Palmer Square Capital BDC Inc. Q4 FY2024 earnings call

• Chris Long highlighted fourth quarter performance with capital deployment, investment income, and dividend details. 2024 was transformative with IPO and unique portfolio features. Outlined proprietary investment philosophy with 6 key points including deep experience, diversified portfolio, etc.
• Angie Long discussed market outlook, noting floating rate senior secured credit attractive, spread tightening, patience and liquidity importance, and ability to operate in private and public debt markets.
• Matt Bloomfield talked about portfolio and investment activity, fair value of portfolio, investments and realizations, recalibrated base dividend to $0.36, portfolio diversification with key stats like 96% senior secured, average hold size, etc.
• Jeff Fox reviewed financial results, total investment income, net expenses, NAV, balance sheet, and stock repurchase plan.

In the fourth quarter, Palmer Square Capital BDC deployed $171.8 million of capital and generated total investment income of $34.9 million and net investment income of $14.8 million. They 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. For 2024, it was a transformative year with an IPO in January, having a unique portfolio spanning broadly syndicated public debt and large private credit investments, disclosing monthly NAV, and reporting a January 31 NAV per share of $16.70. The portfolio is 96% senior secured, with key industries like software, health care providers and services, and professional services. Revenue contribution details: Total investment income $34.9M, net investment income $14.8M, dividend-related details as above.

• Lowered the base dividend to $0.36 beginning in the first quarter of 2025 to address rate cuts and support NAV stability.
• Intends to maintain ample liquidity to take advantage of future investment opportunities.
• Supplemental dividend will be paid out of excess of quarterly undistributed net investment income above the regular quarterly distribution.

• Market conditions influenced by interest rate uncertainty, changing economic conditions.
• Uncertainty around the trajectory of interest rates.
• Potential impact of tariffs and new administration policies on the economy.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.