Q2 2025 Palmer Square Capital BDC Inc Earnings Call
Speaker #1: At this time, all participants are in listen-only mode. A question and answer session will follow the prepared remarks. As a reminder, this conference call is being recorded.
Speaker #1: At this time, I'd like to turn the call over to Jeremy Goff, Managing Director. You may begin.
Speaker #3: Welcome to Palmer Square Capital BDC's second quarter 2025 earnings call. Joining me this afternoon are Chris Long, Chairman and Chief Executive Officer; Angie Long, Chief Investment Officer; Matthew Bloomfield, President; and Jeffrey Fox, Chief Financial Officer and Director.
Speaker #3: Palmer Square Capital BDC's second quarter 2025 financial results were released earlier today and can also be accessed on Palmer Square's Investor Relations website at palmersquarebdc.com.
Speaker #3: 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.
Speaker #3: 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, 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 #3: Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions can be incorrect.
Speaker #3: 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.
Speaker #3: To obtain copies of SEC-related filings, please visit our website at palmerquarebdc.com. And with that, I will turn the call over to Chris Long.
Speaker #4: Good afternoon, everyone. Thank you for joining us today for Palmer Square Capital BDC's second quarter 2025 conference call. On today's call, I will provide an overview of the second quarter highlights and touch on our proprietary investment strategies.
Speaker #4: Then I'll turn the call over to the team to discuss our market outlook, positioning, portfolio and investment activity, and financial results. During the second quarter, our team deployed $92.4 million of capital and generated total and net investment income of $31.7 million and $13.8 million, respectively.
Speaker #4: We delivered net investment income of $43.00 per share and paid a $42.00 per share second quarter total dividend, which includes a $6.00 supplemental distribution.
Speaker #4: We recently announced our June NAV per share of $15.68. Let me now spend a moment on our platform and strategy. As we navigate today's macro environment, it is critical to emphasize the strength of our platform and the differentiated nature of our investment strategy.
Speaker #4: PFPD, our flagship BDC, is a marquee vehicle on our platform, which includes one of the world's best-known CLO platforms, as well as a variety of seasoned opportunistic credit-type strategies.
Speaker #4: PFPD benefits from our most senior team members, all of whom have been together managing money for over a decade. We believe our focus on senior secured liquid credit and the optionality we have to deploy into private credit offers a unique value proposition that is uncommon across the BDC sector.
Speaker #4: It allows us to be agile during times of volatility and adjust to various market environments. We believe this strategy is well-suited for the shifting macro landscape we face today.
Speaker #4: And as Angie will discuss in more detail, PFPD shares can offer new investors a very attractive yield and a clear line of sight on the go-forward opportunities when compared to other income-generating investment options.
Speaker #4: At our core, we are a shareholder-driven organization, and we structured PFPD to the best of our ability to uphold this value. First, we disclose an enhanced level of transparency highlighted by our monthly net asset value disclosure.
Speaker #4: We are the only publicly traded BDC to provide this, and allow our shareholders to see underlying portfolio performance on an intra-quarter basis. Second, we believe our fee structure is more attractive than those of our peers.
Speaker #4: We only charge a management fee on net assets, not gross assets. We want to be rewarded when we attract more equity capital that grows NAV, not for taking leverage.
Speaker #4: Additionally, our incentive fee is at the lower end of the sector. We combine the size and scale of our position as a growing global alternative asset manager with our local roots.
Speaker #4: Clients and investors choose to partner with Palmer Square because we have a global footprint and offer a unique level of accessibility. We believe our LPs and investors know that Palmer Square is a team they want to be part of, and we have maintained a high-touch approach to client service since our founding.
Speaker #4: Since our last earnings call, we have had the pleasure of speaking with many investors who share our excitement about the path forward for PFPD and the unique value we believe it offers.
Speaker #4: We look forward to continuing these conversations in the quarters to come as we execute on opportunities that we expect to drive optimal returns for our shareholders.
Speaker #4: I will now hand the call over to Angie.
Speaker #5: Thank you, Chris. In the second quarter, PFPD's results proved durable through episodes of heightened volatility induced by tariff policy and geopolitical risk. To echo Chris, at Palmer Square, we construct our portfolios to generate attractive risk-adjusted returns and weather times of uncertainty.
Speaker #5: We are committed to this approach as we seek to deliver value for PFPD shareholders. Stepping back and looking at broader market dynamics, in many ways, we are back to where we started the year.
Speaker #5: Although we avoided a freeze in M&A activity as the most onerous tariff scenarios came off the table, deal volume remains compressed. Loan prices tracked broader risk assets, dropping following Liberation Day and then subsequently recovering.
Speaker #5: While there was a bit of spread widening during that brief period in April, spreads quickly returned close to prior levels. As of the end of July, PFPD was yielding 12.12%, an attractive yield in any market.
Speaker #5: But particularly so if you consider how tight spreads are today and the conservative positioning of the portfolio. PFPD's positioning today reflects our view that spreads this tight may not fully account for the lack of clarity related to policy and geopolitical events, or the ongoing risks from various sectors.
Speaker #5: Our ability to be nimble with the PFPD portfolio, combined with the disciplined process and a deeply experienced credit team, positions PFPD well to exploit opportunities when spreads widen and returns justify adding incremental risk.
Speaker #5: That said, and as we'll continue to reiterate, with a backdrop like we have today, PFPD is delivering attractive yields on an absolute basis and relative to other parts of the liquid credit market.
Speaker #5: Further, we have the ability to actively adjust the portfolio to take advantage of changing conditions when we feel that it’s warranted. There are reasons to be optimistic as we move through the third quarter. We have seen more early-look transactions in July, and we’re hopeful this indicates at least a modest pickup in overall deal activity.
Speaker #5: Although strengthening the M&A market would be beneficial, it is not our only avenue to deploy capital. In contrast to BDCs that purely focus on private credit, PFPD can transact in a deeply liquid secondary market for broadly syndicated loans as opportunities present themselves.
Speaker #5: Another constructive sign is that credit remains relatively resilient against opaque macro dynamics. We are encouraged by the portfolio's current composition. Non-accruals declined during the quarter as we worked through previous situations, and we are hopeful about the remaining non-accrual as the current recovery outcome appears better than we were previously modeling.
Speaker #5: As we look ahead, we will maintain our rigorous approach to underwriting, and believe the conservative approach that has supported our strong credit quality up to this point will continue to serve our fellow shareholders well.
Speaker #5: At Palmer Square, we manage over $34 billion in corporate and structured credit, and we bring the full benefit of the size and scale of our entire platform to the BDC.
Speaker #5: By leveraging this expertise, we believe we're well-positioned to evaluate an array of opportunities and identify where the best relative value lies. To close, we believe PFPD shares continue to offer attractive yields for exposure to first-lean senior secured loans in the BSL market.
Speaker #5: As of July 31st, PFPD's yield of 12.12% compares to the leveraged loan index yielding 7.97%, the high-yield index yielding 7.08%, and the 10-year Treasury yielding 4.37%.
Speaker #5: It is difficult to find the premium yield that PFPD shares currently imply across liquid credit markets, and particularly within an actively managed platform. With that, I’d like to hand the call over to Matt, who will discuss our portfolio and investment activity.
Speaker #6: Thank you, Angie. Turning to our portfolio and investment activity for the second quarter. Our total investment portfolio, as of June 30, 2025, had a fair value of approximately $1.28 billion across 39 industries that demonstrate strong credit quality, as well as industry and company-specific tailwinds.
Speaker #6: And a diverse mix of end markets. This compares to a fair value of $1.33 billion at the end of Q1 2025, reflecting a decrease of approximately 4%.
Speaker #6: In the second quarter, we invested $92.4 million in capital, which included 23 new investment commitments at an average value of approximately $3.1 million.
Speaker #6: During the same period, we realized approximately $133.3 million through repayments and sales. As Angie mentioned, despite the April volatility, by the end of the second quarter, spreads had nearly returned to pre-tariff levels.
Speaker #6: While spreads are relatively tight against a still uncertain macro backdrop, we maintain a cautious approach throughout the balance of the year as the market gains clarity on the impact of tariffs and ongoing geopolitical issues.
Speaker #6: That said, we are encouraged by the resilience of the broader credit market during the quarter, as well as our portfolio's performance. To recap, at the end of the second quarter, our weighted average total yield to maturity of debt and income-producing securities had a fair value of 10.10%.
Speaker #6: And our weighted average total yield to maturity of debt and income-producing securities at amortized cost was 8.27%. We continue to see our portfolio diversification as a key differentiator, with our 10 largest investments accounting for just 10.69% of the overall portfolio.
Speaker #6: Further, our portfolio is 96% senior secured, with an average hold size of approximately $5.1 million. On a fair value weighted basis, our first-lien borrowers have a weighted average EBITDA of $412 million, senior secured leverage of 5.6 times, and interest coverage of 2.2 times.
Speaker #6: Notably, during the quarter, new loans sourced from our European investment team totaled 18% of overall new investments. These loans are U.S. dollar-denominated loans but are made to businesses with operations across many European countries and, in certain cases, also with U.S. operations.
Speaker #6: We believe our strength in Europe highlights a significant advantage for PFPD in accessing high-quality investment opportunities during a time when M&A remains subdued in North America.
Speaker #6: Additionally, new private credit loans comprise 2.8% of overall new investments and were funded at a weighted average spread of 501 basis points over the reference rate.
Speaker #6: As Angie mentioned earlier on credit quality, non-accruals declined this quarter, and we are optimistic about the outcome of the remaining non-accrual, which represents just 0.19% of the portfolio at fair value.
Speaker #6: Our pick income as a percentage of total investment income remains low relative to the industry, at approximately 2.53%. Finally, we maintain an average internal rating of 3.6 on a fair value weighted basis for all loan investments.
Speaker #6: Our rating is derived from a unique relative value-based scoring system. We continue to believe this is an increasingly important tool for our portfolio, as our ability to find relative value opportunities has historically increased coming out of volatile periods.
Speaker #6: The resilience of our portfolio during market uncertainty in the first half of the year further validates our focus on risk mitigation and understanding relative value in credit markets.
Speaker #6: We believe our diversified and high-quality portfolio is well positioned to perform in the second half of 2025. Now, I'd like to turn it over to Jeff, who will review our second quarter 2025 financial results.
Speaker #7: Thank you, Matt. Total investment income was $31.7 million for the second quarter of 2025, down 13.3% from $36.5 million for the comparable prior year period.
Speaker #7: We attribute the decrease primarily to the 100 basis points of rate cuts towards the end of 2024, as our portfolio is predominantly comprised of floating-rate loans.
Speaker #7: Total net expenses for the second quarter were $17.8 million, compared with $20.8 million in the prior year period. Net investment income for the second quarter of 2025 was $13.8 million, or $0.43 per share.
Speaker #7: Compared to $15.8 million, or $0.48 per share. For the comparable period last year, during the second quarter of 2025, the company had a total net realized and unrealized loss of $6.7 million.
Speaker #7: Compared to total net realized and unrealized losses of $10.4 million in the second quarter of 2024, this consisted of net unrealized depreciation of $13.3 million relating to existing portfolio investments and net unrealized depreciation of $12.4 million related to exited portfolio investments.
Speaker #7: At the of the second quarter, Nav per share was $15 and 68 cents. Compared to $15 and 85 cents at the end of the first quarter of 2025.
Speaker #7: Moving to our balance sheet, total assets were $1.3 billion and total net assets were $505.2 million as of June 30, 2025. At the end of the second quarter, our debt-to-equity ratio was 1.51 times, slightly up from 1.50 times at the end of the first quarter of 2025.
Speaker #7: Available liquidity, consisting of cash and undrawn capacity on our credit facilities, was approximately $253.5 million. This compares to approximately $229.5 million at the end of the first quarter of 2025.
Speaker #7: As part of our existing stock repurchase plan, which commenced on January 22, 2025, and expires on January 22, 2026, during the second quarter, we purchased 350,045 shares at an average price of $13.43 for a total purchase cost of $4.23 million.
Speaker #7: On August 6th, the board of directors declared a third quarter 2025 base dividend of $0.36 per share, in line with our formalized dividend policy.
Speaker #7: Given the liquid nature of the portfolio, we plan to announce the supplemental dividend in September, which allows for repayments to settle. The supplemental distribution will be paid out of the excess of PFPD's quarterly undistributed net investment income above the base quarterly distribution.
Speaker #7: And with that, I'd like to open up the call for questions.
Speaker #1: At this time, if you would like to ask a question, press star, then the number one on our telephone keypad. To withdraw your question, simply press star one again.
Speaker #1: We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Doug Harder with UBS. Please go ahead.
Speaker #8: Thanks. Yeah, you've talked about the benefit of the liquid nature of your portfolio, and I was wondering if you could give us some examples of that during the second quarter and how that might have been put to use.
Speaker #9: Hi, Doug. It's Matt. Thanks for the question. Yeah, I mean, I'd say, you know, certainly April was, you know, quite volatile from, you know, from a risk standpoint.
Speaker #9: You know, certainly in the credit markets and obviously in the equity markets. You know, to our comments when, you know, spreads widened, obviously, you know, liquid loan prices declined.
Speaker #9: You know, I'd say we definitely put some capital to work there where we felt, you know, pretty comfortable in the overall business fundamentals of some specific companies.
Speaker #9: You know, I'd say we didn't get over our skis, though. I think there was still, obviously, a lot of uncertainty going on during that time period.
Speaker #9: And, you know, quite frankly, still is today. But it does give us the ability to, you know, buy loans at discounts to par that we think are attractive and that will, you know, ultimately pay out at par.
Speaker #9: And certainly when those refinancings happen and those pay out at par, we can get some benefit from the acceleration of that discount as well, which, you know, is supportive of earnings.
Speaker #9: So, I'd say we did some in the quarter for sure. But again, it was, you know, some interesting times with what was going on from a tariff standpoint.
Speaker #9: So we wanted to make sure to, you know, also kind of protect the capital base as well.
Speaker #8: No, that makes sense. And then just, I guess, along those lines, you know, how did you manage leverage during that period of volatility?
Speaker #8: How willing were you to kind of let it float up or, ou know, kind of how, you know, just your thoughts on how you managed leverage during that period of time?
Speaker #9: Yeah. Yeah. Great question. You know, so we certainly, you ow, have the benefit of seeing loan price movements, you know, daily, or, you know, during, during the hours of trading during those days.
Speaker #9: So, you know, we can kind of look at it in real time. We were certainly, you know, pretty comfortable letting it float for most of the month of April.
Speaker #9: But, you know, we obviously maintain excess liquidity in cash. And so to the extent we need to pay down, or want to pay down, parts of those credit facilities, we can do that to manage leverage.
Speaker #9: But, you know, to Angie's comments on the calls, we kind of moved through April and got into May, and things started to rebound and certainly continue to rebound through June.
Speaker #9: You know, we felt very, very comfortable with the leverage level. And obviously, at quarter end, it was basically flat to where it was in the prior quarter.
Speaker #8: Great. Thank you.
Speaker #1: Your next question comes from the line of Melissa Weidel with J.P. Morgan. Please go ahead.
Speaker #10: Good afternoon. Thanks for taking my questions today. I wanted to start on the income statement, really top line, interest income. Notice the stable or slightly higher quarter over quarter, despite there being, you know, a decent number of exits or repayments during the quarter.
Speaker #10: And I assume is sort of a lower average earning asset base in Q2 versus Q1. I was wondering if that's driven by some repayment, some acceleration of OID on some repayments, or anything else that we should be aware of?
Speaker #8: Hey, Melissa, it’s Matt. Thanks for the question. Yeah, you know, certainly you saw with a bit of the portfolio shrinkage, we did have, you know, a fair amount of refinancing activity during the quarter.
Speaker #8: So, yeah, part of that certainly helped from an acceleration standpoint for income. You know, when we look at the rate of yields on new investments versus the prior quarter, you know, we're actually able to build some spread into the portfolio during the quarter.
Speaker #8: Part of that was, as we mentioned in the prepared remarks, finding some pretty good value out of Europe and some U.S. dollar loans that were sourced from our European effort.
Speaker #8: So, so, a little bit of benefit from paydowns for sure. But then also just from portfolio rotation capabilities, finding some better value in some different pockets.
Speaker #10: You actually just touched on my next question. I noticed the 40-basis-point pickup in the yield on new investments. It seems like part of that was driven by the European opportunity.
Speaker #10: I'm curious how broad-based that opportunity is. Should we, you know, might that be an area for more defensiveness on portfolio yield? And how much of, you know, how much of that would you reasonably source for originations in the BDC itself?
Speaker #10: I'm not sure if those would count in the 30% bucket or not.
Speaker #8: Yeah. No, great, great, great questions. Well, I mean, they do count in the 30% bucket, but we've got a lot of capacity there. You know, I'd say historically, we haven't done as much in Europe in this BDC, just given, you know, the opportunity set on public and private credit has been, you know, really good in the U.S.
Speaker #8: You know, but to our comments, we have seen quite a bit of spread tightening throughout this year, you know, taking April out of the picture.
Speaker #8: But, you know, spreads in Europe continue to be wider than those in the U.S. And so, the kind of way I would look at it from a comparable, you know, risk-for-risk basis for a deal in Europe, you're probably picking up 50 basis points of excess spread.
Speaker #8: And so, you know, we continue to look pretty deep over there. I'd say the opportunity set's not as big as the U.S.
Speaker #8: I think, you know, the U.S. broadly syndicated loan market is probably three times the size of Europe, give or take. But there are some interesting things going on over there.
Speaker #8: I think M&A activity has been a pretty big focal point for a lot of the private equity sponsors, and we are seeing a lot of interesting value in Europe.
Speaker #8: And so, we have seen the same on the credit side. So, you know, I don't want to say that it's going to continue to be a huge portion of the BDC, but I think that points to the strengths of our, you know, kind of global team on where we look to source opportunities.
Speaker #8: So, what will certainly continue to go? You know, to keep looking over there as well.
Speaker #10: I appreciate that. Context is really helpful. I'll hop back into you. Thanks.
Speaker #1: At this time, I would like to turn the call back to Jeremy Goff for closing remarks.
Speaker #4: Thank you, operator. On behalf of the PFPD management team, we thank you for your continued support and for joining us today. We look forward to updating you on third quarter 2025 financial results in November.
Speaker #4: Thank you all again.
Speaker #1: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.