Company: PDCC
Filing Date: 2025-07-18
Form Type: N-2
Source: 0001214659-25-010613
Chunk: 11

Company: Pearl Diver Credit Co Inc.
Filing Date: 2025-07-18
Form: N-2
Chunk 11
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 CLO in the market.

CLOs have two priority-of-payment schedules (commonly
called “waterfalls”), which are detailed in a CLO’s indenture and which govern how cash generated from a CLO’s
underlying collateral is distributed to the CLO’s debt and equity investors. One waterfall (the interest waterfall) applies to interest
payments received on a CLO’s underlying collateral. The second waterfall (the principal waterfall) applies to cash generated from
principal on the underlying collateral, primarily through loan repayments and the proceeds from loan sales. Through the interest waterfall,
any excess interest-related cashflow available — after the required quarterly interest payments to CLO debt investors are made and
certain CLO expenses (such as administration and collateral management fees) are paid — is then distributed to the CLO’s equity
investors each quarter, subject to compliance with certain tests. The equity tranche represents the first-loss position, but is entitled
to all of residual interest and principal collections from the underlying assets and therefore exposes investors to relatively higher
risk than the more senior tranches but allows for greater potential upside.

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Underlying Assets of CLOs

CLOs are generally required to hold a portfolio
of assets that is highly diversified by underlying borrower and industry and that is subject to a variety of asset concentration limitations.
Most CLOs are non-static, revolving structures that allow for reinvestment over a specific period of time (the “reinvestment period”,
which is typically up to five years). The terms and covenants of a typical CLO structure are, with certain exceptions, based primarily
on the cashflow generated by, and the par value (as opposed to the market price) of — the collateral. These covenants include collateral
coverage tests, interest coverage tests, and collateral quality tests.

Broadly syndicated senior secured loans are typically
originated and structured by banks on behalf of corporate borrowers with proceeds often used for leveraged buyout transactions, mergers
and acquisitions, recapitalizations, refinancings, and financing capital expenditures.

Broadly syndicated senior secured loans are typically
distributed by the arranging bank to a diverse group of investors primarily consisting of: CLOs, senior secured loan and high yield bond
mutual funds and closed-end funds, hedge funds, banks, insurance companies, and finance companies. CLOs currently represent 50%-75% of
the demand for newly issued leveraged loans, according to S&P Capital IQ.