Goldman in talks to buy $37 billion credit firm Palmer Square. Its listed fund trades 24% below asset value

Goldman Sachs is the lead bidder to buy Palmer Square Capital Management, a Kansas-based credit manager overseeing about $37 billion, Bloomberg News reported on Tuesday. Palmer Square, run by Chris and Angie Long, is one of the larger issuers of collateralized loan obligations, with a CLO platform of about $27 billion, according to the report as carried by Investing.com. No final decision has been made and talks could still end without a deal. Goldman declined to comment and Palmer Square did not respond, the report said.

Goldman shares were down 1.3% at $947.21 shortly before noon, according to Nasdaq.

The listed piece of Palmer Square

Most of Palmer Square is private, but one part trades every day. Palmer Square Capital BDC (PSBD) is a business development company, a listed fund that lends to companies, and it is externally managed by Palmer Square. That makes it the one place public investors could react to the report.

They did, briefly. PSBD traded as high as $10.875 on Tuesday, about 4.8% above Monday's $10.38 close, then faded to $10.43, up 0.5%, by 11:55 a.m., per Nasdaq.

The bigger number is the gap to what the fund owns. PSBD estimated its net asset value at $13.66 a share as of August 31. At $10.43, the shares trade about 24% below that value. The 52-week range is $9.34 to $13.93.

What the fund holds

According to PSBD's second-quarter results, at June 30 it had $1.1 billion invested across 206 companies in 45 industries. About 87.3% was first-lien senior secured debt, and 98% of its long-term investments paid floating rates. Portfolio yield was 11.95%, up from 10.10% a year earlier, and loans on non-accrual were 0.29% of the portfolio. Leverage was 1.71 times equity. It has declared a third-quarter base dividend of $0.36 a share, payable October 13 to holders of record on September 25.

That floating-rate mix is the link to Main Street. The companies in portfolios like this one borrow at rates that reset with short-term benchmarks, so the Fed's latest hike, which took the prime rate to 7%, passes straight into their interest bills. We worked through what that does to a floating-rate borrower in our piece on the 7% prime rate.

What to watch

A sale of the manager would not by itself change PSBD's loans, but a change in who controls an externally managed fund's adviser generally needs the fund's shareholders to approve a new advisory agreement. If a deal is announced, the terms offered to PSBD holders and whether anything is done about the discount to asset value are the details that matter for the listed shares. For Goldman, Bloomberg's report frames the deal as a way to grow in CLOs, a market that has grown to more than $1.3 trillion in the U.S.

Sources: Bloomberg News as reported by Investing.com and TradingView; Palmer Square Capital BDC SEC filings; Nasdaq quote data. This is market information, not investment advice.