Pearl Diver Credit Company Inc. ($PDCC)

Good morning, and welcome to the Pearl Diver Credit Company Inc. First Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Melissa Lin from Investor Relations. Thank you. You may begin.

Good day, ladies and gentlemen. Thank you for standing by. Pearl Diver Credit Company refers participants on this call to the Investor web pages for the press release, investor information and filings with the SEC for a discussion of the risks that affect the business. . Pearl Diver Credit Company specifically refer participants to the presentation furnished today with the SEC and remind participants that some of the comments may contain forward-looking statements and as such be subject to risks and uncertainties, which, if they materialize, could materially affect results. Reference is made to the section titled Forward-Looking Statements in the company's press release for the quarter ended March 31, 2026, which is incorporated herein by reference. We note forward-looking statements whether written or oral include, but are not limited to Pearl Diver Credit Company's expectations or predictions of financial or business performance and conditions as well as its competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and assumptions, which, if they materialize, could materially affect results and such forward-looking statements do not guarantee performance and as Pearl Diver Credit Company does not give such assurances. Pearl Diver Credit Company is under no obligation, expressively disclaims any obligation to update, alter or otherwise revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. In addition, historical data pertaining to operating results and other performance indicators applicable to Pearl Diver credit company are not necessarily indicative of results to be achieved in succeeding periods. I will now turn the call over to Indranil Basu, Chief Executive Officer of Pearl Diver Credit Company.

Thank you to everyone joining us today for your interest in Pearl Diver Credit Company, and welcome to our first quarter 2026 earnings call. We'd like to invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. With me today is our Chief Financial Officer, Chandrajit Chakrabort. And after our prepared remarks, we'll open it up to any questions. The broader CLO equity market remained challenged in the first quarter with spreads remaining relatively tight. As the quarter progressed, geopolitical risks spiked with the war in the Middle East, pushing oil prices higher and causing concern once again regarding near-term inflation. Our results for the quarter were mostly driven by unrealized losses, which are noncash in nature and driven by market-based movements. The portfolio continues to generate strong recurring cash flows once again comfortably in excess of our distributions and expenses. The first quarter brought a more challenging backdrop in the loan market with a loan index declining from 96.64 to 94.63 amid concerns around AI-exposed sectors and geopolitical tensions. Senior CLO debt tranches held up well, while the equity returns reflected the move in loans with longer reinvestment period positions are performing shorter profiles. Despite the above, underlying fundamentals remain constructive, default rates in loans are still low and weaknesses have been concentrated rather than broad-based. Loan price softness also makes new CLO equity more attractive with assets available at meaningfully lower prices. Nearly our entire portfolio is composed of CLOs with reinvestment period end dates of 2026 and later, allowing managers to manage exposure to individual credits or sector weaknesses. As CLO equity investors, we view dislocations like this as a chance to take advantage. Both loan and CLO liability spreads tightened through January and February, as risk sentiment remain constructive coming into the year. On our last call in February, we noted we were becoming more optimistic about the CLO environment after a difficult 2025. Shortly after our call, the war in the Middle East began and cast a shadow over the macro environment. Inflation fears returned, while the potential for additional rate cuts were quickly taken off the table. CLO liability spreads followed loans wider with AAA and AA tranches remaining relatively well anchored, while BBB and BB spreads widened more meaningfully before partially retracing into early April. Underlying loan portfolio spreads were modestly tighter quarter-over-quarter, reflecting elevated repricing activity through January and February before the tightening pace stalled in March. On the new issue front, primary CLO activity totaled approximately $39 billion in Q1 with volumes building through the quarter even as spreads widened in March, a reflection of continued investor demand and improved entry point on loan assets. Refinancing and reset activity totaled approximately $48 billion, though the pace moderated meaningfully in March as wider primary spreads reduced the economics of refinancing existing liabilities. Looking ahead, a substantial pipeline of 2024 vintage CLOs that exit their non-call periods over the course of '26, which assuming spreads continue to stabilize should support a pickup in refinancing and recent activity later in the year. We completed 4 resets and refinancings, approximately 6% of the portfolio and added 1 new position that offered attractive relative value. Across these deals, we have reduced the weighted average costs of debt by 22 basis points and reduced [ AAA ] spreads by 18 basis points. This rotation partially has offset a slight decrease in the portfolio's weighted average GAAP yield to 11.27% at quarter end compared to 12.99% as of December 31. As of March 31, our portfolio consisted of 60 CLO equity positions managed by 33 distinct CLO managers. Underlying loan portfolios include approximately 1,400 obligors across more than 30 sectors with no single CLO position representing more than 4.8% of the portfolio and our largest corporate obligate exposure at just 70 basis points. Nearly all our investments remain in their reinvestment periods, which gives managers the flexibility to adjust exposures, reinvest prepayments at attractive levels and manage sector-specific risks as the market evolves. We believe this diversification and reinvestment flexibility continue to position the portfolio well. While the first quarter was marked by geopolitical volatility and pressure in certain areas of the loan market, recent data points to a more stable backdrop for CLO equity, with broadly syndicated loan CLO equity distributions beginning to stabilize and weighted average spread compression slowing, we believe this creates a more supportive environment for disciplined CLO equity investment. Underlying trade performance remains broadly resilient with loan defaults contained and Moody's projecting U.S. speculative grid defaults to decline to 3% by October 2026 from 5.3% a year earlier. Against this backdrop, we believe CLO equity remains well positioned to generate attractive cash flows, supported by active collateral management and disciplined trade selection. We will continue to monitor the macro environment closely and deploy capital selectively where we see attractive risk-adjusted opportunities. We remain constructive on CLOs and believe our data-driven approach to manage our selection and portfolio construction is well suited to this environment. Our focus remains the same: concentrate on disciplined portfolio management, invest opportunistically when we find attractive risk-adjusted positions and drive long-term total return. With that, I will now turn the call over to Chandrajit for a more detailed review of our financial highlights for the quarter

Thanks, Indranil, and hello, everyone. For the quarter ended March 31, 2026, we delivered investment income of $4.8 million or $0.70 per share of common stock compared to $5.7 million in the prior quarter. Total expenses for the quarter were $2.1 million or $0.31 per share compared to $0.37 in the previous quarter. We recorded net unrealized losses on investments of $25.1 million or $3.67 per share and incurred a modest net realized loss of $24,000. In total, net investment income was $2.6 million or $0.39 per share. Our net loss for the quarter was $22.5 million or $3.28 per share. Recurring cash flows from the CLO portfolio remains solid, totaling $10.5 million or $1.53 per share, exceeding distributions and expenses by $0.56 per share compared to $9.8 million or $1.44 per share in the prior quarter. Moving to our balance sheet. As of March 31, 2026, total assets were $112.8 million and total net assets were $72 million, resulting in net asset value per share of $10.48. This compares to net asset value per share of $14.42 as of December 31. Available liquidity consisting of cash and short-term investments, net of unsettled trades was approximately $0.8 million, and the company had leverage of $39.5 million, composed of $33.6 million of Series A term preferred stock and $5.8 million in short-term reverse repurchase agreements. Our leverage at the end of March was 35% of total assets, which is within our long-term target leverage range of 25% to 35%. Our leverage levels will vary over time as we intend to utilize leverage opportunistically when attractive investment opportunities arise and for short-term cash management purposes. We continue to execute share issuance through our at-the-market, ATM equity issuance program. During the quarter, we issued 34,970 shares for net proceeds of approximately $0.5 million. We distributed dividends of $0.22 per common share in January, February, March and April, and we will distribute our $0.22 per common share dividend later this month. For June, July and August, we declared today that we will distribute a $0.13 per common share dividend. When setting our dividend, our Board looks at a number of factors, including net investment income, taxable income, recurring cash flows from our investment and the outlook for our investment portfolio. Our Board's decision with respect to the dividend beginning in June, both realigns our dividend with our near-term outlook for net investment income and enables us to preserve capital for additional deployment opportunities in order to stabilize and grow our net asset value over time. In summary, we believe our proactively and prudently managed investment portfolio positions us well to deliver attractive risk-adjusted and sustainable total returns to our shareholders. I will now turn it back to our CEO, Indranil Basu.

Thanks, Chandrajit. We continue to be excited about the opportunities in the CLO market and the long-term resilience of the asset class in the face of ongoing macro uncertainty. Fundamentally, we believe that CLOs provide investors with an efficient way to access a senior secured corporate loan asset class and can offer an attractive risk return profile across various credit cycles. We believe that PDCC remains positioned to provide investors with strong dividend yield and risk-adjusted total returns. With that, we thank you for your time and open up the call to Q&A. Operator?

Thank you, Mr. Basu. [Operator Instructions] Our first question comes from Gaurav Mehta with Alliance Global Partners.

I wanted to go back to some of your comments. I think you mentioned you have seen some stabilization and spread compression slowing in April. Maybe provide some more color on that? And then it seems like NAV for April was higher than March. So is that driven by your comments around stabilization and spread compression slowing?

Yes. Thank you, Gaurav, for the question. Yes, we are seeing some signs of a slowdown in spread compression. Specifically, if I look at, for instance, over the past couple of years, let's -- going back over the past couple of years, spreads tightened by an average of roughly 2.5 basis points per month. In April that figure was closer to only 50 basis points. Since the start of 2024, that compression in loan spreads had been a headwind for equity returns. But this dynamic now appears to be petering out, which is a constructive signal for portfolio yields going forward. In the portfolio, for instance, normally, we deal with about 40% of the underlying loans trading at prices above par. We are seeing now that number has come down to about 30%

Okay. Second question I want to ask is on the resets and refinancing opportunities. Can you provide some color maybe on how much opportunity you have in your portfolio to do refinancing?

Yes. That's a good question. So about 1/3 of our portfolio is coming out of their lockup period this year. So we think these will be prime candidates for resets and refinancings. So as the CLO liability spreads stabilize, and as I mentioned in the call, the AAA, AA, the senior parts of the CLO liability structure have held up well. So I think we're entering into a phase where about 1/3 of the portfolio will become available for reset and refinancing through the rest of the year

Our next question comes from Eric Zwick with Lucid Capital Markets.

You seem to express some optimism about the investment environment today. And I'm wondering if you could just provide some characteristics around the type of investment in some of those that you're seeing that are attractive and if it's primarily kind of, I would assume, kind of secondary market today or if you're seeing some increased volume in primary market as well.

Yes. Currently, that's a good question. Thank you, Erik. We are definitely currently more geared towards the secondary market. The primary market, we are watching with interest, but haven't been that active in the primary market as a participant. Interesting secondary market positions are coming up in [indiscernible] and that's really where we are more active currently.

And just kind of putting that together with your commentary about resetting the dividends and preserving some capital for investment opportunities. Should I take that to mean that we could see the portfolio potentially grow on a cost basis? Or were you more just kind of be recycling that capital and the portfolio would stay more consistent from kind of a level basis?

Yes. I mean, the whole idea is to -- as you know, Pearl Diver is focused more on delivering total returns and the purpose of this reduction in the dividend is to kind of essentially align the portfolio and the company's dividend policy closer to the net interest income. And obviously, we're going to look for opportunities as net interest income continues to grow. We will obviously look at revising our dividend policy accordingly. The capital that we preserved by doing this current reduction, we expect to invest in attractive opportunities and protect the NAV.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Indranil Basu for closing comments.

Thank you, everyone, for joining our first quarter conference call, and thank you for your support and interest in Pearl Diver Credit Company. Have a nice day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.