Pearl Diver Credit Company Inc.

Greetings and welcome to the Pearl Diver Credit Company 2025 Q4 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce 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 December 31, 2025, which is incorporated herein by reference. We note forward-looking statements, whether written or oral, include, but are not limited to, for all diver credit companies' 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 Driver Credit Company does not give such assurances. Pearl Driver Credit Company is under no obligation, especially 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 Driver Credit Company are not necessarily indicative of results to be achieved in succeeding periods. I will now turn the call over to Andrew Novasu, Chief Executive Officer of Pearl Driver Credit Company.

Thank you to everyone joining us today for your interest in Pearl Diver Crate Company, and welcome to our fourth quarter 2025 earnings call. I'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 continued to face challenges in the fourth quarter due to tight spreads, which impacted results industry-wide, and we were not immune. With that said, our results were mostly driven by unrealized losses, which are non-cash in nature and driven by market-based movements. Positively, our portfolio generated sequentially improving recurring cash flows once again, comfortably in excess of our distributions and expenses, and we also sequentially improved our net investment income. Looking into 2026, we remain optimistic about CLOs. CLOs remain a very attractive investment opportunity compared to other trade asset classes, and demand for CLOs remains high. Notably, despite a challenging 2025, CLO debt tranches delivered solid full-year returns, aided by pull-to-part dynamics across older vintage bonds and despite tighter spreads. With a resilient macro environment, inflation continuing to reduce to central bank targets, relatively healthy corporate earnings, and a low leverage loan default rate, We believe there continues to be many opportunities to utilize our differentiated data-driven approach to CLO equity investing and thoughtfully grow our portfolio. Our focus remains the same. Concentrate on disciplined portfolio management, invest opportunistically when we find attractive risk-adjusted positions, and drive long-term total returns. 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 sectoral weaknesses. As CLO equity investors, we view dislocations like these as a chance to take advantage. As we discussed last quarter, the market had priced in two to three quarter point rate cuts as of September 30th, and we expressed optimism about the potential benefits for CLO equity in an orderly easing cycle. However, the fourth quarter presented a more complex reality that highlights the nuanced dynamics of our S-class. The Federal Reserve delivered on expectations with two additional 25 basis point cuts in October and December, bringing the total easing for the year in line with market projections. However, CLO equity faced significant headwinds in 2025 with industry returns at an estimated negative 10%. for the year, according to Citibank. Our own performance reflected some of these broader market challenges. The primary pressure came from substantial spread tightening in the underlying loans inside CLOs, approximately 34 basis points in the US loan market. While tightening credit spreads are typically constructive for corporate credit quality, The compression occurred unevenly across the market. CLO managers competed aggressively for higher quality credits, bidding up prices in the healthier segments of the loan universe, while stressed and distressed names experienced a difficult year. This bifurcation created a challenging environment where the anticipated benefits of rate cuts and increased LBO activity which did materialize with strong M&A volumes, were more than offset by the compressed arbitrage spreads at the CLO equity level. Additionally, while we saw continued CLO refinancing and reset activity, these technical benefits were insufficient to fully compensate CLO equity holders for the spread compression in the underlying loans. The net result was a downward pressure on NAS across the entire CLO closed-ended fund sector. Looking ahead to 2026, we're observing several developments that shape our outlook. The loan repricing momentum that characterized much of the last cycle appear to be petering out and we expect 2026 refinancings to deliver less spread compression than we experienced in 2025 and eventually stabilize. We are encouraged by improved activity in new loan issuance which we believe should provide better opportunities for CLO managers and potentially support wider CLO equity spreads going forward. Importantly, 2025 saw significant tightening in CLO debt tranches, which creates potential refinancing upside for CLO structures in the year ahead. Combined with a more stabilized loan market environment, we believe the worst of 2025 headwinds may be behind us. Our focus remains on prudent portfolio management and patient capital deployment as we navigate what we view as an improving backdrop for the asset class. Throughout the quarter, we remained active in managing the portfolio. We completed four resets and refinancings. Exited one position where the upside had been realized or risk-reward had diminished and added eight new positions that offered attractive relative value. This rotation contributed to a slight decrease in the portfolio's weighted average gap yield to 12.99% at quarter end compared to 13.07% as of September 30th. This quarter, we refinanced or reset 6% of the portfolio. Across these deals, we have reduced the weighted average cost of debt by 28 basis points and reduced triplet spreads by 12 basis points. This acts as a natural hedge to the spread compression seen in the load market, boosting the cash flows for the CLAO equity positions. Since quarter end, we have closed refinancings on an additional 6% of the portfolio. 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 December 31st, our portfolio consisted of 57 CLO equity positions managed by 33 distinct CLO managers. The underlying loan portfolios include approximately 1,300 obligors across more than 30 sectors, with no single CLO position representing more than 4.9% of the portfolio, and our largest corporate exposure remaining at just 0.7%. 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. With that, I'll 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 December 31st, 2045, we delivered investment income of $5.9 million, or 86 cents per share of common stock, compared to $5.4 million in the prior quarter. Total expenses for the quarter were $2.5 million, or 37 cents per share, compared to 35 cents in the previous quarter. net investment income increased to $3.4 million or 49 cents per share up from $3 million or 44 cents per share in Q3. We recorded net unrealized losses on investments of $15.7 million or $2.3 per share and incurred a modest net realized loss of $35,000. In total, net investment income was $3.4 million or 49 cents per share. Our net loss for the quarter was $12.4 million or $1.81 per share. Recurring cash flows from the CLA portfolio were strong, totaling $9.8 million or $1.44 per share, exceeding distributions and expenses by 41 cents per share and an increase from $8.7 million or $1.28 per share in the prior quarter. Moving to our balance sheet, as of December 31st, 2025, total assets were $141.3 million and total net assets were $98.6 million, resulting in net asset value per share of $14.42. This compares to net asset value per share of $16.89 as of September 30th. Available liquidity consisting of cash and short-term investments, net of unsettled trades was approximately $1 million, And the company had leverage of $40.5 million, composed of $33.6 million of Series A term preferred stock and $7 million in short-term reverse repurchase agreements. Our leverage at the end of December was 28.7% 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 continue to execute share issuances through our at-the-market ATM equity issuance program. During the quarter, we issued 30,680 shares for net proceeds of approximately $0.5 million. We distributed dividends of 22 cents per common share in October, November, December, and January, and will distribute our 22 cents per common share dividend in February, March, April, and May. 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 uncertainties. Fundamentally, we believe that CLOs provide investors with an efficient way to access the senior secured corporate loan asset plus and can offer an attractive risk profile across various credit cycles. We believe that PDCC is positioned to provide investors with strong dividend yields and attractive risk-adjusted total returns. With that, we thank you for your time and open up the call to Q&A. Operator?

Thank you. Before we start the Q&A, I will hand it back over to Chandrajit Chakraborty for a clarification.

Thanks. Just a brief clarification.

Total net assets as of December 31 were $98.6 million. With that, we'll now take your questions.

Thank you, we will now be conducting a question and answer session. If you would 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 2 if you would 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. One moment please while we poll for questions. The first question is from Gaurav Mehta from Alliance Global Partners. Please go ahead.

Yeah, thank you. Good morning. I wanted to ask you on the investment environment. Can you comment on what you guys are seeing in the primary market versus secondary market? And should we expect more of the investments in secondary markets in 26?

Gaurav, this is Neil. Thank you for asking this question. Very relevant. Yes, we are seeing opportunities in both the primary and the secondary market, but currently we are more overweight opportunities in the secondary market.

Okay. As a follow-up, can you comment on the refinancing and reset opportunities in your portfolio over the next few quarters?

Sure.

In terms of refi and reset opportunities, we currently have multiple positions which are exiting their non-call periods. And therefore, in an environment of tightening CLO liability spreads, we expect certain amount of site to come through. And we shall see it all play out, hopefully, in the next couple of quarters.

Lastly, maybe a big picture on the loan market. Can you maybe comment on, I guess, supply of new loans expected in 2026?

Yes, once again, as you have seen from our presentation, the last quarter of 2025 reflected an environment of tightening loan spreads across multiple sectors, which were not effectively balanced by 85 reset activities in the CRO liability side. We expect this pressure to reduce in the coming quarters. We expect M&A activity to marginally increase. Certain sectors will, of course, lag behind in our view in the market in terms of increased M&A activity. One of the things we want to watch closely is obviously the rate-cutting pace and approach of the central banks, which have a large impact on M&A activity going forward. So given that, we are cautiously optimistic of an improving M&A activity and issuance of new loans. from certain specific sectors.

All right.

Thank you.

That's all I have.

The next question is from Eric Zwick from Lucid Capital Markets. Please go ahead.

Thank you. Good morning. In your prepared remarks, I think it was your comments, you mentioned that you're seeing some signs of loan repricing momentum. starting to slow down. And I'm curious, is that specific to your portfolio specifically, or is that more a larger market dynamic? I'm curious if you could just add a little, you know, detail there to those comments.

Sure.

So, for now, it's both a larger market dynamic, but we are also seeing it in our own portfolio. And once again, we are seeing signs of loans being priced more in line with the risk reward that they represent. There is a gradual slowing down in the loan repricing, prepayment speeds. Last quarter, I would want to say a fairly large, more than 50% of CLO loan portfolios where pricing in the market at prices above par, we see that ratio coming down to about close to 30% as we look at our portfolio these days. So we expect that that is a sure indicator of a slowing pre-payment and repricing speed.

Thank you. Appreciate the color there. And then the second question for me on the, um, uh, you know, first quarter update in the, in the press release, you mentioned that you continue to, you know, utilize the, the ATM, um, to issue shares and just, just curious how you think about that given, uh, you know, where the stock trades today relative to the NAV.

So I am looking at the last record. This is closing on Friday. We continue to utilize ATM when trading at a premium, I think your question regarding the current premiums on Friday, if there was one, let me have a look.

Okay.

trading at NAV, so the last observed stock price was at NAV, not at a premium.

Okay. Thank you for that. That's all I had today.

There are no further questions at this time. I would like to turn the floor back over to Indranil Basu for closing comments.

I'd like to thank everyone for listening today. Thank you for your support. and we'll see you next quarter.

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