Palmer Square Capital BDC Inc. ($PSBD)

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Palmer Square Capital BDC's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jeremy Goff, Managing Director. Please go ahead.

Welcome to Palmer Square Capital BDC's First Quarter 2026 Earnings Call. Joining me this afternoon 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 2026 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. 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 uncertainties 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 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 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.

Good afternoon, everyone. Thank you for joining us today for Palmer Square Capital BDC's First Quarter 2026 Conference Call. On today's call, I will provide an overview of our first quarter results, touch on our market outlook and competitive positioning, and then turn the call to the team to discuss the current industry dynamics at play, our portfolio activity and financial results. During the first quarter, our team deployed $109.4 million of capital and generated total and net investment income of $26.2 million and $11 million, respectively. We delivered net investment income of $0.35 per share and paid a $0.37 per share total dividend, which includes a $0.01 supplemental distribution above our base dividend and included approximately $0.02 of spillover income. Consistent with the sector, our earnings profile is reflective of monetary policy tightening over the last several quarters, in addition to experiencing a slowdown in new deal and refinancing activity given the macro backdrop. With this in mind, our dividend payout still represents an 11.1% yield on NAV and 13.5% yield on the stock price as of April 30, which we believe is a compelling value proposition for investors. We also believe we are beginning to experience a pickup in activity in April, which we are hopeful continues in the remainder of the second quarter. As such, our Board has confirmed our second quarter base dividend of $0.36 with the supplemental to follow in normal course. We will continue to prioritize to the extent possible, a distribution strategy that maximizes cash returns to investors. Our March NAV per share was $13.30. This mark is based on real actionable prices in the market and underscores our intentional commitment to transparency and accountability regardless of today's market conditions. This level of transparency is especially relevant in today's environment. With heightened scrutiny around BDC portfolio company valuations, we believe our monthly NAV disclosure delivers an added layer of confidence in the underlying value of PSBD's portfolio while highlighting the uniqueness of our portfolio's positioning in liquid senior secured debt. We are pleased with the increased amount of positive feedback we have been receiving in this regard. The first quarter of 2026 presented another episode of volatility induced by the software sell-offs and credit cycle concerns in general, factors we discussed on our fourth quarter earnings call in February. These issues have continued to drive headlines in the month since, in addition to concerns and economic impacts resulting from the Iran war. As I did last quarter, I'd like to spend a moment reiterating our philosophy around software and technology investments as it remains very topical. We continue to prefer deeply embedded mission-critical software in areas such as cybersecurity, IT infrastructure and ERP systems, which we believe will ultimately be net beneficiaries of AI advancements. Within these subsectors, we lend to large, highly scaled providers that have meaningful profitability and cash flow. We found that these large enterprise platforms tend to be backed by sophisticated private equity sponsors and believe their capital structures provide meaningful equity cushions below our senior secured loans. In our experience, these providers also frequently benefit from significant incumbency advantages. We believe another advantage is the breadth and depth of their data collected across industries. This data positions incumbent to develop more effective AI infrastructure than their more nascent peers as data quality remains a foundational element of model performance and inference. To that end, we believe our portfolio companies are already realizing the benefits of AI advancements. Examples include data analytics business that has over 60% of its top 50 customers using at least one AI native product, while one of our large ERP software companies, AI application has seen adoption by 40% of its over 7,000 customers. In the latter example, management expects that adoption to be over 75% by year-end 2026. Beginning in April, we've started to observe a stabilization and in some cases, a reversal of the mark-to-market prices on software and other AI-impacted loans, which we believe reflects the market's growing realization of the advantages incumbent providers hold amid the AI-driven disruption. To echo recent commentary from a large private equity sponsor, these incumbents are well positioned to win, but that position is not guaranteed. We believe that advantage is predicated on their long-term customer relationships, their ownership of critical data that underpins the day-to-day functions of their clients and their ability to incorporate AI into existing software systems to improve services. With that, I will hand the call over to Angie.

Thank you, Chris. Through the first quarter, PSBD's portfolio faced many macro headwinds, but we believe it performed respectively given the degree of volatility across asset classes. Importantly, given this backdrop, we continue to see stability in our underlying credits, continued earnings growth in our software exposure and minimal fundamental impacts from the Iran war. As the broader market begins to regain its footing, we believe PSBD's portfolio will perform steadily as we look to capitalize on an improving opportunity set and what we believe should be better risk-adjusted spreads going forward. Stepping back, the first quarter was defined by significant macro volatility driven by the sell-off in software and technology credit, persistent headlines around redemptions in evergreen vehicles and geopolitical uncertainty, most notably the situation in Iran. Within that context, our views on software remain unchanged. As Chris alluded to earlier, we continue to believe that deeply embedded mission-critical platforms are well positioned to be net beneficiaries of AI advancements. As we are already seeing across parts of the market, these businesses are beginning to incorporate AI into their existing systems, leveraging long-standing customer relationships and differentiated data sets to enhance their offerings. Across the broader market, the dislocation has started to create more attractive entry points. In the secondary loan market, in particular, we're seeing pricing that, in certain cases, reflects macro concerns more than company-specific performance. That shift is beginning to create a much better risk-reward dynamic than we have seen over the past several quarters. From an activity standpoint, M&A volumes slowed during the quarter as sponsors paused in response to the macro backdrop. However, with improving visibility, we are beginning to see activity return, including increased refinancing activity and select new opportunities across both the broadly syndicated and private credit markets. Importantly, spreads are now beginning to move wider across both markets. We are cautiously optimistic and believe the extended period of spread tightening is likely behind us. Finally, we must acknowledge that geopolitical developments remain a key variable. A timely resolution in Iran would likely be supportive of market conditions, particularly given the potential for elevated oil prices to have broader inflationary impacts across the economy. While the environment remains fluid, we believe the combination of more attractive pricing and a disciplined approach positions us well for the periods ahead. At the portfolio level, underlying credit performance continues to remain solid and capital markets remain open for high-quality borrowers. We have experienced increased volatility in NAV, which is not unexpected given the market dynamics we've discussed thus far and the overall liquid nature of our underlying loans. We view this as a function of an efficient market attempting to price in perceived risks rather than a reflection of any meaningful deterioration in underlying credit quality. To reiterate Chris' earlier comments, our monthly NAV is based on real actionable market prices, providing more frequent transparency into how the portfolio is valued and eliminating perceived questions around the true NAV of the BDC. In terms of our balance sheet, we continue to believe the flexibility of our financing facilities is a core benefit of the BDC. The CLO that we issued in 2024 will exit its non-call period in July 2026, and we will likely be looking at a potential refinancing options for that during the second quarter. During the first quarter, we remained active and disciplined with our share repurchase program. We bought back 140,149 shares for approximately $1.6 million and have remaining availability of approximately $4.2 million. In addition, Palmer Square Capital Management, our manager, purchased an additional 67,875 shares for approximately $800,000 via its program. The Board will continue to evaluate share repurchases in the second quarter and beyond, given the attractive trading levels of our stock relative to NAV, and we'll consider future upsizes to the program if deemed appropriate. For added context, PSBD shares were yielding 13.5% as of April 30, 2026, a significant premium to the 11.1% yield on NAV. We believe this presents a compelling value proposition in the current environment, especially when taking into account the quality and conservative position of PSBD's portfolio. As we look ahead to the remainder of 2026, we are constructive on the emerging opportunity set and believe the depth of our platform combined with PSBD's flexibility to nimbly allocate across both public and private markets will continue to serve as a strong advantage in positioning the portfolio to capitalize on attractive risk-adjusted opportunities as they emerge. I'll now turn the call over to Matt to discuss our portfolio and investment activity in more detail.

Thank you, Angie. As Angie mentioned, PSBD navigated the first quarter of 2026 well despite heightened volatility facing the sector and broader markets. Relative to the fourth quarter, our net investment income per share decreased to $0.35 per share in the first quarter of 2026, predominantly due to a combination of lower base rates as well as slower prepayment activity in the shortest quarter of the year. I'd like to note that the full impact of lower base rates was felt more in the first quarter of 2026 than in the fourth quarter of 2025 due to how our borrower contracts are structured, and we believe the second quarter should represent a more normalized environment, assuming no additional rate cuts in the near term. In recent weeks, we are beginning to observe increased new issue activity and refinancings. While prepayment activity is difficult to predict, we believe it could reaccelerate as we move through the year. In addition, to reiterate Chris and Angie's comments, we also believe we are in a more reasonable spread environment today versus the past several quarters and are optimistic about the opportunity to reinvest paydowns into a higher spread environment in the near term. Our total investment portfolio as of March 31, 2026, had a fair value of approximately $1.15 billion, diversified across 44 industries that demonstrate strong credit quality, industry and company-specific tailwinds and a variety of end markets. This compares to a fair value of $1.20 billion at the end of the fourth quarter of 2025, reflecting a decrease of approximately 4.1%. In the first quarter, we invested $109.4 million of capital, which included 42 new investment commitments at an average value of approximately $2.1 million. During the same period, we realized approximately $79.9 million through repayments and sales. Importantly, we remain focused on diversification as we allocate new capital across the portfolio as we believe the recent market turbulence has refocused investors on the importance of risk management through diversification. To recap key portfolio highlights, at the end of the first quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 11.73%, and our weighted average total yield to maturity of debt and income-producing securities at amortized cost was 8.26%. We believe our focus on first lien loans, combined with diversification across industries and company size contributes to a strong credit profile with exposure to 44 different industries. Further, our 10 largest investments account for just 10.64% of the overall portfolio, and our portfolio is 96% senior secured with an average hold size of approximately $4.4 million. We view this as a key risk management tool for PSBD. On a fair value weighted basis, our first lien borrowers have a weighted average EBITDA of $452 million, senior secured leverage of 5.5x and interest coverage of 2.4x. Additionally, new private credit loans comprised 22.3% of overall new investments at a weighted average spread of 486 basis points over the reference rate. While credit quality remains an industry-wide concern, nonaccruals continue to be low at PSBD. On a fair value basis, nonaccruals represent less than 1 basis point and on an at-cost basis, only 90 basis points. Our PIK income represents approximately 1.64% of total investment income, well below our peers in the industry average. We believe this underscores the quality of our disclosed investment income. We've maintained an average internal rating of 3.6 on a fair value weighted basis for all loan investments. Our rating is derived from a unique relative value-based scoring system. We believe credit performance across the portfolio remains strong. We continue to experience stable leverage levels and loan-to-value ratios and our diversification positions us attractively within the dynamic markets we participate in. As we have discussed in the past, we believe larger borrowers are better positioned to deliver favorable credit outcomes over the long term, a dynamic we expect to continue as AI is advantageous to companies with the scale to invest in and leverage these technologies. As Angie described, in conjunction with the Board, we continue to evaluate share repurchases as a means of driving shareholder value given the discounts in the market. We will continue to evaluate share repurchases on a go-forward basis, and we'll look to balance attractive investment opportunities in conjunction with those potential repurchases. Earlier in the call, we mentioned dislocations in the secondary market, creating a better risk/reward dynamic than we have seen over the past several quarters. While we are actively evaluating new investments, we plan to approach these opportunities with balance. We are managing leverage carefully given movements in NAV, which Jeff will discuss in more detail, and we will be discerning in weighing the return profile of any new investments against that available through share repurchases to ensure we are making the most accretive capital allocation decisions on behalf of our shareholders. Now I'd like to turn the call over to Jeff, who will review our first quarter 2026 financial results.

Thank you, Matt. Total investment income was $26.2 million for the first quarter of 2026, down 16% from $31.2 million for the comparable period last year. Income generation during the quarter reflected a mix of contractual interest income, paydown-related income and select fee income from new deal activity. Total net expenses for the first quarter were $15.2 million compared to $18.3 million in the prior year period. Net investment income for the first quarter of 2026 was $11 million or $0.35 per share compared to $12.9 million or $0.40 per share for the comparable period last year. During the first quarter of 2026, the company had total net realized and unrealized losses of $48.3 million compared to total net realized and unrealized losses of $21.3 million in the first quarter of 2025. This consisted of net unrealized depreciation of $52.8 million related to existing portfolio investments and net unrealized depreciation of $15.2 million related to exited portfolio investments. At the end of the first quarter, NAV per share was $13.30 compared to $14.85 at the end of the fourth quarter of 2025. Moving to our balance sheet. Total assets were $1.2 billion and total net assets were $413.8 million as of March 31, 2026. At the end of the first quarter, our debt-to-equity ratio was 1.7x compared to the 1.54x at the end of the fourth quarter of 2025. This difference is predominantly due to the change in NAV as well as the modest impact from share repurchases. Available liquidity, consisting of cash and undrawn capacity on our credit facilities was approximately $325.3 million. This compares to approximately $311.3 million at the end of the fourth quarter of 2025. Finally, on May 6, the Board of Directors declared a second quarter 2026 base dividend of $0.36 per share, in line with our dividend policy. Furthermore, our policy continues to be distributing excess earnings in the form of a quarterly supplemental distribution. With that, I'd now like to open up the call for questions.

Our first question will come from the line of Kenneth Lee with RBC Capital Markets.

Just one on the NAV. Could you remind us again, and it sounds like a lot of the marks are driven by market and actionable pricing there. Could you remind us again how much input does Palmer Square have in terms of the loan valuations within the book? Or is it completely driven by what you're seeing on the secondary markets there?

Ken, it's Matt. Thanks for the question. Yes, so it's completely driven by third-party marks. So on the broadly syndicated side, those are real quotes, real levels tradable in the secondary market. So those come from a third-party service provider that aggregates all those daily marks on the syndicated loans. And then on the private credit side, those are marked from third-party valuation provider.

Great. One follow-up, if I may. Just wanted to get your thoughts around dividend coverage, just given where NII is leveling at right now.

Sure. So it's obviously something we and the Board spend a lot of time on. First quarter of the year is always the slowest from a prepayment activity standpoint, shortest day count of the year. And obviously, with the volatility that transpired in predominantly February and March, activity slowed down pretty dramatically there. As we moved into April, I'd say we do feel incrementally better about what we're seeing from new origination activity, conversations. We've had a couple of refinancings that have already hit. So we feel very good about the $0.36 base dividend and the ability to pay supplemental this quarter. So that's kind of a consideration. Obviously, base rates certainly play a big impact in that. Obviously, out of our control, but incrementally feeling better about where those are settling out, at least in the near term. Obviously, we're not interest rate prognosticators per se. But as we kind of look through things, look through the portfolio, look through activity in April, felt increasingly comfortable with where we're at here for the near to intermediate term.

Our next question will come from the line of Rick Shane with JPMorgan.

I need to queue in a little faster. Ken kind of asked my question, but I'm curious as well about cadence of deal flow, both repayments and investments, and you largely addressed that. But any other color you want to add, that would be appreciated.

Yes. I mean, I think kind of similar to past years coming into the end of last year, conversations and activity level felt pretty robust and that likely that, that would continue into the first half of 2026. Certainly with what transpired in the software space and then followed by Iran war as the case has been for the past several years, M&A conversations can grind to a halt pretty quickly. That being said, I think specifically outside of software, it feels like conversations have reengaged through the latter half of April and into early May. I think that always takes a little bit of time to translate into actual deal activity. But from what we're seeing from early looks, as we would call them on the broadly syndicated side, those have increased the past couple of weeks. Conversations, term sheets on the private credit side have marginally increased as well. I think certainly, spreads, we expect to be wider. And I think there's always got to be a little bit of digesting that from the borrower standpoint and from the sponsor community. So I don't expect it to be a huge acceleration, but definitely expect it to be picking back up from the very, very depressed levels that we really saw for February and March of the first quarter.

Just one follow-up question. One of the things we're hearing more generally is improved documentation, better covenants associated with deals, more thoughtful opportunity for due diligence. Is that something particularly in the BSL market? Is it fair to extrapolate that as well?

Yes, I think it is. Given the bandwidth we have across the firm from a capital deployment standpoint in the broadly syndicated market, so even outside of the BDC with our global CLO platform and private funds business, we tend to be meaningful relationships to those sponsors. So we get to have a lot of early access with management team. I'd say the amount of time we're getting to spend has certainly increased. And then as that flows through towards the credit documentation, certainly in times of volatility and wider spreads, it becomes a more lender-friendly environment, which we certainly welcome. It's been quite some time, I feel like, since we've been able to say that. So we'll use that to try to get as good documentation and as favorable levels that we can from a lender standpoint, and that's certainly come to our favor here recently.

Last question, and I apologize for so many, but we've asked most of the management teams in the space. When you think about where we are in the continuum in terms of structure and pricing, is it fair to say we're sort of back to the middle? We've gone from tight, but we're not at distressed type markets. It's more sort of in the normal range right now.

Yes. I think the way we look at it, and we've been pretty vocal, I think, over the -- really the past year plus in that spreads have just been very, very tight relative to risk. And that encompassed corporate credit, structured credit, investment grade, high yield. And so I'd say we've -- in a lot of ways, I would have expected spreads to be considerably wider given everything going on from a macro sentiment. I'd say we did see spread widening. I do think spreads will stay a little bit wider. But I think the way we view it from the markets we're participating in, we'd call it probably more fair value, certainly not cheap, certainly not super wide to your point, from stressed or distressed levels. So I think you're being better compensated certainly than we have been in quite some time. But we kind of view it, I'd say, as fair compensation relative to what we've seen over the past 20-plus years.

Our next question will come from the line of Derek Hewett with Bank of America.

Could you provide some color on pro forma leverage as of April since we've seen some recovery in the BSL market? And then secondly, are there like certain sectors that have been significantly dislocated earlier this year, maybe even software that you might lean into from a new investment perspective?

Derek, I appreciate the question. I'd say from April standpoint, we should be posting the updated NAV later next week. But certainly, to your point, we have seen a modest rebound in prices in April. So we expect leverage to come back down. But we'll be able to kind of disclose the updated NAV for April, like I said, probably by the end of next week, which gives some good directionality, I think, to where things are headed. But we certainly, as you know, kind of given the underlying collateral and credit facilities we have, we're able to manage leverage pretty quickly. We even paid down, I think, about $14 million in total on the credit facilities in the first quarter to try to maintain appropriate leverage levels, at least that we were comfortable with. There were obviously a lot of moving pieces going on in the quarter, but that is something we have good control over and can manage that effectively on a daily basis. To the second part of your question, undoubtedly, software was the most disrupted sector in the first quarter, and that predominantly is responsible for the unrealized mark-to-market move in NAV as the whole sector traded off considerably. That -- our opinion is we want to be prudent in how we think about overall exposure there. But I do think -- and you've heard kind of our prepared comments from Chris, Angie and myself, there's undoubtedly some really great companies in there that are trading at real discounts to par. And so when we have conviction in something, we will certainly look to take advantage of that where we think it makes sense. Outside of that as well, there's obviously a lot going on with the Iran situation that has produced some interesting opportunities in the chemical space as an example, that I think we've talked about in the past has been a very tough sector really for the past 2-plus years, given a lot of the supply-demand dynamics, a lot of the effective dumping by Chinese producers, specifically in some of the pan-European markets. With the closure of the strait for the past couple of months, that's led to some meaningful earnings tailwinds for some of the petrochemical producers. So we have been able to see some benefit from a couple of tactical positions there. So I think we've said over the last several quarters, there hasn't been as much interesting things to do from a total return standpoint, just given how tight spreads have gotten. That dynamic has certainly changed with a lot of the dynamics across both software and the geopolitical tensions. That being said, we would still echo some of our prepared remarks where we want to be prudent. We want to make sure we have dry powder to the extent there's further dislocations. But we're certainly seeing more of that's interesting to us now than we have in quite some time.

This concludes our question-and-answer session. I'll turn the call back over to Jeremy for any closing comments.

Thank you, operator, and thank you, everyone, for your time and all the thoughtful questions. We look forward to updating everyone on second quarter 2026 financial results in August. Thank you again.

That concludes our call today. Thank you all for joining. You may now disconnect.