Palmer Square Capital BDC Inc. Q1 FY2025 Earnings Call

Welcome to Palmer Square Capital BDC's First Quarter 2025 Earnings Call. This conference call is being recorded. I would like to turn the call over to Jeremy Goff, Managing Director. You may begin.

Welcome to Palmer Square Capital BDC's First Quarter 2025 Earnings Call. Joining me this afternoon 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 2025 financial results were released earlier today and can also be accessed on Palmer Square's Investor Relations website. We have also arranged for a replay of today's event that can be accessed on our website. 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 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. With that, I will now turn the call over to Chris Long.

Good afternoon, everyone. Thank you for joining us today for Palmer Square Capital BDC's First Quarter 2025 Conference Call. Today, I will begin by providing an overview of the quarterly highlights and touch on our differentiated market positioning, then turn the call to the team to discuss our market outlook, portfolio and financial results. During the first quarter, our team deployed $104.3 million of capital and generated total and net investment income of $31.2 million and $12.9 million, respectively. We delivered net investment income of $0.40 per share and paid a $0.39 per share first quarter total dividend, which includes a $0.03 supplemental distribution. In line with our commitment to sector-leading transparency, we recently announced our March NAV per share of $15.85. To reiterate, the unique structure of our portfolio allows us to disclose an enhanced level of transparency. We are the only public BDC to disclose monthly NAV, providing real-time visibility into the health and value of our portfolio. Before I turn the call over to Angie to discuss our market outlook, I'll touch on the current macro environment and how we are managing our portfolio accordingly. The recent volatility spurred by tariff uncertainty has no impact on our approach to underwriting or how we monitor our portfolio. In fact, in many ways, Palmer Square has its roots in environments that are just like today's, and our investment thesis was built for times like these. We founded Palmer Square Capital Management in the wake of the great recession, and our focus on identifying the best relative value across corporate and structured credit has remained unchanged since 2009. In that span of time, we've navigated numerous periods of volatility, including the COVID-19 pandemic and the regional banking failures while scaling our broader platform to over $34 billion in assets under management. As we have discussed on our previous earnings calls, we attribute the strength of our portfolio and stable credit quality to our rigorous investment process and focus on larger companies with strong fundamentals. Our fundamental investment strategy rooted in both liquid credit opportunities and senior secured private credit investments remains fully intact. More importantly, it is underpinned by the resources and platform that Palmer Square Capital Management offers. We have a robust team of investment professionals who work tirelessly to identify opportunities to optimize our portfolio in real time, and our senior leaders average over 20 years of credit investment experience. Our team has demonstrated a unique ability to combine a top-down and bottom-up investment framework that places a premium on risk management and prudently deploys capital across market cycles. Our investment philosophy focuses on finding innovative ways to identify market dislocations while using the flexibility created by our nimble portfolio structure, which spans liquid bank and private credit loans to tactfully take advantage of attractive opportunities as they arise. We believe our strategy was tailor-made to perform during periods of volatility, which is aided by our ability to act quickly on behalf of our fellow shareholders. At our core, we are a client and shareholder-driven organization, and we uphold shareholder alignment with the most importance. Our fee structure is lower than most externally managed publicly traded BDCs, and our annualized dividend payout of 12.3% as of April 30 reinforces our commitment to returning capital to our shareholders. Finally, we combine the size and scale of our position as a growing global asset manager with our local roots. Clients and investors choose to partner with Palmer Square because we have a global footprint with a specialized approach, but our team is approachable and accessible. Our LPs and investors know that Palmer Square is a team they want to be part of, and we have maintained a high-touch approach to client service since our founding. In a time characterized by uncertainty, we are certain that the landscape will continue to shift. But we believe that our nimble portfolio construction and ample liquidity enable us to capture the best relative value opportunities across the entire spectrum of corporate and structured credit. Moving forward, investors will continue to get the full power and breadth of the Palmer Square platform as we work to deliver on our mission to generate attractive risk-adjusted returns through a highly liquid strategy underpinned by excellent credit quality and a shareholder-friendly fee structure. I will now hand the call over to Angie.

Thank you, Chris. In the first quarter, our portfolio proved resilient against the dynamic macro backdrop, which continued to evolve into April, leading to a significant amount of volatility. As Chris mentioned, Palmer Square was created during an incredibly volatile time in the markets, and our investing philosophy is rooted in managing portfolios to provide investors with strong risk-adjusted returns in all market types. We believe the current backdrop is an incredible opportunity for investors to earn a premium yield of approximately 12.3% in a BDC focused on first lien senior secured loans. Compared to other yields available in the credit markets today, it's very difficult to achieve that type of yield without taking significant credit risk. For example, as of April 30, the high-yield index yields 7.9%. The leveraged loan index yields 8.1%, and the 10-year treasury yields 4.2%. The excess yield pickup for PSBD relative to the leveraged loan index is also near the widest level since our IPO, at approximately 420 basis points of additional yield. While each offers a different type of credit risk profile, we believe the premium yield and spread on PSBD relative to the underlying portfolio risks continue to remain extremely attractive. As we noted on our fourth quarter earnings call, we observed credit spreads tightening across most credit markets, many through their 10-year tights, and we believe a conservative approach to portfolio management represented a prudent posture to our fellow shareholders. While credit spreads have begun to widen due to the heightened market volatility over the past 5 to 6 weeks, we remain more conservatively positioned and believe that maintaining some dry powder is especially wise in the current environment. We are in a fluid situation in terms of how trade policy develops in Washington. And there's a high degree of uncertainty around where the tariff rates will ultimately settle. In the recent past, we have seen concerning moves and volatility in the treasury markets, declines in consumer and CEO confidence and a slowdown in new issuance in the credit markets as M&A activity remains subdued. Going forward, we anticipate M&A volumes are likely to remain muted due to heightened volatility and the inability for management teams to have conviction and strategic planning while U.S. trade policy continues to evolve. However, our differentiated investment strategy provides us with the distinct ability to invest in both the private and public sides of the debt markets, which is unique across the broader BDC peer set. To put it more plainly, we are not reliant on M&A volumes to drive originations and portfolio activity. Our ability to invest in liquid credit gives us access to the approximately $1.5 trillion secondary market for broadly syndicated loans. We believe the current volatility in the market may create opportunities to invest in high-quality loans at compelling entry points. For the modest amount of new issuance volume we have seen in the syndicated market, spreads are certainly wider, discounts are larger than they have been in quite some time and credit documentation has become more lender-friendly. Historically, the best time to invest in the primary market has been coming out of bouts of volatility due to that dynamic. And we believe our portfolio is advantageously structured to capitalize on that circumstance when some of the current market dynamics abate. We can do all of this while still maintaining flexibility to increase our private credit allocation should we see compelling investment opportunities there. As Chris mentioned, at Palmer Square Capital, we managed over $34 billion in corporate and structured credit, and the BDC benefits from the size and scale of the entire platform. Our unique investment approach relative to most BDCs gives us more shots on goal as we evaluate investment across the liquid, private, and structured credit markets. This optionality becomes even more valuable during periods of volatility. We are confident in our ability to preserve our strong credit quality as we deliver better long-term risk-adjusted rewards for our investors over time in addition to what we believe is an extremely attractive current yield. The Palmer Square team will continue to uphold our disciplined underwriting standards as we navigate these unique times. As a result of this commitment, our portfolio has among the industry's lowest levels of PIK income and nonaccruals. We are confident that we have the right expertise to navigate any situation that arises in the months and quarters ahead. It's in our DNA. With that, I'd like to hand the call over to Matt, who will discuss our portfolio and investment activity.

Thank you, Angie. Turning to our portfolio and investment activity for the first quarter. Our total investment portfolio as of March 31, 2025, had a fair value of approximately $1.33 billion across 39 industries that demonstrate strong credit quality, industry and company-specific tailwinds and a diverse mix of core service offerings and end markets. This compares to a fair value of $1.41 billion at the end of the fourth quarter of 2024, reflecting a decrease of approximately 5.2%. In the first quarter, we invested $104.3 million of capital, which included 23 new investment commitments at an average value of approximately $3.9 million. During the same period, we realized approximately $144.4 million through repayments and sales. To echo Angie, toward the back half of 2024 and the first few months of 2025, we observed tightened spreads across the BSL and most other credit markets. As a result, we managed our portfolio conservatively to monitor risk and to maintain credit quality and liquidity. In many cases, we did not believe we were being adequately compensated for the underlying credit risk, and thus, we chose to either be repaid during refinancings or to sell loans we believed were overvalued. Following the recent market turbulence, we continue to believe in our diligent approach to credit underwriting and portfolio management as we act in the best interest of our investors and portfolio. Before I turn the call over to Jeff, I'll provide an overview of our portfolio's performance during the quarter and composition. At the end of the first quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 10.37%, and our weighted average total yield to maturity of debt and income-producing securities at amortized cost was 8.48%. We continue to see our portfolio diversification as a key differentiator with our 10 largest investments accounting for just 10.19% of the overall portfolio. Our portfolio is 96% senior secured with an average hold size of approximately $5.2 million. On a fair-valuated basis, our first lien borrowers have a weighted average EBITDA of $399 million, senior secured leverage of 5.5x and interest coverage of 2.1x. As of March 31, 2025, we had 3 loans on non-accrual status, representing just 0.24% of fair value, well below reported BDC market averages. In the quarter, new private credit loans comprised 8.6% of overall new investments and were funded at a weighted average spread of 476 basis points over the reference rate. Our PIK income as a percentage of total investment income remains very low relative to the industry at approximately 1.63%. We maintain an average internal rating of 3.6% on a fair-valuated basis for all loan investments. Our rating is based on a unique relative value-based scoring system. We believe this is an increasingly important tool for our portfolio as our ability to find relative value opportunities has historically increased coming out of volatile periods. To reiterate Chris and Angie's comments made earlier, Palmer Square Capital was established during the volatile times of 2009, and our entire credit underwriting mentality centers around risk mitigation and understanding relative value in the credit markets. The recent market volatility only furthers our statements that we made on prior quarter's call about being defensive during tight spread environments. And we believe the aforementioned qualities position us positively to perform and maintain our strong credit quality throughout the balance of the year. Now I'd like to turn it over to Jeff, who will review our first quarter 2025 financial results.

Thank you, Matt. Total investment income was $31.2 million for the first quarter of 2025, down 10.3% from $34.8 million for the prior year period. We attribute the decrease to the impacts of a falling rate environment on our portfolio, which is predominantly comprised of floating rate loans. Total net expenses for the first quarter were $18.3 million compared with $18.5 million in the prior year period. Net investment income for the first quarter of 2025 was $12.9 million or $0.40 per share compared to $16.3 million or $0.52 per share for the comparable period last year. During the first quarter of 2025, the company had total net realized and unrealized losses of $21.3 million compared to total net realized and unrealized gains of $6.6 million in the first quarter of 2024. This consisted of net unrealized depreciation of $21.7 million related to the existing portfolio investments and net unrealized appreciation of $6.3 million related to exited portfolio investments. At the end of the first quarter, NAV per share was $15.85 compared to $16.50 at the end of the fourth quarter of 2024. As a reminder, the March NAV also reflects the payment of a $0.39 quarterly distribution comprised of a base dividend of $0.36 and a supplemental dividend of $0.03 per share. Moving to our balance sheet. Total assets were $1.4 billion and total net assets were $515.8 million as of March 31, 2025. At the end of the first quarter, our debt-to-equity ratio was 1.50x, consistent with the fourth quarter of 2024. Available liquidity consisting of cash and undrawn capacity on our credit facilities was approximately $229.5 million. This compares to approximately $200 million at the end of the fourth quarter of 2024. As mentioned on our fourth quarter earnings call, our Board of Directors reinstated and extended our existing stock repurchase plan, which commenced on January 22, 2025. The program expires on January 22, 2026. During the first quarter, we purchased 98,399 shares at an average price of $14.89 for a total purchase cost of $1.5 million. On May 7, the Board of Directors declared a second quarter 2025 base dividend of $0.36 per share, in line with our formalized dividend policy. Given the liquid nature of the portfolio, we plan to announce the supplemental dividend in June, which allows for repayments to settle. The supplemental distribution will be paid out of the excess of PSBD's quarterly undistributed net investment income above the base quarterly distribution. With that, I'd now like to open up the call for questions.

Your first question comes from Kenneth Lee with RBC Capital Markets.

Just one on the macro backdrop. And obviously, it sounds like you're maintaining a conservative discipline. Any kind of updated outlook or thoughts around where leverage could range? Is there still continued possibility of potential deleveraging over the near term there?

Ken, it's Matt. Thanks for the question. Yes, I think we feel pretty good about where leverage is and where it is trended. I think on a go-forward basis, we'll certainly see what opportunities come about, both in whether it's in the primary market or secondary market. But kind of given the backdrop with where we're at now, I think we feel pretty comfortable about where we're at.

Got you. And then in terms of one follow-up, if I may. In terms of the potential opportunities, the attractive opportunities, especially within the liquid loan markets, are you seeing some early signs of pockets of opportunities at this point? And perhaps are there any certain sectors or areas that look particularly interesting at this point?

Yes, it's a good question. We feel that it’s probably a bit early to confidently invest a significant amount of capital into the secondary market at this time. As you might expect, new deal activity is still quite slow. There are opportunities in certain tariff-affected sectors that we have been cautious about or have underweighted, which have definitely been hit hard by the volatility. We are examining some individual names in those areas and believe there may be opportunities ahead. However, given the changing policy and tariff situation, we think it’s still a bit early to have strong confidence in those. Nonetheless, we are exploring some options that could be interesting going forward.

Got you. Actually, one quick follow-up, if I may. In terms of the paydowns in the quarter and aside from any kind of refinancings or prepayments, were there any discretionary trades or investments that were sold within the portfolio in the quarter there?

Yes. I'd say the vast majority were from refinancing repayments. We've kind of alluded to on last quarter's call, with the spread tightening environment that really kind of persisted into January and February, there was just a lot of instances where we didn't feel like we were being compensated from a spread and yield basis on a go forward. So we just took those par paydowns. There were a smaller amount of discretionary sales that we made more just on a relative value standpoint, but the vast bulk of that was just from paydown activity.

Your next question comes from Melissa Wedel with JPMorgan.

I would like to begin by discussing the earnings potential of the portfolio at present. It's clear that you've mentioned the spread is starting to widen on new investments. It also appears that your willingness to invest additional capital at this time is not entirely strong. You seem to be holding back some resources and seeking a bit more clarity. As we consider the earnings potential of the portfolio moving forward, while you are adopting a careful approach to investing in opportunities with wider spreads, how are you assessing the earnings potential compared to the first quarter levels?

Melissa, thank you for the question. No, I think certainly, in the first quarter, given how much repayment activity we saw, you obviously saw us proactively shrinking the portfolio, keeping some dry powder, building some capacity. I certainly think with the macro backdrop now, as you could expect, refinancing activity has come to a very, very low level. And I do think we've seen spread tightening be in the rearview window at this point, which I think all of that bodes well on a go-forward basis. First quarter is also the lowest quarter from a day count standpoint, which does have a bit of an impact as we move to the second quarter. So I think we feel good about the moves we made in advance of the April volatility. I think we're definitely open to deploy capital to the right situations. We do continue to see some new opportunities as well. We've got the $1.5 trillion secondary market to continue to look through. So I think we want to be somewhat conservative still. There's still a lot of uncertainty out there from the macro standpoint. But if we find good opportunities, and I do think we will, we're certainly ready to deploy capital into those.

Okay. I appreciate that. And then as you are evaluating opportunities in this very fluid environment, one thing you do know for sure is that where your stock is trading and where your NAV is certainly trading at quite a discount to NAV. Obviously, you've got a repurchase plan there in place. Should we be expecting repurchase activity to pick up with even the discount to NAV?

Yes, you are absolutely correct. We have buyback programs in place that are structured based on a formula. If the discount remains, these programs will continue to be utilized. We believe the current price level is very attractive. As Chris mentioned, we publish our monthly net asset value, which is genuine and trustworthy for investors. We see a unique opportunity in the market right now, given the notable discount and the potential to achieve the yield that Chris and Angie discussed during the call. We acknowledge your point, and we are in agreement. Yes, the buyback programs will remain active.

We have a follow-up question from Melissa Wedel with JPMorgan.

I wanted to discuss the decline in NAV from quarter to quarter. One aspect that surprised us was the extent of the NAV decrease, especially considering your flexibility compared to other BDCs to rotate assets. I heard you mention that much of the activity in the first quarter stemmed from repayments. As some loans traded off and spreads widened, should we have anticipated that you might be quicker in executing relative value trades within the portfolio? Could you provide more details on what you observed throughout the quarter and how those decisions were made? Additionally, how should we frame our expectations moving forward?

Yes, certainly. Good question. I think really, January and February, there wasn't too much in the way of movement. It was really as we got into March and particularly the back half of March with some of the macro and equity volatility, syndicated loan prices did sell off. There were some pretty big ETF outflows that drove that. So from our vantage point, it's kind of unrealized mark-to-market. I'd say we're not looking to time markets perfectly. And so from our vantage point, when loans trade down 1 point or 2 for what we view as par assets, it's not in our best interest, or I think shareholders' best interest for us to necessarily sell those down two points and crystallize losses. So it's really just the last couple of weeks of March just from a mark-to-market basis in price movements that we fully expect to recapture over time as loans normalize.

At this time, I would like to turn the call back to Chris Long for closing remarks.

Thank you so much. On behalf of the entire management team, we appreciate you joining us today and your continued support of Palmer Square Capital BDC. We look forward to updating you on our second quarter 2025 financial results in August.

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