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 the liquidity of certain banks;
●
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 impact of fluctuations in interest rates
and foreign exchange rates on our business and our portfolio companies;
●
rising levels of inflation, and its impact on us, on our portfolio companies and on the industries in which we invest;
●
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, including a possible slowdown in the economy and risk of recession;
●
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;
●
our ability to continue to effectively manage our business due to the
disruptions caused by global political and economic instability;
●
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;
●
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.
63
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. Because we are a BDC, the forward-looking statements and projections contained
in this in this annual report on Form 10-K are excluded from the safe harbor protection provided by Sections 27A of the Securities Act
and Section 21E of the Exchange Act.
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. Beginning with our taxable year ended 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.
On January 22, 2024, we completed
our IPO, issuing 5,450,000 shares of common stock, par value $0.001, at a public offering price of $16.45 per share. Our common stock
began trading on the New York Stock Exchange under the symbol “PSBD” on January 18, 2024.
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 PSCM, 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. However, no assurance can be given that our investment
objective will be achieved, and investment results may vary substantially on a monthly, quarterly and annual basis. 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 funds that typically own corporate debt securities,
including the equity and junior debt tranches of CLOs. We seek to invest in credit and other assets that the Investment Advisor believes
have strong structural protections, limited downside, and low long-term beta, or volatility, in comparison to systemic risk within the
broader credit and equity markets. A significant portion of the loans in which we may invest or obtain exposure to through our investments
in structured securities may be deemed “Covenant-Lite Loans,” which means the loans contain fewer or no maintenance covenants
compared to other loans and do not include terms which allow the lender to declare a default if certain covenants are breached.
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. 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.
64
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;
● 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, 2023,
our weighted average total yield to maturity of debt and income producing securities at fair value was 10.51%, and our weighted average
total yield to maturity of debt and income producing securities at amortized cost was 8.93%.
65
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, 2023, we
had 227 debt and equity investments in 191 portfolio companies with an aggregate fair value of approximately $1.0 billion.
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.
Our investment activity for the years ended December 31, 2023, 2022,
and 2021 is presented below (information presented herein is at amortized cost unless otherwise indicated).
For the Year Ended
December 31,
2023
December 31,
2022
December 31,
2021
New investments:
Gross investments
$ 273,733,424
$ 278,951,054
$ 926,351,937
Less: sold investments
(247,083,117 )
(314,355,643 )
(401,760,802 )
Total new investments
26,650,307
(35,404,589 )
524,591,135
Principal amount of investments funded:
First-lien senior secured debt investments
$ 267,272,174
$ 247,233,397
$ 829,591,637
Second-lien senior secured debt investments
3,858,750
19,102,118
57,492,916
Corporate bonds
2,602,500
-
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
273,733,424
278,951,054
926,351,937
Principal amount of investments sold or repaid:
First-lien senior secured debt investments
233,535,659
292,852,517
380,386,061
Second-lien senior secured debt investments
8,013,549
11,938,325
12,583,308
Corporate Bonds
-
987,500
-
Convertible bonds
-
4,504,808
3,026
CLO Equity
2,533,909
1,976,080
-
Collateralized securities and structured products - debt
3,000,000
1,501,875
8,788,407
Common Stock
-
594,538
-
Total principal amount of investments sold or repaid
247,083,117
314,355,643
401,760,802
66
Our investment activity for the years ended December 31, 2023 and December
31, 2022, 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, 2023 and December 31, 2022 respectively.
For the Year
Ended
December 31,
2023
December 31,
2022
December 31,
2021
Number
of new investment commitments
67
38
155
Average
new investment commitment amount
$ 3,802,624
$ 4,784,093
$ 4,521,355
Weighted
average maturity for new investment commitments
5.19
years
5.95
years
5.85
years
Percentage
of new debt investment commitments at floating rates
98.82 %
100.00 %
99.42 %
Percentage
of new debt investment commitments at fixed rates
1.18 %
0.00 %
0.58 %
Weighted
average interest rate of new investment commitments
10.22 %
9.17 %
4.80 %
Weighted
average spread over reference rate of new floating rate investment commitments
4.87 %
4.80 %
4.39 %
Weighted
average interest rate on investment sold or paid down
9.56 %
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, 2023 and December 31, 2022,
our investments consisted of the following:
December 31, 2023
December 31, 2022
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
First-lien senior secured debt
$ 984,089,538
$ 952,100,626
$ 951,753,250
$ 870,880,344
Second-lien senior secured debt
67,449,770
55,989,218
71,513,263
58,118,340
Corporate Bonds
4,495,104
4,239,975
1,884,529
1,332,888
CLO Mezzanine
14,859,567
13,764,620
17,589,330
14,732,721
CLO Equity
24,478,438
18,953,309
27,012,348
21,800,224
Short-term investments
63,763,005
63,763,005
50,347,215
50,347,215
Total Investments
$ 1,159,135,422
$ 1,108,810,753
$ 1,120,099,935
$ 1,017,211,732
67
The table below describes
investments by industry composition based on fair value as of December 31, 2023 and December 31, 2022:
December 31,
2023
December 31,
2022
Software
14.0 %
12.9 %
Healthcare Providers and Services
9.3 %
9.9 %
Professional Services
7.2 %
5.9 %
IT Services
6.7 %
8.4 %
Insurance
5.9 %
5.8 %
Short Term Investments
5.8 %
4.9 %
Diversified Financial Services
4.2 %
2.6 %
Hotels, Restaurants and Leisure
4.2 %
3.9 %
Media
3.7 %
3.2 %
Independent Power and Renewable Electricity Producers
3.4 %
2.8 %
Chemicals
2.9 %
3.3 %
Building Products
2.9 %
3.7 %
Construction and Engineering
2.6 %
2.5 %
Food Products
2.0 %
1.3 %
Auto Components
1.7 %
1.9 %
Structured Subordinated Note
1.7 %
2.1 %
Containers and Packaging
1.7 %
1.5 %
Machinery
1.6 %
0.6 %
Diversified Consumer Services
1.6 %
1.6 %
Electronic Equipment, Instruments and Components
1.5 %
1.2 %
Internet Software and Services
1.4 %
1.1 %
Energy Equipment and Services
1.4 %
0.6 %
Commercial Services and Supplies
1.3 %
1.3 %
Structured Note
1.2 %
1.4 %
Aerospace and Defense
1.2 %
2.5 %
Metals and Mining
1.2 %
2.0 %
Healthcare Technology
1.0 %
2.1 %
Oil, Gas and Consumable Fuels
0.9 %
1.7 %
Diversified Telecommunication Services
0.8 %
0.3 %
Healthcare Equipment and Supplies
0.8 %
0.9 %
Specialty Retail
0.6 %
1.3 %
Real Estate Management and Development
0.6 %
0.6 %
Wireless Telecommunication Services
0.6 %
0.6 %
Pharmaceuticals
0.6 %
0.6 %
Electrical Equipment
0.5 %
0.5 %
Road and Rail
0.5 %
0.5 %
Household Durables
0.4 %
0.3 %
Industrial Conglomerates
0.4 %
0.4 %
Technology Hardware, Storage and Peripherals
- %
0.4 %
Textiles, Apparel and Luxury Goods
- %
0.1 %
Airlines
- %
0.8 %
Total
100.0 %
100.0 %
68
The table below shows the weighted average yields and interest rate
of our debt investments at fair value as of December 31, 2023 and December 31, 2022:
December 31,
2023
December 31,
2022
Weighted
average total yield of debt and income producing securities
10.51 %
11.47 %
Weighted
average interest rate of debt and income producing securities (1)
10.10 %
8.83 %
Weighted
average spread over reference rate of all floating rate investments (2)
4.61 %
4.47 %
(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, 2023, 2022, and 2021:
For the Year Ended December 31
2023
2022
2021
Total investment income
$ 112,223,607
$ 74,499,900
$ 39,685,653
Less: Net expenses
54,236,087
33,419,068
16,851,412
Net investment income
57,987,520
41,080,832
22,834,241
Net realized gains (losses) on investments
(2,715,413 )
(8,130,187 )
4,753,263
Net change in unrealized gains (losses) on investments
52,563,544
(107,432,980 )
(8,527,786 )
Net increase (decrease) in net assets resulting from operations
$ 107,835,651
$ (74,482,335 )
$ 19,059,718
Investment Income
Investment income for the
years ended December 31, 2023, 2022, and 2021, was as follows:
For the Year Ended December 31
2023
2022
2021
Interest from investments
$ 107,739,382
$ 73,705,450
$ 38,897,216
Dividend income
4,066,745
610,203
9,597
Other income
417,480
184,247
778,840
Total investment income
$ 112,223,607
$ 74,499,900
$ 39,685,653
69
For the years ended December
31, 2023, 2022, and 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, decreased from $1.1
billion as of December 31, 2021 to $966.9 million as of December 31, 2022, and increased from $966.9 million as of December 31,
2022 to $1.0 billion as of December 31, 2023. All debt and short-term investments were income producing, and there were no loans on non-accrual
status as of December 31, 2023.
Expenses
Operating expenses for the years ended December 31, 2023, 2022, and
2021, was as follows:
For the Year Ended December 31
2023
2022
2021
Interest expense
$ 44,483,152
$ 23,452,169
$ 8,616,661
Management fees
8,408,074
8,328,713
6,369,583
Other operating expenses
2,320,870
2,604,275
2,586,366
Directors fees
75,000
75,000
75,000
Management fee waiver
(1,051,009 )
(1,041,089 )
(796,198 )
Net expenses
$ 54,236,087
$ 33,419,068
$ 16,851,412
Net expenses for the year
ended December 31, 2023 were $54.2 million, which consisted of $44.5 million in interest and debt financing, $8.4 million in management
fees, $2.3 million in other operating expenses, and $75 thousand in directors fees offset by $1.1 million in management fee waiver from
the Investment Advisor.
Interest expense increased during the year ended December 31, 2023,
primarily due to increased average interest rates under our BoA Credit Facility and WF Credit Facility. Average debt outstanding decreased
from $667.5 million to $629.6 million for the years ended December 31, 2022 and December 31, 2023, respectively. Management fees increased
due to a higher value of average net assets during the period. Average net assets increased from $416.4 million to $420.4 million as of
December 31, 2022 and December 31, 2023, respectively.
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, 2023,
2022, and 2021, net unrealized gains (losses) on our investment portfolio were comprised of the following:
For the Year Ended
For the Year Ended
For the Year Ended
December 31,
2023
December 31,
2022
December 31,
2021
Unrealized gains on investments
$ 65,920,976
$ 1,635,443
$ 6,224,196
Unrealized (losses) on investments
(13,357,432 )
(109,068,423 )
(14,751,982 )
Net change in unrealized gains (losses) on investments
$ 52,563,544
$ (107,432,980 )
$ (8,527,786 )
70
The change in unrealized appreciation (depreciation) for the years
ended December 31, 2023, 2022, and 2021 totaled $52.6 million, $(107.4) million, and $(8.5) million, respectively. For the year ended
December 31, 2023, this consisted of net unrealized appreciation of $41.1 million related to existing portfolio investments and net unrealized
appreciation of $11.5 million related to exited portfolio investments (a portion of which has been reclassified to realized gains). 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 registered offerings of our
common stock and other future offerings of equity and debt securities (including on-balance sheet CLO financings), 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. On January 14, 2020, our sole stockholder approved the application of the
reduced asset coverage requirements in Section 61(a)(2) of the 1940 Act to us effective as of such date. As a result of the reduced asset
coverage requirement, 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, 2023, we experienced a net increase
in cash and cash equivalents of $466 thousand. During the period, net cash provided by operating activities was $19.5 million, primarily
as a result of proceeds received from sale of investments (excluding investments in short-term money market funds) of $247.1 million,
partially offset by fundings of portfolio investments (excluding investments in short-term money market funds) of $273.7 million. We invested
in short-term money market funds during the period, and as of the end of the period we held $63.8 million in fair value of short-term
money market funds. During the same period, net cash used in financing activities was $19.1 million, primarily consisting of $1.0 million
of net repayments under the BoA Credit Facility and WF Credit Facility, $1.8 million of payments of debt issuance costs and distributions
paid in cash of $33.9 million, partially offset by proceeds from the issuance of common stock of $17.6 million.
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 (excluding investments in short-term
money market funds) 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 (excluding investments in short-term money market funds) 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.
71
As of December 31, 2023 and December 31, 2022, we had cash and cash
equivalents of $2.1 million and $1.7 million, respectively. As of December 31, 2023, we had $504.0 million principal outstanding under
the BoA Credit Facility and $136.3 million principal outstanding under the WF Credit Facility. 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.
During the years ended December 31, 2023, 2022, and 2021, we had aggregate
capital commitments and undrawn capital commitments from investors as follows:
December
31, 2023
December
31, 2022
December
31, 2021
Capital
Commitments
Unfunded
Capital
Commitments
% of
Capital
Commitments
Funded
Capital
Commitments
Unfunded
Capital
Commitments
% of
Capital
Commitments
Funded
Capital
Commitments
Unfunded
Capital
Commitments (1)
% of
Capital
Commitments
Funded
Common stock
$ 17,654,225
$ -
100 %
$ 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,
2023, our asset coverage ratio was 172%.
Capital Contributions
During the years ended December 31, 2023, 2022, and 2021, the Company
issued and sold 2,816,166 shares at an aggregate purchase price of $46.7 million, 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 is currently $725 million. 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.
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Prior to February 3, 2023, the loans under the BOA Credit Facility
may have been base rate loans or euro currency loans. The base rate loans bore interest at the base rate plus 1.30%, and the eurocurrency
rate loans bore interest at 1-month or 3-month LIBOR plus 1.30%. The “base rate” was equal to the highest of (a) the federal
funds rate plus 0.50%, (b) the prime rate, and (c) 1-month or 3-month LIBOR. On February 3, 2023, the
Company entered into an omnibus amendment to the BoA Credit Facility that, among other things: (i) removed LIBOR transition language and
(ii) replaced eurocurrency rate loans with SOFR loans.
As of February 3, 2023, the
loans under the BoA Credit Facility may be base rate loans or SOFR loans. The base rate loans will bear interest at the base rate plus
1.40%, and the SOFR loans will bear interest at 1-month SOFR plus 1.40% or 3-month SOFR plus 1.45%. The “base rate” will be
equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate, and (c) 1-month or 3-month SOFR plus 0.10%. The Credit
Agreement includes fallback language in the event that SOFR becomes unavailable. Interest pursuant to base rate loans is payable quarterly
in arrears, and interest pursuant to SOFR 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 (Section 17, as modified by Section
57, of the 1940 Act). 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, 2023,
we had approximately $504.0 million principal outstanding and $221.0 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.
On December 18, 2023, we entered into an amendment to the WF Credit
Facility (the “WF Credit Facility Fourth Amendment”) that amends the WF Credit Facility to, among other things: (i) increase
the amount available for borrowing under the WF Credit Facility from $150,000,000 to $175,000,000, (ii) extend the facility maturity date
from December 18, 2025 to December 18, 2028 and (iii) extend the reinvestment period from December 18, 2023 to December 18, 2026 (subject
to other provisions of the WF Credit Facility).
Prior to April 10, 2023 the loans under the WF Credit Facility may
have been Broadly Syndicated Loans or Middle Market loans and were eurocurrency rate loans unless
such rate was unavailable, in which case the loans were base rate loans until such rate was available. Broadly Syndicated Loans bore interest
at the LIBOR or base rate, as applicable, plus 1.85%, and Middle Market Loans bore interest at LIBOR or base rate, as applicable, plus
2.35%. The “base rate” was equal to the highest of (a) the federal funds rate plus 0.50% and (b) the prime rate. On April
10, 2023, the Company entered into an amendment to the WF Credit Facility that, among other things: (i) transferred and assigned U.S.
Bank National Association’s rights and obligations as collateral agent and as a secured party to U.S. Bank Trust Company, National
Association, (ii) referenced SOFR instead of LIBOR and (iii) removed LIBOR transition language.
As of April 10, 2023, the
loans under the WF Credit Facility may be Broadly Syndicated Loans or Middle Market Loans and will bear interest at Daily Simple SOFR
or base rate (to the extent Daily Simple SOFR is unavailable), plus 2.50%, with an interest rate floor of 0.0%. 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 Daily Simple SOFR becomes unavailable. Interest is payable quarterly, as determined by the WFB as the administrative
agent. Following an amendment to the WF Credit Facility on October 13, 2021, 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 WF Credit Facility Fourth Amendment, and 1.00% thereafter. The applicable percentage for the advance
rate on 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 (Section 17, as modified by Section 57, of the 1940 Act). 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 PSCM or its affiliates cease to directly or indirectly
own a majority of the membership interests of the Investment Advisor.
As of December 31, 2023, we had approximately $136.3 million principal
outstanding and $38.7 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 provides 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 the IPO, the Board
primarily used 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 the IPO 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 the IPO, 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, and, if we use newly issued shares to implement the dividend reinvestment plan at a time when the
shares are trading at a price below NAV, the stockholders’ receipt of fewer shares than they would have if we had effectuated open
market purchases. 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 Equiniti, 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 Equiniti 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 Policies
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 policies 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 policies 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.
Under procedures established by our Board, 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 that are not publicly traded or 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 executive officer of ours and an interested member of our Board, and Angie K. Long and Scott A. Betz, each an executive
officer of ours, 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 PSCM. 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 1.75% 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 agreed to waive its right to receive management fees in excess of 1.75% of the total net assets
during any period prior to the IPO. 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, 2023 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
$ 505,417,357
$ -
$ 505,417,357
$ -
$ -
WF Credit Facility, Net
$ 136,411,448
$ -
$ -
$ 136,411,448
$ -
Total contractual obligations
$ 641,828,805
$ -
$ 505,417,357
$ 136,411,448
$ -
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, 2023 and December 31, 2022, we had fifteen unfunded commitments totaling $20.1
million, and two unfunded commitments totaling $2.6 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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