Palmer Square Capital BDC, a relative newcomer to the public markets, just held its first-quarter earnings call. On the surface, it was a standard affair: strong earnings, positive NAV growth, and optimistic predictions for the year ahead. But beneath the surface, a subtle shift in tone hinted at a potentially seismic change in the credit landscape: the waning dominance of private credit.

For the past few years, private credit funds have enjoyed a period of unprecedented growth, luring borrowers with promises of speed and flexibility. Traditional lenders, burdened by regulations and risk aversion, seemed to be losing their grip on the market. But Palmer Square, with its unique hybrid approach straddling both syndicated and private credit, seems to have identified a crack in the private credit armor.

Throughout the call, management emphasized the resurgence of the broadly syndicated loan market. Angie Long, Chief Investment Officer, noted a distinct shift in borrower behavior, with companies previously reliant on private credit returning to the syndicated market in search of more attractive terms. This echoes recent market activity, where several high-profile private credit deals have been refinanced in the syndicated market, a trend Palmer Square expects to accelerate.

This shift has significant implications for the broader credit landscape. Private credit's allure was built on its ability to provide capital when traditional lenders couldn't. But as the syndicated market reopens, offering competitive spreads and terms, private credit's advantage diminishes.

Consider this: In Q4 2023, new investment spreads for Palmer Square averaged 487 basis points, significantly higher than their existing portfolio yield. This suggests a market where attractive opportunities are emerging in the syndicated space, potentially drawing capital away from private credit.

"“In many cases, we saw borrowers from the private debt space return to the syndicates markets to refinance parts of their capital structure. In our view, these are all healthy signs of the capital markets working efficiently.” - Angie Long, Chief Investment Officer, Palmer Square"

While Palmer Square didn't explicitly state a bearish outlook on private credit, their actions speak volumes. The swift deployment of their IPO proceeds, primarily in the syndicated market, signals a strong belief in the relative value of these opportunities. Moreover, their emphasis on portfolio liquidity and their ability to capitalize on market dislocations positions them well to navigate a potential shift in market dynamics.

Shift in Borrowing Preference

Reference: https://seekingalpha.com/symbol/PSBD/transcripts

Projected Growth in Syndicated Loan Issuance vs Private Credit

This isn't to say that private credit is dead. It will undoubtedly continue to play a vital role in the credit ecosystem. But the days of unchallenged dominance may be numbered. As traditional lenders regain their footing and investors like Palmer Square exploit the evolving risk-return dynamics, private credit will need to adapt to a new reality – one where competition is fiercer, and the cost of capital is less forgiving.

"Fun Fact: The private credit market has exploded in size over the past decade, reaching over $1.4 trillion in assets under management. This growth has been fueled by investors seeking higher yields in a low-interest-rate environment."