PSBD - NYSE

Welcome to Palmer Square Capital BDC's Fourth Quarter and Year-End 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to Jeremy Goff, Managing Director, you may begin.

Welcome to Palmer Square Capital BDC's Fourth Quarter and Year-End 2024 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 fourth quarter and fiscal year ended 2024 financial results were released earlier today and can be also 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 6 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.

Good afternoon, everyone. Thank you for joining us today for Palmer Square Capital BDC's Fourth Quarter and Year-end 2024 Conference Call. Today, I will begin by providing an overview of the fourth quarter and full year highlights, then turn the call to the team to discuss the market outlook, portfolio and financial results. PSBD exhibited solid performance in the fourth quarter, underpinned by continued stability and strong income generation across our high-quality portfolio. During the fourth quarter, our team deployed $171.8 million of capital and generated total and net investment income of $34.9 million and $14.8 million, respectively. We delivered net investment income of $0.45 per share and paid a $0.48 per share fourth quarter total dividend, including a $0.06 supplemental distribution. This supplemental distribution included $0.03 of spillover earnings from prior quarters as we have previously communicated our plans to pay out nearly all earnings to shareholders throughout the fiscal year. 2024 was a transformative year for Palmer Square Capital BDC. We successfully IPO-ed in January and brought to market the only publicly-traded BDC that has built a portfolio that spans both broadly syndicated public debt and large private credit investments. Our unique portfolio allows us to disclose an enhanced level of transparency, and we are the only public BDC that discloses monthly NAV. This disclosure is in large part determined based on real actionable prices for our assets, providing real-time visibility into the health and value of our portfolio. In line with our commitment to sector-leading transparency, we recently announced our January 31 NAV per share of $16.70. Before I turn the call over to Angie to discuss our market outlook, I want to reiterate the qualities of our proprietary investment philosophy that differentiate us from many others in the space and have underpinned our performance in our first year as a publicly-traded company. Our ability to deliver attractive risk-adjusted returns to our shareholders is rooted in, one, our deep experience as an established manager with years of expertise, opportunistically investing in corporate debt and structured credit. Two, as I just mentioned, our differentiated approach to portfolio composition that spans both liquid bank loans and private credit loans which we believe offers superior diversification and flexibility relative to our broader BDC peers. Three, our large and expanding addressable market opportunity that enables meaningful platform level deal flow. Four, our rigorous underwriting process focused on downside protection and credit quality, coupled with the agility to pursue the most attractive relative value across liquid and private markets. Five, our diversified high-quality portfolio comprised primarily of floating rate senior secured loans to large stable borrowers. And sixth, our focus on shareholder alignment as demonstrated by our industry-leading approach to fees and transparency. As we maintain strong credit performance across our portfolio, we believe our ability to be nimble and opportunistic will continue to be a differentiator for PSBD. In today's market, managers across the board grapple with an evolving rate environment and lower cash pay in their portfolios, many of which are comprised of illiquid assets. PSBD is positioned to act quickly and efficiently when attractive opportunities arise. Further, we believe our portfolio of predominantly higher-quality senior secured loans, large private credit loans and select structured credit investments enables more upside through NAV appreciation and total return over time. Looking ahead, we have been encouraged by the rhetoric we've heard as other managers that have said the future of fixed income will be a combination of public and private credit. We set up Palmer Square to be a first mover on this front and the lessons we have learned will propel us to even higher heights moving forward. Further, we're confident that our vehicles remain differentiated even from larger peers that may also be pursuing the advantage of combining private and public debt as they approach future portfolio construction. One point that demonstrates this is our fee structure. As we've said before, Palmer Square only charges a management fee on net assets. This is rooted in our firm belief that we should be rewarded for attracting equity capital that grows net asset value, not for taking on leverage. This philosophy further highlights our alignment with you, our fellow shareholders. I will now hand the call over to Angie to discuss our market outlook.

Thank you, Chris. In the fourth quarter, PSBD delivered strong financial results against an evolving macroeconomic backdrop, which included meaningful spread tightening across most credit markets. We believe our strategies enable investors to benefit from attractive total yields driven by floating rate exposure, lower duration and higher-quality bias, diversification from traditional equity and credit indices and rotational ability to act on dislocations as they arise in both the liquid and private credit markets. In our view, floating rate senior secured credit is the most attractive area of credit in the current environment for a few reasons. First, floating rate assets offer a current income advantage over similarly rated fixed rate credit. While SOFR has declined somewhat in recent quarters, it remains higher than many had forecast as the economy continues to perform well. When these strong base rates and an overall healthy macro backdrop are coupled with the spread premium offered by below investment-grade loans, we believe the result is one of the most attractive risk-adjusted return opportunities in credit markets today. Relative value plays another important role in how we think about navigating the current investment environment. As spreads tighten, we believe staying higher in the capital structure with senior secured loans makes the most sense for our investors as you are not being compensated to take on additional credit risk in junior portions of the capital structure. Patience and liquidity are also important at this juncture as we want the ability to reposition our portfolio when better entry points or opportunities arise. Additionally, there is ongoing uncertainty around the trajectory of interest rates. While we are not interest rate prognosticators, we do think rate volatility will continue as expectations around rate cuts or hikes evolve throughout the year. For example, in September, the market was pricing in 5 rate cuts in 2025, and now it's pricing in just 1 or 2. We believe this potential for volatility could lead to total return opportunities for the portfolio or even wider spreads on loans. Due to the advantages of our deep corporate and structured credit team, and our differentiated investment strategy. We have the distinct ability to play in both the private and public sides of the debt markets. This allows our shareholders to partake in the upside that the market is presenting as opposed to being locked into 1 segment of the market or a portfolio full of illiquid assets. We believe this capability is even more paramount in the face of a tighter spread environment across nearly all credit classes, many of which are through their 10-year ties. We believe the inflationary impact of tariffs and the new administration's policies broadly are still not fully known. But we're confident that Palmer Square's platform is strategically positioned to take advantage of pockets of opportunity regardless of the impact the new policy has in the economy. We believe our borrowers have adjusted well to the market volatility and the higher rate environment over the past few years and stand prepared to operate effectively in any of the scenarios currently contemplated. In any economic environment, we uphold our disciplined underwriting standards, providing investors with the security of a 96% senior secured loan portfolio with some of the industry's lowest levels of PIK income and nonaccruals. As of December 31, 2024, we provided investors with an 11.6% yield, which remains highly attractive by historical measures and quite competitive to current yields in the BDC sector. To reiterate, we have managed our strategies through multiple spread tightening cycles, and we have more flexibility than most BDCs to respond aggressively when opportunities open up across the liquid, private and structured credit primary and secondary markets. We believe our measured and patient approach in tighter spread environments ultimately drives better long-term risk-adjusted returns for our investors. We have strong momentum as we enter into 2025 and believe our investment philosophy is positioned to drive attractive yields while mitigating risk in the current spread tightening environment. 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 fourth quarter. Our total investment portfolio as of December 31, 2024, had a fair value of approximately $1.41 billion across 38 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 $1.39 billion at the end of the third quarter of 2024 and reflecting a small increase of approximately 1.2%. In the fourth quarter, we invested $171.8 million of capital which included 28 new investment commitments at an average value of approximately $4.5 million. During the same period, we realized approximately $176.4 million through repayments and sales. As Angie mentioned, we continue to observe tightened spreads across the BSL and private credit markets. We examined both of these markets to determine appropriate risk-adjusted spreads for our portfolio and remain confident in our ability to identify opportunities that meet our thresholds. However, we want to reiterate that compromising on credit quality to reach for incremental spread in this market is not what we believe is prudent for our portfolio or our investors. Based on the current investment landscape and deal environment, we believe there will be better opportunities in the future months for capital deployment. As such, we are focused on maintaining ample liquidity so that we can take advantage of the opportunities we are anticipating for the back half of the year. To this end, our Board and management team have recalibrated our base dividend, lowering it to $0.36 beginning in the first quarter of 2025. This decision directly addresses the rate cuts we saw in the fourth quarter of 2024, and we believe will support NAV stability as we seek to continue our existing policy of paying out nearly all of our net investment income via the base and supplemental distributions. Our Board and management team know that consistency is a key consideration for our fellow shareholders, and we believe that our go-forward dividend yield will remain competitive with the broader BDC sector while continuing to offer attractive credit quality and risk mitigation. In reflecting on our fourth quarter and full year 2024 performance, I want to highlight some of our achievements in our first year as a publicly-traded company and key statistics that speak to our market positioning entering 2025. As of December 31, 2024, PSBD shares offered an annualized dividend yield of 11.6% on a portfolio focused on first lien, predominantly floating rate liquid loans. At the end of the fourth quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 10.65% and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 9.06%. Our highly diverse portfolio is a key value driver for investors who also benefit from our team's distinct industry expertise. In 2024, our portfolio's largest exposure by industries included software, health care providers and services and professional services. To quantify this diversification, the 10 largest investments only account for 9.6% of the overall portfolio. Our portfolio is 96% senior secured with an average hold size of approximately $5.4 million. On a fair value weighted basis, our first lien borrowers have a weighted average EBITDA of $422 million, senior secured leverage of 5.4x and interest coverage of 2.0x. During the fourth quarter, we did not add any loans to nonaccrual. Our 2 existing loans on nonaccrual represent just 0.08% of fair value, well below reported BDC market averages. In the quarter, new private credit loans comprised 17% of overall new investments and were funded at a weighted average spread of 489 basis points over the reference rate. Our PIK income as a percentage of overall total investment income remains very low relative to the industry at approximately 1.96%. We maintain an average internal rating of 3.6 on a fair value-weighted basis for all loan investments. Our rating is based on a unique relative value-based scoring system. Now I'd like to turn the call over to Jeff, who will review our fourth quarter 2024 financial results.

Thank you, Matt. We are pleased with our fourth quarter and full year 2024 financial performance. Total investment income was $34.9 million for the fourth quarter of 2024, up 16.9% from $29.8 million for the prior year period. This increase can be attributed to continued growth in our portfolio as well as interest income from our investments. Total net expenses for the fourth quarter were $20.1 million compared with $14.4 million in the prior year period. Net investment income for the fourth quarter of 2024 was $14.8 million or $0.45 per share compared to $15.4 million or $0.58 per share for the comparable period last year. During the fourth quarter of 2024, the company had a total net realized and unrealized losses of $2.9 million compared to the total realized and unrealized gains of $6.6 million in the fourth quarter of 2023. For the 3 months ended December 31, 2024, this consisted of net unrealized depreciation of $1.9 million related to existing portfolio investments and net unrealized depreciation of $1.5 million related to exited portfolio investments. At the end of the fourth quarter, NAV per share was $16.50 compared to $16.61 at the end of the third quarter of 2024. As a reminder, the December NAV also reflects the payment of a $0.48 quarterly distribution comprised of a base dividend of $0.42 and a supplemental dividend of $0.06 per share. Subsequent to year-end, we disclosed our January NAV of $16.70. Moving to our balance sheet. Total assets were $1.4 billion and total net assets were $537.8 million as of December 31, 2024. At the end of Q4, our debt-to-equity ratio was 1.5x, compared to 1.52x at the end of Q3. Available liquidity, consisting of cash and undrawn capacity on our credit facilities was approximately $200 million, this compares to approximately $181 million at the end of the third quarter. As mentioned on previous earnings calls, in December 2023, our Board of Directors approved a stock repurchase plan, giving us the ability to acquire up to $20 million of PSBD stock on or before January 17 of 2025. On December 19 of 2024, our Board of Directors extended our stock repurchase plan, which commenced on January 22 of 2025. This program expires on January 22 of 2026. During the fourth quarter, we purchased 48,300 shares at an average price of $15.84 for a total purchase cost of $765,000. On February 27, the Board of Directors declared a first quarter 2025 regular distribution of $0.36 per share. As Matt mentioned, we believe this allows PSBD to maintain a competitive dividend yield to BDC peers and allows us to be disciplined in deploying capital for better opportunities in the future. Given the liquid nature of the portfolio, we plan to announce the supplemental dividend in March, 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 regular quarterly distribution. And with that, I'd like to open the call up for questions.

[Operator Instructions] And your first question comes from the line of Kenneth Lee with RBC Capital Markets.

Just one on the outlook for dividends there, sounds like partly driven by impact of rate cuts as well as the opportunity set out there. What gives you confidence that the new level is going to be sustainable for the rest of the year there?

Thanks, Ken. This is Matt. We obviously looked at a lot of different scenarios across the portfolio, different rate environments, different spread environments, along with the Board and management team felt like that was the level we felt pretty good about for the duration. Obviously, with the supplemental on top of that, we feel like we'll be able to beat that. But wanted to be conservative. And as we mentioned in our prepared remarks, just with the deal environment as it is right now, not seeing a ton of great opportunities in our mind from a risk-reward standpoint. And so wanted to set it where we felt it was appropriate on a comparison basis for other BDC yields, but to also give ourselves plenty of flexibility going forward to the extent that we do see things that are more interesting in the future.

Got you. Very helpful there. And just one follow-up, if I may. What's the outlook over the near term in terms of either potential investment sales or prepayments within the portfolio there? I recognize it's fairly -- it could be difficult to predict there.

Yes. I mean, I think we obviously saw a lot of repayment refinancing activity in the quarter. You see in the sold investments or prepayments was pretty elevated relative to third quarter. I think part of that was just to Angie's comments earlier, pretty rapidly tightening spread environment. So a lot of borrowers came back to the market, either refinanced and pushed out their maturities or in some cases, just refinanced or repriced the loans to where it didn't make sense for our BDC to hold those. And so we took repayments in those. I'd say that's continued to start 2025, a lot more so on the refinancing side of things than pure new M&A volume or LBO volume. And look, in these markets, that can persist for quite some time. So I think a lot of people have been saying back half of the year for new deal activity for the past couple of years, and maybe that's the case now. But I think from where we sit and from our conversations with sponsors, it feels like it's going to remain pretty muted for the near term.

Your next question comes from the line of Doug Harter with UBS.

Should we take your commentary about kind of being a little more cautious on the near-term deal opportunity to mean that leverage could decline in the near term and kind of wait to be patient to redeploy some of those repayments?

This is Angie. I think that's fair. I don't think you're going to see us in the situation of active leverage reducement. But if we aren't finding things that are incredibly accretive to buy, it makes sense to be more patient and wait for an opportunity to buy things at more attractive yields and spreads.

Great. Appreciate it. And as you think about portfolio construction, do you have kind of an optimal mix between more liquid investments versus kind of private credit loans?

I think that's what's so attractive about our strategy is that we don't have to live in the world of a prescribed mix between the 2, but rather we're going to look for where the best opportunities are at a given time because we have the ability to move between the 2.

Your next question comes from the line of Melissa Wedel with JPMorgan.

Regarding the change in the base dividend, when we look historically, it seems that the -- as a percentage of the total dividend, the supplemental has accounted for maybe low double-digit or low teen percentage of the total dividend. Would you expect that to remain the same going forward? Or might that creep up? I'm trying to back into some earnings power in the portfolio right now.

Yes, I think that's a fair question, Melissa. This is Matt. I mean the way we were thinking about it in the near term, we feel pretty good about continuing in that range. But I think we want to be cognizant of what we're seeing from a market opportunity standpoint. Obviously, we want to be as consistent as possible on a go-forward basis and hence, the resetting at the $0.36 from a base perspective. Our goal is always to obviously outperform, but we're trying to be realistic about the deal environment, the spread environment, obviously, most importantly, and we think from our investors and portfolio standpoint, these are not the types of markets to be really extending on risk and kind of stretching for excess spread. And so we felt comfortable from a base standpoint on where we wanted to set that. And then obviously, we'll see where the opportunities set goes forward. But in the near term, we still feel pretty good. But again, want to be prudent.

Okay. I also heard your points about -- or Angie's points about uncertainty from the impact of potential policies or tariffs. When you look across your portfolio, can you talk about where -- the extent to which you see any exposure to the impact of tariffs potentially? And then beyond your portfolio, do you think that there is more tariff exposure potentially in the broadly syndicated market versus private credit generally?

That's a great question. I mean we've had -- as a team, we've spent a lot of time diving through all of our individual companies, and obviously, specifically at the industry level. We feel really good about how we're positioned as it relates to tariff exposure. We have very de minimis auto exposure -- auto supplier exposure, which, obviously, has moved a lot of manufacturing to Mexico over the years and will be more directly impacted. So it's probably a low single-digit percentage across the portfolio. From talking to a lot of those management teams one-on-one, they think there's a lot of opportunity from a price increase standpoint to pass those prices through. But I think we -- it's a moving target and everybody is kind of operating off of real-time information as we find out where those ultimately lie. As it pertains to the broadly syndicated versus private credit market, I think they're probably relatively balanced. The syndicated market does have some higher auto, transportation exposure that we don't necessarily have in our portfolio, but that certainly would be potentially exposed as it pertains to Mexico. But I don't think there's any massive differential, at least from what we see in the 2 markets that we navigate in.

[Operator Instructions]

Melissa, this is Angie. Just a further clarification on my comments, too. In saying that was meant more as an explanation for being patient rather than a concern around particular names in the portfolio. Just that as you look at the market now isn't really pricing in too much in the way of anything worrisome. But as we look at the macro backdrop, there are various reasons to believe that there could be more attractive entry points in the near- to medium-term future than the market is saying right now.

That concludes our Q&A session. I will now hand the call back over to the management for closing remarks.

This is Chris Long. Thank you so much for all of your time today. On behalf of the entire management team, we appreciate you joining us and your support of Palmer Square Capital BDC. Our conviction in the PSBD portfolio and the durability of our differentiated strategies will continue to guide our credit decisions in the year ahead. Further, we believe our focus on constructing our portfolio to benefit from both liquid loans and private credit investments will continue to separate PSBD from the pack moving forward. Our focus on large borrowers with solid fundamentals will serve as a key risk mitigation tool and be key in preserving our strong credit quality in the quarters ahead. We look forward to updating you with our first quarter 2025 financial results in May. Again, thank you so much for your time.