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

Palmer Square Capital BDC Inc. (NYSE:PSBD) Q1 2024 Earnings Conference Call May 7, 2024 12:00 PM ET

Company Participants

Andrew Wedderburn-Maxwell – Investor Relations
Chris Long – Chairman and Chief Executive Officer
Angie Long – Chief Investment Officer
Matt Bloomfield – President
Jeff Fox – Chief Financial Officer and Director

Conference Call Participants

Melissa Wedel – JPMorgan
Kenneth Lee – Capital Markets
Vilas Abraham – UBS

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.

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.

Question-and-Answer Session

Operator

[Operator Instructions]

And your first question comes from the line of Melissa Wedel with JPMorgan. Please go ahead.

Melissa Wedel

Thanks for taking my questions today. First wanted to clarify or just noticed the decline in portfolio yields, I think it was roughly, maybe 40 basis points or so quarter–over–quarter with base rates being changed a little bit less than that. I was just wondering if there was maybe a little bit of drag on yield from the timing of cash flows during the quarter and proceeds from the IPO? Or was that really a function of some spread narrowing during the quarter?

Matt Bloomfield

Hey Melissa, it’s Matt. Thanks for the question. Yes, I think to the first part of your question, we raised the proceeds kind of late January. So there was certainly just deploying those while we were pretty quick and had a lot of assets already identified. There were certainly a little bit of incremental drag from that. Base rates, I’d say very small piece of that puzzle.

The three months SOFR did come off a few basis points during the quarter. And then, on the margin also just a small amount of spread compression, I’d say that wasn’t a huge percentage just a couple of basis points in total. But the kind of the time to deploy those assets making up the bulk of that.

Melissa Wedel

Okay. That’s very helpful. Thank you. And then, secondly, I was hoping that you could touch on – even though it’s small, the non–accruals that you announced at first quarter end, I think your prepared comments referenced working with management through that situation, I guess, you guys have had really low non–accruals, since formation in ‘09.

Maybe going forward, is this going to – is this indicative of sort of how you approach working through any sort of non–performing assets? Or it occurs to me that because you guys have more exposure to more liquid investments that you could rotate out of any non–performing assets a little bit faster than maybe some other BDC’s could. How should we think about you guys managing through scenarios like that in the future? Thank you.

Chris Long

Melissa, it’s Chris long. Thank you for the great question. And I think thank you for also recognizing and highlighting we have had a 0% non–accrual rate since inception. We, from a management perspective believe that that’s really a hallmark of what we do. So I just want to put that on the record that that’s sort of the expectation of how we think about things. To the second part of your question, sort of pass it over to Matt to address that one specifically.

Matt Bloomfield

Yeah, I think, we certainly do have the ability from the liquidity standpoint to rotate out when it makes sense. But I’d say, historically speaking, across our platforms, when we do come into these situations, it’s always an asset–by–asset evaluation and we’re looking to maximize the ultimate recovery for our funds.

And so, in this case, as well as others that may arise, we think there’s significant upside value to this business on a go–forward basis with a bit of a restructured capital structure. So, in this particular instance, we do think there is incremental recovery to be had by kind of working through the process. So that’s kind of what we’re doing here in real time.

And how we evaluate each, each situation on its own merits. On a go–forward and if we – if we think that some things priced rich to its recovery, we can certainly then utilize the liquidity of our markets, rotate out of that. But in this situation, we think there’s more value to be had. So we’re kind of going through that process.

Melissa Wedel

I’d appreciate that. Thank you, guys.

Operator

[Operator Instructions]

Your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee

Hey, good afternoon. Thanks for taking my question. Just one on the new investments activity in the quarter. Saw some activity within the collateralized securities structured products area. Wondering if you could just talk a little bit more about the relative value that you’re seeing within that category. Thanks.

Matt Bloomfield

Yeah, hi, Ken, it’s Matt. Thanks for the question. Yes, so, when we went into the IPO, we had our kind of model portfolio of assets that we wanted to target. But I would say, we did see some pretty strong relative value in the double B mezzanine market for CLO tranches really starting in the back half of last year and continuing in the first quarter of this year.

As you’ve probably seen, the CLO market has been incredibly robust to start this year. And so we found some value and some new issue Double Bs, as well as some very attractively priced secondary. So, we did take advantage of that a little bit in the quarter and took that up a small percentage. But certainly when you look at all–in yields in that market relative to what you’re seeing on some of the corporate side, certainly utilized our platform across the Palmer Square organization to take advantage of some of that.

Kenneth Lee

Got you. Very helpful there. And just one follow–up if I may? In terms of the broadly syndicated loan markets, thanks again for the color in the prepared remarks, one of you just share your thoughts around the relative attractiveness between the primary and secondary markets within the BSOs right now. Thanks.

Matt Bloomfield

Yeah, you bet. I’d say, a lot of what we’re seeing in the primary markets still has been more frankly on the refinancing side of things, then on pure new issue. There are certainly a lot of conversations going on. A lot of early looks. And so we do expect pure new issue activity to continue to increase throughout the year. But the bulk of the first quarter and kind of what you saw in our repayment activity was more so on the refinancing side of things.

So, there has been some good companies that kind of stay involved in through that refinancing activity. But to the other part of your question, there’s still some very interesting things to do in the secondary market. It’s a $1.4 trillion market that we navigate through.

And so, just by the nature of that size, there’s just a lot of interesting things to continue to do from a secondary standpoint. So, with our deployment in the first quarter, the vast majority of that was secondary. And we still think there’s some good things to do there, as well.

Kenneth Lee

Great. Very helpful there. Thanks again.

Operator

[Operator Instructions] Our next question comes from the line of Vilas Abraham with UBS. Please go ahead.

Vilas Abraham

Hey everybody. Thanks for the question. Just on spread, you touched on spreads getting a little bit tighter as we’ve been seeing and hearing. Can you talk a little bit specifically though about kind of what the levels are now? And just put that into a little bit of context in terms of what you’ve seen over the years? And just kind of how you think that plays out throughout this year?

Matt Bloomfield

Yeah, certainly. This is Matt again. I’d say, in the broadly syndicated market, frankly speaking, we’ve seen less spread compression than we’ve seen in the upper end of the private credit space. In that private credit arena, year, year–and–a–half ago, you were looking at SOFR 600 to 650 type spreads for kind of a down the fairway unit tranche. You’ve seen some pretty meaningful spread tightening going on there, where some deals have now gotten down below 500. So, pretty, pretty dramatic from a spread compression perspective there.

On the syndicated loan side of things, spreads are still a bit wider their 10 year average. And so when you look across all other credit arenas, whether it’s IG, high yield, with spreads, in some cases, testing through their ten year types, loans still screen pretty attractive to us especially with the floating base rate perspective.

Now, that being said, even in April, we have started to see some repricing activity hit our market akin to what some of the larger private credit structures have seen, as well. So, certainly not immune to that, but still I think on a relative basis, still pretty attractive in our view relative to its long–term history.

Vilas Abraham

Okay. And then, going forward this year, would you say that just the volume of deal activity is probably the biggest driver here on which direction spreads go?

Matt Bloomfield

Yeah, I think that’s right. Supply/demand is always going to be a big part of what kind of drives the market. And certainly credit quality and how companies are performing. And so I think, we continue to be pleased with the overall trajectory of credit performance. And in some cases that will warrant some tightening.

But I’d say, more so to your point on capital markets activity, as new issue does pick up, which again, we do expect to happen, that will put a natural cap on how tight – spreads can tighten just from a volume of issuance standpoint, which it’s pretty typical from what we’ve seen historically speaking.

Angie Long

This is Angie. I do think also spreads tightening for our existing portfolio, which is still several assets trading at a discount that does represent a price appreciation, which will – those price appreciations will improve the NAV. So, I think spread tightening while on anything we may buy that’s new is not favorable, spread tightening for anything that we already own, it’s great.

Vilas Abraham

Got it. Makes sense. And then just one more, just on leverage. Any latest thoughts there? It looks like you guys are comfortable in your range. But anything new to do that? How you’re thinking about that?

Matt Bloomfield

No, I think, as Angie has mentioned last call, in the current environment, it’s kind of this range is where we feel comfortable. But we can certainly with the type of portfolio that we have and some of the liquidity that we can utilize, we can talk all that up and down pretty quickly. So, I’d say nothing’s really changed from last quarter in our view on that other than, we did announced the CLO issuance from a capital structure diversification standpoint.

That’ll be leverage neutral to the BDC. But did take advantage of a lot of the spread tightening that that we’re talking about on the liability side of things to put some really nice term–based financing into the capital structure for the BDC.

Angie Long

And it’s Angie again, just to add, we feel comfortable with where the leverage is now. We are obviously nimble and able to move, but the most important thing we’ve been focusing on is the structure of that borrowing and extending terms on existing facilities and then obviously doing a very significant term out with the CLO issuance.

Vilas Abraham

Got it. Very helpful. Thank you.

Operator

[Operator Instructions] There are no more questions at this time. And that concludes our Q&A session. I will now turn the conference back over to Chris Long for closing remarks.

Chris Long

On behalf of the management team, we greatly appreciate your support of Palmer Square Capital BDC. As we look to the remainder of the year, PSBD has a clear differentiated investment strategy, which we believe will deliver strong risk–adjusted returns and shareholder value, amid any market environment. We look forward to providing an update on our second quarter 2024 earnings call in August.

Thank you so much.

Operator

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.