Pearl Diver Credit NYSE: PDCC reported a recovery in net asset value and positive operating results for the second quarter of 2026 as CLO equity market liquidity and valuations improved from the prior quarter.
Net asset value per share rose 6.4% to $11.15 at June 30 from $10.48 at March 31. Net assets increased to $77.3 million from $72 million, while the company reported a net increase in net assets from operations of $8.5 million, or $1.26 per share. That compared with a net loss of $22.5 million, or $3.28 per share, in the first quarter.
Chief Executive Officer Indranil Basu said CLO equity secondary-market activity strengthened during the quarter after a quieter period in March and April. May recorded roughly $1.9 billion in CLO equity trading, according to Basu, helping support valuations through quarter-end.
“Our results for the quarter reflect that recovery,” Basu said, while cautioning that the largely non-cash, market-driven improvement over a single quarter should not be viewed as a trend.
Unrealized Gains Drive Quarterly Recovery
The company recorded $6.7 million in net unrealized gains on investments during the second quarter, or $0.97 per share, reversing $25.1 million of unrealized losses reported in the first quarter. Pearl Diver also recorded a modest net realized loss of $107,000.
Investment income was $4.2 million, or $0.60 per share, down from $4.8 million, or $0.70 per share, in the prior quarter. Total expenses were $2.2 million, or $0.32 per share, compared with $0.31 per share in the first quarter. Net investment income totaled $1.9 million, or $0.28 per share.
Recurring cash flows from the CLO portfolio were $8.8 million, or $1.27 per share, down from $10.5 million, or $1.53 per share, in the first quarter. The second-quarter cash flows exceeded distributions and expenses by $0.38 per share, Chief Financial Officer Chandrajit Chakraborty said.
Chakraborty said the $0.67 sequential increase in NAV per share reflected approximately $0.28 per share of net investment income and $0.97 per share of net unrealized gains, partly offset by the realized loss and $0.57 per share distributed during the period.
Credit Conditions and CLO Spreads Improve
Basu said underlying loan prices were broadly stable during the second quarter, with the index ending June at 94.96, compared with 94.63 at the end of March. He said the first-quarter decline had been driven by concerns around AI-exposed sectors and geopolitical tensions.
According to Basu, CLO liability spreads tightened across the capital structure during the quarter. AAA spreads narrowed to 121 basis points at the end of June from 125 basis points at the end of March. BBB spreads tightened by about 60 basis points to 250 basis points, while BB spreads tightened by roughly 140 basis points to 510 basis points.
Primary CLO issuance totaled about $26 billion in the second quarter, down from roughly $39 billion in the first quarter. Meanwhile, resets and refinancings reached approximately $84 billion, compared with about $49 billion in the prior quarter. Basu said tighter liability spreads and limited loan supply encouraged more activity in resetting existing CLOs than in forming new vehicles.
Credit fundamentals remained constructive, according to management. Pearl Diver’s portfolio had a last-12-month default rate of 1.08%, broadly in line with the wider CLO market’s 1.1% rate and below the 2.29% default rate cited for the overall leveraged loan market.
Refinancing Activity Lowers Funding Costs
Pearl Diver completed five resets and refinancings during the quarter, representing approximately 12% of its portfolio, and added one new position that management said offered attractive relative value.
Across the completed transactions, the company reduced its weighted-average cost of debt by 33 basis points and lowered AAA spreads by 27 basis points. The activity was larger than the company’s first-quarter program, when it completed four transactions covering roughly 6% of the portfolio.
The refinancing actions partly offset a decline in the portfolio’s weighted-average GAAP yield, which fell to 10.33% at June 30 from 11.27% at March 31.
As of June 30, the portfolio consisted of 59 CLO equity positions managed by 34 distinct CLO management platforms. The underlying loan portfolios included about 1,400 obligors across more than 30 sectors. No individual CLO position represented more than 5.1% of the portfolio, while the largest corporate obligor exposure was 70 basis points.
- Approximately 70% of portfolio NAV was in deals with reinvestment end dates of 2029 or later.
- About 25% of the portfolio had reinvestment end dates in 2029, 37% in 2030 and 6% in 2031.
- Roughly 21% of the portfolio was expected to reach the end of its reinvestment period during 2026.
Basu said the reinvestment profile provides CLO managers flexibility to reinvest repayments at current loan prices and manage individual credit or sector weakness.
Leverage Declines; Dividend Set at $0.13 Monthly
Total assets were $116.9 million at June 30, while available liquidity, consisting of cash and short-term investments net of unsettled trades, was approximately $3.2 million.
Leverage totaled $38.4 million, including $33.7 million of Series A term preferred stock, net of unamortized deferred issuance costs, and $4.7 million in short-term reverse repurchase agreements. Leverage was 32.9% of total assets, down from 35% at the end of March and within the company’s stated long-term target range of 25% to 35%. Asset coverage was 295%.
Chakraborty said the company had “deliberately not levered into the recovery” and retained the capacity to increase leverage if conditions remain favorable and investment opportunities arise.
During the quarter, Pearl Diver issued 65,959 shares through its at-the-market equity program for net proceeds of approximately $700,000. The company paid dividends of $0.22 per common share in April and May and $0.13 per share in June.
The company said it will distribute a $0.13 per share dividend at the end of the month and will maintain a $0.13 monthly dividend for September, October and November.
Basu said management is more constructive than it was in May but does not view the improved quarter as evidence that the market cycle has turned. He noted that net investment income declined again during the period, prompting the company to set its distribution accordingly.
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.
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