Company: PDCC
Filing Date: 2025-07-18
Form Type: N-2
Source: 0001214659-25-010613
Chunk: 104

Company: Pearl Diver Credit Co Inc.
Filing Date: 2025-07-18
Form: N-2
Chunk 104
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 LCD.

We believe that the attractive historical performance
of CLO securities is attributable, in part, to the relatively low historical average default rate and relatively high historical average
recovery rate on senior secured loans, which comprise the vast majority of most CLO portfolios.

A CLO’s indenture typically requires that
the maturity dates of a CLO’s assets (typically five to eight years from the date of issuance of a senior secured loan) be shorter
than the maturity date of the CLO’s liabilities (typically 12 to 13 years from the date of issuance). However, CLO investors do
face reinvestment risk with respect to a CLO’s underlying portfolio. See “Risk Factors — Risks Related to Our Investments — We and our investments are subject to reinvestment risk.”

Most CLOs generally allow for reinvestment over
a specific period of time (the “reinvestment period,” which is typically up to five years). Specifically, CLO collateral managers
may, based on their discretion and expertise, adjust a CLO’s portfolio over time, though such discretion is typically constrained
by asset eligibility and diversification criteria set out in the CLO’s indenture. We believe that skilled CLO collateral managers
can add significant value to both CLO debt and equity investors through a combination of their credit expertise and a strong understanding
of how to manage effectively within the rules-based structure of a CLO.

After the CLO’s reinvestment period has
ended, in accordance with the CLO’s principal waterfall, cash generated from principal payments or other proceeds are distributed
to repay CLO debt investors in order of seniority. That is, the AAA tranche investors are repaid first, the AA tranche investors second,
and so on, with any remaining principal being distributed to the equity tranche investors. In limited instances, principal may be reinvested
after the end of the reinvestment period.

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CLOs contain structural features and covenants
designed to enhance the credit protection of CLO debt investors, including overcollateralization tests and interest coverage tests. The
overcollateralization tests require CLOs to maintain certain levels of overcollateralization (measured as par value of assets compared
to principal amount of liabilities, subject to certain adjustments). Interest coverage tests require CLOs to maintain certain levels of
interest coverage (measured as expected interest revenues on the assets compared to interest payments on the liabilities). If a CLO breaches
an overcoll