Q4 2024 Palmer Square Capital BDC Inc Earnings Call
Welcome to Palmer square capital Bdc's fourth quarter and year end 'twenty 'twenty four earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the prepared remarks as.
As a reminder, this conference call is being recorded.
At this time I'd like to turn the call over to Jeremy Golf Managing director you may begin.
Speaker Change: 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, Andrew <unk>, Chief Investment Officer, Matt Bloomfield, President and Jeff Fox, Chief Financial Officer and director.
Speaker Change: 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 as Investor Relations website at Palmer Square BDC Dot Com. We have also arranged for a replay of today's event that can be accessed on our website for the next six months.
Speaker Change: 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.
Speaker Change: Forward looking statements, including without limitation market conditions caused by uncertainty surrounding interest rates changing economic conditions and other factors, we identified in our filings with the SEC.
Speaker Change: 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.
Speaker Change: Obligation to update the forward looking statements unless required by law to obtain copies of SEC related filings. Please visit our website at Palmer square BDC Dot com with that I will now turn the call over to Chris long.
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 finance.
Speaker Change: Results.
Speaker Change: <unk> exhibited solid performance in the fourth quarter underpinned by continued stability and strong income generation across our high quality portfolio.
Speaker Change: 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.
Speaker Change: We delivered net investment income of 45 per share and paid a <unk> 48 per share fourth quarter total dividend, including a <unk> <unk> supplemental distribution.
Speaker Change: This supplemental distribution included <unk> of spillover earnings from prior quarters as we have previously communicated our plan to pay out nearly all earnings to shareholders throughout the fiscal year.
Speaker Change: 2024 was a transformative year for Palmer square capital BDC, we successfully IPO during 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.
Speaker Change: Unique portfolio allows us to disclose an enhanced level of transparency and we are the only public BDC that discloses monthly NAV.
Speaker Change: This disclosure is in large part determine based on real actionable prices for assets, providing real time visibility into the health and value of our portfolio.
Speaker Change: In line with our commitment to sector, leading transparency, we recently announced our January 31, NAV per share of $16 70.
Speaker Change: Okay.
Speaker Change: Before I turn the call over to Andy to discuss our market outlook I want to reiterate the qualities of our proprietary investment philosophy that differentiate us from many others in this space and have underpinned our performance in our first year as a public traded company.
Speaker Change: Our ability to deliver attractive risk adjusted returns to our shareholders is rooted in one our deep.
Speaker Change: <unk> as an established manager with years of expertise opportunistically investing in corporate debt and structure credit too as I just mentioned our differentiated approach to portfolio composition that spans both liquid bank loans and private credit loans, which we believe offer superior.
Speaker Change: The diversification and flexibility relative to our broader BDC peers.
Speaker Change: Three our.
Speaker Change: Our large and expanding addressable market opportunity that enables meaningful platform level of deal flow.
Speaker Change: Four.
Speaker Change: 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.
Speaker Change: <unk> R.
Speaker Change: Our diversified high quality portfolio comprised primarily floating rate senior secured loans to large stable borrowers.
Speaker Change: In fixed our focus on shareholder alignment as demonstrated by our industry, leading approach to fees and transparency.
Speaker Change: As we maintain strong credit performance across our portfolio, we believe our ability to be nimble and opportunistic we'll continue to be a differentiator for PSB.
Speaker Change: In today's market managers across the board grapple with an evolving rate environment and lower cash paying their portfolios many of which are comprised of liquid assets.
Speaker Change: PSB is position to act quickly and efficiently when attractive opportunities arise.
Speaker Change: 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.
Speaker Change: Looking ahead, we are encouraged by the rhetoric with various other managers to have said the future of fixed income will be a combination of public and private credit.
Speaker Change: We set up Palmer square to be a first mover on this front.
Speaker Change: And the lessons, we have learned will propel us to even higher heights moving forward.
Speaker Change: 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.
Speaker Change: One point that demonstrates this is our fee structure.
Speaker Change: 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.
Speaker Change: This philosophy further highlights our alignment with you our fellow shareholders.
Speaker Change: I will now hand, the call over to EOG to discuss our market outlook.
Speaker Change: Thank you Chris.
In the fourth quarter <unk> delivered strong financial results against an evolving macroeconomic backdrop, which included meaningful spread tightening across most credit markets.
Speaker Change: We believe our strategies enable investors to benefit from attractive total yields driven by floating rate exposure lower duration and high quality bias.
Speaker Change: Diversification from traditional equity and credit indices, and the rotational ability to act on dislocations as they arise in both the liquid and private credit markets.
Speaker Change: In our view floating rate senior secured credit is the most attractive areas of credit in the current environment for a few reasons.
Speaker Change: First floating rate assets offer a current income advantage over similarly rated fixed rate credit.
Speaker Change: Silver has declined somewhat in recent quarters. It remains higher than many had forecast as the economy continues to perform well.
Speaker Change: 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.
Speaker Change: Relative value plays another important role in how we think about navigating the current investment environment.
Speaker Change: As spreads tightened, we believe saying 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 and junior portions of the capital structure.
Speaker Change: Patients and liquidity are also important at this juncture as we want the ability to reposition our portfolio when better entry points are opportunities arise.
Speaker Change: Additionally, there is ongoing uncertainty around the trajectory of interest rates, while we are not interest rate Prognosticators, we do see great volatility will continue as expectations around rate cuts or hikes evolves throughout the year.
Speaker Change: For example in September the market was pricing in five rate cuts in 2025 and now its pricing in just one or two.
Speaker Change: We believe this potential for volatility could lead to total return opportunities for the portfolio or even wider spreads on loans.
Speaker Change: 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 one segment.
Speaker Change: <unk> of the market or a portfolio full of illiquid assets.
Speaker Change: 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 types.
Speaker Change: We believe the inflationary impact of tariffs and the new administrations policies broadly are still not fully known but we're confident that Palmer squares platform is strategically positioned to take advantage of pockets of opportunity regardless of the impact the new policy has on the economy.
We believe our borrowers have adjusted well to the market volatility and higher rate environment over the past few years and stand prepared to operate effectively in any of the scenarios currently contemplated.
Speaker Change: 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 non accruals.
Speaker Change: 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.
Speaker Change: 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 and tighter spread environment ultimate.
Speaker Change: <unk> drives better long term risk adjusted returns for our investors.
Speaker Change: 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.
Speaker Change: 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 demonstrates strong credit quality industry and company specific tailwind.
And a diverse mix of core service offerings and end markets.
Speaker Change: This compares to a fair value of $1 39 billion at the end of the third quarter of 2024, reflecting a small increase of approximately one 2%.
Speaker Change: 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.
Speaker Change: During the same period, we realized approximately $176 4 million through repayments and sales.
Speaker Change: As Angie mentioned, we continue to observe tightened spreads across the BSL in private credit markets. We examine both of these markets to determine the appropriate risk adjusted spreads for our portfolio and remain confident in our ability to identify opportunities that meet our thresholds. However.
Speaker Change: However, we want to reiterate the 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.
Speaker Change: Based on the current investment landscape and deal environment, We believe there will be better opportunities in the future months for capital deployment as.
Speaker Change: 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.
Speaker Change: To this end our board and management team have Recalibrated, our base dividend lowering its 36 <unk> 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: As of December 31, 2020 for PSB the shares offered an annualized dividend yield of 11, 6% on a portfolio focused on first lien predominantly floating rate liquid loans.
Speaker Change: 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 six 5% and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 9.0% to 6%.
Speaker Change: 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.
Speaker Change: To quantify this diversification the 10 largest investments only account for nine 6% of the overall portfolio.
Speaker Change: Our portfolio is 96% senior secured with an average hold size of approximately $5 4 million.
Speaker Change: On a fair valuation basis, our first lien borrowers have a weighted average EBITDA of $422 million.
Speaker Change: Senior secured leverage of five four times and interest coverage of 2.0 times.
Speaker Change: During the fourth quarter, we did not add any loans to non accrual our two existing loans on nonaccrual represented just 0.08% of fair value well below reported BDC market averages.
Speaker Change: 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.
Speaker Change: Our pik income as a percentage of overall total investment income remains very low relative to the industry at approximately 196%.
Speaker Change: We maintained an average internal rating of three six on a fair value added basis for all loan investments. Our rating is based on a unique relative value based scoring system.
Jeff Fox: Now I'd like to turn the call over to Jeff who will review our fourth quarter 2024 financial results.
Jeff Fox: 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.
Jeff Fox: This increase can be attributed to continued growth in our portfolio as well as interest income from our investments.
Jeff Fox: 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 <unk> 45 per share compared to $15 4 million or <unk> 58 per share for the comparable period last year.
Jeff Fox: During the fourth quarter of 2024, the company had a total net realized and unrealized losses of $2 9 million.
Jeff Fox: Compared to the total realized and unrealized gains of $6 6 million in the fourth quarter of 2023 for.
Jeff Fox: For the three months ended December 31, 2024. This consisted of net unrealized depreciation of $1 $9 million.
Jeff Fox: Related to existing portfolio investments and net unrealized depreciation of $1 $5 million related to exited portfolio investments.
Jeff Fox: At the end of the fourth quarter NAV per share was $16 50.
Jeff Fox: 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 48 quarterly distributions comprised of a base dividend of <unk> 42, and a supplemental dividend of <unk> <unk> per share.
Jeff Fox: Subsequent to year end, we disclosed our January NAV of $16 70.
Jeff Fox: Moving to our balance sheet total assets were $1 4 billion and total net assets were $537 8 million as of December 31, 2024.
Jeff Fox: At the end of Q4, our debt to equity ratio was one five times compared to 152 times at the end of Q3.
Jeff Fox: Available liquidity, consisting of cash and undrawn capacity on our credit facilities was approximately $200 million.
Jeff Fox: This compares to approximately $181 million at the end of the third quarter.
Jeff Fox: 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 PSB destock on or before January 17th of 2025 under.
Jeff Fox: On December 19th of 2024, our board of directors extended our stock repurchase plan, which commenced on January 20, <unk> of 2025. This program expires on January 22nd of 2026.
Jeff Fox: During the fourth quarter, we purchased 48300 shares at an average price of $15 $84 for a total purchase cost of $765000.
Jeff Fox: On February 27, the board of directors declared a first quarter 2025 regular distribution of 36 per share.
Jeff Fox: As Matt mentioned, we believe this allows <unk> to maintain a competitive dividend yield to BDC peers and allows us to be disciplined in deploying capital for better opportunities in the future.
Jeff Fox: Given the liquid nature of the portfolio, we plan to announce the supplemental dividend in March which allows for repayments to settlement.
Jeff Fox: The supplemental distribution will be paid out of the excess of Psb's quarterly undistributed net investment income above the regular quarterly distributions.
Speaker Change: And with that I'd like to open the call up for questions.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one and your telephone keypad.
Speaker Change: Your request.
Speaker Change: Pat.
Speaker Change: You will say your question and your first question comes from the line of Kenneth Lee with RBC capital markets. Please go ahead.
Kenneth Lee: Hey, good afternoon. Thanks for taking my question just one on the outlook for dividends there.
Speaker Change: <unk>.
It sounds like partly driven by the impact of rate cuts as well as the opportunity set out there.
Speaker Change: What gives you confidence.
Speaker Change: The new level is going to be sustainable for the rest of the year there. Thanks.
Matt Bloomfield: Hey, Thanks, Ken This is Matt, we obviously looked at a lot of different scenarios.
Matt Bloomfield: Across the portfolio different rate environments different spread environments.
Matt Bloomfield: And along with the board and management team felt like that was the level that we felt pretty good about.
Matt Bloomfield: For the duration, obviously with the supplemental.
Matt Bloomfield: 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 the deal.
Matt Bloomfield: Environment as it is right now.
Matt Bloomfield: Not seeing a ton of great opportunities in our mind from a risk reward standpoint, and so wanted to set it where we felt.
Matt Bloomfield: It was appropriate on a comparison basis for 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.
Matt Bloomfield: Yes.
Matt Bloomfield: Got you very helpful. There.
And just one follow up if I may whats the.
Matt Bloomfield: What's the outlook over the near term in terms of either potential investment sales or prepayments.
Matt Bloomfield: In the portfolio and recognize its fairly could be difficult to predict out. Thanks.
Speaker Change: Yes, I mean, I think we obviously saw a lot of repayment and refinancing activity in the quarter.
Speaker Change: You see in the sold investments or prepayments was pretty elevated relative to third quarter I think part of that was just.
Speaker Change: But to Andy's comments earlier pretty rapidly tightening spread environment. So a lot of borrowers came back to the market either refinance and pushed out our maturities or in some cases, just just refinance or repriced the loans to where it didn't make sense for our BDC to hold doesn't and so we took repayments in those.
Speaker Change: I'd say that's continued.
Speaker Change: To start 2025.
Speaker Change: But a lot more so on the refinancing side of things than pure new M&A volume or LBO volume.
Speaker Change: And look in these markets that can persist for for quite some time, so I think.
Speaker Change: A lot of people have been saying back half of the year for new deal activity for the past couple of years.
Speaker Change: Maybe that's the case now, but I think from where we sit and from our conversations with sponsors.
Speaker Change: It feels like it's going to remain pretty muted for the near term.
Speaker Change: Got you very helpful. There. Thanks again.
Speaker Change: Your next question comes from the line of Doug Harter with UBS. Please go ahead.
Speaker Change: Okay.
Speaker Change: Thanks Ashish.
Speaker Change: Should we take your commentary about kind of being a little more cautious on the near term deal opportunities I mean that that leverage could could decline in the near term and kind of wait to be patient to redeploy some of those repayments.
Angie: Hi, This is Angie.
Speaker Change: I think Thats I think Thats fair I don't think.
Angie: Thank you you're going to see us in a situation of.
Angie: Active leveraged reducing it but if we arent finding things that are incredibly accretive to buy it make sense to be more patient and wait for an opportunity.
Angie: To buy things at more attractive yields and spreads.
Angie: Okay.
Angie: Great I appreciate it and as you think about portfolio construction do you have kind of an up to an optimal mix between more liquid.
Angie: Investments versus.
Angie: Kind of private Robert credit loans.
Angie: I think thats whats so.
Angie: Tractive about our strategy is that we don't have to live in a world of a prescribed mix between the tail, 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 two.
Angie: Great. Thank you.
Angie: Yes.
Speaker Change: Your next question comes from the line of Melissa Wedel with JP Morgan. Please go ahead.
Melissa Wedel: Hi, This is about to say good morning, I'll say good afternoon, and thanks for taking it.
Speaker Change: [laughter].
Speaker Change: Regarding the change in the base dividend when we look historically.
Speaker Change: And it seems that the.
As a percentage of the total dividend the supplemental has a Q&A for maybe low double digit or low teen percentage of the total dividend would you expect that to remain the same.
Speaker Change: Forward or might that creep up turn.
Speaker Change: It back into some earnings power on the portfolio right now.
Speaker Change: Yes, I think that's a fair question. Melissa This is Matt I mean, the way we were thinking about it.
Speaker Change: Near term, we feel pretty good about continuing in that range, but I think we want to be.
Speaker Change: Cognizant of what we're seeing from a from a market opportunity standpoint.
Speaker Change: Obviously, we want to be as consistent as possible on a go forward basis, and hence the resetting it to 36.
Speaker Change: 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.
Speaker Change: Obviously, most importantly, and we think from our investors and portfolio standpoint.
Speaker Change: They are not the types of markets to really extending on risk and kind of stretch.
Speaker Change: Stretching for excess spread.
Speaker Change: And so we felt comfortable from from a base standpoint on where we wanted to set that and then obviously, we will we will see where the opportunity set goes forward, but in the near term, we still feel feel pretty good but again, we want to be.
Speaker Change: Want to be prudent.
Speaker Change: Okay. Thanks for that.
Speaker Change: I also heard your points about our Andi think about uncertainties from the impact of potential policies or tariffs.
Speaker Change: When you look across your portfolio can you talk about where did the extent to which you see any exposure to the impact of tariffs potentially and then beyond your portfolio do you think that there were smaller tariff exposure potentially in the broadly syndicated market versus private credit generally.
Speaker Change: Thank you.
Speaker Change: 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.
Speaker Change: 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 will obviously has moved a lot of manufacturing to Mexico over the years and will be more directly impact. So it is a.
Speaker Change: Probably a low single digit.
Speaker Change: Percentage across the portfolio.
Speaker Change: 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.
Speaker Change: Two to pass those prices through.
Speaker Change: But I think we.
It's a moving target and everybody's 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.
Speaker Change: Yes, I think they're probably relatively balanced the syndicated market does have some higher auto transportation exposure.
Speaker Change: Not necessarily have in our portfolio, but that certainly would be potentially exposed as it pertains to Mexico.
But I don't think theres any massive differential at least from what we see in the two markets that we navigate in.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Again, if you would like to ask a question press star one on your telephone keypad.
Andrew: So this is Andrew.
Speaker Change: Further clarification on my comments too.
Speaker Change: In saying that was meant more as it.
Speaker Change: Explanation for.
Speaker Change: Being patient.
Speaker Change: Rather than a concern around particular names in the portfolio just that as you look at the market now isn't really pricing and too much in the way of anything Laurie.
Speaker Change: We look at the macro backdrop, there are various reasons to believe that there could be more attractive entry points.
Speaker Change: Yes.
Speaker Change: Near to medium term future than the market is saying right now.
Speaker Change: That concludes our Q&A session I will now hand, the call back over to the management for closing remarks.
Chris Long: This is Chris long. Thank you so much for all of your time today on.
Speaker Change: On behalf of the entire management team. We appreciate you joining us and your support of Palmer Square capital BDC, our conviction in the <unk> 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.
Speaker Change: Private credit investments will continue to separate <unk> from the pack moving forward our focus on large borrowers with solid fundamentals will serve as a key risk mitigation tool and BT and preserving our strong credit quality in the quarters ahead, we look forward to updating you with our first quarter of 2005 financial results in May again.
Speaker Change: Thank you so much for your time.
Speaker Change: That concludes today's call. Thank you all for joining you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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