Pearl Diver Credit Company - Earnings Call - Q2 2025

Transcript

Speaker 3

Greetings, and welcome to the Pearl Diver Credit Company's second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Peter Skissa of ICR. Thank you, sir. You may begin.

Speaker 2

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, can materially affect results. Reference is made to a section titled "Forward Looking Statements" in the company's press release for the quarter ended June 30, 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, can 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, 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 will now turn the call over to Indranil Basu, Chief Executive Officer of Pearl Diver Credit Company.

Speaker 1

Thank you, everyone, for joining us today and for your interest in Pearl Diver Credit Company, and welcome to our second 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. I am pleased to report that the company delivered solid second quarter results, reflecting the strength of our total return strategy, portfolio management activities, and successful execution of our strategic initiatives. To recap, the second quarter started with Liberation Day in the U.S., with President Trump imposing a new tariff regime that led to widespread macro-economic uncertainty. As we expected, the CLO market remained resilient during this volatile period and has since rebounded from this period of high uncertainty.

Loan fundamentals remained strong, and managers with CLOs in the reinvestment period were able to quickly adapt to the news, reducing exposure to tariff-sensitive issuers while taking advantage of the market dip to purchase loans below par. Through this uncertainty, we maintained a proactive approach and closely monitored our portfolio and the underlying loans within the CLOs. We actioned one reset in the period, traded out of one position for risk management purposes, and added four new positions that we identified as attractive opportunities. The strength of our investment process and strategy can be seen in our portfolio. We recorded an unrealized gain on our investments of $0.5 million and preserved NAV while navigating a volatile market environment. This has continued into the third quarter, with our NAV per share as of July 31 higher than where it stood prior to the tariff announcements on April 2.

However, the weighted average gap yield on the portfolio was 12.75% as of June 30, compared to 15.57% as of March 31. The reduction in yield was largely due to market-wide loan spread compression in the quarter, caused by loan repricings affecting not just the CLOs in the company's portfolio, but pretty much the entire CLO market. Notably, our performance while weathering the volatility in the second quarter is a further testament to our data-driven, differentiated investment approach that we believe allows us to remain highly agile while seeking out relative value in the CLO space. For those of you who may be new to Pearl Diver Credit Company, let me take a minute to explain how we have utilized our machine learning technology and data science-driven proprietary algorithms to consistently deliver performances at or near the top of the CLO equity space.

Over our 17-year history, we have leveraged our collective quantitative and engineering expertise to build a multifaceted investment platform that utilizes machine learning algorithms and natural language processing, coupled with fundamental trade analysis to enable us to build a real-time view of the universe of all CLO tranches in the market. We are able to capture real-time trade data, scrape trust reports, as well as price each of the over 2,000 leveraged loans that are packaged within the CLOs, and ultimately, independently value each and every CLO tranche in the market on a daily basis. In our view, this unique infrastructure would likely take years for others to build, giving our firm a significant edge over competitors. Over the next few quarters, we'll share insights into various components of our platform that incorporate multiple key pieces of proprietary technology.

This quarter, I'd like to highlight our automated investment origination engine, which allows our team to analyze and understand the current market on a daily basis. The CLO market is an over-the-counter market, with trades typically done directly with broker-dealers or via auction processes known as BBICs or bids wanted in competition. Over $11 billion of CLO positions are offered every month, with detail arriving via email, instant messaging, or posts on individual bank web portals. As a result, we can receive over 800 such messages per day, all with varying structures and data formats. Our origination engine utilizes natural language processing technologies to ingest this vast volume of unstructured information into actionable insights, extracting trading prices, offers, and updates in real time.

We are able to link this information with the monitoring data that we already hold on the universe of CLO tranches, taking advantage of information asymmetry where it exists and quickly identifying mispricings and attractive investment opportunities. The data from our origination engine also allows us to run further analysis on the market, creating more accurate pricing models. Consider this: we have the entire pricing history of every single CLO tranche that ever traded, going back more than a decade, allowing us to visualize changing market dynamics over time. This is crucial, as the key drivers of market dynamics change over time, and by identifying these drivers, we are able to get ahead of shifting market trends. We have built a portfolio of CLO investments as of June 30, diversified across 52 unique CLO positions.

The underlying corporate loan portfolios within these CLOs are managed by 31 distinct CLO manager platforms. Across our CLOs, the underlying loan portfolios consist of approximately 1,800 unique loans spread over 30-plus industry sectors. Pearl Diver Credit Company is well-diversified across various manager styles, balancing conservative CLO managers with liquid portfolios with others who capitalize on higher loan spreads through less liquid holdings. Our largest manager exposure is 12.1% of the portfolio, while the single largest CLO equity position is only 5%. Our positions are spread across different manager strategies and over different durations, varying 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 70 basis points of the portfolio.

95% of the investments in the portfolio are in the reinvestment period, allowing CLO managers to take advantage of current market conditions and reinvest prepayments into loans at favorable prices, as well as reduce exposure to vulnerable issuers or sectors. With that, I'll now turn over the call to Chandrajit for a more detailed review of our financial highlights for the quarter.

Speaker 0

Thanks, Indranil, and hello, everyone. For the quarter ended June 30, 2025, we delivered investment income of $5.5 million or $0.81 per share of common stock, compared to $6 million in the prior quarter, as yield on CLO equity investments decreased due to market-wide loan spread compression caused by loan repricing. Total expenses for the quarter were $2.4 million or $0.35 per share. In total, net investment income was $3.1 million or $0.46 per share. We recorded net unrealized gains on investments of $0.5 million or $0.07 per share and incurred a modest net realized loss of $70,000 only. Consequently, our net income for the quarter was $3.5 million or $0.52 per share. Recurring cash flows for the CLO portfolio were strong, totaling $8 million or $1.18 per share, exceeding distributions and expenses by $0.16 per share.

Moving to our balance sheet, as of June 30, 2025, total assets were $166.1 million and total net assets were $123.6 million, resulting in a net asset value per share of $18.19. Subsequent to the end of the quarter, as of July 31, our net asset value per share stood at $18.48, a 1.6% increase compared to where it stood on June 30. Available liquidity consisting of cash and short-term investments, net of unsettled trades, was approximately $0.2 million, and the company had leverage of $40.4 million, composed of $33.5 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 June was 24.3% of total assets, which is modestly below 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 distributed dividends of $0.22 per common share in April, May, June, and July, and will distribute our $0.22 per common share dividend in August, September, and October. Based on our share price at the end of June, our distributions represent an annualized dividend yield of approximately 14.7%. 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.

Speaker 1

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-economic uncertainty. Fundamentally, we believe that CLOs provide investors with an efficient way to access tenure-secured corporate loan asset class and can offer an attractive risk-return profile across various trade cycles. We believe that Pearl Diver Credit Company 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?

Speaker 3

Thank you. We will now be conducting a question and answer session. If you would 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 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 pull for questions. Thank you. Our first question comes from a line of Eric Zwicke with Lucid Capital. Please proceed with your question.

Speaker 4

Thank you. Hello, guys. I wanted to start and just say thanks for including the recurring cash flow number for the quarter in the press release in your prepared remarks as well. I'm curious, do you happen to have, for comparative purposes, that number for the prior quarter as well?

Speaker 0

Yes, we do. Just give me a moment. I'll pull it up. Yes, it was 1.0 as of March 31. It was a similar level. I can get back to you with the number momentarily.

Speaker 4

Sure. That'd be great. I'll move on to a different question in the interim. Just thinking about your commentary about being kind of below your target leverage level at this point, could you just weigh maybe your thoughts today on increasing leverage? You know, how does the risk-adjusted opportunities look, and what does that mean for potential portfolio growth over the next quarter or two?

Speaker 0

Yes. Thank you for that question. We look at leverage opportunistically. Obviously, we have multiple avenues through which we can access leverage. In terms of the leverage, it is going to vary over time. The flexibility to operate below our target range also provides a cushion during volatile periods and ensures that we can take advantage of compelling opportunities when they arise. We evaluate investment opportunities on a daily basis and keep an eye on the cost of leverage compared to the returns we expect from the investments. That is a key driver of whether, you know, as and when we decide to increase the leverage levels, it's always based on the cost of leverage compared to the returns we expect. Just getting back to your first question, we had $7.7 million of recurring cash flow in Q1. I'll just work it out in per share basis in a sec.

Speaker 4

Yeah, that's great. I can do that calculation as well. Thank you. Maybe just another one. As you look at your current pipeline today, wondering if you could provide a little color in terms of the composition in terms of, one, just primary versus secondary opportunities, and secondly, you know, US versus European CLO positions.

Speaker 0

I will turn this question over to Chandrajit Chakraborty, who looks at the portfolio and the trading opportunities on a day-to-day basis.

Sure. When we look at the composition between primary and secondary opportunities, as well as U.S. and European opportunities, as you mentioned, it's always based on the relative value that each of these opportunity sets represents. Particularly when we're looking at the primary market, we are considering what the current cost of capital is. The primary driver of that, as you know, is the cost of the AAA-rated tranche, followed by where the mezzanine tranches are currently pricing. We compare that with what the current loan level spreads are, the prices for those loans, and our expectation of loan repricing and any spread compression. The difference is really the main driver, which is the cash on cash that we can get from our CLO equity investments. At this current point in time, we see some interesting opportunities in the primary market.

In a generic level, over the last several months, the secondary market has continued to provide better relative value compared to the primary market. This situation is dynamic and is changing quite fast as we move through the market conditions. In terms of U.S. and Europe, the European market in certain sectors has continued to perform very strongly. Therefore, when we compare that with our generic U.S. CLO, they tend to be a bit more resilient and the cash flow is more stable. Once again, we evaluate each opportunity on a case-by-case basis to determine what is the best relative value for the Pearl Diver Credit Company portfolio.

One of the things I'd like to add here is, you may have noticed, we added four new positions into the portfolio last quarter. The initial position bought in Q2 was a primary position that priced in March and closed in April, which was attractive as it was issued at near all-time lows of the CLO debt costs. Two other positions that we bought in May traded at substantially high yields and had refinancing upsides. We acquired these in the secondary market. The final position we bought in Q2 was a majority CLO equity position, which we subsequently called. Its realization value upon the call was higher than our purchase price, so we were able to realize a short-term profit. The value, as Chandrajit Chakraborty mentioned, the relative value moves between primaries and secondaries and opportunistic trades.

Speaker 4

That's great color. Thank you. Last question for me. I'm wondering if you could just quantify within your portfolio the opportunity for resets and refis. I guess if you look across and see which ones are callable and have higher spreads on the liability side, I'm wondering if you could just provide a little color there. That'd be great.

Speaker 0

We expect refinancing and reset activity to continue into the second half of 2025. Activity has already accelerated in Q3, with five of our minority positions successfully reset or refinanced, thereby adding value to our holding. Even as minority equity holders, we continue to take an activist role, engaging directly with the CLO managers to drive refinancing opportunities at the liability levels available.

Speaker 4

That's great. Thank you for taking my questions today.

Speaker 0

You're welcome.

Speaker 3

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from a line of Tejas Prakash with ArcStone. Please proceed with your question.

Speaker 4

Hello. It's been great listening about the call, and my question is related to the net asset value in the second quarter. I'm curious to know how is the NAV reacting to the broad credit environment after the sell-off in April after the Liberation Day announcement, and what are any specific strategies by the management team on managing and selecting credits?

Speaker 0

As you have noted, our NAV actually stood at a higher level than April 2 as of July. Part of the reason for the increase in NAV was driven by very strong loan technicals, which boosted the CLO equity NAVs. Added to that, we experienced a significant amount of refinancing activity, which reflected in increased valuations. Right after the Liberation Day, as expected, NAVs declined with a general sell-off in the market driven by uncertainties with regard to tariffs and what that would do to tariff-impacted sectors. The market recovered fairly quickly as investors realized that the impact of tariffs on a very broad portfolio of CLO loan pool is going to be minimal. The credit fundamentals continue to show discipline with leverage levels stable and interest coverage at healthy levels.

Secondary loan prices saw a temporary dip in April, as I mentioned, amid tariff headlines, but recovered strongly into June, ending the first half just below year-end levels. Loan defaults in the first half of 2025 remain low compared to historical average, though activity picked up slightly in June. As a result, the trailing 12-month payment default rate rose to approximately 1.1% at the end of June, up from 91 basis points as of December 2024. It is still below the post-pandemic peak of 1.75%.

Speaker 4

Thank you. More slides.

Speaker 3

Thank you. We have no further questions at this time. I'd like to turn the call back over to management for closing comments.

Speaker 0

Thank you, everyone, for participating in our quarterly call today. We remain available to answer any questions, and we'll speak with you in the next quarter. Thank you for your support to Pearl Diver Credit Company.

Speaker 3

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.