Pearl Diver Credit Company - Earnings Call - Q1 2025

Transcript

Operator (participant)

Greetings and welcome to the Pearl Diver Credit Company Q1 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed into question queue anytime by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Chandrajit Chakraborty, CFO. Please go ahead.

Chandrajit Chakraborty (CFO)

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 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 March 31, 2025, 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 as such, forward-looking statements do not guarantee performance, and Pearl Diver Credit Company does not give such assurances, 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.

Indranil Basu (CEO)

Thank you, Chandrajit. Thank you, everyone, for joining us today for your interest in Pearl Diver Credit Company, and welcome to our 2025 Q1 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. Pearl Diver Credit Company is an externally managed, closed-end investment company with a core investment objective of maximizing our portfolio's total return, with a secondary objective of generating a high current income. We invest primarily in equity and junior debt tranches of collateralized loan obligations, or CLOs. The core pillars of our differentiated total return strategy are maintaining a sustainable distribution policy and protecting NAV.

We utilize leverage opportunistically, targeting lower long-term leverage levels, and prudently manage the risk in the portfolio through diversification across CLO managers, individual obligor, and sector exposure, and CLO vintages and reinvestment end dates. Our portfolio of CLO investments as of March 31st is diversified across 50 unique CLO positions. The underlying corporate loan portfolios within these CLOs are managed by 33 distinct CLO managers. Across our CLOs, the underlying loan portfolios consist of approximately 1,700 unique loans spread over 30-plus industry sectors. PDCC is well-diversified across various manager styles, balancing conservative CLO managers with liquid portfolios and others who capitalize on higher loan spreads through less liquid holdings.

Our largest manager exposure is 12.1% of the portfolio, while the largest single CLO equity position is 4.9%, with 50 positions spread across different manager strategies, evenly spread over different durations, from some short-duration CLO equity to newly issued longer-duration CLO equity. There is no significant concentration in any single CLO. We believe the portfolio is well-diversified and not overly exposed to idiosyncratic risk. Additionally, our largest single corporate obligor exposure is limited to just 0.6% of the portfolio. All investments in the portfolio are in the reinvestment period, allowing CLO managers to take advantage of current market conditions and reinvest repayments into loans at favorable prices, as well as reduce exposure to vulnerable issuers or sectors such as those especially sensitive to tariffs. The weighted average gap yield on the portfolio was 15.57% at March 31st, an increase of 68 basis points from the prior quarter.

The increase is largely due to a combination of fully investing proceeds from the December preferred share issuance and CLO refinancing activity, which lowered the CLO liability costs on certain CLO investments in the portfolio. I'm pleased to report that the company delivered solid period results reflecting the strength of our investment strategy, portfolio management, and successful execution of our strategic initiatives. Proceeds from our public offering of 8% Series A term preferred stock due 2029 have now been fully invested, largely in attractive primary investment opportunities in the first quarter of 2025. The first quarter of 2025 presented two contrasting narratives. The quarter began with strong CLO issuances and record-low CLO liability spreads, followed by a widening of CLO spreads amid global macro uncertainty. In Q1 2025, $45.6 billion in new US CLOs were issued, and $96 billion in CLOs were refinanced.

During this period, we took advantage of low CLO liability structures, locking in tight debt, and invested $30.8 million in primary CLOs. Additionally, approximately 9% of our portfolio was refinanced or reset in Q1, capitalizing on the tight CLO liability market. Looking ahead, we anticipate a slowdown in CLO primary issuance and refinancing activity, as many CLOs have already extended their reinvestment periods and locked in tight liability spreads over the past year. On the other hand, we expect CLOs to capitalize on any loan market volatility due to their extended reinvestment periods and ability to absorb potential loan fund outflows. Turning to our credit outlook, the LSCA index's trailing 12-month default rate ended the first quarter of 2025 at 82 basis points, 11 basis points lower than at the end of 2024. Defaults, including distressed exchanges, also moderated to around 4%.

CLO portfolios, on average, experienced credit stresses at roughly half that level. The first quarter was marked by stability, supported by strong corporate fundamentals, manageable near-term maturities, accessible capital markets, and limited distress within the loan asset class. Tariffs have been top of mind since the beginning of April after President Trump announced reciprocal tariffs on all countries. Market volatility picked up following the newly announced tariff measures. However, we expect only a very moderate pickup in defaults and believe the CLO market will remain resilient, supported by strong underlying trade quality and limited exposure to tariff-affected sectors and companies. CLO portfolios are highly diversified and actively managed, allowing repositioning away from vulnerable sectors or names. Early signs show that some managers have already reduced exposure to tariff-sensitive issuers, a proactive step that reduces headline risk and demonstrates agility. While recent tariffs have added another layer of complexity to an already uncertain macro environment, the leveraged loan and CLO markets are expected to demonstrate resilience. While some uptick in loan downgrades or defaults is likely, CLOs continue to offer strong structural protections with built-in self-correcting mechanisms. With that, I'll now turn the call over to Chandrajit for a more detailed review of our financial highlights for the quarter.

Chandrajit Chakraborty (CFO)

Thanks, Indranil, and hello again, everyone. For the quarter-ended March 31, 2025, we delivered investment income of $6 million or $0.89 per share of common stock, an increase of $0.6 million or $0.08 per share from the prior quarter, as proceeds from the term preferred stock offering were invested throughout the quarter. Total expenses for the quarter were $2.6 million or $0.38 per share, an increase of $0.6 million or $0.08 per share, largely attributable to interest expense on term preferred shares. In total, net investment income was $3.4 million or $0.50 per share. We recorded net unrealized loss on investments of $9.6 million or $1.41 per share, which was a result of market-wide increase in risk premiums that affected CLO equity valuations. Consequently, our net loss for the quarter was $6.1 million or $0.90 per share.

Moving to our balance sheet, as of March 31st, 2025, total assets were $173.7 million and total net assets were $124.6 million, resulting in a net asset value per share of $18.33. Available liquidity consisting of short-term investments, net of unsettled trades, was approximately $0.6 million, and the company had leverage of $40.4 million, composed of $33.4 million from our public offering of Series A term preferred stock in mid-December and $7 million in short-term reverse repurchase agreements. Our leverage at the end of March was 23.2% of total assets, which approaches our long-term target leverage range of 25%-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 distributed dividends of $0.22 per common share in January, February, and March, and will distribute a $0.22 per common share dividend in April. Based on our share price at the end of March, our distributions represent an annualized dividend yield of 13.9%. In summary, we believe our strong and prudently managed investment portfolio positions us well to deliver attractive risk-adjusted returns to our shareholders. I will now turn it over to our CEO, Indranil Basu.

Indranil Basu (CEO)

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 tariff uncertainty. Fundamentally, we believe that CLOs provide investors with an efficient way to access the senior secured corporate loan asset class and can offer an attractive risk-return profile across various trade cycles. We believe that PDCC is positioned to provide investors with strong dividend yields and risk-adjusted returns. With that, we thank you for your time and open up the call to Q&A. Operator.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one 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 star one. Once again, to be placed in the question queue, please press star one at this time. One moment, please, while we pull up your question. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. I'd like to turn the floor back over to management for any further or closing comments at this time. Management lines are live. Perhaps your phones are self-muted.

Chandrajit Chakraborty (CFO)

Thank you, everybody, for participating in our earnings call for Pearl Diver Credit Company. We appreciate your participation. Thank you.

Operator (participant)

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day.