PSBD - NYSE

Welcome to Palmer Square Capital BDC's Second Quarter 2025 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 Second 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 Second Quarter 2025 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. 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 at palmersquarebdc.com. And with that, I will turn the call over to Chris Long.

Good afternoon, everyone. Thank you for joining us today for Palmer Square Capital BDC's Second Quarter 2025 Conference Call. On today's call, I will provide an overview of the second quarter highlights and touch on our proprietary investment strategy, and then turn the call to the team to discuss our market outlook, positioning, portfolio and investment activity and financial results. During the second quarter, our team deployed $92.4 million of capital and generated total and net investment income of $31.7 million and $13.8 million, respectively. We delivered net investment income of $0.43 per share and paid a $0.42 per share second quarter total dividend, which includes a $0.06 supplemental distribution. We recently announced our June NAV per share of $15.68. Let me now spend a moment on our platform and strategy. As we navigate today's macro environment, it is critical to emphasize the strength of our platform and the differentiated nature of our investment strategy. PSBD, our flagship BDC, is a marquee vehicle on our platform, which includes one of the world's best-known CLO platforms as well as a variety of seasoned opportunistic credit type strategies. PSBD benefits from our most senior team members, all of which have been together managing money for over a decade. We believe our focus on senior secured liquid credit and the optionality we have to deploy into private credit offers a unique value proposition that is uncommon across the BDC sector. It allows us to be agile during times of volatility and adjust to various market environments. We believe this strategy is well suited for the shifting macro landscape we face today. And as Angie will discuss in more detail, PSBD shares can offer new investors a very attractive yield and a clear line of sight on the go-forward opportunity when compared to other income-generating investment options. At our core, we are a shareholder-driven organization, and we structured PSBD to be the best of our ability to uphold this value. First, we disclosed an enhanced level of transparency highlighted by our monthly net asset value disclosure. We are the only publicly traded BDC to provide this and allows our shareholders to see underlying portfolio performance on an intra-quarter basis. Second, we believe our fee structure is more attractive than peers. We only charge a management fee on net assets, not gross assets. We want to be rewarded when we attract more equity capital that grows NAV, not for taking leverage. Additionally, our incentive fee is at the lower end of the sector. We combine the size and scale of our position as a growing global alternative asset manager with our local roots. Clients and investors choose to partner with Palmer Square because we have a global footprint and offer a unique level of accessibility. We believe 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. Since our last earnings call, we have had the pleasure of speaking with many investors, who share our excitement in the path forward for PSBD and the unique value we believe it offers. We look forward to continuing these conversations in the quarters to come as we execute on opportunities that we expect to drive optimal returns for our shareholders. I will now hand the call over to Angie.

Thank you, Chris. In the second quarter, PSBD's results proved durable through episodes of heightened volatility induced by tariff policy and geopolitical risk. To echo Chris, at Palmer Square, we construct our portfolios to generate attractive risk-adjusted returns and weather times of uncertainty. We are committed to this approach as we seek to deliver value for PSBD shareholders. Stepping back and looking at broader market dynamics, in many ways, we are back to where we started the year. Although we avoided a freeze in M&A activity as the most onerous tariff scenarios came off the table, deal volume remains compressed. Loan prices tracked broader risk assets, dropping following Liberation Day and then subsequently recovering. While there was a bit of spread widening during that brief period in April, spreads quickly returned to prior levels. As of the end of July, PSBD was yielding 12.12%, an attractive yield in any market, but particularly so as you consider how tight spreads are today and the conservative positioning of the portfolio. PSBD's positioning today reflects our view that spreads this type may not fully account for the lack of clarity related to policy and geopolitical events or the ongoing risks from various sectors. Our ability to be nimble with the PSBD portfolio, combined with a disciplined process and a deeply experienced credit team, positions PSBD well to exploit opportunities when spreads widen and returns justify adding incremental risk. That said, and as we'll continue to reiterate, with a backdrop like we have today, PSBD is delivering attractive yield on an absolute basis and relative to other parts of the liquid credit market. Further, we have the ability to actively adjust the portfolio to take advantage of changing conditions when we feel that it is warranted. There are reasons to be optimistic as we move through the third quarter. We have seen more early look transactions in July, and we're hopeful this indicates at least a modest pickup in overall deal activity. Although a strengthening M&A market would be beneficial, it is not our only avenue to deploy capital. In contrast to BDCs that purely focus on private credit, PSBD can transact in a deeply liquid secondary market for broadly syndicated loans as opportunities present themselves. Another constructive sign is that credit remains relatively resilient against opaque macro dynamics. We are encouraged by the portfolio's current composition. Nonaccruals declined during the quarter as we worked through previous situations, and we are hopeful about the remaining nonaccrual as the current recovery outcome appears better than we were previously modeling. As we look ahead, we will maintain our rigorous approach to underwriting and believe the conservative approach that has supported our strong credit quality up to this point will continue to serve our fellow shareholders well. At Palmer Square, we manage over $34 billion in corporate and structured credit, and we bring the full benefit of the size and scale of our entire platform to the BDC. By leveraging this expertise, we believe we are well positioned to evaluate an array of opportunities and identify where the best relative value lies. To close, we believe PSBD shares continue to offer attractive yields for exposure to first lien senior secured loans in the BSL market. As of July 31, PSBD's yield of 12.12% compares to the leveraged loan index yielding 7.97% the high-yield index yielding 7.08% and the 10-year treasury yielding 4.37%. It is difficult to find the premium yield that PSBD shares currently imply across liquid credit markets and particularly within an actively managed platform. 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 second quarter. Our total investment portfolio as of June 30, 2025 had a fair value of approximately $1.28 billion across 39 industries that demonstrate strong credit quality, industry and company-specific tailwinds and a diverse mix of end markets. This compares to a fair value of $1.33 billion at the end of the first quarter of 2025, reflecting a decrease of approximately 4%. In the second quarter, we invested $92.4 million of capital, which included 23 new investment commitments at an average value of approximately $3.1 million. During the same period, we realized approximately $133.3 million through repayments and sales. As Angie mentioned, despite the April volatility, by the end of the second quarter, spreads had nearly returned to pre-tariff levels. While spreads are relatively tight against the still uncertain macro backdrop, we maintain a cautious approach throughout the balance of the year as the market gains clarity on the impact of tariffs and ongoing geopolitical issues. That said, we are encouraged by the resilience of the broader credit market during the quarter as well as our portfolio's performance. To recap, at the end of the second quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 10.10% and our weighted average total yield to maturity of debt and income-producing securities at amortized cost was 8.27%. We continue to see our portfolio diversification as a key differentiator with our 10 largest investments accounting for just 10.69% of the overall portfolio. Further, our portfolio is 96% senior secured with an average hold size of approximately $5.1 million. On a fair value weighted basis, our first lien borrowers have a weighted average EBITDA of $412 million, senior secured leverage of 5.6x and interest coverage of 2.2x. Notably, during the quarter, new loans sourced from our European investment team totaled 18% of overall new investments. These loans are U.S. dollar-denominated loans but made to businesses with operations across many European countries and in certain cases, also with U.S. operations. We believe our strength in Europe highlights a significant advantage for PSBD in accessing high- quality investment opportunities during a time when M&A remains subdued in North America. Additionally, new private credit loans comprised 2.8% of overall new investments and were funded at a weighted average spread of 501 basis points over the reference rate. As Angie mentioned earlier on credit quality, nonaccruals declined during the quarter, and we are optimistic about the outcome of the remaining nonaccrual, which represents just 0.19% of the portfolio at fair value. Our PIK income as a percentage of total investment income remains low relative to the industry at approximately 2.53%. Finally, we maintain an average internal rating of 3.6 on a fair value weighted basis for all loan investments. Our rating is derived from a unique relative value-based scoring system. We continue to 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. The resilience of our portfolio during market uncertainty in the first half of the year further validates our focus on risk mitigation and understanding relative value in credit markets. We believe our diversified and high-quality portfolio is well positioned to perform in the second half of 2025. Now I'd like to turn it over to Jeff, who will review our second quarter 2025 financial results.

Thank you, Matt. Total investment income was $31.7 million for the second quarter of 2025, down 13.3% from $36.5 million for the comparable prior year period. We attribute the decrease primarily to the 100 basis points of rate cuts towards the end of 2024 as our portfolio is predominantly comprised of floating rate loans. Total net expenses for the second quarter were $17.8 million compared with $20.8 million in the prior year period. Net investment income for the second quarter of 2025 was $13.8 million or $0.43 per share compared to $15.8 million or $0.48 per share for the comparable period last year. During the second quarter of 2025, the company had a total net realized and unrealized losses of $6.7 million compared to total net realized and unrealized losses of $10.4 million in the second quarter of 2024. This consists of net unrealized depreciation of $13.3 million relating to existing portfolio investments and net unrealized depreciation of $12.4 million related to exited portfolio investments. At the end of the second quarter, NAV per share was $15.68 compared to $15.85 at the end of the first quarter of 2025. Moving to our balance sheet. Total assets were $1.3 billion and total net assets were $505.2 million as of June 30, 2025. At the end of the second quarter, our debt-to-equity ratio was 1.51x, slightly up from 1.50x at the end of the first quarter of 2025. Available liquidity, consisting of cash and undrawn capacity on our credit facilities was approximately $253.5 million. This compares to approximately $229.5 million at the end of the first quarter of 2025. As part of our existing stock repurchase plan, which commenced on January 22, 2025 and expires on January 22, 2026, during the second quarter, we purchased 315,045 shares at an average price of $13.43 for a total purchase cost of $4.23 million. On August 6, the Board of Directors declared a third 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 September, 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. And with that, I'd now like to open up the call for questions.

[Operator Instructions] Your first question comes from the line of Doug Harter with UBS.

You've talked about the benefit of the liquid nature of your portfolio. I was wondering if you could give us some examples of that during the second quarter and how that might have been put to use.

Doug, it's Matt. Thanks for the question. Yes, I mean, I'd say, certainly, April was quite volatile from a risk standpoint, certainly in the credit markets, obviously, in the equity markets. As to our comments, when spreads widen, obviously, liquid loan prices decline. I'd say we definitely put some capital to work there where we felt pretty comfortable in the overall business -- underlying business fundamentals of some specific companies. I'd say we didn't get over our skis though. I think there was still obviously a lot of uncertainty going on during that time period and quite frankly, still is today. But it does give us the ability to buy loans at discounts to par that we think are attractive and that will ultimately pay out at par. And certainly, when those refinancings happen and those pay out at par, we can get some benefit from acceleration of that discount as well, which is supportive of earnings. So I'd say we did some in the quarter for sure. But again, it was some interesting times with what was going on from a tariff standpoint. So we wanted to make sure to also kind of protect the capital base as well.

That makes sense. And then just, I guess, along those lines, how did you manage leverage during that period of volatility? How willing are you to kind of let it to float up or kind of how just your thoughts on how you manage leverage during that period of time?

Yes. Yes. Great question. So we certainly have the benefit of seeing loan price movements daily or during the hours of trading during those days. So we can kind of look at it in real time. We are certainly pretty comfortable letting it float for most of the month of April. But we obviously maintain excess liquidity in cash. And so to the extent we need to pay down or want to pay down parts of those credit facilities, we can do that to manage leverage. But to Angie's comments on the call, as we kind of moved through April and got into May and things started to rebound and certainly continue to rebound through June, we felt very, very comfortable with the leverage level. And obviously, at quarter end was basically flat to where it was prior quarter.

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

I wanted to start on the income statement, really top line interest income. Noticed that stable or slightly higher quarter-over-quarter despite there being a decent number of exits or repayments during the quarter and what I assume is sort of a lower average earning asset base in 2Q versus 1Q. I was wondering if that's driven by some -- some acceleration of OID on some repayments or anything else that we should be aware of?

Melissa, it's Matt. Thanks for the question. Yes, certainly, you saw with a bit of the portfolio shrinkage, we did have a fair amount of refinancing activity during the quarter. So yes, part of that certainly helped from an acceleration standpoint for income. When we look at the rate of yields on new investments versus the prior quarter, we're actually able to build some spread into the portfolio during the quarter. Part of that was, as we mentioned in the prepared remarks, found some pretty good value out of Europe and some U.S. dollar loans that were sourced out of our European effort. So a little bit of benefit from paydowns for sure, but then also just from portfolio rotation capabilities, finding some better value in some different pockets.

Yes. You actually just touched on my next question. I notice the 40 bps pickup in the yield on new investments, seems like part of that was driven by the European opportunity. I'm curious how broad-based that opportunity is? Should we -- might that be an area for more defensiveness on portfolio yield? And how much of -- how much of that would you reasonably source for originations in the BDC itself? I'm not sure if those would count in the 30% bucket or not.

Yes. No, great question as well. I mean they do count in the 30% bucket, but we've got a lot of capacity there. I'd say historically, we haven't done as much in Europe in this BDC, just given the opportunity set on public and private credit has been really good in the U.S. But to our comments, we have seen quite a bit of spread tightening throughout this year, taking April out of the picture. But spreads in Europe continue to be wide of the U.S. And so the kind of way I would look at it from a comparable risk-for-risk basis for a deal in Europe, you're probably picking up 50 basis points of excess spread. And so we continue to look pretty deep over there. I'd say the opportunity set is not as big as the U.S. I think the U.S. broadly syndicated loan market is probably 3x the size of Europe, give or take. But there's some interesting things going on over there. I think M&A activity has been a pretty big focal point for a lot of the private equity sponsors and seeing a lot of interesting value in Europe. And so we have seen the same on the credit side. So I don't want to say that it's going to continue to be a huge portion of the BDC, but I think that points to the strength of our kind of global team on where we look to source opportunities. So we'll certainly continue to go -- to keep looking over there as well.

I appreciate that context. It's really helpful.

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

Thank you, operator. On behalf of the PSBD management team, we thank you for your continued support and for joining us today, and we look forward to updating you on third quarter 2025 financial results in November. Thank you all again.