Pearl Diver Credit Company Inc. (PDCC) Earnings Call Transcript & Summary

Good morning, and welcome to the Pearl Diver Credit Company Incorporate Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Shakaji [indiscernible]. 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 of the press release, investor information and filings with the SEC for a discussion of the risks that affect the business. Pearl Diver company specifically reference participants through the presentation furnished today with the SEC and to remind participants that some of the comments may contain forward-looking statements, and as such, is subject to risks and uncertainties, which, if they materialize, could affect results. The reference is made to the section titled Forward-Looking Statements in the company's press release for the quarter ended June 30, 2026, which is incorporated herein by reference. We note forward-looking statements whether written or oral include, but are not limited to, Pearl Diver 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 aim to materialize to affect results and such forward-looking statements do not guarantee performance. And as such, Pear Diver Credit Company does not give such assurances. Pearl Diver Credit Company is under no obligation and expressly 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 detail porting to the 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'll 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 Pear Diver Company, and welcome to our second quarter 2026 earnings call. We'd like to invite you to download our presentation from our website, which provides additional information about the company and our portfolio. With me today is our Chief Financial Officer, Chandrajit Chakraborty. And after our prepared remarks, we'll open it up to any questions. CLO equity markets recovered over the second quarter. Secondary activity was quite coming out of March and into April, but trading levels picked up strongly from where they ended the first quarter. May was a record month for the asset class with roughly $1.9 billion of CLO equity trading on [ BRIRETS. ] That return of liquidity to the equity markets supported valuations through the quarter end. Our results for the quarter reflect that recovery. Net asset value per share ended June at $11.15, up from $10.48 as of March 31, a gain of 6.4% and net assets rose to $77.3 million from $72.0 million as of 31st March. We recorded net unrealized gains of $6.7 million against $25.1 million of unrealized losses in the first quarter and the portfolio generated a net increase in net assets from operations of $8.5 million. While these are largely noncash market-driven movements and one quarter of recovery is not a trend, it is consistent with the view we've put to you in May that the first quarter drawdown reflected spread widening rather than deterioration in the credit underlying our portfolio. Loan prices were broadly stable through the second quarter. The index ended June at 94.96 modestly higher than the 94.63 level, where it closed in March. That was a change from the first quarter where concerns around AI exposed sectors and geopolitical tensions drove prices lower. Senior CLO debt tranches continued to perform well and CLO equity returns benefited from the stale loan backdrop. Underlying fundamentals remain constructive default rates are still low, and where we have seen weakness, it has been concentrated in individual credits rather than broad-based with low prices settling at levels still below par, new CLO equity continues to offer an attractive entry point, and we are finding assets at valuations we consider good value. Around a third of the underlying loans, now trade above par, which carries some spread compression risk, though we believe that this is largely running scores after weighing on returns through all of 2024 and into early 2025. The reinvestment profile of the book is worth putting numbers to because it is a feature that gives the underlying CLOs room to work. Approximately 70% of the portfolio by net asset value sits in deals with reinvestment end dates of 2029 or later. Roughly 25% in 2021, 37% in 2030 and 6% in 2031, with about 21% reaching reinvestment end during the current year 2026. That is a long runway. It means a large majority of the portfolio can continue to reinvest repayments at today's low prices. It allows CLO managers to work through individual credit or sector weakness, and it limits our exposure to crystallizing value at an unfavorable moment. As CLO equity investors, we view dislocations like these as a chance to take advantage. Risk sentiment recorded through the second quarter and both loan and CLO liability spreads tightened as a result. The pressure that built in March, driven by concerns around AI exposed sectors and renewed geopolitical tension, give way to a steady rally through April and May. The interment that developed over the quarter was more constructive than we expected at that point. CLO liability spreads tightened across the capital structure and the move was most pronounced further down the stack. AAA spreads came in from 125 basis points at the end of March to 121 at the end of June. Double spreads stated 10 basis points over the same period. Mezzanine and junior tranches moved considerably more with BBB spreads tightening around 60 basis points to 250 basis points and BB spreads tightening roughly 140 basis points to 510 basis points. Most of that rally came through April and May. Spreads reach their sites in late May and then drifted modestly wider and settled into a narrow rate through June, and they have held around those levels since quarter end. Primary CLO issuance totaled approximately $26 billion in the second quarter, down from roughly $39 billion in the first. April was notably quiet at under $5 billion before volumes recovered to about $13.5 billion in May. The more significant activity was in resets and refinancings, which totaled approximately $84 billion against roughly $49 billion in the first quarter, with both May and June running about $30 million each. Tighter liability spreads made refinancing existing capital structure is compelling and with low supply limited, activity was directed more towards resetting existing vehicles rather than building new ones. That has carried into the third quarter with roughly $30 billion of recent financings having been carried out in July. We completed 5 resets and refinancings. Approximately 12% of the portfolio and added one new position that offer attractive relative value. Across these deals, we have reduced the weighted average cost of debt by 33 basis points and reduce triples SSS spreads by 27 basis points. That is a materially larger program than the 4 deals and roughly 6% of the portfolio we completed in the first quarter. And it locks in cheaper liabilities for the life of those structures. This rotation partially has offset a slight decrease in the portfolio's weighted average cap yield to 10.33% at quarter end, compared to 11.27% as of 31st March. As of 30th June, our portfolio consisted of 59 CLO equity positions managed by 34 different distinct CLO management platforms. The underlying loan portfolios include approximately 1,400 obligors across more than 30 sectors with no single CLO position representing more than 5.1% of the portfolio and our largest corporate obligor exposure standing just at 70 basis points. Merely all our investments remain in their investment periods with the flexibility to adjust exposures being that 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. The second quarter brought a more constructive backdrop for CLO equity with liability spreads tightening adverse capital structure, as we already mentioned, and secondary trading activity recovering strongly. We believe this creates a more supportive environment for disciplined CLO equity investing, underlying trade performance also remains resilient with defaults contained across the market. Our portfolio's last 12-month default rate stood at 1.08% through the second quarter, broadly in line with the wider seal of market, which stood at 1.1% and well below the overall leveraged loan market defense levels, which stood at 2.29%. We are watching this closely though our diversification and the reinvestment flexibility of our CLO managers retain leave us comfortable with how the portfolio is positioned. 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, while we see attractive risk-adjusted opportunities. We remain constructive of CLOs, and we believe our data-driven approach to manager 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. One observation on how we run the vehicle compared to other closing and listed funds is worth mentioning. Consistent with our disciplined strategy since inception, we maintained lower leverage at 32.9% of total assets and a strong asset coverage ratio at 205%. We also charge the lowest base and incentive fee. We regard that as a structural advantage embedding our cost. With that, I'll now turn the call over to Chandrajit for a more detailed review of our financial highlights for the quarter.

Thanks, Inranil, and hello, everyone. For the quarter ended June 30, 2026, we delivered investment income of $4.2 million or $0.60 per share of common stock compared to $4.8 million or $0.70 per share in the prior quarter. Total expenses for the quarter were $2.2 million or $0.32 per share compared to $0.31 in the previous quarter. We reported net unrealized gains on investments of $6.7 million or $0.97 per share compared to net unrealized losses in the prior quarter of $25.1 million or $3.67 per share. We also incurred a modest net realized loss of $107,000. In total, net interest and income was $1.9 million or $0.28 per share. Our net increase in net assets resulting from operations was $8.5 million or $1.23 per share compared with a net loss of $22.5 million or $3.28 per share in the first quarter. Recurring cash flows from the CLO portfolio remained strong, totaling $8.8 million or $1.27 per share, exceeding distributions and expenses by $0.38 per share compared to $10.5 million or [ $1.60 ] per share in the prior quarter. Moving to balance sheet. As of June 30, 2026, total assets were $116.9 million and total net assets were $77.3 million resulting in net asset value per share of $11.15. This compares to net asset value per share of $10.48 as of March 31, a $0.67 increase in NAV. Net investment income contributed approximately $0.28 and net unrealized gains approximately $97, offset by a small realized loss and by the $0.57 per share we distributed during the quarter. Available liquidity consisting of cash and short-term investments, net of [indiscernible] trades was approximately $3.2 million, and the company had leverage of $38.4 million. Some post off, $33.7 million of Series A term preferred stock net of unamortized deferred issuance costs and $4.7 million in short-term reverse repurchase agreements. Our leverage at the end of June was 32.9% of total assets, down some 35% at the end of March and within our long-term target leverage range of 25% to 35%, and our asset coverage ratio was 295%. We have deliberately not levered into the recovery. If conditions continue to remain firm, we retain the capacity to do so on our own timetable. Our leverage levels will vary over time as we intend to utilize leverage opportunistically when attractive interesting opportunities arise and for short-term cash management purposes. We continue to execute share issuance through our at-the-market or ATM equity issuance program. During the quarter, we issued 65,959 shares for net proceeds of approximately $0.7 million. We distributed dividends of $0.22 per common share in April and May and $0.13 per share in June. We will distribute a dividend of $0.13 per share at the end of the month, and we declared today that we will maintain our $0.30 per share dividend for September, October and November. In setting our dividend, our Board looks at a number of factors, including net vision income, taxable income, recurring cash flows from our investments and the outlook for our investment portfolio. Aligning distributions with what the portfolio is actually earning is what protects net asset value across a full cycle. And this has been our strategy since the IPO, to be responsible stewards of the capital. In summary, we leave our proactively and prudently managed investment portfolio positions us well to deliver attractive risk-adjusted and sustainable [indiscernible] return to our shareholders. I'll now turn it back to our CEO, Indranil Basu.

Thanks, Chandrajit. We closed the first quarter saying we would monitor the environment closely and deploy selectively. Three months on, the picture has improved. Net asset value recovery liability spreads tighter across the capital structure, secondary liquidity restored and a refinancing program that has taken 33 basis points out of our cost of debt. We are not declaring that the cycle has turned, and we will not manage this portfolio as though it has. Net investment income declined again this quarter, and we have set the distribution accordingly, but we are more constructive today than we were in May, and 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 providing investors with an efficient way to access the 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?

[Operator Instructions] There are no questions at this time, and this concludes our conference for today. You may disconnect your lines at this time, and we thank you for your participation.