Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing
elsewhere in this Annual Report on Form 10-K.
Forward Looking Statements
This annual report on Form
10-K contains forward-looking statements that involve substantial known and unknown risks, uncertainties and other factors. Undue reliance
should not be placed on such statements. These forward-looking statements are not historical facts, but rather are based on current expectations,
estimates and projections about our company, our current and prospective portfolio investments, our industry, our beliefs and our assumptions.
Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,”
“continue,” “believes,” “seeks,” “estimates,” “would,” “could,”
“should,” “targets,” “projects,” and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties
and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements, including:
●
our future operating results;
●
our business prospects and the prospects of our portfolio companies;
●
changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including changes from the impact of the novel coronavirus (SARS-CoV-2) and related respiratory disease (“COVID-19”) pandemic;
●
uncertainty surrounding the financial and
political stability of the United States, the United Kingdom, the European Union and China, and the war between Russia and Ukraine;
●
the ability of the Investment Advisor to locate suitable investments for us and to monitor and administer our investments;
●
the ability of the Investment Advisor and its affiliates to attract and retain highly talented professionals;
●
risk associated with possible disruptions in our operations or the economy generally;
●
the timing of cash flows, if any, from the operations of the companies in which we invest;
●
the ability of the companies in which we invest to achieve their objectives, including as a result of adverse events, such as the COVID-19 pandemic;
●
our ability to continue to effectively manage our business due to the disruptions caused by adverse events, such as the COVID-19 pandemic;
●
the dependence of our future success on the general economy and its effect on the industries in which we invest;
●
our ability to maintain our qualification as a BDC and as a RIC under the Code;
●
the use of borrowed money to finance a portion of our investments;
●
the adequacy, availability and pricing of our financing sources and working capital;
●
actual or potential conflicts of interest with the Investment Advisor and its affiliates;
●
our contractual arrangements and relationships with third parties;
●
the current economic downturn, interest rate volatility, loss of key personnel, and the illiquid nature of our investments; and
●
the risks, uncertainties and other factors we identify under “Item 1A. Risk Factors” and elsewhere in this annual report on Form 10-K.
Although we believe that the
assumptions on which these forward-looking statements are based are reasonable, any of the assumptions could prove to be inaccurate, and
as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties,
the inclusion of a projection or forward-looking statement in this annual report on Form 10-K should not be regarded as a representation
by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section
entitled “Item 1A. Risk Factors” and elsewhere in this annual report on Form 10-K. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this annual report on Form 10-K. Moreover, we assume no duty and
do not undertake to update the forward-looking statements.
56
Overview
We are a financial services
company that primarily lends to and invests in corporate debt securities of companies, including small to large private U.S. companies.
We were organized as a Maryland corporation on August 26, 2019 and are structured as an externally managed, non-diversified closed-end
management investment company. We have elected to be regulated as a BDC under the 1940 Act and, beginning with our taxable year ending
December 31, 2020, we have elected to be treated as a RIC under Subchapter M of the Code, and we expect to qualify as a RIC annually thereafter.
We are externally managed
by the Investment Advisor, an investment adviser that is registered with the SEC under the Advisers Act, pursuant to the Advisory Agreement.
Subject to the supervision of our Board, a majority of which is made up of Independent Directors, our Investment Advisor manages our day-to-day
operations and provides us with investment advisory and management services and certain administrative services. The Investment Advisor,
in its capacity as Administrator, provides the administrative services necessary for us to operate pursuant to the Administration Agreement.
The Administrator has entered into the Sub-Administration Agreement to delegate certain administrative functions to the Sub-Administrator.
Our Investment Advisor is a majority-owned subsidiary of Palmer Square, which is a privately-held firm specializing in global alternative
(non-traditional) investments with a total return orientation.
Our investment objective is
to maximize total return, comprised of current income and capital appreciation. The Company’s current investment focus is guided
by two strategies that facilitate our investment opportunities and core competencies: (1) investing in corporate debt securities and,
to a lesser extent, (2) investing in CLO structured credit that typically owns corporate debt securities, including the equity and junior
debt tranches of CLOs. To a limited extent, we may enter into derivatives transactions, which may utilize instruments such as forward
contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values
of our portfolio positions from changes in currency exchange rates and market interest rates or to earn income and enhance our total returns.
We may also receive or purchase warrants or rights to acquire equity or other securities in connection with making a debt investment in
a company. We may also invest in other strategies and opportunities from time to time that we view as attractive. We will continue to
evaluate other investment strategies in the ordinary course of business with no specific top-down allocation to any single investment
strategy.
Revenues
We generate revenue primarily
in the form of interest and fee income on debt investments we hold and capital gains, if any, on investments. Our debt investments generally
bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR. Interest on debt securities is generally
payable quarterly or semi-annually. In some instances, we receive payments on our debt investments based on scheduled amortization of
the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The
frequency or volume of these repayments is expected to fluctuate significantly from period to period. Our portfolio activity also reflects
the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due
diligence fees, fees for providing managerial assistance and consulting fees.
Expenses
Our primary operating expenses
include the payment of fees to the Investment Advisor under the Advisory Agreement, our allocable portion of overhead and rental expenses
under the Administration Agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our
operations and transactions, including:
●
interest expense and other costs associated with our indebtedness;
●
the cost of calculating our net asset value, including the cost of any third-party valuation services;
57
●
the cost of effecting sales and repurchases of shares of our common stock and other securities;
●
fees payable to third parties relating to making investments, including our Investment Advisor’s or its affiliates’ travel expenses, research costs and out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;
●
transfer agent and custodial fees;
●
operating costs incurred prior to the commencement of our operations;
●
out-of-pocket fees and expenses associated with marketing efforts;
●
federal and state registration fees and any stock exchange listing fees;
●
U.S. federal, state and local taxes;
●
Independent Directors’ fees and expenses;
●
brokerage commissions and markups;
●
fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;
●
direct costs, such as printing, mailing, long distance telephone and staff;
●
fees and expenses associated with independent audits and outside legal costs;
●
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and
●
other expenses incurred by the Administrator or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion (subject to the review and approval of our Board) of overhead, including rental expenses.
Portfolio and Investment Activity
As of December 31, 2022, our
weighted average total yield to maturity of debt and income producing securities at fair value was 11.47%, and our weighted average total
yield to maturity of debt and income producing securities at amortized cost was 8.70%.
As of December 31, 2021, our
weighted average total yield to maturity of debt and income producing securities at fair value was 5.77% and our weighted average total
yield to maturity of debt and income producing securities at amortized cost was 5.91%.
As of December 31, 2022, we
had 204 debt and equity investments in 176 portfolio companies with an aggregate fair value of approximately $966.9 million.
As of December 31, 2021, we
had 240 debt and private investments in 212 portfolio companies with an aggregate fair value of approximately $1.1 billion.
58
Our investment activity for
the years ended December 31, 2022 and December 31, 2021 is presented below (information presented herein is at amortized cost unless otherwise
indicated).
For the Year Ended
December 31,
2022
December 31,
2021
New investments:
Gross investments
$ 278,951,054
$ 926,351,937
Less: sold investments
(314,355,643 )
(401,760,802 )
Total new investments
(35,404,589 )
524,591,135
Principal amount of investments funded:
First-lien senior secured debt investments
$ 247,233,397
$ 829,591,637
Second-lien senior secured debt investments
19,102,118
57,492,916
Corporate bonds
-
2,883,300
Convertible bonds
3,728,288
1,025,000
Collateralized securities and structured products - debt
-
14,757,907
CLO Equity
8,887,251
20,101,177
Common stock
-
500,000
Total principal amount of investments funded
278,951,054
926,351,937
Principal amount of investments sold or repaid:
First-lien senior secured debt investments
292,852,517
380,386,061
Second-lien senior secured debt investments
11,938,325
12,583,308
Corporate Bonds
987,500
-
Convertible bonds
4,504,808
3,026
CLO Equity
1,976,080
-
Collateralized securities and structured products - debt
1,501,875
8,788,407
Common Stock
594,538
-
Total principal amount of investments sold or repaid
314,355,643
401,760,802
59
Our investment activity for
the years ended December 31, 2022 and December 31, 2021 is presented below (information presented herein is at Par unless otherwise indicated).
New investment commitment refers to funded commitments in new securities made during the year that remained outstanding as of December
31, 2022 and December 31, 2021 respectively.
For the Year Ended
December 31,
2022
December 31,
2021
Number of new investment commitments
38
155
Average new investment commitment amount
$ 4,784,093
$ 4,521,355
Weighted average maturity for new investment commitments
5.95 years
5.85 years
Percentage of new debt investment commitments at floating rates
100.00 %
99.42 %
Percentage of new debt investment commitments at fixed rates
0.00 %
0.58 %
Weighted average interest rate of new investment commitments (1)
9.17 %
4.80 %
Weighted average spread over reference rate of new floating rate investment commitments (2)
4.80 %
4.39 %
Weighted average interest rate on investment sold or paid down
5.45 %
4.40 %
(1)
New CLO equity investments do not have an ascribed interest rate, and are therefore excluded from the calculation.
(2)
Variable rate loans bear interest at a rate that may be determined by reference to either a) LIBOR (which can include one-, two-, three- or six-month LIBOR) or b) the CME Term Secured Overnight Financing Rate (“SOFR” or “S”) (which can include one-, three-, or six-month SOFR), which resets periodically based on the terms of the loan agreement. At the borrower’s option, loans may instead reference an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), which also resets periodically based on the terms of the loan agreements. Loans that reference SOFR may include a Credit Spread Adjustment (“CSA”), where the CSA is a defined additional spread amount based on the tenor of SOFR the borrower selects (making the reference rate S+CSA).
As of December 31, 2022 and December 31, 2021,
our investments consisted of the following:
December 31, 2022
December 31, 2021
Amortized
Fair
Amortized
Fair
Investments:
Cost
Value
Cost
Value
First-lien senior secured debt
$ 951,753,250
$ 870,880,344
$ 1,003,839,402
$ 1,007,407,474
Second-lien senior secured debt
71,513,263
58,118,340
64,317,453
64,658,512
Corporate Bonds
1,884,529
1,332,888
2,883,596
2,947,571
Convertible Bond
-
-
1,021,974
942,069
CLO Mezzanine
17,589,330
14,732,721
18,907,287
19,105,394
CLO Equity
27,012,348
21,800,224
20,101,177
20,253,800
Equity
-
-
500,000
800,000
Short-term investments
50,347,215
50,347,215
78,142,764
78,142,764
Total Investments
$ 1,120,099,935
$ 1,017,211,732
$ 1,189,713,653
$ 1,194,257,584
60
The table below describes
investments by industry composition based on fair value as of December 31, 2022 and December 31, 2021:
December 31,
2022
December 31,
2021
Software
12.9 %
10.2 %
Healthcare Providers and Services
9.9 %
10.8 %
IT Services
8.4 %
9.4 %
Professional Services
5.9 %
6.4 %
Insurance
5.8 %
5.7 %
Cash and Cash Equivalents
4.9 %
6.5 %
Hotels, Restaurants and Leisure
3.9 %
3.5 %
Building Products
3.7 %
3.0 %
Chemicals
3.3 %
2.2 %
Media
3.2 %
3.9 %
Independent Power and Renewable Electricity Producers
2.8 %
3.1 %
Diversified Financial Services
2.6 %
1.8 %
Aerospace and Defense
2.5 %
0.9 %
Construction and Engineering
2.5 %
1.7 %
Structured Subordinated Note
2.1 %
1.7 %
Healthcare Technology
2.1 %
2.1 %
Metals and Mining
2.0 %
1.5 %
Auto Components
1.9 %
1.5 %
Oil, Gas and Consumable Fuels
1.7 %
3.0 %
Diversified Consumer Services
1.6 %
0.8 %
Containers and Packaging
1.5 %
1.8 %
Structured Note
1.4 %
1.6 %
Food Products
1.3 %
1.1 %
Specialty Retail
1.3 %
1.2 %
Commercial Services and Supplies
1.3 %
1.5 %
Electronic Equipment, Instruments and Components
1.2 %
1.1 %
Internet Software and Services
1.1 %
1.3 %
Healthcare Equipment and Supplies
0.9 %
2.0 %
Airlines
0.8 %
1.3 %
Real Estate Management and Development
0.6 %
0.6 %
Wireless Telecommunication Services
0.6 %
0.6 %
Machinery
0.6 %
0.3 %
Pharmaceuticals
0.6 %
0.8 %
Energy Equipment and Services
0.6 %
- %
Electrical Equipment
0.5 %
0.6 %
Road and Rail
0.5 %
0.6 %
Technology Hardware, Storage and Peripherals
0.4 %
0.5 %
Industrial Conglomerates
0.4 %
0.8 %
Household Durables
0.3 %
0.4 %
Diversified Telecommunication Services
0.3 %
1.4 %
Textiles, Apparel and Luxury Goods
0.1 %
0.1 %
Leisure Products
- %
0.4 %
Electric Utilities
- %
0.3 %
Total
100.0 %
100.0 %
61
The table below shows the
weighted average yields and interest rate of our debt investments at fair value as of December 31, 2022 and December 31, 2021:
December 31,
2022
December 31,
2021
Weighted average total yield of debt and income producing securities
11.47 %
5.77 %
Weighted average interest rate of debt and income producing securities (1)
8.83 %
4.80 %
Weighted average spread over reference rate of all floating rate investments (2)
4.47 %
4.31 %
(1) CLO
equity securities are considered income producing securities but do not have an ascribed interest rate, and therefore are excluded from
the calculation
(2)
Variable rate loans bear interest at a rate that may be determined by reference to either a) LIBOR (which can include one-, two-, three- or six-month LIBOR) or b) SOFR (which can include one-, three-, or six-month SOFR), which resets periodically based on the terms of the loan agreement. At the borrower’s option, loans may instead reference an alternate base rate (which can include the Federal Funds Effective Rate or the Prime Rate), which also resets periodically based on the terms of the loan agreements. Loans that reference SOFR may include CSA, where the CSA is a defined additional spread amount based on the tenor of SOFR the borrower selects (making the reference rate S+CSA).
Results of Operations
The following table represents
the operating results for the years ended December 31, 2022 and December 31, 2021:
For the Year Ended
December 31,
2022
2021
Total investment income
$ 74,499,900
$ 39,685,653
Less: Net expenses
33,419,068
16,851,412
Net investment income
41,080,832
22,834,241
Net realized gains (losses) on investments
(8,130,187 )
4,753,263
Net change in unrealized gains (losses) on investments
(107,432,980 )
(8,527,786 )
Net increase (decrease) in net assets resulting from operations
$ (74,482,335 )
$ 19,059,718
Investment Income
Investment income for the
years ended December 31, 2022 and December 31, 2021, was as follows:
For the Year Ended
December 31,
2022
2021
Interest from investments
$ 73,705,450
$ 38,897,216
Dividend income
610,203
9,597
Other income
184,247
778,840
Total investment income
$ 74,499,900
$ 39,685,653
62
For the years ended December
31, 2022 and December 31, 2021, total investment income was driven by interest income from our investments. The size of our investment
portfolio at fair value increased from $600.1 million as of December 31, 2020 to $1.1 billion as of December 31, 2021. The size
of our investment portfolio at fair value decreased from $1.1 billion as of December 31, 2021 to $966.9 million as of December 31, 2022.
All debt and short-term investments were income producing, and there were no loans on non-accrual status as of December 31, 2022.
Expenses
Operating expenses for the
years ended December 31, 2022 and December 31, 2021, was as follows:
For the Year Ended
December 31,
2022
2021
Interest and debt financing expenses
$ 23,452,169
$ 8,616,661
Management fees
8,328,713
6,369,583
Other operating expenses
2,604,275
2,586,366
Directors fees
75,000
75,000
Management fee waiver
(1,041,089 )
(796,198 )
Net expenses
$ 33,419,068
$ 16,851,412
Net expenses for the year
ended December 31, 2022 were $33.4 million, which consisted of $23.5 million in interest and debt financing, $8.3 million in management
fees, $2.6 million in other operating expenses, and $75 thousand in directors fees offset by $1.0 million in management fee waiver from
the Investment Advisor.
Interest expense increased
during the year ended December 31, 2022 as a result of an increase in outstanding debt. Average debt outstanding increased from $477.0
million to $667.5 million for the years ended December 31, 2021 and December 31, 2022, respectively. Management fees increased due to
a higher value of average net assets during the period. Average net assets increased from $318.5 million to $416.4 million as of December
31, 2021 and December 31, 2022, respectively.
Net expenses for the year
ended December 31, 2021 were $16.9 million, which consisted of $8.6 million in interest and debt financing, $6.4 million in management
fees, $2.6 million in other operating expenses, and $75 thousand in directors fees offset by $796 thousand in management fee waiver from
the Investment Advisor.
Net Change in Unrealized Gains (Losses) on
Investments
We fair value our portfolio
investments quarterly and any changes in fair value are recorded as unrealized gains or losses. During the years ended December 31, 2022
and December 31, 2021, net unrealized gains (losses) on our investment portfolio were comprised of the following:
For the Year Ended
December 31,
2022
2021
Unrealized gains on investments
$
1,635,443
$
6,224,196
Unrealized (losses) on investments
(109,068,423
)
(14,751,982
)
Net change in unrealized gains (losses) on investments
$
(107,432,980
)
$
(8,527,786
)
63
The change in unrealized appreciation
(depreciation) for the years ended December 31, 2022 and December 31, 2021 totaled $(107.4) million and $(8.5) million, respectively. For
the year ended December 31, 2022, this consisted of net unrealized depreciation of $106.2 million related to existing portfolio investments
and net unrealized depreciation of $1.2 million related to exited portfolio investments (a portion of which has been reclassified to realized
gains). For the year ended December 31, 2021, this consisted of net unrealized depreciation of $864 thousand related to existing portfolio
investments and unrealized appreciation of $2.7 million related to new portfolio investments, and net unrealized depreciation of $10.4
million related to exited portfolio investments (a portion of which has been reclassified to realized gains).
Financial Condition, Liquidity and Capital
Resources
We anticipate cash to be generated
from the private offering of our common stock and other future offerings of securities (including an initial public offering), and cash
flows from operations, including interest earned from the temporary investment of cash in cash equivalents, U.S. government securities
and other high-quality debt investments that mature in one year or less. Additionally, we are permitted, under specified conditions, to
issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940
Act, is at least equal to 150% immediately after each such issuance. If we are unable to obtain leverage or raise equity capital on terms
that are acceptable to us, our ability to grow our portfolio could be substantially impacted. Furthermore, while any indebtedness and
senior securities remain outstanding, we may be required to prohibit any distribution to our stockholders or the repurchase of shares
unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. In connection with borrowings, our
lenders, including under the BoA Credit Facility and the WF Credit Facility, may require us to pledge assets, investor commitments to
fund capital calls and/or the proceeds of those capital calls. In addition, such lenders may ask us to comply with positive or negative
covenants that could have an effect on our operations.
During the year ended December 31, 2022, we experienced a net increase
in cash and cash equivalents of $557 thousand. During the period, net cash provided by operating activities was $25.1 million, primarily
as a result of proceeds received from sale of investments of $314.4 million, partially offset by fundings of portfolio investments (excluding
investments in short-term money market funds) of $279.0 million. We invested in short-term money market funds during the period, and as
of the end of the period we held $50.3 million in fair value of short-term money market funds. During the same period, net cash used in
financing activities was $24.6 million, primarily consisting of $10.8 million of net repayments under the BoA Credit Facility and WF Credit
Facility and distributions paid in cash of $18.8 million, partially offset by proceeds from the issuance of common stock of $5.0 million.
During the year ended December
31, 2021, we experienced a net increase in cash and cash equivalents of $411 thousand. During the period, net cash used in operating activities
was $438 million, primarily as a result of fundings of portfolio investments (excluding investments in short-term money market funds)
of $926.4 million, partially offset by proceeds received from sale of investments of $406.8 million. We invested in short-term money market
funds during the period, and as of the end of the period we held $78.1 million in fair value of short-term money market funds. During
the same period, net cash provided by financing activities was $438.4 million, primarily consisting of $256.6 million of net borrowing
under the BoA Credit Facility and WF Credit Facility and proceeds from the issuance of common stock of $188.9 million, partially offset
by distributions paid in cash of $6.3 million.
64
As of December 31, 2022 and
December 31, 2021, we had cash and cash equivalents of $1.7 million and $1.1 million, respectively. As of December 31, 2022, we had $514.5
million principal outstanding under the BoA Credit Facility and $126.8 million principal outstanding under the WF Credit Facility. As
of December 31, 2021, we had $552 million principal outstanding under the BoA Credit Facility and $100 million principal outstanding under
the WF Credit Facility.
During the years ended December
31, 2022 and December 31, 2021, we had aggregate capital commitments and undrawn capital commitments from investors as follows:
December 31, 2022
December 31, 2021
Capital
Commitments
Unfunded
Capital
Commitments
% of Capital
Commitments
Funded
Capital
Commitments
Unfunded Capital
Commitments(1)
% of Capital
Commitments
Funded
Common stock
$ 5,023,800
$ -
100 %
$ 193,511,571
$ 4,650,000
98 %
(1)
100% of the unfunded commitments were drawn down in January 2022.
As a BDC, we are required
to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any
preferred stock that we may issue in the future, of at least 150%. If this ratio declines below 150%, we cannot incur additional debt
and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so. As of December 31,
2022, our asset coverage ratio was 157%.
Capital Contributions
During the years ended December
31, 2022 and December 31, 2021, the Company issued and sold 1,716,297 shares at an aggregate purchase price of $29.2 million and 10,007,526
shares at an aggregate purchase price of $206.6 million, respectively. These amounts include shares issued in reinvestment.
Financing Arrangements
Bank of America Credit Facility
On February 18, 2020, we,
through a special purpose wholly-owned subsidiary, PS BDC Funding, entered into the Credit Agreement with the Lenders, BofA N.A. as the
administrative agent and BofA Securities, as Lead Arranger and Sole Book Manager, pursuant to which the Lenders agreed to provide us with
a revolving line of credit.
Under the BoA Credit Facility,
which matures on February 18, 2025, the Lenders have agreed to extend credit to PS BDC Funding in an aggregate amount up to the Commitment
(as defined in the Credit Agreement) amount. The Commitment amount for the BoA Credit Facility was $200.0 million as of the closing date
of the Credit Agreement, increased to $400.0 million on the one-month anniversary of the closing date, further increased to $475.0 million
on October 12, 2020, and further increased to $725 million on September 29, 2021. The Borrowers’ ability to draw under the BoA Credit
Facility is scheduled to terminate on February 11, 2025. All amounts outstanding under the BoA Credit Facility are required to be repaid
by February 18, 2025.
65
The loans under the BoA Credit
Facility may be base rate loans or eurocurrency rate loans. The base rate loans will bear interest at the base rate plus 1.30%, and the
eurocurrency rate loans will bear interest at LIBOR plus 1.30%. The “base rate” will be equal to the highest of (a) the federal
funds rate plus 0.50%, (b) the prime rate and (c) LIBOR. The Credit Agreement includes fallback language in the event that LIBOR becomes
unavailable. Interest pursuant to base rate loans is payable quarterly in arrears, and interest pursuant to eurocurrency loans is payable
either quarterly or monthly, as specified by the Borrowers in a loan notice pertaining thereto. The Credit Agreement requires the payment
of a commitment fee of 0.50% for unused Commitments until the four-month anniversary of the Second Amendment to the Credit Agreement.
Thereafter, the commitment fee is 0.50% on unused Commitments up to 30% of the BoA Credit Facility, and 1.30% on unused Commitments in
excess of 30% of the BoA Credit Facility. Such fee is payable quarterly in arrears. The advance rate for PS BDC Funding’s Eligible
Collateral Assets ranges from 40% for Second Lien Bank Loans to 70% for First Lien Bank Loans that are B Assets to 100% for Cash (excluding
Excluded Amounts) (as each such term is defined in the Credit Agreement).
PS BDC Funding has pledged
all of its assets to BofA N.A., in its capacity as Administrative Agent, to secure its obligations under the BoA Credit Facility. Both
the Company and PS BDC Funding have made customary representations and warranties and are required to comply with various covenants, reporting
requirements, and other customary requirements for similar credit facilities. Borrowing under the BoA Credit Facility is subject to the
leverage restrictions contained in the 1940 Act and PS BDC Funding complies with 1940 Act provisions relating to affiliated transactions
and custody. The custodian of the assets pledged to BofA N.A. pursuant to the BoA Credit Facility is U.S. Bank National Administration.
The obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, including
in the event of a change of control of PS BDC Funding or if the Investment Advisor ceases to serve as investment adviser to the Company.
As of December 31, 2022, we
had approximately $514.5 million principal outstanding and $210.5 million of available Commitments under the BoA Credit Facility, and
PS BDC Funding was in compliance with the applicable covenants in the BoA Credit Facility on such date.
Wells Fargo Credit Facility
On December 18, 2020, we,
through a special purpose wholly-owned subsidiary, PS BDC Funding II, entered into the Loan Agreement with the WF Lenders, WFB as the
administrative agent and U.S. Bank, as Collateral Agent and Custodian, pursuant to which the WF Lenders agreed to provide us with a line
of credit.
Under the WF Credit Facility,
which matures on December 18, 2025, the WF Lenders have agreed to extend credit to PS BDC Funding II in an aggregate amount up to the
Facility Amount (as defined in the Loan Agreement). The Facility Amount for the WF Credit Facility was $150.0 million as of the closing
date of the Loan Agreement. The WF Borrowers’ ability to draw under the WF Credit Facility is scheduled to terminate on December
18, 2023. All amounts outstanding under the WF Credit Facility are required to be repaid by December 18, 2025.
The loans under the WF Credit Facility may be Broadly Syndicated Loans
or Middle Market Loans and shall be eurocurrency rate loans unless such rate is unavailable, in which case the loans shall be base rate
loans until such rate is available. Broadly Syndicated Loans will bear interest at the LIBOR or base rate, as applicable, plus 1.85%,
and Middle Market Loans will bear interest at LIBOR or base rate, as applicable, plus 2.35%. The “base rate” will be equal
to the highest of (a) the federal funds rate plus 0.50% and (b) the prime rate. The Loan Agreement includes fallback language in the event
that LIBOR becomes unavailable. Interest is payable quarterly, as determined by the WFB as the administrative agent. Following the Second
Amendment of the WF Credit Facility, the Loan Agreement requires the payment of a non-usage fee of (x) during the first thirteen months
following the closing of the WF Credit Facility, 0.50% multiplied by daily unused Facility Amounts, (y) between thirteen and sixteen months
following the closing of the WF Credit Facility, 0.50% multiplied by the lesser of (1) daily unused Facility Amounts and (2) 50% of the
Facility Amount plus 2.00% multiplied by the greater of (i) the difference between the daily unused Facility Amount and 50% of the Facility
Amount and (ii) zero, and, (z) thereafter, 0.50% multiplied by the lesser of (1) daily unused Facility Amounts and (2) 20% of the Facility
Amount plus 2.00% multiplied by the greater of (i) the difference between the daily unused Facility Amount and 20% of the Facility Amount
and (ii) zero. Such fee is payable quarterly in arrears. The WF Credit Facility includes the option to downsize the facility by paying
a Commitment Reduction Fee. The Fee is equal to 2.00% of the facility reduction amount prior to the one year anniversary of the closing
of the WF Credit Facility, and 1.00% thereafter. The applicable percentage for PS BDC Funding II’s Eligible Loans ranges from 67.5%
for Middle Market Loans to 70% for Broadly Syndicated Loans (as each such term is defined in the Loan Agreement).
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PS BDC Funding II has pledged
all of its assets to U.S. Bank, in its capacity as Collateral Agent, to secure its obligations under the WF Credit Facility and U.S. Bank
acts as the custodian of such assets. Both the Company and PS BDC Funding II have made customary representations and warranties and are
required to comply with various covenants, reporting requirements, and other customary requirements for similar credit facilities. Borrowing
under the WF Credit Facility is subject to the leverage restrictions contained in the 1940 Act and PS BDC Funding II complies with 1940
Act provisions relating to affiliated transactions and custody. The obligations under the Loan Agreement may be accelerated upon the occurrence
of an event of default under the Loan Agreement, including in the event of a change of control of PS BDC Funding II, if the Investment
Advisor ceases to serve as investment adviser to the Company, or if Palmer Square or its affiliates cease to directly or indirectly own
a majority of the membership interests of the Investment Advisor.
As of December 31, 2022, we
had approximately $126.8 million outstanding and $23.2 million of available Commitments under the WF Credit Facility, and PS BDC Funding
II was in compliance with the applicable covenants in the WF Credit Facility on such date.
Distribution Policy
To the extent that we have
income available, we intend to distribute quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined
by our Board. Any dividends to our stockholders will be declared out of assets legally available for distribution.
We have elected to be treated,
and intend to operate in a manner so as to continuously qualify, as a RIC under the Code. To obtain and maintain RIC tax treatment, among
other things, we must distribute dividends to our stockholders in respect of each taxable year of an amount at least equal to 90% of the
sum of our net ordinary income and net short-term capital gains in excess of our net long-term capital losses (“investment company
taxable income”), determined without regard to any deduction for dividends paid. In order to avoid certain excise taxes imposed
on RICs, we currently intend to distribute dividends to our stockholders in respect of each calendar year of an amount at least equal
to the sum of: (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for such calendar year; (2) 98.2%
of our capital gains in excess of capital losses (“capital gain net income”), adjusted for certain ordinary losses, generally
for the one-year period ending on October 31 of such calendar year; and (3) any net ordinary income and capital gain net income for preceding
years that were not distributed during such years and on which we previously paid no U.S. federal income tax. Under certain applicable
provisions of the Code and U.S. Treasury regulations, distributions payable in cash or in shares of stock at the election of the stockholders
are treated as taxable dividends. The IRS has published guidance indicating that this rule will apply even where the total amount of cash
that may be distributed is limited to no more than 20% of the total distribution. Under this guidance, if too many stockholders elect
to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive
cash (with the balance of the distribution paid in stock). If we decide to make any distributions consistent with this guidance that are
payable in part in stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether
received in cash, shares of our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution
is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income
tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received.
If a U.S. stockholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in
income with respect to the dividend, depending on the value of our stock at the time of the sale. Furthermore, with respect to non-U.S.
stockholders, the Company may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion
of such dividend that is payable in stock.
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For these excise tax purposes,
we will be deemed to have distributed any net ordinary taxable income or capital gain net income on which we have paid U.S. federal income
tax. Depending on the level of taxable income earned in a calendar year, we may choose to carry forward taxable income for distribution
in the following calendar year, and pay any applicable U.S. federal excise tax. We may not be able to achieve results that will permit
the payment of cash distributions.
We currently intend to distribute
net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the
assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment, incur
a corporate-level tax on such capital gains, and elect to treat such capital gains as deemed distributions to our stockholders. If this
happens, our stockholders will be treated for U.S. federal income tax purposes as if they had received an actual distribution of the capital
gains that we retain and reinvested the net after tax proceeds in us. In this situation, our stockholders would be eligible to claim a
tax credit equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. We may not be able to achieve
operating results that will permit us to pay any cash distributions, and if we issue senior securities, we will be prohibited from making
distributions if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if such distributions
are limited by the terms of any of our borrowings.
We have adopted a dividend
reinvestment plan that will provide for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a
stockholder elects to receive cash. As a result, if our Board authorizes, and we declare, a cash dividend or other distribution, then
stockholders who do not “opt out” of the Company’s dividend reinvestment plan will have their cash dividends and distributions
automatically reinvested in additional shares of our common stock, rather than receiving cash dividends and distributions.
Prior to a Listing, the Board
will use newly-issued shares of the Company’s common stock to implement the dividend reinvestment plan. The number of shares of
common stock to be issued to a participant prior to a Listing would be equal to the quotient determined by dividing the cash value of
the dividend payable to such stockholder by the net asset value per share as of the date such dividend was declared.
After a Listing, the Board
intends to primarily use newly-issued shares to implement the dividend reinvestment plan, whether or not the shares are trading at a price
per share at, below or above net asset value. However, the Board reserves the right to purchase shares in the open market in connection
with the implementation of the dividend reinvestment plan. The Board will examine the full facts and circumstances of each such dividend
to determine the approach (i.e., to use newly issued shares or effectuate open market purchases to implement the dividend reinvestment
plan) that is in the best interests of stockholders taking into account the Board’s fiduciary duties to stockholders, including
by weighing the potential dilution in connection with such issuance to be incurred by the Company’s stockholders against the Company’s
need and usage of reinvested funds. The number of newly issued shares to be issued to a participant would be determined by dividing the
total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular
trading on a national securities exchange on the dividend payment date. Shares purchased in open market transactions by US Bank, the plan
administrator and our transfer agent, registrar, and dividend disbursing agent, will be allocated to a participant based upon the average
purchase price, excluding any brokerage charges or other charges, of all shares of our common stock purchased with respect to the dividend.
A registered stockholder may
elect to receive an entire distribution in cash by notifying US Bank in writing so that such notice is received by the plan administrator
no later than the record date for distributions to stockholders. The plan administrator will set up an account for shares acquired through
the plan for each stockholder who has not elected to receive dividends or other distributions in cash and hold such shares in noncertificated
form.
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Critical Accounting Estimates
Our consolidated financial
statements are prepared in conformity with accounting principles generally accepted in the United States of America, which requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting periods.
Critical accounting estimates
are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need
to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. The preparation
of these financial statements will require management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates
could cause actual results to differ. In addition to the discussion below, we have described our critical accounting estimates in the
notes to our consolidated financial statements.
Valuation of Portfolio Investments
In December 2020, the SEC
adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to either (i) choose to continue to determine fair
value in good faith, or (ii) designate its investment adviser as the valuation designee tasked with determining fair value in good faith,
subject to the board’s oversight. Our Board has designated the Investment Advisor to serve as our valuation designee effective August
11, 2022.
We value investments for which
market quotations are readily available at such market quotations. Assets listed on an exchange will be valued at their last sales prices
as reported to the consolidated quotation service at 4:00 P.M. eastern time on the date of determination. If no such sales of such securities
occurred, such securities will be valued at the mean between the last available bid and ask prices as reported by an independent, third-party
pricing service on the date of determination (unless the prices provided by the pricing service is believed by the Investment Advisor
to be unreliable or a significant event has occurred subsequent to the provision of the prices that the Investment Advisor determines
will affect the fair value of the securities). Debt and equity securities whose market prices are not readily available (or for which
either of the events noted in the parenthetical immediately above occur) are valued at fair value by the Investment Advisor. Such determination
of fair values may involve subjective judgments and estimates, although we will also engage independent valuation providers to review
the valuation of each portfolio investment that constitutes a material portion of our portfolio and that does not have a readily available
market quotation at least once annually. With respect to unquoted securities, our Investment Advisor will value each investment considering,
among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors.
With respect to Level 3 assets, we intend to retain one or more independent providers of financial advisory services to assist the Investment
Advisor by performing certain limited third-party valuation services. We may appoint additional or different third-party valuation firms
in the future.
When an external event such
as a purchase transaction, public offering or subsequent equity sale occurs with respect to a fair-valued portfolio company or comparable
company, the Investment Advisor will use the pricing indicated by the external event in connection with its fair valuation determination
process. Because we expect that there will not be a readily available market for many of the investments in our portfolio, we expect to
value many of our portfolio investments at fair value as determined in good faith by the Investment Advisor using a documented valuation
policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that
do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have
been used had readily available market quotations existed for such investments, and the differences could be material.
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Net Realized Gains or Losses and Net Change
in Unrealized Appreciation or Depreciation
We measure realized gains
or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without
regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties.
Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period,
including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. Realized gains
and losses from securities transactions and unrealized appreciation and depreciation of securities are determined using the identified
cost basis method for financial reporting.
Related Party Transactions
We have entered into the Advisory
Agreement with the Investment Advisor and the Administration Agreement with the Investment Advisor (in such capacity, the Administrator).
Mr. Christopher D. Long and Mr. Jeffrey D. Fox, each an interested member of our Board, have an indirect pecuniary interest in the Investment
Advisor. The Investment Advisor is a registered investment adviser under the Advisers Act that is majority-owned by Palmer Square. See
“ Note 3. Agreements and Related Party Transactions – Administration Agreement ” and “ – Investment
Advisory Agreement ” in the notes to the accompanying consolidated financial statements.
Contractual Obligations
We have certain contracts
under which we have material future commitments. We have entered into the Advisory Agreement with the Investment Advisor in accordance
with the 1940 Act. Payments for investment advisory services under the Advisory Agreement are equal to (a) a base management fee calculated
at an annual rate of 2.0% of the average value of the weighted average of our total net assets at the end of the two most recently completed
quarters and (b) an incentive fee based on our performance. The Investment Advisor has agreed to waive its right to receive management
fees in excess of 1.75% of the total net assets during any period prior to a Listing. We have entered into an Administration Agreement
with the Administrator to serve as our administrator. Pursuant to the Administration Agreement, the Administrator furnishes us with office
facilities and equipment, provides us with clerical, bookkeeping and recordkeeping services at such facilities, and provides us with other
services necessary for us to operate or has engaged a third-party firm to perform some or all of these functions.
A summary of our significant
contractual payment obligations related to the repayment of our outstanding indebtedness at December 31, 2022 is as follows:
Payments Due by Period
Total
Less than
1 year
1-3 years
3-5 years
After
5 years
BoA Credit Facility, Net
$ 513,726,164
$ -
$ 513,726,164
$ -
$ -
WF Credit Facility, Net
$ 127,583,253
$ -
$ 127,583,253
$ -
$ -
Total contractual obligations
$ 641,309,417
$ -
$ 641,309,417
$ -
$ -
Off-Balance Sheet Arrangements
Unfunded commitments to provide
funds to portfolio companies are not recorded on our consolidated statements of assets and liabilities. Our unfunded commitments may be
significant from time to time. Unfunded commitments may expire without being drawn upon and the total commitment amount does not necessarily
represent future cash requirements. As of December 31, 2022 and December 31, 2021, we had two unfunded commitments totaling $2.6 million,
and nine unfunded commitments totaling $11.3 million, respectively. See “Note 8. Commitments and Contingencies” in
the notes to the accompanying consolidated financial statements for specific identification of the unfunded commitments. We believe we
maintain sufficient liquidity in the form of cash (including restricted cash, if any), receivables and borrowing capacity to fund these
unfunded commitments should the need arise. See Financial Condition, Liquidity and Capital Resources above.
Other than contractual commitments
and other legal contingencies incurred in the normal course of our business, we do not have any off- balance sheet financings or liabilities.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.