Sound Point Meridian Capital Q1 25/26 Earnings Call Transcript

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Provided by Quartr
August 12, 2025

Key Takeaways

  • Negative Sentiment: Net investment income was $10.8 million, or $0.53 per share, below the $0.75 per-share quarterly distribution. Management attributed the shortfall to CLO spread compression, delayed resets amid tariff-related volatility, and lower loan-accumulation activity.
  • Negative Sentiment: The portfolio’s weighted-average GAAP yield declined to 12.9% from 14.0% in the prior quarter, while NAV per share fell to $18.50 from $18.78. Executives said the primary pressure is reduced CLO arbitrage rather than elevated defaults or credit losses.
  • Positive Sentiment: Management estimates that 49% of the CLO portfolio is currently eligible for refinancing, potentially reducing weighted-average liability costs by 25 basis points. Because of CLO equity leverage, executives estimate this could increase portfolio yield by roughly 250 basis points and offset a substantial portion of prior spread compression.
  • Positive Sentiment: The company raised approximately $55.5 million through its Series B preferred stock offering and extended its CIBC revolving facility maturity to 2028, with potential facility capacity increased to $150 million. Management said the financing strengthens liquidity, extends the maturity profile, and provides flexibility to deploy capital selectively.
  • Neutral Sentiment: CLO issuance remained robust, with year-to-date issuance of $99.9 billion, but Sound Point is favoring secondary investments with high-quality loan portfolios, longer reinvestment periods, and near-term refinancing opportunities. Management reported low portfolio loss and default rates, while acknowledging ongoing risks from tight loan spreads, tariffs, inflation, and recession concerns.
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Earnings Conference Call
Sound Point Meridian Capital Q1 25/26
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Sound Point Meridian Capital, Inc. First Fiscal Quarter ended June 30, 2025, earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. 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.

Speaker 1

Ladies and gentlemen, thank you for standing by. Sound Point Meridian Capital refers participants on this call to the investor webpage at www.soundpointmeridiancap.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 8-K 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.

Speaker 1

We note forward-looking statements, whether written or oral, include, but are not limited to Sound Point 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 Sound 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 Sound Point Meridian Capital are not necessarily indicative of results to be achieved in succeeding periods.

Speaker 1

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

Speaker 2

Thank you to everyone joining us today, and welcome to the Sound Point Meridian Capital earnings call for the fiscal first quarter ended June 30th, 2025. We'd like to invite you to download our investor 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 ended June 30th, 2025. For the quarter, we generated net investment income, or NII, of $10.8 million, or $0.53 per share, a net realized loss on exited investments of $0.01 per common share, while we paid distributions during the quarter of $0.75 per share.

Speaker 2

The shortfall in NII 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 $18.50, 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 six CLO equity investments with an amortized cost and weighted average GAAP yield of $13.3 million and 17.8%, respectively.

Speaker 2

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 CLO 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 31st. As mentioned above, the decrease in GAAP yield was a result of continued loan repricing 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.

Speaker 2

We believe this strategy of broad diversification enables us to manage risk efficiently, providing us with dividend sustainability and downside protection through changing market conditions. Given the speed of loan repricing activity seen since our IPO in June 2024, we believe it is increasingly important to be diversified across non-call periods in our CLO equity portfolio. Recall that once a 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. Should these refinancings occur, we estimate our overall CLO portfolio could save 25 basis points on its weighted average liability cost.

Speaker 2

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 else equal, this will also increase the GAAP yield of our CLO equity investments. With that, I'll now turn the call over to Kevin for a more detailed review of our financial highlights for the quarter.

Speaker 3

Thanks, Ujjaval, and hello, everyone. As Ujjaval mentioned, for the quarter ended June 30, 2025, we delivered net investment income of $10.8 million, or $0.53 per share. For the quarter ended June 30, 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 value stood at $18.50 per share. The fair value of our investment portfolio stood at $522.3 million, while available liquidity consisting of cash was 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.

Speaker 3

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 price as of June 30, this represents an annualized dividend yield of 16.8%. Subsequent to quarter end, on July 8, we priced an underwritten public offering of 2 million shares of our 7 7/8 Series B preferred offering due 2030 at a price of $25 per share. We exercised the full overallotment 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.

Speaker 3

On August 5, 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 prepayments 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 SOFR plus 375. We believe these financing activities are accretive to Sound Point Meridian Capital's common shareholders.

Speaker 3

The five-year maturity of the Series B preferred offering extends our maturity wall, and the three-year CIBC facility provides us flexibility to patiently 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 the 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 NAV per common share was $18.53 per share. I will now turn it back to our CEO, Ujjaval Desai, to provide an update on the CLO market.

Speaker 2

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 second 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, risk-on sentiment returned, driving credit spreads back towards the tightest seen since February 2025. In the second quarter, the Morningstar LSTA US Leveraged 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.

Speaker 2

Demand came from robust CLO originations, which rose to a six-month high and the first inflows seen by leveraged loan mutual funds in three months. By quarter end, loan spreads had retraced and now continue 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 pacing 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.

Speaker 2

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

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star key followed by the number 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star key followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Randy Binner of B. Riley. Please go ahead.

Speaker 4

Hey, good morning. Thanks for all the commentary on the CLO market. I think the question I'd ask is, 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 opportunity. We're seeing that in our model, just on the annualized yield that we forecast NII off of. The question is, what's the prospect for that changing, do you think, and seeing a higher yield? Because I do 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 see better spread opportunities in your markets.

Speaker 2

Sure. Hi, Randy. Thanks for the call. I think you're right. The NII has compressed over the last few quarters, as you can see from our numbers. That's driven by the mismatch we're seeing between assets and liabilities, right? A lot of these CLOs have locked up liabilities from a year ago, two years ago, and spreads have continued tightening. 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. That alone would cause a significant, right, because of the leverage in the structure. That's 400 basis points of spread tightening on the equity. But as an equity holder, we have the option to refinance our liabilities.

Speaker 2

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. That's a very important distinction between how we are running this portfolio versus what's available in the market. 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. 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. That refinancing is going to, if the market stays where it is, obviously, we will be able to save a lot on our liability costs, which will then bring the yield back up.

Speaker 2

That's an active choice we have made over the last few months of rotating the portfolio into more attractive kind of liability structures. I think that's our goal is to continue to work to reset these deals, refinance these deals, and reduce that cost drag effectively to get the arbitrage up. That's what we're working towards. We think if we can execute on this strategy, that should bring the yield back up substantially, so we can offset the spread loss on the portfolio.

Speaker 4

Got it. That's super helpful. I guess outside of that, the recurring cash flows that came up were really higher than we thought, which is obviously positive. Was there anything unusually good in that result this quarter?

Speaker 2

No, I think there's nothing to note on that front. The 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. We've caught up on that. Most of the portfolio now is actually paying equity distributions. A lot of it wasn't as we were ramping up. The second thing is that the size of the portfolio is up because we have taken on more leverage, so the portfolio balance has gone up, which increases the actual dollar amount of cash flows we are receiving. Those are some of the things that's going on as well. I think one thing to note is

Speaker 4

All right.

Speaker 2

One thing to note is the question about the yield. It's important to distinguish between the two main drivers that could reduce the yield of CLO equity. One is going to be obviously the spread compression and the arbitrage compression, which I just talked about, and hopefully we can 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, 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 the NAV of the portfolio. What's really happening here is the spread compression. As we work through the resets, refinancings, that hopefully will get the yield back up.

Speaker 2

That's really the two things I would note here.

Speaker 4

All right. Great. Thank you.

Speaker 2

Of course.

Operator

Your next question comes from Gaurav Mathur of Alliance Global Partners. Please go ahead.

Speaker 5

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

Speaker 2

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

Speaker 5

I guess the way to think is that the yield would go up by 25 basis point on the current portfolio?

Speaker 2

No, it's 25 times 10. So it's going to be-

Speaker 5

Oh

Speaker 2

Yeah. So it's 250 basis points. That's the impact. Again, there are 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 cost, that's a 250 basis points of increase in spread. If you look at our GAAP yield, as we reported today, 12.9% on amortized cost. That's come down from 14.5%, 15% about a year ago. That reduction is primarily driven by the spread compression, and if the market stays where it is, we can offset a big chunk of that. The other thing that also happened this last quarter was, as I mentioned earlier, we prefer, right, in this market, secondary investments versus primary. So we're not doing as many primary deals. You can see that from the numbers.

Speaker 2

USD 17 million or so of primary deals invested as opposed to a much higher number in previous quarters. That has resulted in our loan accumulation facility, that income also has gone down. So you'll see that in the tables. That is also a significant component of GAAP yield. That has come down for us this quarter because we have been less active. Now, if the arbitrage recovers because liabilities get tighter, or if we see any volatility and the arbitrage improves, we will then pivot back to doing new issue CLO equity, which would then result in more of that other income as well, which then overall boosts the total investment income.

Speaker 2

The keys here are 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 fee subsidies that we get. It's a combination of all of those. 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. As that sort of equilibrium is reset, that also hopefully improves that. If you look at 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. We have been more active in generating other income in that month as well.

Speaker 5

Understood. Thank you. Second question I have is on the preferred stock issue. How should we think about the timing of deployment of the capital that you raised in July?

Speaker 2

Yeah, great question. We have two sorts of financing for our capital structure. We have the senior facility, which, as Kevin mentioned earlier, it has been refinanced now to a longer facility. We had a year left under that facility. Now, we have renewed it for three 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. Right now, it's a $100 million facility, but we're not utilizing all of that. If you look at our July numbers, we are currently drawn at $40 million out of the $100. What we did was we repaid that facility down because we drew on the preferred. The preferred is fully invested.

Speaker 2

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 drag. Right now, we are under-deployed on the revolver, and as we see good investment opportunities, we can draw the revolver up to $100 million to be fully leveraged. We are certainly under-leveraged right now, but we want to be prudent. And certainly, having that facility is very helpful in reducing any draw. To answer your question, the preferred capital has been fully deployed by effectively repaying the senior facility.

Speaker 5

Understood. Lastly, I want to ask you on the common dividend, how should we think about the NII coverage of common dividend going forward?

Speaker 2

Right. We are not going to talk about forward-looking statements here, but I think the reality is that 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 of what is 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.

Speaker 5

Understood. Thank you. That is all I had.

Speaker 2

Okay. Thank you, Gaurav.

Operator

Your next question comes from Mickey Schleien of Clear Street. Your line is now open.

Speaker 6

Yes, good morning. Ujjaval, 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. CLO equity cash flows remain relatively healthy. What do you think it will take to get the market to a less cautious stance and perhaps see some of these NAVs come up a bit more?

Speaker 2

Yeah. Hi, Mickey. Good morning. I'm not going to comment on the share price movement, but just in terms of what we can control, which is the NAV of the portfolio. I think the reason why the NAV is down for the market is because of the spread compression we talked about. There's just less income coming through the capital structure. You have to kind of see that rebalance, which will happen as some of the older CLOs get refinanced. That refinancing activity has been very robust. That's our number one focus right now, along with obviously keeping the portfolio clean, is to maximize that arbitrage. As CLO liabilities come up for refinancing, usually every quarter on payment dates, around the payment dates, July was a big date, next one is October.

Speaker 2

We're very focused on getting that arbitrage reset, and that's going to be very important. As you do that, the cash flows get restored, and then the market starts to give you credit for that, which then improves the price of the equity, right? Currently, basically the way the market prices CLO equity is you're not going to get much credit to a deal that still has six 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 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 NAV of the portfolio.

Speaker 2

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 basic to NAV. The second thing is that, if you have significant-- If you're not able to pay your dividends with your income, then that also reduces the NAV. I think you need to basically see that income restored. CLO equity market has been very healthy. The secondary market is trading quite well. CLO equity yields are fairly tight as well. 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. We've seen that significant tightening I talked about on the loan side.

Speaker 2

CLO triple As, for instance, have also tightened, but not quite as much. We're still wider than where we were in February, pre-Liberation Day. It's slowly tightening. As we start to see the triple A market tighten as well over time, that again helps with the cost of liabilities and therefore the arbitrage on the equity. I think all of that is interrelated and that I think is what hopefully will boost the NAVs over time. That's really what we're seeing. The other thing, as I mentioned earlier, is the losses. You got to have the portfolio absolutely clean. In markets like this, you want to 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.

Speaker 2

That's been our focus from the very beginning, is to keep the portfolio clean. If you can keep the portfolio clean, work hard on your liabilities and the arbitrage. That is, I think, the way you can get the NAV increased over time.

Speaker 6

Ujjaval, I understand all the mechanics you just described, and I appreciate that. Loan spread compression's been going on for over a year. This headwind has existed for a long time. There's a cliff, literally, right around Liberation Day. Whether it's your stock price or spreads or whatever you want to look at. 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 a lid on how things progress, or are you optimistic that the market will be able to digest those risks as well?

Speaker 2

Yeah, again, I'm not going to comment on stock price action because 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. Of course, there is concerns around potential inflation, recession risks and all that, and tariffs are not fully resolved yet. There are concerns there. But what's visible in the market today is the fact that loan defaulters are under control, loans are trading really well, and CLO liabilities and equities are also trading really well. It's just that the cash flows in the CLOs have reduced. That obviously will lead to just lower NAVs in these portfolios. There are ways to resolve and improve that.

Speaker 2

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. I think the, and again, the new issuance of CLOs has been very healthy as well. I feel this is all fairly natural. Clearly not what anybody was predicting 3 months ago or 6 months ago, but that's where we are right now, is market has recovered very fast. Credit markets recovered very fast. CLO liabilities are lagging behind. Any of these existing portfolios will always have that lag effect where assets can refinance pretty fast. Liabilities will have up to 2 years of non-call period. So you're going to have this sort of, in these types of markets, CLO equity always lags.

Speaker 2

In other markets when there's more volatility, CLO equity actually, the cash flows get boosted pretty fast. So that's the phase we're in right now. That's kind of how I would answer that question.

Speaker 6

I appreciate that. Thanks for taking my questions this morning.

Speaker 2

Of course. Absolutely.

Operator

As a reminder, if you wish to ask a question, please press star 1. Your next question comes from Eric Zick of Lucid Capital. Please go ahead.

Speaker 7

Thanks. Good morning. Just 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 or factors in estimating those potential savings? I'm just trying to figure out what could potentially change either positive or negative with respect to that 50 basis points between now and Q3 2026, that period that you've laid out there.

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