Executive Summary / Key Takeaways

• Palmer Square Capital BDC distinguishes itself with a flexible investment strategy spanning both liquid broadly syndicated loans and large private credit, aiming to capture the best relative value across market cycles.
• The company offers sector-leading transparency through monthly NAV disclosure, providing investors with timely insight into portfolio valuation.
• Recent financial performance reflects the impact of a falling rate environment on its floating-rate portfolio, resulting in lower net investment income year-over-year in Q1 2025, partially offset by strong realized gains.
• Despite macro volatility and a muted M&A environment, management maintains a disciplined, conservative posture, building liquidity to capitalize on potential future opportunities for wider spreads and better entry points.
• PSBD maintains strong credit quality metrics relative to industry averages, including low levels of PIK income and non-accruals, while offering an attractive dividend yield supported by a base and supplemental distribution policy.

The Foundation: A Unique Strategy in Corporate Credit

Palmer Square Capital BDC Inc. (NYSE:PSBD), established in 2019 and publicly listed in January 2024, operates as an externally managed BDC focused on generating total return through investments in corporate debt securities. Unlike many BDC peers primarily focused solely on traditional middle-market direct lending, PSBD's core investment strategy is deliberately designed for flexibility, spanning both the liquid broadly syndicated loan (BSL) market and the larger end of the private credit market, complemented by selective investments in CLO structured credit.

This differentiated approach is not merely a matter of asset allocation; it is underpinned by Palmer Square Capital Management's extensive experience navigating corporate and structured credit markets since 2009. The firm's investment platform integrates deep credit expertise, rigorous underwriting, and a proprietary relative value scoring system. This capability allows PSBD to analyze and opportunistically deploy capital across distinct market segments, providing an operational agility that management believes is a key differentiator. This enables the company to react swiftly to market dislocations, pursue opportunities in both primary and secondary markets, and is not solely reliant on M&A-driven private credit originations. The ability to access the approximately $1.5 trillion secondary market for broadly syndicated loans offers alternative avenues for deployment, particularly when new issuance activity is slow.

In the competitive landscape, PSBD operates alongside established BDC players such as Barings BDC (BBDC), Prospect Capital (PSEC), and FS KKR Capital Corp. (FSK), as well as facing indirect competition from private equity funds, hedge funds, and increasingly, fintech lending platforms. While larger peers like BBDC and FSK benefit from greater scale and potentially more advanced proprietary analytics, offering efficiencies in deal processing, PSBD positions itself on strategic adaptability and a potentially more conservative risk management approach. PSBD's focus on larger borrowers (weighted average First Lien EBITDA of $399 million as of Q1 2025) and senior secured positions (96% of the portfolio) aims to provide a higher quality bias compared to some middle-market focused BDCs. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, PSBD's unique blend of liquid and private credit exposure provides a distinct value proposition. PSBD's fee structure, based on net assets rather than total assets, is also highlighted by management as a point of shareholder alignment, differing from the fee structures of many externally managed BDCs.

Portfolio and Performance in Focus

As of March 31, 2025, PSBD's total investment portfolio stood at a fair value of approximately $1.33 billion across 39 industries. The portfolio composition reflects the company's strategy, with a significant allocation to First-Lien Senior Secured Debt ($1.15 billion at fair value), complemented by Second-Lien Senior Secured Debt ($72.07 million), Corporate Bonds ($4.23 million), CLO Mezzanine ($34.58 million), CLO Equity ($9.35 million), and Equity investments ($6.82 million). Short-term investments totaled $56.86 million. The portfolio is highly diversified, with the 10 largest investments accounting for just 10.19% of the overall portfolio as of Q4 2024.

Recent financial performance has been influenced by the prevailing market environment, particularly the trajectory of interest rates. For the three months ended March 31, 2025, total investment income was $31.21 million, a decrease from $34.78 million in the prior year period. Management attributed this decline primarily to the impact of a falling rate environment on the predominantly floating-rate loan portfolio. Net expenses saw a slight decrease to $18.30 million from $18.47 million, driven by lower interest expense (due to decreasing average interest rates on debt) and reduced management and incentive fees (tied to lower net investment income and average net assets). Consequently, net investment income for Q1 2025 was $12.91 million, down from $16.32 million in Q1 2024.

Despite the dip in net investment income, the quarter saw strong net realized gains on investments of $5.89 million, compared to $1.74 million in the prior year. However, this was more than offset by a net change in unrealized losses of $15.41 million in Q1 2025, a significant shift from the $8.30 million in unrealized gains in Q1 2024. This unrealized depreciation in Q1 2025 was primarily related to existing portfolio investments, reflecting market valuation adjustments. The net result was a net increase in net assets from operations of $8.39 million for the quarter, down from $22.88 million in the prior year.

Looking back at prior quarters, Q4 2024 total investment income increased year-over-year, reflecting portfolio growth, while Q3 2024 showed robust growth driven by portfolio expansion. The movement in NAV has reflected both operational performance and market dynamics, including the impact of dividend payments and, in Q2 2024, the reversal of unrealized gains on certain loans that prepaid at par.

PSBD emphasizes strong credit quality as a cornerstone of its strategy. As of March 31, 2025, loans on non-accrual status represented a low 0.24% of total investments at fair value (0.72% at amortized cost), which management highlights as being well below reported BDC market averages. This compares favorably to competitors like PSEC, which has faced pressure on profitability margins partly due to asset quality concerns. PSBD's PIK income as a percentage of total investment income was approximately 1.63% in Q1 2025, 1.96% in Q4 2024, and 0.5% in Q3 2024, consistently remaining on the lower end of the industry spectrum. This focus on cash-pay income is a key aspect of their risk mitigation and shareholder return strategy.

Liquidity, Capital, and Shareholder Returns

PSBD maintains a robust capital structure and ample liquidity to support its investment activities and fund commitments. As of March 31, 2025, the company's debt-to-equity ratio stood at 1.50x, consistent with the prior quarter and within its target leverage range, while maintaining an asset coverage ratio of 167.00%, comfortably above the 150% regulatory requirement for BDCs.

The company utilizes diversified financing sources, including revolving credit facilities with Bank of America, N.A. (BAC) (BoA Credit Facility) and Wells Fargo Bank, National Association (WFC) (WF Credit Facility), and a $400.5 million term debt securitization (CLO Transaction) completed in May 2024. As of March 31, 2025, PSBD had significant undrawn capacity under these facilities: $205.90 million under the BoA Credit Facility and $20.70 million under the WF Credit Facility. Total available liquidity, including cash and undrawn capacity, was approximately $229.5 million at the end of Q1 2025.

Unfunded commitments to portfolio companies totaled $20.20 million as of March 31, 2025. Management believes the company maintains sufficient liquidity to fund these commitments, which are typically subject to borrower performance against certain criteria.

PSBD is committed to returning capital to shareholders. The company has a formalized dividend policy, including a base quarterly dividend and a supplemental distribution paid out of excess undistributed net investment income. The base dividend was recalibrated to $0.36 per share starting in Q1 2025, a decision management stated was made to address the impact of falling rates on income and support NAV stability, while allowing for discipline in capital deployment in the current market. A supplemental dividend of $0.03 per share was also declared for Q1 2025.

The company also has an active share repurchase program, authorizing up to $20 million in repurchases if the stock trades below NAV, expiring in January 2026. PSCM, the majority owner, also has a separate purchase plan for up to $2.5 million under similar conditions. These repurchase activities, alongside a dividend reinvestment plan, underscore the focus on shareholder value and alignment.

Outlook and Risks

Management's outlook reflects caution regarding the near-term market environment but confidence in the company's ability to find opportunities. They anticipate refinancing activity will remain low and M&A volumes muted due to macro volatility and policy uncertainty, particularly concerning tariffs. While the recent volatility has led to some spread widening, they are waiting for more clarity before deploying capital more aggressively, prioritizing discipline over stretching for yield in a tight spread environment. Management believes deal activity should pick up as election clarity emerges and the rate environment stabilizes, which could modestly increase spreads and create more attractive deployment opportunities.

Key risks for PSBD include interest rate sensitivity, as its floating-rate portfolio is directly impacted by changes in base rates. While a falling rate environment has pressured income, a stable or rising rate environment would be beneficial. Market volatility can impact portfolio valuations (as seen in Q1 2025 unrealized losses) and the availability of attractive investment opportunities. Changes in United States tariff and import/export regulations are specifically identified as a risk that could negatively affect portfolio companies and broader economic activity. The company also faces risks inherent in debt investing, including credit risk and the potential for loans to go on non-accrual status, although current levels are low. Competition from other BDCs and alternative lenders could pressure yields and deal terms.

Despite these risks, PSBD's differentiated strategy, focusing on larger, higher-quality borrowers and maintaining flexibility across liquid and private credit markets, is intended to mitigate downside while positioning the company to capitalize on opportunities when they arise. The monthly NAV disclosure provides investors with a level of transparency unique in the sector, allowing for more timely assessment of portfolio value.

Conclusion

Palmer Square Capital BDC offers investors a distinct proposition within the BDC landscape, leveraging its manager's deep credit expertise and a flexible strategy to invest across liquid and private debt markets. While recent financial results reflect the impact of a changing rate environment, the company maintains strong credit quality metrics, ample liquidity, and a commitment to shareholder returns through dividends and share repurchases. The unique combination of opportunistic investing, focus on larger borrowers, and monthly NAV transparency positions PSBD as an interesting consideration for investors seeking exposure to corporate credit with a differentiated approach. The ability to remain disciplined and build dry powder in the current uncertain environment, while poised to act when opportunities improve, is central to the investment thesis. Investors should monitor the company's deployment activity, credit quality trends, and the impact of market conditions on its floating-rate income and portfolio valuations as the year progresses.