Pearl Diver Credit (NYSE:PDCC) executives said the collateralized loan obligation (CLO) equity market remained challenging in the fourth quarter of 2025, citing tight spreads and broad pressure on net asset values across the sector. Management emphasized, however, that the company’s quarter was “mostly driven by unrealized losses,” which it described as non-cash and market-based, while recurring cash flows and net investment income improved sequentially.
Market backdrop: spread tightening and uneven loan performance
Chief Executive Officer Indranil Basu said the fourth quarter continued to reflect the “nuanced dynamics” of CLO equity, even as the Federal Reserve delivered two additional 25-basis-point cuts in October and December. Basu noted that, despite those cuts aligning with earlier expectations, CLO equity experienced “significant headwinds” in 2025 and cited Citibank’s estimate of approximately -10% industry returns for the year.
Outlook for 2026: stabilization and potential refinancing upside
Looking ahead, Basu said the company remains optimistic about CLOs relative to other traded asset classes and pointed to strong demand. He also said CLO debt tranches delivered “solid full-year returns” in 2025, aided by pull-to-par dynamics in older vintages despite tighter spreads.
For 2026, management highlighted several developments:
- Loan repricing momentum “appears to be petering out,” and the company expects 2026 refinancings to create less spread compression than in 2025 and eventually stabilize.
- Improved new loan issuance activity could provide “better opportunities” for CLO managers and potentially support wider CLO equity spreads.
- Significant tightening in CLO debt tranches during 2025 may create “potential refinancing upside” for CLO structures in the year ahead.
Basu said the company believes “the worst of 2025 headwinds may be behind us,” while emphasizing continued focus on prudent portfolio management and patient capital deployment.
Portfolio activity and positioning
During the quarter, Pearl Diver Credit completed four resets and refinancings, exited one position where upside had been realized or the risk/reward profile had changed, and added eight new positions that management said offered attractive relative value. The portfolio’s weighted average GAAP yield decreased slightly to 12.99% at quarter end from 13.07% as of September 30.
Management said 6% of the portfolio was refinanced or reset during the quarter. Across those transactions, the company reduced the weighted average cost of debt by 28 basis points and reduced triple-A spreads by 12 basis points, which Basu described as a natural hedge to loan-spread compression by boosting equity cash flows. He added that since quarter end, the company closed refinancings on an additional 6% of the portfolio.
As of December 31, the portfolio consisted of 57 CLO equity positions managed by 33 CLO managers, with underlying exposure to approximately 1,300 obligors across more than 30 sectors. Management said no single CLO position represented more than 4.9% of the portfolio, and the largest corporate exposure was 0.7%. Basu also said nearly all investments remain within their reinvestment periods, providing flexibility to adjust exposures and reinvest prepayments.
Financial results: higher income, but unrealized losses weighed on NAV
Chief Financial Officer Chandrajit Chakraborty reported investment income of $5.9 million, or $0.86 per share, for the quarter ended December 31, 2025, up from $5.4 million in the prior quarter. Total expenses were $2.5 million, or $0.37 per share, compared with $0.35 per share in the previous quarter. Net investment income increased to $3.4 million, or $0.49 per share, from $3.0 million, or $0.44 per share, in the third quarter.
The company recorded net unrealized losses on investments of $15.7 million, or $2.3 per share, along with a net realized loss of $35,000. Chakraborty said the net loss for the quarter was $12.4 million, or $1.81 per share.
Chakraborty also highlighted “strong” recurring cash flows from the CLO portfolio totaling $9.8 million, or $1.44 per share, which exceeded distributions and expenses by $0.41 per share and increased from $8.7 million, or $1.28 per share, in the prior quarter.
On the balance sheet, the company reported total assets of $141.3 million as of December 31, 2025. Chakraborty initially stated total net assets were $90.6 million, but later clarified during the call that total net assets were $98.6 million. The company reported net asset value per share of $14.42 at quarter end, down from $16.89 as of September 30.
Available liquidity, consisting of cash and short-term investments net of unsettled trades, was approximately $1 million. 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. Leverage was 28.7% of total assets, within the company’s stated long-term target range of 25% to 35%.
Capital management, dividend, and Q&A highlights
The company continued issuing shares through its at-the-market (ATM) program, issuing 30,680 shares for net proceeds of approximately $0.5 million during the quarter. Chakraborty said the company paid dividends of $0.22 per common share in October, November, December, and January, and expects to distribute $0.22 per share in February, March, April, and May. He said the board considers factors such as net investment income, taxable income, recurring cash flows, and portfolio outlook when setting the dividend.
In the question-and-answer session, management said it is seeing opportunities in both primary and secondary markets, but is currently “more overweight” opportunities in the secondary market. On refinancing and reset opportunities, management said multiple positions are exiting non-call periods and that, in a tightening CLO liability spread environment, it expects upside to “play out” over the next couple of quarters.
Management also addressed loan repricing dynamics, saying slowing repricing and prepayment speeds are both a market-wide trend and visible in the company’s portfolio. As an indicator, management said that in the prior quarter more than 50% of CLO loan portfolios were priced above par, while it is now seeing that ratio closer to 30%.
Asked about using the ATM relative to the stock’s price versus NAV, management said it utilizes the ATM when trading at a premium, but noted that the last observed stock price referenced in the discussion was trading at NAV rather than a premium.
About Pearl Diver Credit (NYSE:PDCC)
Pearl Diver Credit Company Inc is a newly organized, externally managed, non-diversified, closed-end management investment company. Its primary investment objective is to maximize its portfolio’s total return, with a secondary objective of generating high current income. Pearl Diver Credit Company Inc is based in NEW YORK.
