Palmer Square Capital BDC Inc. (NYSE:PSBD) Q1 2024 Earnings Call Transcript

Palmer Square Capital BDC Inc. (NYSE:PSBD) Q1 2024 Earnings Call Transcript May 12, 2024

Palmer Square Capital BDC Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Palmer Square Capital BDC’s First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will be followed with prepared remarks. As a reminder, this conference call is being recorded. At this time, I’d like to turn the call over to Andrew Wedderburn–Maxwell, Investor Relations. You may begin.

Andrew Wedderburn-Maxwell: Welcome to Palmer Square Capital BDC’s first quarter 2024 earnings call. Joining me this morning are Chris Long, Chairman and Chief Executive Officer; Angie Long, Chief Investment Officer; Matt Bloomfield, President; and Jeff Fox, Chief Financial Officer and Director. Palmer Square Capital BDC’s first quarter 2024 financial results were released earlier today and can also be accessed on Palmer Square’s Investor Relations website at palmersquarebdc.com. We have also arranged for a replay of today’s event that can be accessed on our website for the next six months. During this call, I want to remind you that the forward–looking statements we make are based on current expectations. The statements on this call that are not purely historical are forward–looking statements.

These forward–looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward–looking statements, including and without limitation, market conditions caused by uncertainty surrounding interest rates, changing economic conditions and other factors we identified in our filings with the SEC. Although, we believe that the assumptions on which these forward–looking statements are based on are reasonable, any of those assumptions can prove to be inaccurate and as a result, the forward–looking statements based on those assumptions can be incorrect. You should not place undue reliance on these forward–looking statements.

The forward–looking statements made during this call are made as of the date hereof and Palmer Square Capital BDC assumes no obligation to update the forward–looking statements unless required by law. To obtain copies of SEC related filings, please visit our website at palmersquarebdc.com. With that, I will now turn the call over to Chris Long.

Chris Long: Good afternoon, everyone. We’re very excited to have you with us. Thank you for joining us today for Palmer Square Capital BDC’s first quarter 2024 conference call. I will begin by providing an overview of the quarterly highlights, then turn the call to the team to discuss our market outlook, portfolio, and financial performance. I am pleased to report strong quarterly earnings results, solid credit performance across the portfolio, and continued net asset value expansion. During the first quarter, our team deployed $346 million of capital and generated net investment income of $16.3 million. In mid–April, we announced our NAV per share as of March 31st, 2024 of $17.16. On the heels of our successful IPO in January, these first quarter operating results serve as a testament to PSBD’s differentiated investment strategy that provides the ability to capitalize on investment opportunities across the syndicated and private credit markets.

In March, our Board approved a formal base and supplemental dividend policy that reinforces our commitment to enhance transparency and shareholder alignment. Going forward, we expect to declare a quarterly base distribution of $0.42 per share, as well as a supplemental dividend each quarter of at least 50% of net investment income, above the base distribution. This framework speaks to our Board’s confidence in our liquid and diversified investment strategy, as we focus on delivering long–term total returns through dividends and NAV expansion. Since our inception in 2019, our mission has been to deliver a truly unique public vehicle that offers investors attractive, risk–adjusted returns through a highly liquid and transparent strategy and shareholder–friendly fee structure.

We believe that Palmer Square Capital BDC remains well–positioned for upside in this dynamic operating environment. While credit across the sector shown resilience this past year in the phase of recessionary fears, we expect to see a divergence between managers as idiosyncratic credit issues arise, given the illiquid nature and concentration of certain assets, we have intentionally constructed the PSBD portfolio to emphasize high quality, shorter duration and liquid credits that we believe will enable us to opportunistically rotate investments with agility as the macroeconomic environment changes. We remain very pleased with the credit quality of our portfolio. We attribute our strong credit performance to PSBD’s rigorous investment process, focusing on larger companies with strong fundamentals in positions that are senior in the capital structure.

In the past, we have discussed utilizing the strengths of the Palmer Square platform to drive value for the BDC and its investors. Having a differentiated source of financing capabilities with at the forefront of those conversations, our credit facilities were always part of that equation and remain so today. Given the attractive nature of turn–based financing in the CLO market, utilizing Palmer Square’s relationships and expertise in the global CLO market could be another way to secure attractive financing for PSBD. With that, we are extremely pleased to report that on April 24th, Palmer Square Capital BDC, through Palmer Square BDC CLO I, a wholly–owned indirect subsidiary of PSBD, along with Bank of America, as arranging partner, priced a $400.5 million CLO secured by broadly syndicated loans held by PSBD.

We believe this unique issuance demonstrates our value proposition and ability to utilize the broader strength of the Palmer Square platform across the globe to execute innovative and attractive financing transactions to drive enhanced returns for shareholders. This CLO has a reinvestment period through 2029 and does not mature until 2037 with additional flexibility to refinance its spreads continue to tighten in the future. The offering is scheduled to close on May 23rd. We are incredibly excited about the long–term opportunity for our strategy, especially at this present moment in time giving these compelling risk return we see in today’s markets. I will now hand the call over to Angie to discuss our outlook for the year.

A business executive confidently presenting a financial research report to a boardroom.

Angie Long: Thank you, Chris. While, this call marks our second quarter as a public company, Palmer Square has a long track record of developing strategies and products that manufacture attractive yield and return opportunities for its clients. Sitting here today, broader equity indices continue to trade at or near all–time highs, despite macro and inflationary pressures. Investors and corporates, high–yield bonds and other traditional credit instruments are trading near their 10–year types on a spread basis, which means they’re not attractive at all relative to history. On the other hand, with current base rates and continued attractive spreads in the broadly syndicated loan and larger private credit markets, PSBD continues to offer a compelling yield and told return profile in our opinion, which makes us increasingly excited about managing PSBD in this type of environment.

Looking across the broader credit universe, we strongly believe PSBD is strategically positioned to offer investors stable, risk–adjusted returns for the foreseeable future. With an approximate 12% annualized dividend yield at quarter end, PSBD in our opinion provides tremendous value for investors. As mentioned on our last call in February, capital markets activity continued to pick up its pace in the first quarter of 2024 with refinancing activity leading the way. In the broadly syndicated markets, companies were met with healthy demand, which allows many borrowers to refinance their debt and push out maturities. In many cases, we saw borrowers from the private debt space return to the syndicates markets to refinance parts of their capital structure.

In our view, these are all healthy signs of the capital markets working efficiently. Sponsor conversations around new LDO activity have also continued to pick up, which we think bodes well for an overall increase in new financing activity throughout 2024. We view the resurgence of the broadly syndicated loan market as another positive catalyst that will likely help jump start sponsor–related M&A activity. This further highlights the importance of having a nimble, opportunistic approach that can find attractive investment opportunities across market environments. The last three months are the robust first quarter of CLO activity since the global financial crisis and was 45% ahead of the first quarter of ‘23. In the first quarter of ‘24 Palmer Square as a firm continued to be active in the CLO markets in both the US and Europe.

And as Chris mentioned in his opening remarks, we used our strengths in the market to secure attractive term–based financing for the BDC with our inaugural BDC CLO. Overall, we remain confident that the reopening of the syndicated markets, record high PE dry powder and increasing demands from LPs for return of capital, all point to a pickup in M&A activity over the medium– term. We see a robust need in markets for both syndicated and direct loans, which positions Palmer Square Capital BDC as a lender of choice. With that, I’d like to hand the call over to Matt, who will discuss our portfolio and investment activity.

Matt Bloomfield: Thank you, Angie. Turning to our portfolio and investment activity for the first quarter. Our total investment portfolio had a fair value at March 31st 2024 of approximately $1.4 billion across 39 industries that demonstrate strong credit quality, as well as our focus of having one of the most diverse portfolios among our peers. This compares to a fair value of $1.1 billion at the end of fiscal year 2023, reflecting sequential growth of approximately 26%. In the first quarter, we invested $346 million of capital, which included 54 investment commitments at an average value of approximately $4.7 million. During the same period, we realized approximately $70 million through repayments and sales. This speed of deployment can be attributed to PSBD’s differentiation in the marketplace.

As a reminder, our strategy focuses on large companies with stable, recurring revenue streams, while underweighting cyclical industries. Our analysts are organized by industry, which is intentional due to our core beliefs, the trends come by industry and not credit ratings. Because of this deliberate strategy, we have a large pool of accessible loans that have been proactively evaluated by our investment committee and the liquid nature of our portfolio allows us to deploy capital with extraordinary efficiency as opposed to waiting to source and originate new deals. We believe that the ability to execute with speed, while remaining disciplined and mitigating risk offers our shareholders meaningful upside, compared to the broader direct lending universe.

Looking back to the first quarter, I wanted to highlight key portfolio statistics, which underscore our beliefs that PSBD represents one of the most compelling investment opportunities in this sector. As of March 31st, PSBD shares offered an annualized dividend yield of 12% on a portfolio focused on first lien, floating rate, liquid securities. In our opinion, this provides investors with a very attractive total return opportunity in a market where spreads are tightening and our NAV has further upside potential. At the end of the first quarter, our weighted average total yield to maturity of debt and income producing securities at fair value was 10.1% and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 9.1%.

Our investors benefit from a highly diversified portfolio of high–quality sectors and borrowers. At the end of the first quarter of 2024, our largest portfolio exposures based on industry, included software, healthcare, professional services, and insurance. All industries that we believe offer highly stable and growing income profiles. Furthermore, the ten largest Investments account for only 9.7% of the overall portfolio. We believe these factors point to industry–leading diversification, which will continue to drive strong credit performance across market cycles. Our portfolio is 96% senior secured with an average pool size of approximately $5 million. On a fair value–weighted basis, our first lien borrowers have a weighted average EBITDA of $452 million, senior secured leverage of 5.3 times and interest coverage of 2.2 times.

We believe that these metrics compare very favorably with the best–in–class portfolios trading at a premium in public markets. Our focus on liquid loans to larger companies with solid fundamentals and positions that are senior in the capital structure has yielded strong credit outcomes, including an average internal rating of 3.6 on a fair value weighted basis for all loan investments and no debt investments on non–accrual status as of the end of the first quarter. Unlike traditional middle market risk systems, we have a unique relative value–based scoring system that allows our team to ascertain where the best relative value resides and to reflect that in the portfolio. It’s a dynamic system. It’s updated quarterly. But given the size of the markets we participate in, the scores are updated in real time when warranted.

Subsequent to quarter end, one loan representing approximately 15 basis points of our total investments at fair value has been moved to non–accrual status. We believe this to be an idiosyncratic event and remain in active dialog with management to resolve this situation. In the first quarter, we also removed three names from our watch list as credit performance continued to improve. Now, I’d like to turn it over to Jeff, who’ll review our first quarter 2024 financial results.

Jeff Fox: Thank you, Matt. We were very pleased with our first quarter results. The total investment income was $34.8 million for the first quarter of 2024, up 33% from $26.2 million for the prior year period. This increase was primarily driven by the growth in our portfolio, as well as the interest income from our investments. Total net expenses for the first quarter were $18.5 million, compared with $12.6 million for the prior year period. The increase in expenses, compared to the prior year was driven by higher interest expense in line with our portfolio expansion, as well as the implementation of our management’s incentive fee at the time of the IPO. Net investment income for the first quarter of 2024 was $16.3 million or $0.52 per share, compared to $13.6 million or $0.55 per share for the comparable period last year.

During the first quarter of 2024, the company had total net realized and unrealized gains of $6.6 million, compared with $14.5 million in the first quarter of 2023. NAV per share was $17.16, up from $17.04 at the end of the fourth quarter, representing a 0.7% increase sequentially. As a reminder, the March NAV also reflects the payment of a $0.49 dividend in line with the dividend policy we announced in late March. The quarterly distribution is comprised of a base dividend of $0.42 and is supplemental dividend of $0.07 per share. Moving to our balance sheet. As of March 31st 2024, total assets were $1.4 billion and total net assets were $559 million. At the end of Q1, our debt–to–equity ratio was 1.42 times, compared with 1.39 times at the end of Q4.

Available liquidity, consisting of cash and undrawn capacity on our credit facilities was approximately $110 million. This compares to $30.8 million of undrawn investment commitments. On March 29th of 2024, we entered into an amendment of the BoA credit facility to extend the maturity to February of 2028. Further details for this transaction can be found in our 10–Q. As a reminder, our Board of Directors approved a stock repurchase plan to acquire up to $20 million of PSBD common stock. This program expires on January 17th 2025. Additionally, Palmer Square Capital Management has authorized an incremental $5 million repurchase program that will raise the total authorization up to $25 million moving forward. On May 7th, the Board of Directors announced that it declared a second quarter 2024 base dividend of $0.42 per share, in line with the dividend policy we formalized during the first quarter.

We plan to announce the supplemental component of the dividend in June. Given the liquid nature of our loans in the portfolio, calculating this portion of the dividend requires an extended period to allow for repayment settlements. The supplemental distribution will be paid out at the excess of PSBD’s quarterly undistributed net investment income above the base quarterly distribution amount of $0.42 per share. We are positioned to demonstrate high attractive levels of investment income across our portfolio and strong credit performance across our borrowers, while mitigating risk wherever possible. With that, I’d like to open up the call for questions.

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