Sound Point Meridian Capital Inc (SPMC) 2026 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SoundPoint Meridian Capital Inc. First fiscal quarter ended June 30, 2025 earnings conference call.

(Operator Instructions)

This call is being recorded on Tuesday, August 12, 2025.

I would now like to turn the conference over to Julie Smith. Please go ahead.

Ladies and gentlemen, thank you for standing by. Sound Point Meridian Capital refers participants on this call to the investor webpage at www.soundpointmeridian Cap.com for the press release, investor information and filings with the Securities and Exchange Commission, and for a discussion of the risks that can affect the business.

Sound Point Meridian Capital specifically refers participants to the presentation furnished today on the Form 8K with the SEC. And to remind listeners that some of the comments today may contain forward-looking statements, and as such, will be subject to risks and uncertainties which, if they materialize, could materially affect results.

Reference is made to the section titled forward-looking Statements in the company's earnings press release for the period ended June 30, 2025, which is incorporated herein by reference. We note forward-looking statements, whether written or oral, include, but are not limited to Soundoint Meridian Capital's expectation or prediction of financial and business performance and conditions, as well as its competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties, and assumptions which, if they materialize, could materially affect results. And such forward-looking statements do not guarantee performance, and some point Meridian Capital gives no such assurances. Sound Point Meridian Capital is under no obligation and expressly disclaims any obligation to update, alter, or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, historical data pertaining to the operating results and other performance indicators applicable to SoundPoint Meridian Capital are not necessarily indicative of results to be achieved in succeeding periods.

I will now turn the call over to Ujjaval Desai, Chief Executive Officer of Sound Point Meridian Capital.

Thank you to everyone joining us today and welcome to the SoundPoint Meridian Capital earnings call for the fiscal first quarter ended June 30th, 2025. We'd like to invite you to download our investment presentation from our website which provides additional information about the company and our portfolio.

With me today is our Chief Financial Officer Kevin Gerlitz, and after our prepared remarks, we'll open it up to your questions.

We're happy to report results for the first fiscal quarter ending June 30th, 2025. For the quarter, we generated net investment income, or NII of $10.8 million or $0.53 per share. The net realized loss on exited investments of $0.01 per common share while we paid distributions during the quarter of $0.75 per share.

The shortfall in NRI relative to common distributions was primarily driven by continued spread compression within the CLO collateral portfolios, the delay of certain reset transactions in the face of tariff-induced volatility in April and May, and lower participation in loan accumulation facilities during the quarter. Net asset value per share ended the quarter at 18.5%, down from where it stood on March 31st at 18.78.

During the quarter we deployed approximately $18.6 million in four CLO warehouse investments. We purchased three CLO equity investments in the primary market with an amortized cost and weighted average GAAP yield of $22 million and 15.2% respectively. In the secondary market, we purchased 6 CLO equity investments with an amortized cost and weighted average GAAP yield of $13.3 million and 17.8% respectively.

We refinanced the liabilities of seven CLO equity investments in the portfolio and had one outstanding warehouse investment as of June 30th with two unfunded commitments to purchase the equity with a cost of $2.9 million.

As of June 30th, the weighted average GAAP yield on our CLO equity portfolio was 12.9% versus 14.0% as of March 301.

As mentioned above, the decrease in GAAP yield was a result of continued lore pricing activity within the CLO collateral portfolios and the delay of certain reset transactions in the CLO equity portfolio.

Our portfolio as of June 30th was diversified across 86 unique CLOs managed by 26 different CLO managers. The underlying loan portfolio consisted of over 1,500 loan issuers across 30 plus industries on a look-through basis. We believe this strategy of broad diversification enables us to manage risk efficiently, providing us with dividends, sustainability and downside protection through changing market conditions.

Given the speed of laundry pricing activity seen since our IPO in June 24, we believe it is increasingly important to be diversified across non-call periods in our CLO equity portfolio. Recall that once the CLO's non-call period ends, the CLO is able to refinance its debt at the direction of the equity holder. As of June 30th, 2025, we estimate that 49% of our portfolio is currently in the money for a CLO refinancing based on today's market clearing levels.

With these refinancings occur, we estimate our overall COO portfolio could save 25 basis points on its weighted average liability cost. This would substantially offset the 38 basis points of weighted average spread loss that we've experienced in the underlying portfolio since our IPO in June 2024. Any savings from refinancing CLO debt would increase the difference between asset yield and liability cost, what we commonly call the CLO equity arbitrage. All less equal, this would also increase the GAAP yield of our CLO equity investments.

With that, I'll now turn the call over to Kevin for more detailed review of our financial highlights for the quarter.

Thanks, Oval and hello everyone. As Ujjaval mentioned, for the quarter ended June 30th, 2025, we delivered net investment income of $10.8 million or $0.53 per share. When the quarter ended June 30th, we recorded a net realized loss of $136,000 and an unrealized loss on investments of $953,000.

Total expenses during the quarter were $8.4 million. GAAP net income for the quarter was $9.7 million or $0.47 per share.

Moving to our balance sheet, as of June 30, total assets were $524.4 million net assets were $377.8 million and our net asset values stood at $18.50 per share. The fair value of our investment portfolio stood at $522.3 million while available liquidity consisting of cash is approximately $1.5 million at the end of the quarter.

As of June 30, the company had outstanding debt that totaled 27% of total assets. During the quarter, we declared monthly cash distributions of $0.25 per share, payable at the end of July, August and September. Based on our share prices of June 30th, this represents an annualized dividend yield of 16.8%. Subsequent to quarter end, on July 8th, we priced an underwritten public offering of 2 million shares of our 7 and 7/8 Series B preferred offering to 2030 at a price of $25 per share.

We exercise the full over allotment option of this offering, which resulted in an incremental issuance of 300,000 shares. Net proceeds from this offering totaled approximately $55.5 million after payment of underwriting discounts, commissions, and estimated offering expenses. Proceeds from the offering were used to purchase new investments in accordance with our investment strategy, as well as to partially repay our senior secured revolving credit facility provided by CIBC.

On August 5th, we announced monthly distributions for Calendar Q4 2025 of $0.25 per share, unchanged from our previously announced Q3 2025 monthly distributions. On August 6. We executed our first amendment to the CIBC credit facility, which extended the maturity date of the facility to August 4, 2028. The facility's current size remains at $100 million but the maximum facility size was increased from $125 million to $150 million.

Subject to certain closing conditions, voluntary pre-payments are prohibited until August 6, 2026 and are thereafter permitted with no prepayment penalty. There are no commitment fees on the facility so long as 70% or $70 million is outstanding after February 6, 2026.

Pricing on the facility remains unchanged at Sour Plus 375. We believe these financing activities are a creative to Sound Point Meridian Capital's common shareholders. The five year maturity of the Series B preferred offering extends our maturity wall, and the 3 year CIBC facility provides us flexibility to patently deploy capital in attractive investment opportunities and prudently manage our leverage profile. In changing market conditions.

Furthermore, we believe the combination of floating rate financing from the CIBC credit facility and fixed rate financing from our Series A and Series B preferred stock is a beneficial hedge in today's interest rate environment.

Finally, as of July 31, 2025, our estimated net asset value for common share was $18.53 per share. I will now turn it back to our CEO, Ujjaval, to provide an update on the CLO market.

Thanks, Kevin.

Before opening up for questions, I want to give a quick update on the overall market environment for corporate loans and CLO equity.

The 2nd quarter of 2025 kicked off with President Trump's Liberation Day announcement, which stoked recession fears and resulted in the most volatile days experienced by the stock market since COVID-19 outbreak. As the severity of the tariff policy was rolled back, the market recovered. By quarter end, Riscon's sentiment returned, driving credit spreads back towards the tightest scene since February 2025.

In the second quarter, the Morningstar LSDA US leverage loan Index returned 2.3%, bringing year-to-date returns to 2.8%. While loan returns were flat in April, the asset class experienced the strongest monthly gain in two years of 1.6% during May.

Demand came from robust CEO originations which rose to a 6-month high, and the first inflow seen by leverage loan mutual funds in 3 months. By quarter end, loan spreads had retraced and now continued to hover near decade-long lows.

Turning to the CLO market, despite the macro volatility, CLO primary market volumes remained robust, led by a rebound in June primary activity. In fact, by the end of the second quarter, year-to-date CLO issuance totaled $99.9 billion which is facing just slightly behind 2024's record setting amount of issuance. We continue to be highly selective regarding the managers we work with in the primary market and look to participate where we can play an active role in structuring the deal.

Though CLO issuance continues at a breakneck speed, we prefer secondary investments in today's environment, noting that loans continue to reprice and are currently at multi-year lows. Our focus remains on investments with high quality loan portfolios, longer reinvestment periods, and non-call periods of about one year or less.

With that we thank you for your time and would like to open up the call for Q&A operator.

(Operator Instructions)

Randy Binner, B. Riley.

I think the question I'd ask is the, is this the, to your comments on I guess spreads are just tighter than I think a lot of people thought they would be and, not creating as much op opportunity so we're seeing that in our model just on the kind of the annualized yield that we forecast NII off of and so. The question is, what's the prospect for that changing, do you think and kind of seeing a higher yield because I think at this point the yield we would forecast, I think is kind of flat to down but just curious your thoughts on when we might kind of see better spread opportunities in your markets.

I think you're right, the NII has compressed, over the last few quarters as you can see from our numbers, and that's driven by, the mismatch we're seeing between assets and liabilities, right? A lot of these CLOs have. A locked up liabilities from a year ago or 2 years ago and spreads have continued tighten.

So if you look at in our presentation we posted today on page 10, there is a table that shows what has happened to the spread on the portfolio. It's gone down 38 basis points in the last 12 months. And then if you look at the, so that alone would cause a significant right because of the leverage in the structure that's, 400 basis points of spread tightening on the on the equity.

But we have as an equity holder, we have the option to refinance our liabilities. And so what we did here was put a quick table together on page 10, which shows the breakdown of the portfolio by when the non-call period ends and that's an important, very important, distinction between how we are running this portfolio versus, what's available in the market.

And that's part of the reason why we've been pivoting to secondary investments because we want to have the ability to refinance these liabilities sooner rather than later. So if you can see from that table, a lot of the portfolio, about half of the portfolio can be refinanced over the next, 12 odd months, and that refinancing is going to, if the market stays where it is, obviously, we will be able to save a lot on the liability costs which will then bring the yield back up.

So that's an active choice we have made over the last few months of rotating the portfolio into more attractive kind of liability structures and I think that's that's our goal is to continue to work to reset these deals, refinance these deals, and reduce that that cost drag effectively to get the arbitrage up.

So that's kind of what we're working towards. So we think if we can execute on the strategy, that should bring the yield back up, substantially, so we can offset the spread loss in the portfolio.

And but I guess outside of that the the recurring cash flows that came up were really like higher than we thought and so was there anything which is obviously positive? Was there anything unusually good in that result this quarter?

No, I think there's nothing to note, on that front of me, the, if you call our ramp, so there are two things going on. One is, as our portfolio has been ramping, we start to get first distributions, usually there's a lag in that. So, we're caught up on that, so those. Most of the portfolio now is actually paying equity distributions, and a lot of it wasn't as we were ramping up.

And the second thing is that the size of the portfolio is up because we have taken on more leverage, so we have more, the portfolio balance has gone up, which increases the actual dollar amount of cash flows we're receiving. So those are some of the things that that's going on as well.

I think one thing to note is the question about the yield. It's important to distinguish between the two kind of main drivers that could reduce the yield of CLO equity. One is going to be obviously the spread compression and the arbitrage compression, which we, I just talked about and hopefully we can revert revert some of that.

The other thing is losses, right? You can have losses in the portfolio and that can also reduce spread. We're happy to note that the loss rates in our portfolios have been very low, lower than what was modeled, so our portfolio continues to perform well. Default rates have been pretty low as well.

So that bodes well for NAV of the portfolio and you know what's really happening here is the spread compression and so as we work through the recess refinancing that hopefully will get the yield back up. So that's really the two things I would note here.

Gourav Mathur, Alliance Global Partners.

I wanted to follow up on the year discussion. I think you said 49% of your portfolio can be refinanced over, next 12 months, and I think you said 25 basis points in savings and liability costs. So if that happens, what's like the impact on the yield of the portfolio?

Yes, that's correct. So if you look at the slide in the presentation deck, about 49% of the portfolio, we're saving about 50 basis points of yield, on the li sorry, the liability cost, savings is 50 basis points on that half of the portfolio. So that's overall on the entire portfolio, that's 25 basis points. And so that is, effectively what happens is that as we refinance those CLOs. The cost, liability cost goes down, which then effectively offsets the spread loss that we have seen. So the 38 basis points, 25 of that, would be offset through these savings that we hope to achieve over the next year.

And so I guess the way the thing is that the yield would go up by 25 basis point on the current portfolio

No, it's 25 times 10, so it's it's going to be it's a, yeah, so it's 250 basis points. That's again, a lot of assumptions there, a lot of things can happen, but just solely looking at this particular metric, yes, if you save 25 basis points of liability costs, that's a 250 basis points of increase in spread.

So if you look at our GAAP yield, as we reported today, 12.9%. On on amortized cost and that's come down from, 14.5, 15%, about a year ago and so that reduction is primarily driven by by by the spread compression and we can, if the market stays where it is, we can offset a big chunk of that.

The other thing that also that happened that happened this last quarter was, as I mentioned earlier, we we prefer, right in this market, secondary investments versus primary. So we're not doing as many primary deals, and you can see that from the numbers, $13 million or so, $17 million or so of primary deals invested as opposed to a much higher number in previous quarters, and that has resulted in our kind of loan accumulation facility. That income also has gone down. So you'll see that in the tables.

That is also a significant component of of GAAP yield, and that has come down for us this quarter because we have been less active. Now if the market, recover the arbi charge recovers because liabilities get tighter, or if we see any volatility.

And the arbitrage improves, we will then pivot back to the new CLO equity, which would then result in more, of that other income as well, which then overall boosts the total investment income. So that the keys here, obviously the total income, whether that comes from the CLO equity income component, which is the yield of the equity, or from other income like warehouse income or other other fee fee subsidies that we get. It's a combination of all of those.

So this quarter was unique in that we saw significant asset compression, but we also, were much more active on the secondary side as opposed to primary, and as that sort of, equilibrium is. That also hopefully improves that. So if you look at sort of what we've been doing in July, which we also released numbers for July, the month of July, you will see that our yield has ticked up a little bit, and we have been, more active in in generating other income in that quarter as well, in that month as well.

Second, question I have is on the prefer start issue and, how should we think about the timing of deployment of the capital that you raised in July?

Great question. So as we have two sorts of financing for a capital structure. We have the senior facility, which, as Kevin mentioned earlier, it has been refinanced now to a longer facility. So we had a year left under the facility. Now we have renewed it for 3 years, so we have a lot more runway there, and we have increased the size of. That as well so we can, bring that up to $150 million if needed.

So right now, it's $100 million facility, but we're not utilizing all of that. If you look at sort of a July numbers, we are currently drawn at 40 million out of the 100. So what we did was we repaid that facility down. And, because we drew on the preferred, so the preferred was fully, it's fully invested.

We don't have any cash drag, because we drew the facility down, and that's really the fact that it's a revolver, it's very beneficial to us, otherwise there would be significant cash. So right now, we are underdeployed on the revolver and as we see good investment opportunities, we can draw the revolver fully up to 100 million to be fully levered.

So we are certainly under leverage right now, but we want to be prudent. And that certainly having that facility is very helpful in reducing any draw. So to answer your question, the preferred capital has been fully deployed, by effectively repaying the senior facility.

Then, lastly I want to ask you on the common dividend, how should we think about the NRI coverage of common dividend going forward?

Right, we're not going to talk about sort of forward-looking statements here, but I think the the reality is that, we have our common dividends are $0.75 a quarter, and we have announced that same dividends for the next quarter as well. Currently, yes, we are short of that, but I gave plenty of reasons what's going on there and how we intend to boost the NII. Assuming the market cooperates, so we feel good about that $0.75 dividend right now.

Mickey Schleien, Clear Street.

I wanted to ask you a high level question. It seems that the CLO equity market remains. Cautious relative to the pre liberation day levels and that's also evident in your stock price, but the equity cash flows remain relatively healthy. So what do you think it will take to get the market to a less cautious stance and, perhaps see some some of these NIVs come up a bit more?

I think I'm not going to comment on sort of the share price movement, but just in terms of the, what we can control, which is the NAV of the portfolio, I think the reason why the NAB is down, for the market is because of the spread compression we talked about.

There's just less income. Coming through the capital structure and you have to kind of see that that rebalance, right, which will happen as some of the older CLOs get refinanced and that refinancing activity has been very robust and so that's our number one focus right now along with obviously keeping the portfolio clean is to, maximize that arbitrage.

So as CLO liabilities come up for refinancing, usually every quarter on payment dates around the payment date. So July was a big date, next one is October, we're, very focused on getting that arbitragere. Reset and that's going to be very important.

So as you do that, the cash flows get restored and then the market starts to give you credit for that, which then improves the the the price of the equity, right? So current, basically the way the Market prices low equity is, you're not going to get much credit to a deal that hasn't that still has, 6 months or 12 months left in its non-call period.

People are not going to give you full credit for it, but if something is very short, about to be to be reset or has just been reset. The market will price in those future cash flows, and that then boosts the price of the equity, which then boosts the NAB of the portfolio. So I think that's what we need to see is that sort of increase in the marks, the mark to market of the portfolio, that's basically the NAV.

The second thing. That you know if you have significant, if you're not able to pay your dividends with your income, then that also reduces the NAV. So I think you know it's a you need to basically see that income restored. C equity market has been very healthy.

The secondary market is trading quite well. CO equity yields are, fairly tight as well. So there is no issue in that part of the market. It's pretty healthy. Everything's functioning well. It's just that the returns are lower because of this arbitrage mismatch, which I think over time, hopefully, is restored.

Liability costs usually lag loan spreads. So, we've seen that significant tightening I talked about on the loan side. CLO AAA's, for instance, have also tightened, but not quite as much. We're still wider than where we were in February, pre-liberation Day, and so, as and it's slowly tightening, so as we start to see. The AAA market tighten as well over time that again helps with the with the cost of liabilities and therefore the arbitrage on the equity.

So I think all of that is interrelated and that I think is what hopefully will boost the NAVs over time. So that's really. What we're seeing, the other thing, as I mentioned earlier, is the losses. You've got to have the portfolio absolutely clean in markets like this.

You want to sort of focus on high quality managers, clean portfolios, loans trading below 90 is a big issue, anything in the 80s in a market where most loans are trading at par represents potential default risk. So that's been our focus from the very beginning is to keep the portfolio clean.

So if you can keep the portfolio clean, work hard on your liabilities and and the and the arbitrage, that is, I think, the way you can get the the NAV increased over time.

U, I understand all the mechanics, you just described, and I appreciate that, but long spread compression has been going on, for over a year. So this headwind has existed for a long time. But there's a cliff, literally right around liberation day, whether it's your stock price or spreads or whatever you want to look at. So it feels like the market is still worried about. Issues besides loan spreads, whether that's tariffs or the Fed or other macroeconomic volatility, do you think that that's going to keep sort of a lid on how things progress or are you optimistic that, the market will be able to digest those risks as well?

Yeah, I don't, I mean, again, I'm not going to comment on stock price action because that, that's a different topic in terms of how the investor base thinks about it.

We're focused on what we control, which is the NAV of the portfolio and the quality of the portfolio. We're not seeing that risk in the loan market today at all. I mean, of course there is. There are concerns around potential inflation, recession risks and all that, and tariffs are not fully resolved yet.

So there are concerns there. But what's visible in the market today is that is the fact that Loan default rates are under control. Loans are trading really well, and CLO liabilities and equity is also trading really well. It's just that the cash flows in the CLOs have produced, and that obviously will lead to, just lower. NAVs in these portfolios and you know there are ways to resolve and improve that.

I'm not concerned right now about that other risk, which is, increased default risk or, macro volatility. It could happen, but that's not what we're seeing in the market right now. So I think the, I, and again, the new assurance of CLOs has been very healthy as well. So I feel this is all fairly natural. Clearly not what, anybody was predicting, three months ago or six months ago, but that's where we are right now is the market has recovered very fast. Credit markets recovered very fast. CLO liabilities are lagging behind. And any of these existing portfolios will always have that lag effect where assets can refinanced pretty fast. Liabilities will have, up to 2 years of non call period.

So you can have this sort of in these types of markets, CLO equity always lags and other markets when there's more volatility, CLO equity actually, the cash flows get boosted pretty fast. So we're, that's the phase we're in right now. So that's kind of how I answer that question.

(Operator Instructions)

Erik Zwick, Lucid Capital.

Just kind of one question from me this morning, with regard to the opportunity to. Reprice some of the liabilities and looking at that slide 10, that far right column the kind of the 50 basis points that you've referenced, what is the largest, factor factors in estimating those potential savings and just trying to figure out, what could potentially change either, positive or negative with respect to that, 50 basis points between now and you know Q3 26 that period that you've laid out there.

I think it's just, right now, the COLO market is trading, or the liabilities are trading around 161 basis points all in. That's the cost and there are a number of factors that impact that.

One is going to be just the overall market where everything is, and do things get tighter now if loans continue to stay where they are, by the way, we are in the midst of another round of refinancing on the loan loan side, right? So more. Half the loans are trading above par and so that those loans are ripe for some spread reduction and we're seeing some of that and we saw some in June and July as well.

So if the market kind of stays relatively healthy, we expect liability costs to come down even further. So the 161 could actually be tighter than that which actually would mean more savings for us, but conversely, if there is volatility, then the spreads could blow out and we saw that in in early this year when, these spreads reached about 200 basis points. So, there is obviously. A range around this. What this table shows you is where the market is today.

We believe that there is certainly if the loan market stays healthy, we think there is certainly potential for spread tightening from here, but it's also, spread widening possible as well. The second thing is. The quality of the portfolio, you can't refinance these deals, all of them at these levels. The good deals, the stronger deals that have high quality portfolios, high quality managers can get these refinancings. So you have to, you can't apply this to every single CLO portfolio. So as you, if you're looking at this and saying, okay, does this mean everyone else's portfolio can refinance as well, the answer is no.

This only applies to deals that are clean. The deals that, have the right sort of coverage ratios in the structures, those can be refinanced, and it's not a general statement on where the sale market can refinance itself. So I think this is specific to our portfolio and the fact that the quality of the portfolio is very high and that manager quality is also very high. So that's kind of how to answer that question.

But there are a number of variables that could certainly impact this this particular refund number.

You know that that's helpful and I appreciate your commentary there about the you know high quality portfolio and your confidence you know it's not just a market opportunity but you've got to be able to have the the quality to to realize those savings as well so I appreciate that thank you that's all I had today.

There are no further questions at this time. I will now turn the call back over to Ujjaval to say, please continue.

Great. Well, thanks everyone for listening in today. Appreciate your support for SPMC, and, enjoy the rest of your summer and we'll see you guys in 3 months' time.

Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.