Hello, everyone. Welcome to Palmer Square Capital BDC's third quarter 2026 earnings call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the prepared remarks. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. As a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to Jeremy Goff, Managing Director. You may begin.
Welcome to Palmer Square Capital BDC's third quarter 2026 earnings call. Joining me this afternoon are Chris Long, Chairman and Chief Executive Officer, Matt Bloomfield, President, and Jeff Fox, Chief Financial Officer and Director. Palmer Square Capital BDC's third 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 uncertainty 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 third quarter 2026 conference call. On today's call, I will provide an overview of our third quarter results, touch on our market outlook, the current industry dynamics at play, and then turn the call to the team to discuss our portfolio activity and financial results. PSBD delivered solid financial performance in the third quarter, supported by a disciplined capital allocation strategy. We prioritized share repurchases during the quarter, buying back $5.2 million of PSBD shares under the expanded repurchase program that was announced last quarter. This underscores our continued commitment to allocating capital in a way that prioritizes shareholder value while remaining selective in a moderate deal environment.
During the third quarter, our team deployed $115 million of capital and generated total and net investment income of $26.6 million and $11.6 million respectively. We delivered net investment income of $0.38 per share and paid a $0.38 per share total dividend, which includes a $0.02 supplemental distribution above our base dividend. Notably, our dividend payout represents an attractive 11.4% yield on NAV and 15.3% yield on the stock price as of October 30th. In further alignment with the priorities and approach I've just discussed, our board has declared a fourth quarter base dividend of $0.36 per share, with the supplemental dividend to be determined in the normal course.
Turning to net asset value, our NAV per share as of September 30th, 2026 was $13.34, reflecting fair value adjustments resulting from pricing moves within the broadly syndicated loan market and an increase of $0.13 per share from the end of the second quarter. Matt will provide additional color on our broader outlook for credit and how it specifically relates to PSBD's portfolio momentarily, but at a high level, we see a similar dynamic to what we discussed at the close of the second quarter, a multifaceted market environment that remains fluid. In the third quarter specifically, we experienced heightened interest rate volatility late in the quarter, with the 10-year Treasury yield recording one of its largest quarterly moves in history and the 30-year yield reaching multi-decade highs.
Inflation remained persistent, prompting the Fed to act in September as economic data reinforced the need for a rate hike, with the potential for additional increases in the months ahead. As I shared in previous quarters, the Palmer Square platform was built for markets like these. While the macro challenges we see today create a more complex investing environment, it is this kind of complexity that highlights the capabilities and experience of the platform behind PSBD and our ability to find opportunities and create shareholder value. As Matt will discuss, we continue to see and evaluate deals across our opportunity set in floating rate bank loans and private credit, which have continued to outperform traditional fixed income and corporate credit during the quarter. We believe the yields across the broader BDC sector, particularly given current discount to NAV, are becoming increasingly difficult for investors to ignore.
As we look at the opportunities set in front of us, we are further reassured by the resilience of corporate earnings and the relative stability of underlying credit performance, and are optimistic that attractive opportunities can arise even as deal activity remains muted by rate volatility and broader sentiment. Turning to AI and software for a moment, AI-related debt issuances continued to accelerate during the third quarter, competing with other income-generating products for investor capital. At the same time, we are closely monitoring growing opposition to data center permitting and construction, which could impact the pace of AI infrastructure development. This remains an important trend to watch, particularly given that AI infrastructure investment represents a meaningful portion of GDP and corporate earnings growth trajectories.
As we have previously discussed, we remain confident in our software portfolio, which is strategically focused on AI beneficiaries and management teams who have demonstrated an ability to adapt and innovate. As I conclude my remarks, I'd like to reiterate Palmer Square Capital Management's competitive advantage as one of the industry's leading global CLO managers. The breadth of our platform, which provides extensive visibility across the entire broadly syndicated loan landscape, enables us to act selectively, and we believe the combined benefits to PSBD from our scale, longstanding relationships, and significant sourcing capabilities within the syndicated loan market continue to be underappreciated by the market. We remain focused on delivering the best possible outcomes for our portfolio, and most importantly, our shareholders.
We believe the flexibility of our liquid portfolio, combined with our active management approach and line of sight across the leveraged loan market, positions us well to execute as market conditions evolve. Looking ahead, if interest rate volatility and geopolitical uncertainty remain elevated, we expect it to continue weighing on deal activity in the fourth quarter. From our recent conversations with sponsors, we've heard anecdotally that transaction processes are taking longer to complete and deal timelines are increasingly being extended. That said, sponsors ultimately need to transact, and we expect activity to improve over time, although the pace of that improvement may be uneven. With that, I will hand the call over to Matt.
Thank you, Chris. As Chris alluded to, credit performance remains consistent despite a volatile macro backdrop, which has been further compounded by inflationary pressures and the Fed increasing interest rates in September. Rising diesel prices resulting from ongoing geopolitical tensions in the Middle East and Europe pose additional uncertainties related to the outlook for economic growth. Growing concerns about the costs of AI-related build-outs and the resulting impact rising AI debt levels have had on credit spreads has further added to recent credit volatility. In light of these dynamics, and consistent with our expectations through the summer, the BSL market saw relatively subdued but steady activity during the quarter, with a pickup in deal flow following Labor Day, followed by a notable pullback as we moved into the fourth quarter.
As spreads remained tight, partly driven by market technicals, we saw several private credit borrowers refinance into the BSL market to take advantage of more attractive pricing. Encouragingly, we have also seen a modest pickup in sponsor-backed M&A activity across the software sector. This momentum, coupled with multiple high-profile software refinancings, including Proofpoint, which priced in July, and Sophos, which priced in September, demonstrates the market's willingness to underwrite risk in the sector, even if lenders remain increasingly risk-averse. As we have discussed in the past, for the right opportunities in the software sector, such as these in cybersecurity, we believe there will continue to be strong relative value and total return opportunities for those willing to do the work.
During the quarter, we also observed that some lenders were able to secure more favorable terms, including stronger credit documentation, wider spreads, and in one instance, additional junior capital support, which we view as a constructive development for lenders. Turning to the portfolio, we are pleased with performance during the third quarter, generating net investment income of $0.38 per share, $0.02 above our base dividend, along with modest NAV accretion compared to the second quarter. We also continue to focus efforts on optimizing the right side of the balance sheet, and we were able to reduce leverage while simultaneously returning capital to our shareholders through our share repurchase program. These results reflect our active and disciplined approach to managing both our investments and balance sheet.
As discussed on our last earnings call, during the quarter, we reset and extended our BDC CLO, lowering the weighted average cost of debt to SOFR plus 139 from SOFR plus 172, while extending the reinvestment period to July 2031 and maturity to July 2039. Given the lower cost of financing through our CLO, we also reduced excess capacity under our Bank of America BSL funding facility to reduce associated unused fees. Together, these actions help enhance our funding efficiency and reduce carrying costs while preserving liquidity and financial flexibility should M&A activity accelerate. Notably, we reduced our leverage from 1.71x in the second quarter of 2026 to 1.63 times in the third quarter of 2026. This was driven by a combination of debt paydown and NAV appreciation during the quarter.
We are pleased with the strength and flexibility of our balance sheet, which positions us to capitalize on attractive investment opportunities as they arise. Importantly, share repurchases remain a top near-term priority as we evaluate capital allocation opportunities against our broader investment mandate. Tactically, we currently see better relative value in private credit compared to the syndicated loan market, given prevailing spread dynamics. Within the BSL market, we see more attractive risk-adjusted returns in the secondary market compared to new issuance. Our team continues to actively evaluate these opportunities and allocate where we see the most compelling value. While these are how we currently see the opportunity set, given the fluidity of the market, that can certainly change.
Our investment portfolio as of September 30th, 2026, had a fair value of approximately $1.09 billion, diversified across 45 industries that demonstrate strong credit quality, industry and company-specific tailwinds, and a variety of end markets. This compares to a fair value of $1.11 billion at the end of the second quarter of 2026, reflecting a decrease of approximately 2.3%. in the third quarter, we invested $115 million of capital, which included 31 new investment commitments at an average value of approximately $3.5 million. During the same period, we realized approximately $165.8 million through repayments and sales. To recap key portfolio highlights, at the end of the third quarter, our weighted average total yield to maturity of debt and income-producing securities at fair value was 11.99%, and our weighted average total yield to maturity of debt and income-producing securities at amortized cost was 8.38%.
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 45 different industries. Further, our 10 largest investments account for just 10.92% of the overall portfolio, and our portfolio is 97% senior secured, with an average hold size of approximately $4.1 million. On a fair value-weighted basis, our first-lien borrowers had a weighted average EBITDA of $483 million, senior secured leverage of 5.71x , and interest coverage of 2.38x . Additionally, new private credit loans comprised 12.2% of overall new investments, at a weighted average spread of 659 basis points over the reference rate. On a fair value basis, non-accruals represent less than one basis point, and on an at-cost basis, only 96 basis points. Our PIK income represents approximately 2.18% of total investment income, well below our peers in the industry average.
We have 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. Stepping back, the line between syndicated and direct lending continues to blur, with borrower relationships increasingly spanning both markets. We believe our ability to invest across these financing channels is a competitive advantage, allowing us to maintain and expand incumbent relationships while leveraging knowledge of these borrowers to identify attractive investment opportunities. At the same time, we remain disciplined in our approach to capital allocation, weighing new investments against other opportunities, including share repurchases, with the goal of maximizing value for shareholders. As we close out the year, we remain confident in the credit performance of our portfolio and the sustainability of the base dividend heading into 2027.
We expect recent refinancing activity to be additive to earnings power and market-implied base rate expectations to be supportive as well. Now, I would like to turn the call over to Jeff, who will review our third quarter 2026 financial results.
Thank you, Matt. Total investment income was $26.6 million for the third quarter of 2026, down 16.1% from $31.7 million for the comparable prior year period. Income generation during the quarter reflected contractual interest income from our investments, which was impacted by lower base rates versus the prior year, as well as a modest amount of paydown-related income and fee income. Total net expenses for the third quarter were $14.9 million compared to $18 million for the prior year period. Net investment income for the third quarter of 2026 was $11.6 million, or $0.38 per share, compared to $13.6 million, or $0.43 per share, for the comparable period last year.
During the third quarter of 2026, the company had a total net realized and unrealized gains of $2.4 million, compared to total net realized and unrealized losses of $10.3 million in the third quarter of 2025. This consisted of net unrealized depreciation of $2.2 million related to existing portfolio investments and net unrealized appreciation of $9.2 million related to exited portfolio investments. At the end of the third quarter, NAV per share was $13.34, increasing from $13.21 at the end of the second quarter of 2026. Moving to our balance sheet, total assets were $1.1 billion, and total net assets were $403.4 million as of September 30th, 2026. At the end of the third quarter, our debt-to-equity ratio was 1.63x compared to 1.71x at the end of the second quarter of 2026.
Available liquidity, consisting of cash and undrawn capacity on our credit facilities, was approximately $195 million. This compares to approximately $331 million at the end of the second quarter of 2026. Finally, on November 4th, the board of directors declared a fourth-quarter 2026 base dividend of $0.36 per share, in line with our dividend policy. Furthermore, our policy continues to distribute excess earnings in the form of a quarterly supplemental distribution. With that, I'd now like to open the call up for questions.
We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kenneth Lee with RBC Capital Markets. Kenneth, your line is open. Please go ahead.
Good afternoon, and thanks for taking my question. Just one on the liquid loan markets there. You mentioned in the prepared remarks that you are preferring private credit versus the more liquid side right now. You also mentioned that spreads remain tight. Just wondered if you could give a little bit more color in terms of some of the terms and documentation that you are seeing in the BSL markets right now. Thanks.
Yeah. Hi, Kenneth. It is Matt. Thank you for the question. Yeah, that is right. I mean, I think on the margin, we do see a little bit better relative value, particularly from a spread perspective on the private credit portion of the market. I think with some continued outflows in non-traded BDCs, that has led to, I would say, modest spread widening in that market. Net-net, we think there continue to be some interesting opportunities there. Throughout most of the third quarter, spreads remained relatively tight on the broadly syndicated side of things, talking about kind of the primary market there, especially with some of the deal flow post-Labor Day.
Certainly, what we have seen over the month of October, with a lot of increased rate volatility in general, there is certainly some more, I would say, interesting opportunities in the broadly syndicated secondary market, as we mentioned in the prepared remarks. To be quite frank, we have not seen a whole host of kind of new issues coming to the market here recently as well. I think, net-net, from our vantage point, we think there will be some better things to do on the secondary side of things versus primary. As we move into early next year, that tends to be a slower quarter in general from M&A activity and deal flow. We will have to see how things evolve over the next few months.
Great. Very helpful there. Just one follow-up, if I may. You briefly referenced the dividend outlook there, or at least the coverage. Wonder if you could just further expand upon that, thoughts on dividend coverage, especially given the current rate outlook and some of the potential deal activity that you see coming up. Thanks.
Sure. Yeah, I think as we kind of look forward and model out kind of where the portfolio sits today from a spread perspective, obviously, I alluded to my comments on some more attractive spreads on the private credit side and certainly have seen some spread widening across most credit markets, if not all credit markets, in October. So, feel net-net better just about where spreads are at. Obviously, base rates, we saw an increase from the Fed in September. I think the market's trying to decide which way we're headed on a go-forward basis, but certainly there's been a little bit more rate hikes priced in throughout next year, which from our vantage point, we would certainly view as a bit of a tailwind for yields on the portfolio, all within the fact that borrowers are still in a very good shape from an interest coverage standpoint.
We sit at 2.4x interest coverage across our portfolio, so we feel like there's good cushion for those borrowers to absorb some more rate hikes without causing too much in the way of stress from a cash flow standpoint. All that put together, again, we feel pretty good about where we sit from a base dividend standpoint on the go-forward, and certainly anticipate paying out any of the additional excess income generated through the supplementals.
Great. Very helpful there. Thanks again.
Your next question comes from the line of Melissa Wedel with UBS. Melissa, your line is open. Please go ahead. Melissa, your line is open. Please go ahead. Your next question comes from the line of Ethan Kaye with Lucid Capital Markets. Ethan, your line is open. Please go ahead.
Hey, guys. Thanks for taking the question. Just wanted to ask about interest costs going forward. I know there were maybe some puts and takes here this quarter, as it relates to the CLO refinancing and the excess capacity removal. Can you talk about run rate, if you expect this to be a good run rate going forward, what we saw in 3Q here?
Hey, Ethan. It's Matt. Thank you for that question. Yeah, I think we feel pretty good about where the right side of the balance sheet is now, post the refinancing and extension on the CLO and the downsizing on the BofA facility. All of those are obviously floating rate based, so they'll matriculate wherever base rates go. But from the spreads on those perspective, we feel really good about where those are at. Thought we got very nice execution, took advantage of all the comments we've made over the past several quarters about spreads being tight across most credit markets. We certainly look to take advantage of that in the third quarter as well by tightening those up. I think on a go-forward basis, those should be pretty steady state, and we feel good for the medium to longer term with those facilities in place.
Great. I guess one more on the portfolio turnover looked a little bit higher this quarter, certainly relative to 1H, and seemingly relative to what some peers have shown so far this quarter. Anything that drove that elevated exit levels?
I think as we looked across the portfolio during the quarter, we did see a fair amount of refinancing activity on the broadly syndicated side of things. As we alluded to in some prior calls, spreads remained pretty tight, and in some cases, kept tightening throughout the quarter. We just thought from a relative value standpoint and a risk-adjusted return standpoint that we weren't necessarily being compensated for some of those, so we just took the paydowns in those cases. We also, as you'll probably see in the 10-Q, we sold a lot of our CLO mezz investments in the quarter. Again, as we talked about spreads being really tight across most credit markets, we just thought there'll be better opportunities from a capital deployment and from a spread perspective in other asset classes on a go-forward basis.
Those are the two I would highlight as being ones to note in the quarter. But again, we also think we've got a lot of capacity now, should volatility persist and more interesting opportunities arise on the secondary side of things, on the broadly syndicated loan side. Certainly, as we've talked about in the prepared remarks, continue to think share repurchases make a lot of sense given where discounts are and where the return on equity sits from those buybacks. Debt paydown as well. We mentioned in the quarter, we paid down some of our debt facilities to continue to manage the overall leverage level. Those are all things that I think look pretty consistent as we sit here today in the fourth quarter.
Great. One more quick one, if I may. I noticed the weighted average maturity on new investment commitments this quarter looks significantly lower, significantly less than previous quarters. Does that have to do with more secondary opportunities, or I guess, what's driving that?
Yeah. Good catch, and noted on that. I think the main thing we've seen there is, we alluded to a couple of the refinancings that got done in the quarter. Most of those or some of those that we've seen, and certainly ones that we participated in in this quarter, tended to be two- to three-year extensions versus full seven-year refinancing. So, that's part of it. I think when it's a shorter WAL, those tend to be more attractive in certain situations, not every situation. But for those select refinancings we participated in, that was a dynamic at play there.
Then, yes, to your other comment, secondary transactions where we can find credits that we feel very comfortable in from a credit quality standpoint and a repayment perspective to the extent we can pick those up at discounts to par and those that have shorter maturity profiles, we think that pull to par or the ability to get refinanced out at par on a shorter basis makes a lot of sense for the portfolio as well.
Great. Thank you.
As a reminder, if you would like to ask a question, please press star one to raise your hand. If you are muted locally, please remember to unmute your device. Your next question comes from the line of Melissa Wedel with UBS. Melissa, your line is open. Please go ahead.
Thank you. Hopefully you can hear me this time.
Yeah.
Appreciate you taking my question. Good. Wanted to touch on the repurchase activity. Can you remind us, and if I missed it, I apologize, remind us how much remaining capacity is on that plan?
Yeah. Of course, Melissa. This is Matt again. We have, as of the end of the third quarter, about $24.8 million left on that plan. So, quite a bit of capacity left even after the $5.2 million this quarter.
Got it. Leverage did come down during the quarter, and you had net exits. Just wondering how you're feeling about 1.63x at the end of the third quarter, and how much room you think that How you balance the additional attractive potential repurchases you could continue to do going forward versus new capital deployment? Basically, are you managing to maintain leverage at that level, or how are you thinking about it?
Yeah, I think we talked last quarter, we were comfortable at the 1.71x . We certainly didn't want to go much higher than that but given our ability to manage leverage from a debt paydown perspective, from the liquidity in our underlying portfolio, we felt really good about that. I'd say during the quarter, as we saw those opportunities come up that I just talked about on the prior question, we just didn't think it made sense to stay involved at some of those spread levels. So, we took those paydowns, certainly paid down some debt with that. As we sit here in the fourth quarter, we'll kind of make those same judgments. If things aren't attractive from a relative value standpoint, we're happy to continue to take refinancings and deploy that into some debt paydown and to share buybacks.
But as I noted, in October, with some of the activity we've seen in the broader markets, on the margin, things are getting a little bit more interesting from a deployment standpoint. So, we'll balance all of those things, but we feel good about where we sit from a leverage standpoint. Certainly, that can come down. I don't know that we'll take it too much higher from an opportunity deployment set, but it's something that we feel very comfortable managing, and we'll just kind of see where the opportunity set lies as we move forward through the rest of this quarter and beyond.
Got it. I think I'm at the end of the queue, so I'll ask one more. This was a good quarter also in terms of stemming the outflows on NAV or the NAV depreciation, and had a, not just stabilization, but a slight uptick quarter-over-quarter. Can you talk about how you're thinking about NAV stability going forward? It's definitely an area we get questions about.
Yeah, I think it was kind of to unpack the third quarter on a monthly basis, I'd say July and August were pretty steady, loan prices matriculated higher in general in the broadly syndicated loan market as things were pretty stable. The back half of September got a little more volatile. As we just talked about, October in general was a pretty volatile market in credit writ large, especially with everything going on in broader rates and inflation and whatnot. We would ultimately like to see more stability across the markets. I think it's just good from a portfolio stabilization level. I think we've obviously increased our private credit allocation over the past couple of years to roughly 15% of the portfolio now. So, there are things I think we'd look to do to hopefully make things a little bit more stable.
As I mentioned, that volatility unlocks a lot of opportunities as well. When you can execute in the secondary market at discounts to par, over the long term, we think that should lead to cretiveness across the portfolio. Sometimes, there's a little bit more volatility in the short term. When you see good credits that go from par and trade down a few points, to the extent you can take advantage of that, we think that should build things back into the portfolio and lead to good returns on a go-forward basis too. So, that's kind of how we think about it. We're cognizant of it, but also, with the liquid nature of our portfolio, or at least the majority of the portfolio, that's something that's a little bit part of it, I suppose.
Thank you.
We have reached the end of our Q&A session. I will now turn the call back to Jeremy Goff, Managing Director, for closing remarks.
Thank you, operator, and thank you all for your time today. We look forward to updating everyone on our fourth quarter and 2026 full-year results in the new year. Have a great rest of your day.
This concludes today's call. Thank you for attending. You may now disconnect.