Pearl Diver Credit Company Inc. Q1 FY2026 earnings call

• Macroeconomic and Market Backdrop

  • The broader CLO equity market remained challenged in Q1 2026, with persistently tight spreads. Geopolitical risk spiked mid-quarter following the outbreak of conflict in the Middle East, which pushed oil prices higher and revived near-term inflation concerns, removing expectations for near-term interest rate cuts from the market.
  • Broad syndicated loan prices declined over the quarter from 96.64 to 94.63, driven by concerns over AI-exposed sectors and growing geopolitical tension. Senior CLO debt tranches held their value well, but equity valuations reflected the downturn in underlying loan prices.
  • Despite market volatility, underlying credit fundamentals remain constructive: loan default rates are still low, weakness is concentrated in specific sectors rather than broad-based, and lower loan prices have improved the entry point for new CLO equity investments.
  • Primary CLO new issuance volume reached $39 billion in Q1, with volumes rising through the quarter even as spreads widened in March, indicating sustained investor demand. Refinancing and reset activity totaled $48 billion, but pace slowed sharply in March as wider primary spreads reduced the economic benefit of refinancing existing liabilities.

• Portfolio Actions and Updates

  • The firm completed 4 portfolio resets and refinancings, representing ~6% of its total portfolio, and added one new attractive relative-value position. Across these transactions, the weighted average cost of portfolio debt was reduced by 22 basis points, and AAA spread costs fell by 18 basis points.
  • The portfolio's weighted average gap yield decreased slightly to 11.27% as of quarter-end, down from 12.99% at the end of December 2025, partially offset by the cost reductions from resets/refinancings.
  • The firm issued 34,970 common shares via its at-the-market (ATM) equity program during the quarter, generating ~$0.5 million in net proceeds. The company maintained a 22 cents per share monthly common dividend from January through May 2026, and declared a reduced 13 cents per share monthly dividend for June through August 2026 to realign payouts with near-term net investment income projections and preserve capital for future investment opportunities to stabilize and grow NAV over time.

• Strategic Positioning

  • Management emphasized that the portfolio's high diversification and broad reinvestment period flexibility position it well to navigate ongoing market volatility. Management views current market dislocations as an opportunity to acquire attractive assets at discounted prices.

Pearl Diver Credit Company is exclusively focused on investing in CLO equity, so it reports consolidated financial performance for its single investment segment: For Q1 2026, investment income was $4.8 million (0.70 USD per common share), down from $5.7 million in the prior quarter. Total expenses were $2.1 million (0.31 USD per share), down from 0.37 USD per share in Q4 2025. Net investment income totaled $2.6 million (0.39 USD per share). The firm recorded $35.1 million in net unrealized losses on investments and a $24,000 net realized loss, resulting in a total net loss of $22.5 million (3.28 USD per share). Recurring cash flow from the CLO portfolio was $10.5 million (1.53 USD per share), exceeding total distributions and expenses by 0.56 USD per share, up from $9.8 million (1.44 USD per share) in the prior quarter. As of March 31, 2026, total assets were $112.8 million, total net assets were $72 million, and net asset value (NAV) per share was $10.48, down from $14.42 per share at December 31, 2025. Leverage as a percentage of total assets was 35%, hitting the upper bound of the firm's 30-35% long-term target range. The portfolio holds 60 distinct CLO equity positions managed by 33 different CLO managers, with underlying exposure to ~1,400 corporate obligors across 30+ sectors; no single CLO position makes up more than 4.8% of the total portfolio, and the largest single obligor exposure is just 70 basis points. 99%+ of portfolio holdings are still in their reinvestment period (all ending 2026 or later), giving CLO managers flexibility to adjust credit and sector exposure.

• Moody's projects U.S. speculative-grade loan default rates will decline to 3% by October 2026, down from 5.3% a year prior, supporting the firm's constructive view of underlying credit fundamentals.
• Management expects a substantial pipeline of refinancing and reset opportunities will open up through the remainder of 2026: one-third of the firm's current portfolio will exit non-call lock-up periods this year, and if CLO liability spreads stabilize, activity will pick up in the second half of the year.
• Management maintained its constructive long-term outlook for CLO equity as an asset class, noting it provides efficient access to senior secured corporate loans and offers attractive risk-adjusted returns across credit cycles. It expects PDCC to continue delivering strong dividend yields and long-term total returns to shareholders.

• Ongoing geopolitical volatility from the Middle East conflict has revived inflation risks and pushed out expectations for interest rate cuts, creating downward pressure on loan prices and CLO equity valuations.
• Spread compression on underlying loans has been a persistent headwind for CLO equity returns over the past several years, though this dynamic has recently begun to slow.
• Wider primary CLO liability spreads have reduced the economic benefit of refinancing and reset activity, slowing transaction volume in the segment in the short term.
• All forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from management projections, and the firm is not obligated to update forward-looking statements unless required by law.

Q: Gaurav Mehta (Alliance Global Partners) asked for additional detail on the recent stabilization in spread compression, and whether April's higher NAV was driven by this trend. / A: Management confirmed that the pace of loan spread compression has slowed sharply. Over the past couple of years, spreads compressed by an average of ~2.5 basis points monthly, but compression slowed to just 0.5 basis points in April. This dynamic, which has been a headwind for equity returns since 2024, appears to be ending, which is constructive for future portfolio yields. Management also noted that the share of underlying loans trading above par has fallen from 40% to 30%, further supporting this shift.

Q: Mehta followed up asking how much of the portfolio will be eligible for resets and refinancings this year. / A: Management stated that roughly one-third of the current portfolio will exit its non-call lock-up period in 2026, making these positions prime candidates for resets and refinancings. If CLO liability spreads stabilize as expected, transaction activity will pick up through the remainder of the year.

Q: Eric Zwick (Lucid Capital Markets) asked what types of investment opportunities management finds attractive currently, and whether activity is concentrated in primary or secondary markets. / A: Management confirmed the firm is currently focused primarily on attractive secondary market opportunities, which frequently appear in bid-wanted-in-competition (BWIC) processes. The firm is monitoring the primary market with interest but is not an active participant there at this time.

Q: Zwick asked if the dividend cut was to support future portfolio growth on a cost basis or just to keep portfolio size stable via capital recycling. / A: Management clarified that the dividend reduction aligns the firm's dividend policy with current net investment income levels, and the board will revisit dividend policy if net investment income grows in the future. Capital preserved from the lower dividend will be deployed into attractive opportunities to protect and grow net asset value over time.