Pearl Diver Credit Company Inc.

and welcome to the Pearl Diver Credit Company third quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Emma Little, 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 webpage for the press release, investor information, and filings with the SEC for discussion of the risks that affect the business. Pearl Diver Credit Company specifically refers participants to the presentation furnished today with the SEC and to 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 September 30, 2025, which is incorporated herein by reference. We know 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 such, Pearl Diver Credit Company does not give such assurances. Pearl Diver Credit Company is under no obligation 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 data pertaining 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 Endranil 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 third quarter 2025 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 Chakraborty, and after our prepared remarks, we'll open it up to any questions. The broader CLO equity market faced some headwinds this quarter, and our results were influenced by that backdrop. Even so, our portfolio continued to generate recurring cash flows comfortably in excess of our distributions and expenses. and we remain focused on disciplined portfolio management and long-term total return. Across the U.S. CLO equity space, performance softened primarily due to spread tightening in the broadly syndicated loans market. The first brand's bankruptcy also attracted attention, so let me address that directly. Our exposure to first brands is small at 22 basis points across the portfolio, slightly below the roughly 24 basis points exposure across the broadly syndicated loan CLO market. The portfolio's average junior OC cushion today stands at 4.5%. while deals with first brands exposure have a slightly higher cushion of 4.6%, well above the market average. The position with the largest first brands exposure represents only 1% of the portfolio, yet it maintains one of the highest par value over collateralization ratios. Given the position size and the risk distribution features inherent in CLO structures, including diversification, CCC limits, and power wheel mechanisms, even a serial loss scenario would have only a limited impact on our NAV. Importantly, we see first brands as an idiosyncratic event rather than evidence of broader deterioration in loan fundamentals. It is also worth briefly highlighting the differences between the broadly syndicated loan market and private credit. Broadly syndicated loans benefit from transparent external pricing, active secondary trading, broad diversification across issuers and industries, and structural protections. Private credit markets, by contrast, typically involve internal marks limited liquidity, and higher concentration risks. These differences matter, particularly during periods of market stress and are part of why Cielo portfolios remain resilient through this episode. 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 these as an opportunity to take advantage. As of September 30, 2025, the rates market had priced in approximately two to three quarter-point rate cuts. We view this development as broadly positive for CLO equity, given its inherent nature as an arbitrage product. In a scenario of orderly, non-shock-driven rate cuts, credit spreads tend to tighten, and lower borrowing costs improve corporate refinancing conditions, and strengthen interest coverage ratios. At the same time, lower rates typically stimulate leveraged buyout activity, leading to increased loan issuance and expanding the pipeline of opportunities available to CLO managers. A healthy and active loan market not only enhances portfolio diversification, but can also modestly widen spreads, improving the arbitrage opportunity for CLI equity and mezzanine tranches while maintaining a robust credit quality. Notably, we have already observed a meaningful uptick in LBO activity this year, with approximately $200 billion in deals announced during the first three quarters of 2025. surpassing the $164 billion recorded for the entirety of 2024. This trend underscores our constructive outlook for CLO equity performance in a gradually easing monetary environment. Throughout the quarter, we remained active in managing the portfolio. We completed eight resets and refinancings. exited two positions where upside had been realized or the risk-reward had diminished, and added eight new positions that offered attractive relative value. This rotation contributed to an increase in the portfolio's weighted average gap yield from 13.07% at quarter end compared to 12.75% as of June 30th. With this refinancing activity, we have now refinanced over 35% of the portfolio as of quarter end valuation. Across these deals, we have reduced the weighted average cost of debt by 31 basis points and reduced triple S spreads by 21 basis points. This acts as a natural hedge to the spread compression seen in the loan markets, boosting the cash flows for the CLO equity positions. Since quarter end, we have closed further refinancings on an additional 5% of the portfolio with a further 4% in the pipeline for Q4. For those newer to Pearl Diver, a core part of our identity is the investment platform we have built over the past 17 years. From early on, we made a deliberate choice to combine machine learning and natural language processing technologies with traditional fundamental credit analysis, giving us a detailed, real-time view of the entire CLO universe. Our systems independently value CLO tranches, monitor loan-level data across more than 2,000 leveraged loans, and integrate thousands of market data points every day. This allows us to rapidly assess relative value across structures, managers, and market conditions, and to identify mispricing when it appears. Importantly, our technology is not standalone. It is embedded into how we manage risk and allocate capital, enabling us to respond with speed, precision, and consistency, particularly during periods of volatility. We believe this infrastructure remains a meaningful competitive advantage in sourcing opportunities and managing the portfolio across cycles. As of September 30th, our portfolio consisted of 53 CLO equity positions managed by 33 distinct CLO managers. The underlying loan portfolios include approximately 1,900 corporate obligors across more than 30 different sectors with no single CLO position representing more than 4.6% of the portfolio and our largest corporate obligor exposure standing at just 60 basis points. Nearly all our investments remain in their investment periods, which gives the 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. With that... I'll now turn the call over to Chandrujit for a more detailed review of our financial highlights for the quarter.

Thanks, Indranil, and hello, everyone. For the quarter ended September 30, 2045, we delivered investment income of $5.4 million, or 80 cents per share of common stock, compared to $5.5 million in the prior quarter. Total expenses for the quarter were $2.4 million, or 35 cents per share, the same as that in the previous quarter. We recorded net unrealized losses on investments of $6.9 million, or $1.02 per share, and reflecting softer credit market conditions mentioned earlier, we incurred a modest net realized loss of $424,000. In total, net investment income was $3 million, or 44 cents per share. Therefore, our net loss for the quarter was $4.3 million, or 64 cents per share. Recurring cash flows from CLO portfolio were strong, totaling $8.7 million, or $1.28 per share, exceeding distributions and expenses by 26 cents per share. This is up from prior quarter where it was $8 million or $1.18 per share respectively. Moving to our balance sheet as of September 30th, 2025, total assets were $157.5 million, and total net assets were $114.9 million, resulting in a net asset value per share of $16.89. As of June 30, 2025, the total assets were $166.1 million, and total net assets were $123.6 million. Available liquidity consisting of cash and short-term investments, net of unsettled trades were approximately $2.8 million, and the company had leverage of $40.4 million, composed of $33.5 million of Series A term preferred stock and $7 million in short-term reverse repurchase agreements. Our leverage at the end of September was 25.7% 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 have also started to tap our at-the-market ATM equity issuance program. Through November 5, we have issued approximately 26,600 shares for net proceeds of approximately $0.4 million. We distributed dividends of 22 cents per common share in July, August, September, and October. and we'll distribute our 22 cents per common share dividend in November, December, and January. Based on our share price, at the end of September, our distributions represent an annualized dividend yield of approximately 16%. When setting our dividend, our board looks at a number of factors, including net investment income, taxable income, recurring cash flows from our investments, and the outlook for our investment portfolio. In summary, we believe our strong and prudently managed investment portfolio positions us well to deliver attractive, risk-adjusted, and sustainable total returns to our shareholders. I'll now turn it back to our CEO, Indranil Basu.

Thanks, Chandrajit. We continue to be excited about the present opportunities in the CLO market and the long-term resilience of the asset class in the face of macro uncertainty. Fundamentally, we believe that CLOs provide investors with an efficient way to access the senior secured corporate load asset class and can offer an attractive risk-return profile across various trade cycles. We believe that PDCC is positioned to provide investors with a 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. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Yeah, thank you. Good morning. I wanted to ask you if you could provide some more color on what you guys are seeing in the primary CLO market. and what should we expect as far as investment opportunities between primary and secondary CLO market over the next few quarters?

Thank you, Gaurav.

Thanks for the question. Very pertinent. Currently, in the primary CLO equity market, our view is that the arbitrage returns are not adequate enough to participate in a large scale. We look at primary CLO market opportunities selectively, but on a broad average basis, we think the returns with a long-term hold kind of view in the primary CLO equity market is in the kind of between 10% to 12% range. whereas we see a little bit more attractive opportunities in the secondary CLO equity markets where yields could be higher, especially CLOs which are still within their reinvestment period with a couple of years probably remaining with a more imminent refinancing reset upside ahead of them.

Okay, thanks for that color.

Second question I want to ask you is on resets and refis. In your prepared remarks, you said that in 4Q, 5% of the portfolio has been reset and refi, and I think you said additional 4%, so that's 9% of the portfolio. How should we think about the impact of that reset and refi on the expected yields? And then after 4Q, how much more reset and refi opportunity do you guys have for 2026?

Thanks, Laura, for that question. Our preference is not to make comments on intra-quarter activities until the quarter end. We could speak to the reset and the refinancing activities that we conducted for the last quarter, which is a matter of record. So in that, we... As we mentioned in our prepared remarks, we undertook several resets and refinancings with fairly significant addition to the yields. So in terms of the refis and resets we have lined up or we are in the process of executing for Q4, I think it would be appropriate to speak on them at the end of that quarter.

Okay, fair enough. So for the third quarter, the improvement in yields from second quarter, was that a mix of portfolio rotations and resettling fire, only portfolio rotations?

Both. Okay. All right. Thanks for taking my question. That's all I have. Thanks, Raul.

Thank you. Once again, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Eric Zwick with Lucid Capital Markets. Please proceed with your question.

Good morning, guys. Thanks. I wanted to start with just a little bit of a follow-up on the pipeline and maybe just kind of the mix of opportunities between U.S. and European CLOs that you see today, how you weigh the relative attractiveness of each

Yes, thanks, Eric.

Yes, that's, again, a very good question. The vast majority of the portfolio, as you know, is focused on the US CLO market. We would occasionally look at the European CLO market, especially European single B positions, which when swapped into dollar terms, can provide stronger protection to the NAV of the portfolio. We believe the European underlying loan portfolios are actually stronger. And in that sense, the European debt positions, junior mezzanine positions, single Bs and double Bs, can be a positive addition to the portfolio. The US CLO market is better for CLO equity in general, but European equity positions at this stage do not offer adequate relative value for addition to the portfolio.

That's helpful, thank you.

And just switching gears a little bit to, you noted the ATM activity that you had in the quarter? And just given that the pullback we've seen in the industry, you know, trading at a discount now relative to NAV, you know, how do you weigh, you know, future ATM missions versus potentially, you know, repurchasing shares?

We obviously look at our market. This is a long-term project for us. We look at both opportunities on a continuing basis. We have not currently taken the decision where we have to choose between repurchasing versus ATMs. We think repurchasing shares is an option, but it is probably too early in the fund's life at this stage to consider repurchase as an option.

Thanks.

And just last one for me, as we look at, you know, we've had pretty nice growth in the portfolio over the last few quarters. I guess given kind of what you see today and you've mentioned you've still got, you know, flexibility to stay, you know, increase leverage and stay within your target, how should we think about, you know, potential portfolio growth over the next quarter or two?

So once again, this question about how we modulate The level of leverage in our portfolio depends on the specific period in question. We will add to leverage when we feel the leverage costs are attractive enough. Currently, the leverage is within our target range. But on a continuous basis, we continue to look at options to modulate the level of leverage. We obviously use two types of leverage. As you are aware, one is our term-preferred issuance. But in addition, we also have highly flexible reverse repurchase lines that we use from time to time to manage for more short-term requirements such as working capital. And between the two, we think we will continue to monitor conditions as they evolve. And we expect to invest the ATM proceeds and excess cash into the CLO equity market going forward in a kind of, as I mentioned earlier, between European junior mezzanine debt and US, probably at this stage, secondary market CLO equity.

Thanks for taking my questions today. Thanks, Eric.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Basu for any final comments.

I'd like to thank everyone for joining in today's earnings call. Thank you, everyone, for your support and your interest in Pearl Diver Crate Company.

Have a nice day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.