Palmer Square Capital BDC(PSBD) - 2020 Q4 - Annual Report

PART I Item 1. Business The company operates as a BDC, maximizing total return by investing in private U.S. corporate debt and CLO structured credit - Palmer Square Capital BDC Inc. was organized on August 26, 2019, and commenced operations on January 23, 2020, electing to be regulated as a BDC and treated as a RIC[11][392] - The company's investment objective is to maximize total return, comprising current income and capital appreciation, primarily by investing in corporate debt securities of privately held U.S. companies and CLO structured credit[13][298][393] - The Investment Advisor, Palmer Square BDC Advisor LLC, is a majority-owned subsidiary of Palmer Square, which had approximately $13.9 billion in assets under management as of December 31, 2020[12][20] - The company has implemented ESG guidelines effective March 1, 2021, prohibiting direct purchase of 'Prohibited ESG Securities' related to speculative energy extraction, controversial weapons, and other specific sectors[84][85] Portfolio Overview as of December 31, 2020 | Metric | Value | | :--- | :--- | | Number of Debt & Private Fund Investments | 202 | | Number of Portfolio Companies | 181 | | Aggregate Fair Value of Investments | ~$600.1 million | | Top Industry (Software) as % of Total Assets | 12.9% | | Top Portfolio Company (Playtika Holding Corp.) as % of Total Assets | 1.3% | Item 1A. Risk Factors The company faces risks from its limited operating history, advisor dependence, conflicts of interest, leverage, and regulatory constraints - The company has a limited operating history, having commenced operations on January 23, 2020, and neither Palmer Square nor the Investment Advisor has previously managed a BDC[172][173] - Success is highly dependent on the financial and managerial expertise of the Investment Advisor and Palmer Square, with no assurance that key personnel will remain employed[174][175] - The incentive fee structure may create a conflict of interest by encouraging investments in deferred interest securities that increase assets under management and fees[184][190] - The use of leverage magnifies potential gains or losses, and the company must maintain an asset coverage ratio of at least 150%[191][193] - A significant portion of potential investments may be 'Covenant-Lite Loans,' which offer fewer protections to lenders and increase the risk of loss[62][212][222] - The expected discontinuation of LIBOR by mid-2023 poses material risks due to operational challenges and uncertainty of successor rates[197][198] - The company's ability to make distributions may be limited by the 150% asset coverage test and covenants in credit facilities[264][265] Item 1B. Unresolved Staff Comments The company reports no unresolved comments from the SEC staff - There are no unresolved staff comments[269] Item 2. Properties The company's office facilities in Mission Woods, Kansas are considered adequate for its business operations - The company's headquarters are located at 1900 Shawnee Mission Parkway, Suite 315, Mission Woods, Kansas 66205[270] - The office facilities are considered suitable and adequate for the business[270] Item 3. Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings[271] - No material legal proceeding is threatened against the company[271] - The company may be a party to certain legal proceedings in the ordinary course of business from time to time[271] Item 4. Mine Safety Disclosures This section is not applicable as there are no mine safety disclosures - There are no mine safety disclosures[272] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock has no public market, with details provided on holders, distributions, and recent unregistered sales - There is currently no public market for the company's common stock, and no outstanding options, warrants, or convertible equity[275] - As of March 12, 2021, the company had 131 record holders of its common stock[5][276] - The company issued and sold 12,562,805 shares of common stock for an aggregate purchase price of approximately $238.6 million during the year ended December 31, 2020, exempt from registration requirements[287][450] Distributions Declared for Fiscal Year Ended December 31, 2020 | Declaration Date | Record Date | Per Share | Payment Date | Total Distributions Declared | | :--- | :--- | :--- | :--- | :--- | | 5/12/2020 | 5/12/2020 | $0.040 | 5/14/2020 | $488,608 | | 8/17/2020 | 8/17/2020 | $0.270 | 8/18/2020 | $3,325,960 | | 11/16/2020 | 11/16/2020 | $0.360 | 11/17/2020 | $4,472,622 | | 12/29/2020 | 12/31/2020 | $0.310 | 1/19/2021 | $3,894,469 | | Total | | | | $12,181,659 | Item 6. Selected Financial Data This section presents key financial data for the initial operating period ending December 31, 2020 Selected Consolidated Financial Data (Jan 23, 2020 - Dec 31, 2020) | Metric | Amount | | :--- | :--- | | Total investment income | $25,468,576 | | Net expenses | $10,771,790 | | Net investment income | $14,696,786 | | Net realized gains (losses) on investments | $(1,018,741) | | Net unrealized gains (losses) on investments| $13,055,565 | | Net increase in net assets from operations | $26,733,610 | | Net investment income per share | $1.32 | | Net increase in net assets per share | $1.13 | | Total assets | $667,490,101 | | Net assets | $253,144,971 | | Total return based on net asset value | 4.29% | | Number of portfolio company investments | 181 | | Total portfolio investments | 202 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's 2020 financial results, portfolio activity, liquidity, and critical accounting policies - The company generates revenue primarily from interest and fee income on debt investments and capital gains, with debt investments generally bearing floating interest rates[299] - As of December 31, 2020, the company had 202 debt and private investments in 181 portfolio companies with an aggregate fair value of approximately $600.1 million[300][301][305] - The weighted average total yield to maturity of debt and income producing securities at fair value was 4.96%[300][301][305] - The company's asset coverage ratio was 164% as of December 31, 2020, exceeding the 150% requirement for BDCs[315] Operating Results (Jan 23, 2020 - Dec 31, 2020) | Metric | Amount | | :--- | :--- | | Total investment income | $25,468,576 | | Less: Net expenses | $10,771,790 | | Net investment income | $14,696,786 | | Net realized gains (losses) on investments | $(1,018,741) | | Net change in unrealized gains (losses) on investments| $13,055,565 | | Net increase in net assets from operations | $26,733,610 | Investment Income Breakdown (Jan 23, 2020 - Dec 31, 2020) | Source | Amount | | :--- | :--- | | Interest from investments | $24,956,907 | | Dividend income | $228,092 | | Other income | $283,577 | | Total investment income | $25,468,576| Operating Expenses Breakdown (Jan 23, 2020 - Dec 31, 2020) | Expense Category | Amount | | :--- | :--- | | Interest expenses | $4,739,682 | | Management fees | $3,947,575 | | Professional fees | $992,352 | | Directors fees | $80,000 | | Offering costs | $503,292 | | Initial organization | $122,199 | | Other general and administrative expenses | $880,137 | | Less: Management fee waiver | $(493,447) | | Net expenses | $10,771,790| Financing Arrangements as of December 31, 2020 | Facility | Aggregate Principal Committed | Outstanding Principal | Amount Available | | :--- | :--- | :--- | :--- | | Bank of America Credit Facility | $475,000,000 | $395,000,000 | $80,000,000 | | Wells Fargo Credit Facility | $150,000,000 | $0 | $150,000,000 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate changes, with additional risk from foreign currency fluctuations - The company's net investment income is affected by the difference between investment rates and borrowing rates, making it sensitive to interest rate changes[351] - Investments denominated in foreign currencies are subject to risks from changes in currency exchange rates, which the company may hedge using standard instruments[354][355] Annualized Impact of Hypothetical Base Rate Changes on Net Investment Income (as of Dec 31, 2020) | Change in Interest Rates | Increase (Decrease) in Interest Income | Increase (Decrease) in Interest Expense | Net Increase (Decrease) in Net Investment Income | | :--- | :--- | :--- | :--- | | Down 25 basis points | $(1,507,147) | $(987,500) | $(519,647) | | Up 100 basis points | $6,028,588 | $3,950,000 | $2,078,588 | | Up 200 basis points | $12,057,176 | $7,900,000 | $4,157,176 | | Up 300 basis points | $18,085,764 | $11,850,000 | $6,235,764 | Item 8. Consolidated Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the period ending December 31, 2020 - The consolidated financial statements for the period from January 23, 2020 through December 31, 2020 have been audited by PricewaterhouseCoopers LLP[359][360] Consolidated Statement of Assets and Liabilities (as of Dec 31, 2020) | Asset/Liability Category | Amount (Dec 31, 2020) | | :--- | :--- | | Non-controlled, non-affiliated investments, at fair value | $653,156,200 | | Cash and cash equivalents | $682,579 | | Total Assets | $667,490,101 | | Credit facility, net | $393,152,103 | | Total Liabilities | $414,345,130 | | Total Net Assets | $253,144,971 | | Net Asset Value Per Common Share | $20.15 | Consolidated Statement of Operations (Jan 23, 2020 - Dec 31, 2020) | Income/Expense Category | Amount | | :--- | :--- | | Total Investment Income | $25,468,576 | | Total Expenses | $11,265,237 | | Less: Management fee waiver | $(493,447) | | Net expenses | $10,771,790 | | Net Investment Income (Loss) | $14,696,786 | | Total realized and unrealized gains (losses)| $12,036,824 | | Net Increase in Net Assets from Operations | $26,733,610 | | Basic and diluted net investment income per common share | $1.32 | | Basic and diluted net increase in net assets from operations | $2.40 | Consolidated Statement of Cash Flows (Jan 23, 2020 - Dec 31, 2020) | Cash Flow Category | Amount | | :--- | :--- | | Net cash used in operating activities | $(623,170,895) | | Net cash provided by financing activities | $623,851,974 | | Net increase in cash and cash equivalents | $681,079 | | Cash and cash equivalents, end of period | $682,579 | Investment Portfolio Composition (Fair Value as of Dec 31, 2020) | Investment Type | Fair Value | Percentage of Net Assets | | :--- | :--- | :--- | | First-lien senior secured debt | $566,459,850 | 223.8% | | Second-lien senior secured debt | $19,975,980 | 7.8% | | Collateralized securities and structured products - debt | $13,615,501 | 5.4% | | Short-term investments | $53,104,869 | 21.0% | | Total Investments | $653,156,200 | 258.0% | Industry Composition of Investments (Fair Value as of Dec 31, 2020) | Industry | Percentage of Total Investments | | :--- | :--- | | Software | 13.3% | | Healthcare Providers and Services | 12.0% | | Short-Term Investments | 8.1% | | Insurance | 7.7% | | Professional Services | 4.4% | | Media | 4.4% | | Diversified Financial Services | 3.7% | | Hotels, Restaurants and Leisure | 3.6% | | Independent Power and Renewable Electricity Producers | 3.2% | | Diversified Consumer Services | 3.2% | | IT Services | 3.1% | | Commercial Services and Supplies | 2.8% | | Specialty Retail | 2.4% | | Containers and Packaging | 2.4% | | Health Care Technology | 2.3% | | Diversified Telecommunication Services | 2.2% | | Construction and Engineering | 2.2% | | Structured Note | 2.1% | | Chemicals | 1.8% | | Oil, Gas and Consumable Fuels | 1.7% | | Interactive Media and Services | 1.5% | | Metals and Mining | 1.3% | | Food Products | 1.2% | | Healthcare Equipment and Supplies | 1.1% | | Building Products | 1.1% | | Pharmaceuticals | 1.0% | | Wireless Telecommunication Services | 0.9% | | Leisure Products | 0.8% | | Electric Utilities | 0.8% | | Aerospace and Defense | 0.7% | | Construction Materials | 0.6% | | Internet and Direct Marketing Retail | 0.5% | | Technology Hardware, Storage and Peripherals| 0.5% | | Capital Markets | 0.4% | | Energy Equipment and Services | 0.3% | | Real Estate Investment Trusts (REITs) | 0.3% | | Textiles, Apparel and Luxury Goods | 0.3% | | Transportation Infrastructure | 0.1% | | Total | 100.0% | Financial Highlights (Jan 23, 2020 - Dec 31, 2020) | Metric | Value | | :--- | :--- | | Net Asset Value, Beginning of Period | $20.00 | | Net Investment Income | $1.32 | | Net Realized and Unrealized Gain (Loss) on Investments | $(0.19) | | Net Increase in Net Assets from Operations | $1.13 | | Distributions to Common Stockholders | $(0.98) | | Net Asset Value, End of Period | $20.15 | | Shares Outstanding, End of Period | 12,562,805 | | Total Return | 4.29% | | Ratio of operating expenses to average net assets with waiver | 5.44% | | Ratio of net investment income to average net assets with waiver | 7.43% | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - There are no changes in and disagreements with accountants on accounting and financial disclosure[481] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of the fiscal year - Disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of December 31, 2020[482] - The company did not include a report on management's assessment of internal control over financial reporting, as permitted for newly public companies[483] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2020[484] Item 9B. Other Information This section details the terms of the $150 million Wells Fargo Credit Facility established in December 2020 - On December 18, 2020, the company entered into a Loan and Security Agreement for a Wells Fargo Credit Facility through its wholly-owned subsidiary[485] - The WF Credit Facility has a facility amount of $150.0 million, matures on December 18, 2025, and the ability to draw terminates on December 18, 2023[486] - Loans under the WF Credit Facility bear interest at LIBOR or base rate plus 1.85% for Broadly Syndicated Loans and 2.35% for Middle Market Loans[487] - As of December 31, 2020, there was no principal outstanding and $150 million of available commitments under the WF Credit Facility[489] PART III Item 10. Directors, Executive Officers and Corporate Governance This section details the company's board of directors, executive officers, and key corporate governance policies - The Board of Directors includes both independent and interested directors, with Christopher D. Long and Jeffrey D. Fox identified as interested directors[492][493] - Key executive officers not serving as directors include Angie K. Long (Chief Investment Officer) and Scott A. Betz (Chief Compliance Officer)[495] - The company's Code of Ethics applies to all directors and officers, restricting personal investments in securities that may be purchased or held by the company[504][505] - The Audit Committee consists entirely of independent directors, with Ms. Webber recognized as an 'audit committee financial expert'[507] Item 11. Executive Compensation Executive officers receive no direct compensation, while independent directors receive an annual fee - Executive officers receive no direct compensation from the company; however, some have indirect pecuniary interests in the advisory fees paid to the Investment Advisor[509] - Independent Directors receive an annual fee of $25,000 and reimbursement for reasonable out-of-pocket expenses incurred for attending meetings[510] - The company does not have a compensation committee; the Board as a whole is responsible for reviewing Administrator reimbursements and director compensation[514] Director Compensation for Year Ended December 31, 2020 | Name | Aggregate Compensation from Palmer Square Capital BDC Inc. | | :--- | :--- | | Megan L. Webber | $25,000 | | James W. Neville Jr. | $25,000 | | Christopher C. Nelson | $25,000 | | Christopher D. Long | $— | | Jeffrey D. Fox | $— | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section discloses beneficial stock ownership by major shareholders, directors, and executive officers - As of March 12, 2021, there were 12,776,672 shares of common stock issued and outstanding[5][516] Beneficial Ownership of Common Stock (as of March 12, 2021) | Name | Shares Owned | Percentage of Common Stock Outstanding | | :--- | :--- | :--- | | Christopher D. Long | 26,131 | * (less than 1.0%) | | Jeffrey D. Fox | 7,839 | * (less than 1.0%) | | Angie K. Long | 26,131 | * (less than 1.0%) | | Scott A. Betz | 3,920 | * (less than 1.0%) | | All directors and executive officers as a group (7 persons) | 37,890 | * (less than 1.0%) | | Excelsior Holdings D2 LLC | 2,613,051 | 20.5% | | Alaris Master Fund, LP | 1,478,675 | 11.6% | | Caravel Holdings LLC | 1,567,831 | 12.3% | | BFFV19, LLC | 783,915 | 6.1% | Item 13. Certain Relationships and Related Transactions, and Director Independence The company details its related party agreements and procedures for managing conflicts of interest - The company has an Advisory Agreement and Administration Agreement with its Investment Advisor, and a Resource Sharing Agreement and License Agreement with Palmer Square[521][522][523][524] - Policies and procedures are in place to manage conflicts of interest, including screening transactions and seeking Board approval or SEC exemptive relief[525] - The company has obtained exemptive relief from the SEC to permit greater flexibility in co-investing with investment funds managed by Palmer Square[208][528] - A majority of the company's directors are independent, as defined by the 1940 Act, and the Audit Committee is exclusively composed of independent directors[531] Item 14. Principal Accounting Fees and Services This section outlines fees paid to the independent accounting firm and the Audit Committee's pre-approval policy - The Audit Committee has a pre-approval policy for audit, audit-related, tax, and other services provided by the independent auditor to ensure independence[538][539] Principal Accountant Fees and Services | Fee Type | Fiscal Year Ended Dec 31, 2020 | Fiscal Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Audit Fees | $240,000 | $20,000 | | Audit-Related Fees | - | — | | Tax Fees | $33,000 | — | | All Other Fees | - | — | | Total | $273,000 | $20,000 | PART IV Item 15. Exhibits, Consolidated Financial Statements, and Schedules This section lists all financial statements, schedules, and exhibits filed with the annual report - The report includes consolidated financial statements and supplementary data, such as the Report of Independent Registered Public Accounting Firm and various financial statements[542][543] - A list of exhibits is provided, including organizational documents, investment advisory and administration agreements, credit agreements, and certifications[544][545][547] Item 16. Form 10-K Summary The company has elected not to provide a summary for its Form 10-K filing - The registrant has elected not to provide summary information[546] SIGNATURES The report is duly signed by the company's principal executive officer, financial officer, and directors - The report is signed by Christopher D. Long, Chief Executive Officer and President (Principal Executive Officer), Jeffrey D. Fox, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer), and other directors[551][552] - The signing date for the report is March 12, 2021[551][552]