market conditions as supportive for alternative lenders, citing higher floating-rate yields, bank retrenchment, private-credit demand and opportunities in secondary loans and CLO securities. The Company did not provide formal earnings, dividend or portfolio-growth guidance. It intends to make quarterly distributions when income is available and to continue qualifying as a RIC.
Following the IPO, the base management fee is 1.75% annually on specified average net assets. The income incentive fee begins with the first calendar quarter after the IPO, subject to a 6% annualized hurdle, a catch-up provision and a 12.5% incentive-fee rate above the catch-up amount.
- Leverage magnifies gains and losses. Rising benchmark rates can increase borrowing costs and reduce net investment income, although the portfolio is predominantly floating rate.
- Portfolio investments are primarily below-investment-grade, privately originated or less liquid loans. Covenant-lite loans may provide fewer lender protections.
- CLO junior debt and equity investments are highly levered and carry a heightened risk of loss or reduced distributions.
- Valuations are subject to management judgment; year-end investments were classified as 5.8% Level 1 and 94.2% Level 2, with no Level 3 investments reported.
- The Company relies on Palmer Square Capital Management and its investment professionals. Loss of key personnel, termination of the resource-sharing agreement or resignation of the Investment Advisor could disrupt operations.
- Management and incentive-fee arrangements, including fees based on accrued non-cash income and net asset values determined by the Investment Advisor as valuation designee, create potential conflicts of interest.
- The Company must maintain BDC and RIC qualifications and satisfy distribution, income and asset-diversification requirements. It reported $9.0 million of capital-loss carryforwards at year-end.
- The filing identifies risks from economic downturns, inflation, geopolitical events, banking-system stress, cybersecurity incidents, refinancing needs and the February 2025 maturity of the Bank of America facility.
PricewaterhouseCoopers LLP issued an unqualified audit opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023. The independent auditor was not engaged to opine on internal control effectiveness because the Company qualifies for the emerging-growth-company exemption.
Investor verification points
- Verify post-IPO quarterly net investment income, incentive fees, dividend coverage and NAV performance, including the effect of the new incentive-fee structure.
- Monitor refinancing or repayment plans for the $504.0 million Bank of America facility maturing in February 2025.
- Reconcile reported portfolio yields with realized cash income, PIK or OID accruals and non-cash income included in taxable income.
- Review valuation changes, credit quality, non-accrual status and markdowns for the largest portfolio exposures and CLO positions.
- Assess whether the $20.1 million of unfunded commitments and $14.6 million of unsettled purchases affect liquidity or borrowing capacity.
- Track compliance with the 150% asset coverage requirement and financial covenants under both secured credit facilities.
- Compare the NYSE market price of PSBD with the reported NAV per share of $17.04 and consider potential dilution from dividend reinvestment or future offerings.