Palmer Square Q3 income falls as leverage declines to 1.63 times

By Tom Whitfield

Palmer Square Capital BDC (NYSE: PSBD) reported third-quarter 2026 net investment income of $11.6 million, or $0.38 per share, down from $13.6 million, or $0.43 per share, a year earlier.

Total investment income fell 16.1% to $26.6 million from $31.7 million. Net expenses declined to $14.9 million from $18 million, cushioning but not reversing the revenue decline.

What drove the lower income?

CFO Jeff Fox said: “Income reflected contractual interest on investments, which was affected by lower base rates compared with the prior year, along with a modest amount of paydown-related and fee income.”

Net asset value rose to $13.34 per share at Sept. 30 from $13.21 at the second-quarter end. Chairman and CEO Chris Long linked part of the increase to fair-value adjustments tied to pricing moves in the broadly syndicated loan market.

Lower interest income outweighed expense savings, while fair-value gains contributed to a small increase in net asset value.

Can the dividend hold?

Third-quarter net investment income matched the total dividend of $0.38 per share, including a $0.02 supplemental distribution. On Nov. 4, the board declared a $0.36 base dividend for the fourth quarter. Any supplemental dividend would be determined in the normal course.

President Matt Bloomfield said he remained confident in the sustainability of the base dividend heading into 2027. He also expected recent refinancing activity to add to earnings power and said market-implied base-rate expectations could provide support. Those statements point to management’s forecast, not a guarantee, and the supplemental dividend remains undecided.

Palmer Square repurchased $5.2 million of its shares during the third quarter. Bloomfield said approximately $24.8 million remained available under the repurchase plan at quarter-end and described buybacks as a near-term capital allocation priority.

Management will weigh repurchases against new investments and debt reduction. Bloomfield said the company was comfortable with quarter-end leverage and did not expect to take it much higher, although it could fall further depending on available opportunities.

The base dividend has management backing, but supplemental payments and refinancing benefits remain conditional.

Why did the portfolio shrink?

The portfolio’s fair value stood at approximately $1.09 billion at Sept. 30, down from $1.11 billion at the end of the second quarter. Palmer Square deployed $115 million during the quarter, including 31 new investment commitments, while receiving approximately $165.8 million from repayments and sales.

Bloomfield said the company accepted paydowns on some broadly syndicated loans rather than participate in refinancings at spreads it considered inadequate for the risk. It also sold many collateralized loan obligation mezzanine investments because it saw better prospective opportunities elsewhere.

Bloomfield reported the following quarter-end portfolio figures:

• Senior secured investments: 97% of the portfolio.
• Ten largest investments: 10.92% of the total.
• Non-accrual investments: less than one basis point of the portfolio at fair value and 96 basis points at cost.
• Payment-in-kind income: approximately 2.18% of total investment income.

Bloomfield saw better relative value in private credit than in syndicated loans, particularly on spreads. Within broadly syndicated loans, he favored secondary-market opportunities over new issuance. Private credit represented roughly 15% of the portfolio.

Repayments outpaced deployment, and management declined some refinancings because it judged the available spreads inadequate.

What changed in funding and deal activity?

Debt-to-equity fell to 1.63 times from 1.71 times at the second-quarter end, reflecting debt paydown and higher net asset value. Available liquidity, including cash and undrawn credit-facility capacity, dropped to approximately $195 million from $331 million. The disclosure did not isolate what drove that decline.

During the quarter, Palmer Square reset and extended its BDC CLO. The transaction cut the weighted average cost of debt to SOFR plus 139 basis points from SOFR plus 172 basis points, extended the reinvestment period to July 2031 and extended maturity to July 2039.

The company also reduced excess capacity under its Bank of America broadly syndicated loan funding facility to lower unused fees. Bloomfield expected the financing facilities’ spreads to remain relatively steady, although floating-rate costs will move with base rates. He said higher rates could support portfolio yields, reversing the pressure seen in year-on-year income, while noting that borrowers had interest coverage of about 2.4 times.

Long said: “Elevated interest-rate volatility and geopolitical uncertainty could continue to weigh on fourth-quarter deal activity.” Long said sponsors had reported longer transaction processes, although he expected activity to improve over time at an uneven pace.

Funding became cheaper, but lower liquidity and slower deal processes temper the outlook.

What does Palmer Square finance?

Palmer Square Capital BDC is an externally managed business development company that provides financing to private middle-market companies. It focuses on privately originated and negotiated investments in senior secured loans and other debt instruments, seeking to support businesses while generating current income for shareholders.

The company may invest across industries and capital structures, including first-lien and unitranche loans, second-lien and subordinated debt, and selected equity investments.

Palmer Square enters the fourth quarter with lower earnings, a smaller portfolio, cheaper debt and a dividend plan that still depends on execution.