Palmer Square Capital BDC Inc. (PSBD) Earnings

Management highlights

- Capital Deployment and Allocation: The firm deployed $72.4 million in new capital across 21 new investment commitments in Q2 2026, and realized $109.8 million from repayments and sales. With deal activity subdued across both private credit and broadly syndicated loan markets, the board expanded the share repurchase program to $30 million, which management views as an accretive, compelling use of capital that creates shareholder value at current discounted valuations. The firm paid a total Q2 2026 dividend of $0.39 per share, consisting of a $0.36 base dividend and a $0.03 supplemental distribution, matching Q2 NII per share. A Q3 2026 base dividend of $0.36 per share has been declared, with the supplemental dividend to be determined later. The dividend yield is 11.8% on net asset value (NAV) and 16.3% on the current share price. - Portfolio and Credit Quality: The portfolio remains diversified across 45 industries, with a 0.29% non-accrual rate, indicating resilient underlying credit quality despite macro uncertainty. The weighted average yield to maturity of debt and income-producing securities is 11.95% on a fair value basis. Management remains confident in the firm's software portfolio, which is concentrated in defensive sub-sectors including cybersecurity, IT infrastructure, and ERP systems that are well-positioned to benefit from rising AI adoption. Management notes that loan valuation uncertainty has increased due to limited transaction activity, disconnecting public market sentiment from underlying portfolio performance, and expects increased refinancing activity will establish clearer valuation benchmarks in coming quarters. - Balance Sheet Optimization: The firm successfully reset and extended its BDC CLO, lowering the weighted average cost of debt to SOFR plus 1.39% from SOFR plus 1.72%, extending the reinvestment period to July 2031 and final maturity to July 2039. This transaction is expected to be fully accretive to earnings after refinancing costs starting in Q4 2026. The firm reduced excess capacity on its Bank of America BSL funding facility to cut unused carrying costs, while maintaining full availability on its Wells Fargo facility to deploy for attractively priced private credit opportunities. As of June 30, 2026, debt-to-equity ratio is 1.71x, and total available liquidity is $331 million. - Competitive Advantage: Management highlights that Palmer Square's position as a leading global CLO manager gives the firm a unique sourcing advantage across the entire broadly syndicated loan market, enabling better visibility and more selective capital deployment for attractive risk-adjusted returns, an advantage that is underappreciated by investors focused on traditional direct lending BDCs.

Guidance

Management reaffirms its long-term disciplined capital allocation and dividend policy, with no material upward or downward revisions to core strategy. Key forward-looking outlooks include: - Management expects that increased refinancing activity in coming quarters will act as a catalyst to establish clearer valuation and spread benchmarks for the broadly syndicated loan market, reducing the current disconnect between public market sentiment and underlying portfolio fundamentals. - The recently completed CLO refinancing is expected to be fully accretive to earnings starting in the fourth quarter of 2026, driven by lower overall cost of capital and reduced financing expenses. - Management remains constructive on long-term opportunity across both BSL and private credit markets as market activity improves, and expects to be well-positioned to capitalize on discounted opportunities as they emerge amid elevated credit dispersion. - No formal quantitative earnings or economic guidance was provided in the call.

Segment performance

Palmer Square Capital BDC is a business development company with two core investment segments: broadly syndicated loans (BSL) and private credit. No separate segment-level revenue figures are provided. Aggregate total investment income for Q2 2026 was $27.3 million, down 13.8% year-over-year. Net investment income (NII) was $12 million, or $0.39 per diluted share, compared to $13.8 million or $0.43 per share in Q2 2025. Total net assets as of June 30, 2026, were $406.2 million, and the total investment portfolio had a fair value of $1.11 billion, down 3.6% from the end of Q1 2026. New private credit investments made up 24.1% of total new investments in the quarter, carrying a weighted average spread of 534 basis points over the reference rate. 96% of the overall portfolio is senior secured, and the top 10 investments account for 10.74% of total portfolio value. The non-accrual rate is 0.29% on a fair value basis, which is well below industry averages.

Risks & headwinds

- Macro and Market Uncertainty: Persistent inflation driven by geopolitical conflict (specifically the Iran war and its impact on energy prices) and ongoing uncertainty around Federal Reserve interest rate policy create ongoing market volatility and valuation challenges. - Valuation Uncertainty: Limited transaction activity in current markets makes it harder to benchmark private asset valuations, leading to a disconnect between public market sentiment and underlying portfolio performance, and contributing to NAV volatility. - Maturity and Refinancing Risk: 2021 and 2022 loan vintages are reaching maturity in a higher interest rate, constrained exit environment, leading to increasingly company-specific outcomes. While many borrowers will refinance successfully, some will face material challenges, and elevated credit dispersion requires rigorous idiosyncratic credit analysis. - Leverage: Current leverage is slightly above the firm's traditional target range, driven by prior quarter NAV declines from BSL software loan pricing moves, though management notes the portfolio's high liquidity allows for active daily management of leverage levels. - AI Sentiment Volatility: Dominant AI-focused narratives have driven significant negative sentiment toward software loans, creating price dislocations even for fundamentally resilient companies, though this also creates discounted opportunities for selective investors.

Analyst Q&A

• Q: With the recently expanded $30 million share repurchase program, how active do management expect to be given current valuations and competing investment opportunities? /

  A: Management had used only $4 million of the prior program by the end of Q2, leaving the full $30 million of expanded capacity available. At current discounted share prices, management views repurchases as delivering very strong returns on equity, and expects to deploy a meaningful portion of the capacity in the near term. They will balance repurchase activity against maintaining a comfortable balance sheet and leverage level, and note that repurchases are particularly accretive given the current subdued M&A and deal environment. This matches management's stated priority of returning value to shareholders when near-term investment opportunities are limited.

• Q: You noted discounted opportunities in liquid loan markets; what conditions would make management more positive on deploying capital into these opportunities? /

  A: The $1.5 trillion+ secondary loan market provides a large pipeline of opportunities, but management emphasizes idiosyncratic credit analysis, as discounts usually reflect fundamental uncertainty. Management is particularly constructive on discounted cybersecurity software loans, and sees attractive opportunities in discounted loans with near-term maturities where additional new equity is being brought in to support refinancing. More attractive opportunities are currently emerging in the broadly syndicated loan market than in private credit, where deal activity remains muted.

• Q: Year-to-date net realized losses are $14 million; how concentrated are these losses, and how do actual realization prices compare to prior carrying values? /

  A: Year-to-date realized losses are concentrated in just a handful of positions, mostly legacy non-accrual positions carried over from prior quarters. There has been very little difference between management's marked carrying values and actual realization prices in secondary market transactions, so marks accurately reflect current expected recoveries.

• Q: Is the expanded share repurchase program mostly formulaic or discretionary? /

  A: Of the $30 million expanded program, $10 million is allocated to the 10B51 formulatic repurchase plan, while the remaining $20 million is open market discretionary repurchases, allowing management flexibility over the timing and size of repurchases based on market conditions.