Pearl Diver Credit Company Inc. 2026 Q2 Earnings Call

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 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 affect results. 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 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 affect results, and such forward-looking statements do not guarantee performance. As such, Pearl 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 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 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 second 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 Chakraborty. After our prepared remarks, we'll open it up to any questions. CLO equity markets recovered over the second quarter. Secondary activity was quiet 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 viewings. 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 31st, a gain of 6.4%. Net assets rose to $77.3 million from $72.0 million as of March 31st. 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 non-cash, market-driven movements and one quarter of recovery is not a trend, it is consistent with the view we 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 steadier 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 loan 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 has largely run its course 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 the 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 2029, 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 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 recovered 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, gave way to a steady rally through April and May. The environment 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. BB spreads tightened 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 reached their tights in late May and then drifted modestly wider and settled into a narrow range 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 most 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 above $30 million each. Tighter liability spreads made refinancing existing capital structures compelling, and with loan 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 resets and refinancings having been carried out in July.

We completed five resets and refinancings, approximately 12% of the portfolio, and added one new position that offered attractive relative value. Across these deals, we have reduced the weighted average cost of debt by 33 basis points and reduced AAA spreads by 27 basis points. That is a materially larger program than the four 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 gap yield to 10.33% at quarter end, compared to 11.27% as of March 31. As of June 30, 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. Nearly all our investments remain in their reinvestment periods. With 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. The second quarter brought a more constructive backdrop for CLO equity, with liability spreads tightening across the 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 credit 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 CLO market, which stood at 1.1%, and well below the overall leveraged loan market default levels, which stood at 2.29%. We are watching this closely, though our diversification and the reinvestment flexibility 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 credit 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 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 closed-end listed funds is worth mentioning. Consistent with our disciplined strategy since inception, we maintain lower leverage at 32.9% of total assets and a strong asset coverage ratio at 295%. We also charge the lowest base and incentive fee. We regard that as a structural advantage embedded in our ethos. With that, I'll now turn the call over to Chandrajit for a more detailed review of our financial highlights for the quarter.