PSBD - NYSE

Welcome to Palmer Square Capital BDC's Third 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. Jeremy, you may begin.

Welcome to Palmer Square Capital BDC's Third 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 Third 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 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. 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 Third Quarter 2025 Conference Call. On today's call, I will provide an overview of our third quarter highlights, background on our broader credit platform and touch on the benefits of our differentiated investment strategy, then turn the call to the team to discuss our market outlook and financial performance. During the third quarter, our team deployed $138.7 million of capital and generated total and net investment income of $31.7 million and $13.6 million, respectively. We delivered net investment income of $0.43 per share, well covering our $0.36 per share third quarter base dividend and covering our $0.42 per share total dividend, which includes a $0.06 supplemental distribution. Given interest rate expectations, we appreciate the recent market focus on dividend coverage by the BDC investor community. Unlike many peers, we decided from the outset to create a distribution strategy that maximizes cash returns to our investors sooner rather than later. In that spirit, we continue to pay out nearly all of our excess earnings in the form of a supplemental dividend, which we believe is the right thing to do for our investors. Additionally, we recently announced our September NAV per share of $15.39. As the only publicly traded BDC to disclose NAV on a monthly basis, we believe we provide a unique level of transparency and accountability, giving shareholders regular insight into our performance. Angie will provide additional commentary on our market outlook, but I want to spend a moment addressing recent industry events. There has been much debate around whether there are cracks in the payment of private credit and leveraged lending at large. We believe it is important for investors to understand that these idiosyncratic situations arrive in credit markets year in and year out and that does not indicate that there is any new systemic risk in private credit or liquid credit portfolios. Default rates in private and public credit have been running at consistent levels for the past couple of years, non-accrual rates in BDCs remain below historical levels on average and underlying portfolio company performance continues to show strength. As a concrete example, through EBITDA growth and lower base rates, PSBD's interest coverage ratio increased sequentially to 2.5x from 2.1x last quarter, a meaningful improvement that demonstrates companies can better service their debt. When you couple these patterns with PSBD's current yields and the discount to NAV, we continue to believe that the opportunity set is compelling for investors and PSBD common stock is undervalued. To that end, our board recently approved an additional $5 million of open market share repurchases, which Matt and Jeff will discuss in further detail. We have confidence in our strategy and believe that our emphasis on senior secured liquid credit and the optionality to deploy into private credit position us to remain agile and adjust to various market environments. This agility is further enhanced by our specialized and seasoned investment team and strong alignment with our shareholders. To put a finer point on this, our investment team is incentivized in a way that promotes a clear focus on investor outcomes and experience, which by definition, creates strong alignment through the investment process to make decisions that maximize risk-adjusted performance. At the heart of our investment philosophy is the conviction that active management and credit when executed properly, can generate attractive total returns in excess yield. We believe our focus on higher-quality assets, minimizing interest rate duration and maintaining liquidity where possible, combined with our core competency of locating relative value has helped drive strong outcomes for our portfolio. Looking ahead, we continue to lean into our strengths and prioritize synergies across our platform strategies, which we believe will ultimately benefit the BDC. For instance, our CLO issuance volume informs our BDC by enabling us to see nearly all the deal flow in the bank loan space and act on it when appropriate. We believe this quality is often underappreciated by equity investors, particularly given that our presence and recognition in the global CLO space exceeds many other well-known alternative asset managers. Since our last earnings call, we've had the opportunity to connect with both existing and new investors, reiterating our position as a deeply experienced corporate and structured credit manager. We believe our differentiated story is resonating, but it's still in the early innings for the public life of PSBD, with our listing taking place less than 2 years ago. We look forward to continuing these conversations in 2026 and as we remain steadfast in our commitment to shareholder alignment and transparency. With that, I will hand the call over to Angie.

Thank you, Chris. We are pleased with PSBD's third quarter results despite shipping rate expectations, uneven economic data and a more recent rebound in tariff concerns. Our portfolio is constructed to perform consistently through periods of uncertainty, and we're proud of the efforts we've made to deliver both attractive risk-adjusted returns and transparency to PSBD shareholders. Taking a step back, while capital market conditions this quarter felt similar to recent quarters in some respects, we are beginning to see signs of gradual improvement in deal activity. Although overall M&A volumes remain relatively subdued, there has been encouraging progress over the past few months, which has continued through October. We've seen a healthier mix of opportunities filtering through both the broadly syndicated and private credit markets and deal flow appears to be building momentum each month. Overall, sponsor engagement is rising. The recently announced $55 billion take-private of Electronic Arts, which represents the largest LBO on record will require approximately $20 billion in debt financing. Even more recently, the approximately $18 billion take-private of Hologic will include over $12 billion of financing. These announcements underscore the market's appetite for high-quality transactions, and we believe there could be more announcements to come. We also continue to see elevated refinancing activity during the third quarter, helping to provide incremental income generation. This is in line with the syndicated loan market, which saw record levels of activity driven largely by refinancings and repricings. While we can't forecast the pace of refinancing activity going forward, we expect at least some continuation of that trend. Turning to private credit. Competition remains elevated and spreads have compressed meaningfully over the past year. Even so, we continue to find relative value in certain instances versus new broadly syndicated loans, and we expect private transactions to remain an important source of incremental spread and diversification for PSBD. Notably, in our private credit book, tuck-in activity is accelerating. We view private credit as a complementary lever to our BSL strategy, particularly in today's environment where deals are moving between the 2 markets. Spread compression has been a recurring theme over the past several quarters and has remained near all-time types across credit markets. Despite this, we're committed to our disciplined approach in deploying capital and playing a long game. As we've stated on previous earnings calls, we will not chase growth when risk-adjusted returns do not meet our standards. We think this is very important for investors to understand, especially later in credit cycles. As expected, the Fed cut base rates by 25 basis points in September and another 25 basis points in October, and the market is anticipating additional easing in 2026, given the softening labor market. While declining base rates will be beneficial to borrowers' cash flows and should spur M&A activity, we believe pressure from inflation and tariffs may continue to test the Fed as they balance their dual mandate. That said, we are not macro forecasters, and our forecast remains squarely on the credit side of the equation, where we believe our expertise and disciplined approach to underwriting continue to differentiate both PSBD and our platform at large. Looking ahead, we're cautiously optimistic about the environment. Early signs of improving deal flow, both in our pipeline and the market more broadly suggests that a more active M&A environment could take hold in coming quarters. However, PSBD's flexibility across both liquid and private markets means we are not dependent on the pace of that recovery, and it allows us to adapt quickly and position the portfolio for attractive opportunities as they arise. As of October 31, PSBD was yielding 13.6%, an attractive yield in any market, but particularly compelling given today's tight spreads and the conservative positioning of our portfolio. We believe we've been able to achieve this in large part due to the power of our 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 third quarter. Our total investment portfolio as of September 30, 2025, had a fair value of approximately $1.26 billion across 42 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 $1.28 billion at the end of the second quarter of 2025, reflecting a decrease of approximately 1.6%. In the third quarter, we invested $138.7 million of capital, which included 28 new investment commitments at an average value of approximately $4.8 million. During the same period, we realized approximately $156.0 million through repayments and sales. As you will notice, we continue to think about diversification as we allocate new capital in the portfolio. As Angie mentioned, third quarter activity demonstrates early signs of improvement with M&A gradually picking up after a subdued period. That said, we maintain a cautious approach for the balance of the year as the BDC sector at large absorbed the impact of rate cuts and a potentially cooling economy. To recap key portfolio highlights, at the end of the third quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 10.07% and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 8.00%. We believe our focus on first lien loans and diversification by industry and size contribute to a strong credit profile with 42 different industries represented in our investment mix. Further, our 10 largest investments account for just 10.6% of the overall portfolio, and our portfolio is 95% senior secured with an average hold size of approximately $5.0 million. Again, we believe this position in sizing is an important risk management tool for PSBD. On a fair valuated basis, our first lien borrowers have a weighted average EBITDA of $421 million, senior secured leverage of 5.5x and interest coverage of 2.5x. Additionally, new private credit loans comprised 20.9% of overall new investments and were funded at a weighted average spread of 536 basis points over the reference rate. While credit quality is a top concern across the sector, non-accruals continue to be low at PSBD. On a fair value basis, it is only 40 basis points and on an at-cost basis, only 101 basis points. Our PIK income as a percentage of total investment income remains well below our largest peers and below the industry at approximately 1.14%. We take pride in knowing our shareholders do not have to wonder about the quality of our disclosed investment income. We've maintained an average internal rating of 3.6 on a fair valuated basis for all loan investments. Our rating is derived from a unique relative value-based scoring system. Generally speaking, we believe that the credit performance within the portfolio remains strong. Our non-accruals remain very low by industry standards and the underlying credit metrics of our borrowers are encouraging. We continue to see stability in both leverage levels and loan-to-value ratios across our portfolio companies. While we did add Klöckner Pentaplast and first brands to non-accrual, to echo Chris, we view these as isolated events rather than indicative of broader stress in the portfolio. LifeScan, a previous nonaccrual loan for the past several quarters, was removed from non-accrual status and is currently trading back into the high 90s, and we believe will likely result in a full par recovery. This is a testament to our ability to work through individual credit issues and maximize recoveries for the portfolio. Subsequent to quarter end, we took further strides in optimizing the right side of our balance sheet by refinancing the Wells Fargo credit facility, tightening the spread by 55 basis points. Additionally, we extended the maturity of the facility to November 2030 and increased the facility amount to $200 million from $175 million. We believe this exemplifies our focus on driving earnings power to the BDC even in a falling rate environment through active balance sheet management in addition to active portfolio management. To add to Chris' point earlier on shareholder alignment, I'd like to reiterate that we charge a management fee based on net asset value instead of gross assets. The reason being, we don't want to get paid simply for taking on leverage. Further, our incentive fee of 12.5% is below the 15% to 20% of other peers in the sector, and we incorporate a net realized loss look back on a 1- to 3-year basis. So if we underperform on the credit side, we should earn lower fees. Additionally, for further alignment with our shareholders, the board has approved an additional $5 million of open market share repurchases at PSBD. This is in addition to the ongoing 10b5-1 share buyback plan that PSBD currently has in place. Given the market level discounts to NAV in the BDC space, we believe this could be an accretive tool to further shareholder return. As we navigate current market dynamics, we are in lockstep with the priorities of our shareholders, and we'll continue to provide transparent visibility into our performance, which includes monthly NAV disclosure. Now I'd like to turn the call over to Jeff, who will review our third quarter 2025 financial results.

Thank you, Matt. Switching to the financial results. Total investment income was $31.7 million for the third quarter of 2025, down 15.1% from $37.3 million for the comparable prior year period. Total net expenses for the third quarter were $18 million compared to $21.6 million in the prior year period. Net investment income for the third quarter of 2025 was $13.6 million or $0.43 per share compared to $15.7 million or $0.48 per share for the comparable period last year. During the third quarter of 2025, the company had total net realized and unrealized losses of $10.3 million compared to total net realized and unrealized losses of $8.2 million in the third quarter of 2024. This consisted of net unrealized depreciation of $7.9 million related to existing portfolio investments and net unrealized depreciation of $1.1 million related to exited portfolio investments. At the end of the third quarter, NAV per share was $15.39 compared to $15.68 at the end of the second quarter of 2025. Moving to our balance sheet. Total assets were $1.3 billion and total net assets were $490.4 million as of September 30, 2025. At the end of the third quarter, our debt-to-equity ratio was 1.53x, slightly up from the 1.51x at the end of the second quarter of 2025. Available liquidity consisting of cash and undrawn capacity on our credit facilities was approximately $252.8 million. This compares to approximately $253.5 million at the end of the second 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 third quarter, we purchased 343,064 shares at an average price of $13.75 for a total purchase cost of $4.72 million. As Matt previously mentioned, the Board also approved an additional $5 million of open market share repurchases, which is in addition to the existing stock repurchase plan mentioned. On November 5, the Board of Directors declared a fourth 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 December, 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 the call up for questions.

[Operator Instructions] It looks like our first question today comes from the line of Kenneth Lee with RBC Capital Markets.

Just the investments associated with First Brands. Wonder if you could just talk a little bit more about what's the current outlook for the path to recovery there. And perhaps if you could just talk about why was there a decision made to hold on versus sell the investments in the quarter there?

Ken, it's Matt. Thanks for the question. Yes, so I'd say it's obviously an incredibly complex situation, which I think, quite frankly, is going to take quite some time to work through the bankruptcy courts. So from our perspective, we're essentially taking it on a day-by-day basis as we work with legal counsel and advisers on really trying to understand the ins and outs of what's taking place. Our view on staying involved, we're obviously part of the group that put together a pretty sizable debtor in possession financing for the company, which came with a lot of benefits to our existing position, including kind of the 3:1 roll up to kind of put us at the top of the capital structure. Obviously, some pretty outsized economics as part of that. And our view is that there's still pretty good tangible brand value across that portfolio. So that is kind of the rationale for staying involved to date. On a go-forward basis, we'll continue to evaluate what we think makes the most sense to ultimately improving recoveries. And I think as we alluded to with the LifeScan situation coming off, that was a tough situation for many, many quarters, and you're kind of working through that process, it is ultimately going to result in most likely a par recovery for us. So I think we want to be patient. We want to kind of see the process through. But it's obviously an incredibly complex situation that is going to take quite a long time to work through.

Got you. And just one follow-up, if I may. One of the advantages of the private credit side is that potentially there's more documentation, more ability to due diligence. For the liquid credit side, do you anticipate any changes in the investment process in terms of evaluating the adequateness of collateral go forward just based on the experiences you had with First Brands there.

I think we continue to do everything we can from a documentation standpoint, whether it's on the liquid side or on the private credit side. Obviously, in the First Brands situation, everything that's kind of being reported that was done kind of on an off-balance sheet basis kind of hidden from most lenders vantage points. So I'd say that is a much different situation than a typical restructuring where like whether it's LifeScan or Klöckner that we've talked about, given kind of what transpired kind of behind the scenes and if you will on First Brands. But yes, I think documentation certainly is a very, very important thing that we always look at and try to push as hard as we can to make sure as tight as can be, and there's lots of situations where we ultimately will not invest in a transaction if there are certain provisions within the credit agreement that we aren't able to get.

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

First thing, I wanted to clarify the total repurchase capacity in light of the $5 million that was just approved. It seems like you're running at a little bit below that on a quarterly basis right now. And so I'm wondering how many -- assuming a sort of steady repurchase level, where is that capacity right now on a total basis?

Yes. So we've still got several million of existing capacity from the existing 10b5-1 that was kind of reinstituted earlier this year. So there's no changes to that. This is just an additional 5 in the form of an open market purchase plan. So kind of just gives us additional firepower. I think if there are certain days when the markets are more volatile for us to be able to continue to be active at what we think are pretty attractive levels for buybacks. So it's just an additional plan, and then we'll continue -- the board will continue to reevaluate on a go-forward basis, the existing 10b5-1 and that's also in addition to the plan that's still in place at the management company level. And all that's in the 10-Q in more detail.

Okay. Following up on one of the slides in your slide deck, it looks like interest coverage picked up a little bit more than normal quarter-over-quarter jumping to 2.5x from 2.2x last quarter. I'm curious if that's just a function of lower borrowing costs or if that's also reflective of general top line or EBITDA growth within the portfolio.

Yes, we agree. It was a nice move quarter-over-quarter. I think it was a mix of continued EBITDA growth within the portfolio, which again, we think shows a lot of strength in the underlying borrowers across the portfolio. And then also, to your point, as spreads have compressed some of these borrowers have had the ability to kind of refinance and reprice their facilities. So their all-in cash interest costs have come down as well. So the combination of both of those, the EBITDA growth and the lower interest burden has caused that to increase, which again, we're very pleased with, but it certainly seems to be accelerating, which is good.

And our next question comes from the line of Douglas Harter with UBS.

This is Cory Johnson on for Doug. Just a question, can you help me to understand the internal rating system? And I guess, just the decision of why First Brands will not be considered really one because I guess there were no one ratings during this quarter.

Yes. So our rating system is more relative value focused versus kind of pure credit metrics that a lot of private credit lenders use. So for us, it's really about when we look across the name, whether we think it's kind of fair value at a level 2 would be on3 that we would obviously be worried about and looking to reduce. So First Brands kind of falls in that category. But a 4 for us, right, is more, we think it's attractive, whether it's on a dollar price, on a spread basis where on the liquid side of the portfolio, we would be looking to buy that loan in the secondary market if you will. So it's more relative value based versus just pure underlying credit metrics on how we score it. And so those ratings move around intra-quarter based on company performance, industry dynamics and kind of secondary trading levels.

And that appears to be all the questions we have. So I will now turn the call back to Jeremy Goff for closing remarks. Jeremy?

Thank you, operator. We wish everyone a happy and healthy holiday season, and we look forward to updating you on our fourth quarter 2025 financial results in the new year. Thank you, everybody, for joining.