Palmer Square Capital BDC's Q3 2025: Contradictions Emerge on Investment Strategy, European Opportunities, and Dividend Sustainability

Business Commentary:

• Capital Deployment and Income Generation:
• Palmer Square Capital BDC Inc. (PSBD) deployed $138.7 million of capital in Q3 2025, generating total and net investment income of $31.7 million and $13.6 million, respectively.
• The company delivered a net investment income of $0.43 per share, covering its base dividend of $0.36 per share and total dividend, including a $0.06 supplemental distribution.

• This performance was driven by the company's strategy to maximize cash returns to investors, despite challenging market conditions.

• Portfolio Performance and Quality:

• PSBD's portfolio maintained strong credit quality, with non-accruals at 40 basis points on a fair value basis and 101 basis points on an at-cost basis.
• The portfolio consists of 42 industries, with 95% of investments being senior secured loans, and the average hold size is approximately $5.0 million.

• This stability is attributed to the company's disciplined approach to deploying capital and its focus on high-quality assets.

  

• Dividend Strategy and Shareholder Alignment:

• PSBD has consistently paid a supplemental dividend, distributing virtually all of its excess earnings to shareholders.
• The board approved an additional $5 million of open market share repurchases, emphasizing shareholder alignment.

• This strategy reflects the company's commitment to maximizing shareholder value and maintaining transparency.

• Interest Coverage and Economic Environment:

• The company's interest coverage ratio increased sequentially to 2.5x from 2.1x last quarter, demonstrating improved financial health.
• This improvement was driven by a combination of EBITDA growth and lower interest costs due to refinancing and repricing opportunities.

• The Fed's base rate cuts are anticipated to benefit borrowers' cash flows and spur M&A activity, while tariff concerns remain a potential challenge.

• Private Credit Market and Investment Strategy:

• Competition in the private credit market remains elevated, with spreads compressing significantly over the past year.
• Despite this, PSBD continues to find opportunities for relative value in private loans versus new broadly syndicated loans.
• The company maintains a disciplined approach to deploying capital, prioritizing risk-adjusted returns over growth, especially in late-stage credit cycles.

Contradiction Point 1

Investment Process and Collateral Adequacy

It involves changes in the investment process and collateral requirements, which are critical for understanding the company's risk management and credit standards.

Given First Brands' experiences, will there be changes to the investment process related to collateral adequacy in liquid credit? - Kenneth Lee (RBC Capital Markets)

2025Q3: We remain committed to strong documentation standards on both the liquid and private credit sides. - [Matthew Bloomfield](CEO)

How did you manage leverage during April volatility? - Douglas Harter (UBS)

2025Q2: We maintained excess liquidity in cash and used it to pay down credit facilities if needed. - [Matthew Bloomfield](CEO)

Contradiction Point 2

European Opportunities and Portfolio Yield Diversification

It involves changes in the company's strategy regarding European opportunities and the impact on portfolio yield diversification, which are crucial for understanding the company's growth strategy and risk profile.

Why did interest coverage improve more than usual? Was it due to lower borrowing costs or increased EBITDA? - Melissa Wedel (JPMorgan Chase & Co)

2025Q3: European opportunities count towards the 30% bucket. Spreads in Europe are wider, offering up to 50 basis points of excess spread. - [Matthew Bloomfield](CEO)

What drove the stable interest income despite lower average earning assets? - Melissa Wedel (JPMorgan)

2025Q2: The stability was partly due to refinancing activity accelerating income. Additionally, new investments yielded better spreads, helped by European opportunities with U.S. dollar loans. - [Matthew Bloomfield](CEO)

Contradiction Point 3

Interest Coverage and Borrower Health

It involves the explanation of improved interest coverage, which is a key indicator of the financial health of the borrowers, impacting investor confidence.

Did the improvement in interest coverage result from lower borrowing costs or higher EBITDA? - Melissa Wedel(JPMorgan Chase & Co)

2025Q3: The increased interest coverage is due to a combination of continued EBITDA growth across the portfolio and borrowers' ability to refinance and reprice facilities, lowering their interest burdens. This trend suggests the underlying health of borrowers and supports the portfolio's strength. - [Matthew Bloomfield](President)

How is the portfolio's earnings power expected to compare to Q1 levels in the current environment? - Melissa Wedel(JPMorgan)

2025Q1: Our clients are doing well. The portfolio is 80% levered with 2.25x pro forma leverage, which is significantly below our stated range of 3x to 4x. Yes, you're seeing 10-year high levels of interest coverage, 1.9x on the pro forma side. - [Matthew Bloomfield](President)

Contradiction Point 4

Investment Strategy and Market Opportunities

It highlights a contradiction in the company's investment strategy and the perceived opportunities in the marketplace.

Can you clarify the total repurchase capacity with the new $5 million approval and provide details on the current 10b5-1 plan? - Melissa Wedel(JPMorgan Chase & Co)

2025Q3: The new $5 million authorization is in addition to the existing 10b5-1 plan, providing further flexibility for repurchases, especially during market volatility. The board will continue to review and manage repurchase plans, with ongoing plans at both the BDC and management levels. - [Matthew Bloomfield](CEO)

Does your caution on near-term deal opportunities indicate leverage could decline in the short term? - Douglas Harter(UBS)

2024Q4: While we aren't planning active leverage reduction, we may not be actively deploying capital if we can't find accretive opportunities. We'll remain patient and wait for better entry points, focusing on attractive yields and spreads. - [Angie Long](CIO)

Contradiction Point 5

Dividend Strategy and Sustainability

It involves changes in financial management, specifically regarding dividend strategy and sustainability, which are critical for investor confidence.

Can you explain PSBD's internal rating system and why First Brands wasn't rated a 1? - Cory Johnson(UBS Investment Bank)

2025Q3: The new dividend level was set following the examination of various scenarios, considering different rate and spread environments. It was determined to be appropriate, given the current deal environment which lacks attractive risk-reward opportunities for investments. - [Matthew Bloomfield](CEO)

Will the supplemental distribution percentage stay the same or increase following the base dividend change? - Melissa Wedel(JPMorgan)

2024Q4: We expect continued consistency in the supplemental distribution percentage, although we will be cautious about the market environment. The goal is to set a realistic base dividend and achieve consistent performance through investment opportunities. - [Matthew Bloomfield](CEO)