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spk03: Welcome to Palmer Square Capital BDC's first quarter 2024 earnings call. At this time, all participants are in listen-only mode. A question and answer session will be followed with the preferred remarks. As a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to Andrew Weatherburn-Maxwell, Investor Relations.
spk04: You may begin.
spk05: Welcome to Palmer Square Capital BDC's first quarter 2024 earnings call. Joining me this morning are Chris Long, Chairman and Chief Executive Officer, Angie Long, Chief Investment Officer, Matt Bloomfield, President, and Jeff Fox, Chief Financial Officer and Director. Palmer Square Capital BDC's first quarter 2024 financial results were released earlier today and can also be accessed on Palmer Square's Investor Relations website at palmersquarebdc.com. We have also arranged for a replay of today's event that can be accessed on our website for the next six months. During this call, I want to remind you that the forward-looking statements we make are based on current expectations. The statements on this call that are not purely historical are forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including and without limitation market conditions caused by uncertainty surrounding interest rates, changing economic conditions, and other factors we identified in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are based on are reasonable, any of those assumptions can prove to be inaccurate. And as a result, the forward-looking statements based on those assumptions can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements made during this call are made as of the date they were off, 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.
spk00: Good afternoon, everyone. We're very excited to have you with us. Thank you for joining us today for Palmer Square Capital BDC's first quarter 2024 conference call. I will begin by providing an overview of the quarterly highlights, then turn the call to the team to discuss our market outlook, portfolio, and financial performance. I am pleased to report strong quarterly earnings results, solid credit performance across the portfolio, and continued net asset value expansion. During the first quarter, our team deployed $346 million of capital and generated net investment income of $16.3 million. In mid-April, we announced our NAV per share as of March 31st, 2024, of $17.16. On the heels of our successful IPO in January, these first quarter operating results serve as a testament to PSBD's differentiated investment strategy that provides the ability to capitalize on investment opportunities across the syndicated and private credit markets. In March, our board approved a formal base and supplemental dividend policy that reinforces our commitment to enhance transparency and shareholder alignment. Going forward, we expect to declare a quarterly base distribution of 42 cents per share. as well as a supplemental dividend each quarter of at least 50% of net investment income above the base distribution. This framework speaks to our board's confidence in our liquid and diversified investment strategy as we focus on delivering long-term total returns through dividends and NAV expansion. Since our inception in 2019, Our mission has been to deliver a truly unique public vehicle that offers investors attractive, risk-adjusted returns through a highly liquid and transparent strategy and shareholder-friendly fee structure. We believe that Palmer Square Capital BDC remains well positioned for upside in this dynamic operating environment. While credit across the sector has shown resilience this past year in the face of recessionary fears, We expect to see a divergence between managers as idiosyncratic credit issues arise, given the illiquid nature and concentration of certain assets. We have intentionally constructed the PSBD portfolio to emphasize high quality, shorter duration, and liquid credits that we believe will enable us to opportunistically rotate investments with agility as the macroeconomic environment changes. We remain very pleased with the credit quality of our portfolio. We attribute our strong credit performance to PSBD's rigorous investment process, focusing on larger companies with strong fundamentals in positions that are senior in the capital structure. In the past, we have discussed utilizing the strengths of the Palmer Square platform to drive value for the BDC and its investors. Having a differentiated source of financing capabilities was at the forefront of those conversations. Our credit facilities were always part of that equation and remain so today. Given the attractive nature of term-based financing in the CLO market, utilizing Palmer Square's relationships and expertise in the global CLO market could be another way to secure attractive financing for PSBD. With that, we are extremely pleased to report that on April 24th, Palmer Square Capital BDC through Palmer Square BDC CLO1 a wholly owned indirect subsidiary of PSBD, along with Bank of America as a ranging partner, priced a 400 spot five million dollar CLO secured by broadly syndicated loans held by PSBD. We believe this unique issuance demonstrates our value proposition and ability to utilize the broader strength of the Palmer Square platform across the globe to execute innovative and attractive financing transactions to drive enhanced returns for shareholders. This CLO has a reinvestment period through 2029 and does not mature until 2037. With additional flexibility to refinance, its spreads continue to tighten the future. The offering is scheduled to close on May 23rd. We are incredibly excited about the long-term opportunity for our strategy, especially at this present moment in time, giving the compelling risk return we see in today's market. I will now hand the call over to Angie to discuss her outlook for the year.
spk01: Thank you, Chris. While this call marks our second quarter as a public company, Palmer Square has a long track record of developing strategies and products that manufacture attractive yield and return opportunities for its clients. Sitting here today, broader equity indices continue to trade at or near all-time highs despite macro and inflationary pressures. Investing-grade corporates, high-yield bonds, and other traditional credit instruments are trading near their 10-year types on a spread basis, which means they're not attractive at all relative to history. On the other hand, with current base rates and continued attractive spreads in the broadly syndicated loan and larger private credit markets, PSVD continues to offer a compelling yield and total return profile, in our opinion. which makes us increasingly excited about managing PSBD in this type of environment. Looking across the broader credit universe, we strongly believe PSBD is strategically positioned to offer investors stable, risk-adjusted returns for the foreseeable future. With an approximate 12% annualized dividend yield at quarter end, PSBD, in our opinion, provides tremendous value for investors. As mentioned on our last call in February, capital markets activity continued to pick up its pace in the first quarter of 2024, with refinancing activity leading the way. In the broadly syndicated market, companies were met with healthy demand, which allowed many borrowers to refinance their debt and push out maturities. In many cases, we saw borrowers from the private debt space return to the syndicated markets to refinance parts of their capital structure. In our view, these are all healthy signs of the capital markets working efficiently. Sponsor conversations around new LBO activity have also continued to pick up, which we think goes well for an overall increase in new financing activity throughout 2024. We view the resurgence of the broadly syndicated loan market as another positive catalyst that will likely help jumpstart sponsor-related M&A activity. This further highlights the importance of having a nimble, opportunistic approach that can find attractive investment opportunities across market environments. The last three months saw the most robust first quarter of CLO activity since the global financial crisis and was 45% ahead of the first quarter of 23. In the first quarter of 24, Palmer Square as a firm continued to be active in the CLO markets in both the U.S. and Europe. And as Chris mentioned in his opening remarks, we used our strength in the market to secure attractive term-based financing for the BDC with our inaugural BDC CLO. Overall, we remain confident that the reopening of the syndicated market, record high PE dry powder, and increasing demands from LPs for return of capital all point to a pickup in M&A activity over the medium term. We see a robust need and market for both syndicated and direct loans, which positions Palmer Square Capital BDC as a lender of choice. With that, I'd like to hand the call over to Matt, who will discuss our portfolio and investment activity.
spk06: Thank you, Angie. Turning to our portfolio and investment activity for the first quarter. Our total investment portfolio had a fair value at March 31st, 2024 of approximately 1.4 billion across 39 industries that demonstrate strong credit quality, as well as our focus of having one of the most diverse portfolios among our peers. This compares to a fair value of 1.1 billion at the end of fiscal year 2023, reflecting sequential growth of approximately 26%. In the first quarter, we invested $346 million of capital, which included 54 investment commitments at an average value of approximately $4.7 million. During the same period, we realized approximately $70 million through repayments and sales. This speed of deployment can be attributed to PSBD's differentiation in the marketplace. As a reminder, our strategy focuses on large companies with stable recurring revenue streams while underweighting cyclical industries. Our analysts are organized by industry, which is intentional due to our core beliefs that trends come by industry and not credit ratings. Because of this deliberate strategy, we have a large pool of accessible loans that have been proactively evaluated by our investment committee, and the liquid nature of our portfolio allows us to deploy capital with extraordinary efficiency, as opposed to waiting to source and originate new deals. We believe that the ability to execute with speed while remaining disciplined and mitigating risk offers our shareholders meaningful upside compared to the broader direct lending universe. Looking back at the first quarter, I wanted to highlight key portfolio statistics which underscore our belief that PSBD represents one of the most compelling investment opportunities in the sector. As of March 31st, PSBD shares offered an annualized dividend yield of 12% on a portfolio focused on first lien, floating rate, liquid securities. In our opinion, this provides investors with a very attractive total return opportunity in a market where spreads are tightening and our NAV has further upside potential. At the end of the first quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 10.1% and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 9.1%. Our investors benefit from our highly diversified portfolio of high quality sectors and borrowers. At the end of the first quarter of 2024, our largest portfolio exposures based on industry included software, healthcare, professional services, and insurance. All industries that we believe offer highly stable and growing income profiles. Furthermore, the 10 largest investments account for only 9.7% of the overall portfolio. We believe these factors point to industry-leading diversification, which will continue to drive strong credit performance across market cycles. Our portfolio is 96% senior secured, with an average hold size of approximately 5 million. On a fair value weighted basis, our first lien borrowers have a weighted average EBITDA of $452 million, senior secured leverage of 5.3 times, and interest coverage of 2.2 times. We believe that these metrics compare very favorably with the best-in-class portfolios trading at a premium in public markets. Our focus on liquid loans to larger companies with solid fundamentals in positions that are senior in the capital structure has yielded strong credit outcomes, including an average internal rating of 3.6 on a fair value weighted basis for all loan investments and no debt investments on non-accrual status as of the end of the first quarter. Unlike traditional middle market risk systems, we have a unique relative value-based scoring system that allows our team to ascertain where the best relative value resides and to reflect that in the portfolio. It's a dynamic system that's updated quarterly, but given the size of the markets we participate in, the scores are updated in real time when warranted. Subsequent to quarter end, one loan representing approximately 15 basis points of our total investments at fair value has been moved to non-recrual status. We believe this to be an idiosyncratic event and remain in active dialogue with management to resolve the situation. In the first quarter, we also removed three names from our watch list as credit performance continued to improve. Now, I'd like to turn it over to Jeff, who will review our first quarter 2024 financial results.
spk07: Thank you, Matt. We were very pleased with our first quarter results. The total investment income was $34.8 million for the first quarter of 2024, up 33% from $26.2 million for the prior year period. This increase was primarily driven by the growth in our portfolio, as well as the interest income from our investments. Total net expenses for the first quarter were $18.5 million, compared with $12.6 million for the prior year period. The increase in expenses compared to the prior year was driven by higher interest expense in line with our portfolio expansion, as well as the implementation of our management incentive fee at the time of the IPO. Net investment income for the first quarter of 2024 was $16.3 million, or $0.52 per share, compared to $13.6 million, or $0.55 per share, for the comparable period last year. During the first quarter of 2024, the company had total net realized and unrealized gains of $6.6 million, compared with $14.5 million in the first quarter of 2023. NAS per share was $17.16, up from $17.04 at the end of the fourth quarter, representing a 0.7% increase sequentially. As a reminder, the March NAB also reflects the payment of a 49-cent dividend in line with the dividend policy we announced in late March. The quarterly distribution is comprised of a base dividend of 42 cents and a supplemental dividend of 7 cents per share. Moving to our balance sheet. As of March 31st, 2024, total assets were $1.4 billion and total net assets were $559 million. At the end of Q1, our debt-to-equity ratio was 1.42 times compared with 1.39 times at the end of Q4. Available liquidity consisting of cash and undrawn capacity on our credit facilities was approximately $110 million. This compares to $30.8 million of undrawn investment commitments. On March 29th of 2024, we entered into an amendment of the B of A credit facility to extend the maturity to February of 2028. Further details for this transaction can be found in our 10Q. As a reminder, our Board of Directors approved a stock repurchase plan to acquire up to $20 million of PSBD common stock. This program expires on January 17, 2025. Additionally, Palmer Square Capital Management has authorized an incremental $5 million repurchase program that will raise the total authorization up to $25 million moving forward. On May 7, The Board of Directors announced that it declared a second quarter 2024 base dividend of 42 cents per share, in line with the dividend policy we formalized during the first quarter. We plan to announce the supplemental component of the dividend in June. Given the liquid nature of our loans in the portfolio, calculating this portion of the dividend requires an extended period to allow for repayment settlements. The supplemental distribution will be paid out of the excess of PSBD's quarterly undistributed net investment income above the base quarterly distribution amount of 42 cents per share. We are positioned to demonstrate high and attractive levels of investment income across our portfolio and strong credit performance across our borrowers while mitigating risk wherever possible.
spk04: With that, I'd like to open up the call for questions. We will now begin the question and answer session.
spk03: If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening by a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Melissa Wendell with JP Morgan. Please go ahead.
spk02: Thanks for taking my questions today. First, wanted to clarify or just notice the decline in portfolio yield. I think it was roughly maybe 40 basis points or so quarter over quarter with base rates being changed a little bit less than that. I was just wondering if there was maybe a little bit of drag on yield from the timing of cash flows during the quarter and proceeds from the IPO. Or was that really a function of some spread narrowing during the quarter?
spk06: Hey, Melissa, it's Matt. Thanks for the question. Yeah, I think to the first party of your question, we raised the proceeds kind of late January, so there was certainly just deploying those while we were pretty quick and had a lot of assets already identified. There was certainly a little bit of incremental drag from that. You know, base rates, I'd say, you know, a very small piece of that puzzle. The three-month SOFR, you know, did come off a few basis points during the quarter. And then on the margin, also just a small amount of spread compression, I'd say. That wasn't a huge percentage, just a couple of basis points in total. But the kind of the time to deploy those assets making up the bulk of that.
spk02: Okay. That's very helpful. Thank you. Secondly, I was hoping that you could touch on, even though it's small, the non-accrual that you announced post-quarter end. I think your prepared comments referenced working with management, you know, through that situation. I guess, you know, you guys have had really low non-accruals, you know, since formation or none, maybe. Going forward, is this indicative of sort of how you approach working through any sort of non-performing assets or you know it occurs to me that because you guys have more exposure to more liquid investments that you could rotate out of any non-performing assets a little bit faster than maybe some other bdcs could how should we think about you guys managing through scenarios like that in the future thank you melissa it's chris long thank you for the great question i think thank you for also
spk00: recognizing and highlighting we have had a 0% non-accrual rate since inception. We, from a management perspective, believe that that's really a hallmark of what we do. So I just want to put that on the record, that that's sort of the expectation of how we think about things. And to the second part of your question, pass it over to Matt to address that one specifically.
spk06: Yeah, I think we certainly do have the ability, from the liquidity standpoint, to rotate out when it makes sense. But I'd say, historically speaking, across our platforms, when we do come into these situations, it's always an asset by asset evaluation. And we're looking to maximize the ultimate recovery for our funds. you know, this case as well as, you know, others that may arise, you know, we think there's, you know, significant upside value to this business on a go-forward basis with a bit of a restructured capital structure. So, you know, in this particular instance, we do think there's incremental recovery to be had by kind of working through the process. So, that's kind of what we're doing here in real time and how we evaluate each, you know, each situation on its own merits on a go forward. And if we think that something's priced rich to its recovery, we can certainly then utilize the liquidity of our markets to rotate out of that. But in this situation, we think there's more value to be had. So we're kind of going through that process.
spk02: I appreciate that. Thanks, you guys.
spk03: Again, if you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your next question comes from the line of Kenneth Lee with RBC Capital Markets. Please go ahead.
spk08: Hey, good afternoon. Thanks for taking my question. Just one on the new investments activity in the quarter. Saw some activity within the collateralized security structured products area. Wondering if you could just talk a little bit more about the relative value that you're seeing within that category. Thanks.
spk06: Yeah. Hi, Kenneth. It's Matt. Thanks for the question. Yeah, so when we went into the IPO, we had our kind of model portfolio of assets that we wanted to target. But I would say we did see some pretty strong relative value in the BB mezzanine market for CLO tranches. You know, really, you know, starting in the back half of last year and continuing in the first quarter of this year. You know, as you've probably seen, the CLO market has been incredibly robust to start this year. And so, we found some value in some new issue BBs as well as some very attractively, you know, price secondary. So, we did take advantage of that a little bit in the quarter and took that up, you know, a small percentage. Certainly when you look at all in yields in that market relative to what you're seeing on some of the corporate side, certainly utilized our platform across the Palmer Square organization to take advantage of some of that.
spk08: Gotcha. Very helpful there. And just one follow-up, if I may. In terms of the broadly syndicated loan markets, thanks again for the color and the prepared remarks. I want to just share your thoughts around the relative attractiveness between the primary and secondary markets within the BSLs right now. Thanks.
spk06: Yeah, you bet. I'd say a lot of what we're seeing in the primary market still has been more, frankly, on the refinancing side of things than on pure new issue. There are certainly a lot of conversations going on, a lot of early looks, and so we do expect pure new issue activity to continue to increase throughout the year. But the bulk of the first quarter and kind of what you saw in our repayment activity was more so on the refinancing side of things. So there's been some good companies to kind of stay involved in through that refinancing activity. But to the other part of your question, there's still some very interesting things to do in the secondary market. It's a $1.4 trillion market that we navigate through. And so just by the nature of that size, there's just a lot of interesting things to continue to do. from a secondary standpoint. So with our deployment in the first quarter, the vast majority of that was secondary, and we still think there's some good things to do there as well.
spk08: Great. Very helpful there. Thanks again.
spk03: Again, if you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. Our next question comes from the line of Phyllis Abraham with UBS. Please go ahead.
spk09: Hey, everybody. Thanks for the question. Just on spread, you touched on spreads getting a little bit tighter as we've been seeing and hearing. Can you talk a little bit specifically, though, about kind of what levels are now and just put that into a little bit of context in terms of what you've seen over the years and just kind of how you think that plays out throughout this year.
spk06: Yeah, certainly. It's Matt again. I'd say in the broadly syndicated market, frankly speaking, we've seen less spread compression than we've seen in the upper end of the private credit space. You know, in that private credit arena, you know, year, year and a half ago, you were looking at, you know, SOFR 600 to 650 type spreads. You know, for kind of a down the fairway unit tranche, you know, you've seen some pretty meaningful spread tightening going on there, where some deals have now gotten done below 500. So pretty dramatic, you know, from a spread compression perspective there. On the syndicated loan side of things, spreads are still a bit wide of their 10-year average. So when you look across all other credit arenas, whether it's IG, high yield, with spreads, in some cases, testing through their 10-year types, loans still screen pretty attractive to us, especially with the floating base rate perspective. Now, that being said, even in April, we have started to see some repricing activity hit our market, you know, akin to what some of the larger private credit structures have seen as well. So, you know, certainly not immune to that, but still, I think, on a relative basis, you know, still pretty attractive in our view relative to its long-term history.
spk09: Okay. And then going forward this year, would you say that just the volume of deal activity is probably the biggest driver here on which direction spreads go?
spk06: Yeah, I think that's right. You know, supply demand is always going to be, you know, a big part of what kind of drives the market and certainly credit quality and how companies are performing. And so I think, you know, we continue to be pleased with the overall trajectory of credit performance. And in some cases, that will warrant some tightening. But I'd say more so to your point on capital markets activity. As new issue does pick up, which again we do expect to happen, that will put a natural cap on how tight spreads can tighten just from a volume of issuance standpoint, which is pretty typical from what we've seen historically speaking.
spk01: This is Angie. I do think also spread tightening for our existing portfolio, which is still several assets trading at a discount that does represent a price appreciation, which will, you know, those price appreciations will improve the NAV. So I think, you know, spread tightening on anything we may buy that's new is not favorable. Spread tightening for anything that we already own is great.
spk09: Got it. Makes sense. And just one more, just on Any latest thoughts there? It looks like you guys are comfortably in your range, but anything new that you'd add to how you're thinking about that?
spk06: No, you know, I think, you know, as Angie mentioned last call, you know, in the current environment is kind of, you know, this range is where we feel comfortable. But we can certainly with the, you know, the type of portfolio that we have and some of the liquidity that we can utilize, you know, we can toggle that up and down pretty quickly. So I'd say nothing's really changed from last quarter in our view on that other than, you know, we did announce the CLO issuance from a capital structure diversification standpoint. That'll be leveraged neutral to the BDC, but did take advantage of a lot of this spread tightening that we're talking about on the liability side of things to put some really nice term-based financing into the capital structure for the BDC.
spk01: I understand, Jiggen. Just to add, we feel comfortable with where the leverage is now. We are obviously nimble and able to move, but the most important thing we've been focusing on is the structure of that borrowing and, you know, extending terms on existing facilities and then obviously doing a very significant term out with the CLO issuance.
spk04: Got it. Very helpful. Thank you. Again, if you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
spk03: There are no more questions at this time, and that concludes our Q&A session. I will now turn the conference back over to Chris Long for closing remarks.
spk00: On behalf of the management team, we greatly appreciate your support of Palmer Square Capital BDC. As we look to the remainder of the year, PSBD has a clear differentiated investment strategy, which we believe will deliver strong risk-adjusted returns and shareholder value amid any market environment. We look forward to providing an update on our second quarter 2024 earnings call in August. Thank you so much.
spk04: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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