Sound Point Meridian Capital NYSE: SPMC reported net investment income of $5.8 million, or $0.28 per share, for its fiscal second quarter ended September 30, 2026, below the $0.60 per share in distributions paid during the period.
CEO Ujjaval Desai said income remained below common distributions despite refinancing activity in the company’s collateralized loan obligation, or CLO, portfolio. He attributed the shortfall to tighter loan spreads and higher modeled loss reserves for software loans affected by artificial intelligence.
Net asset value, or NAV, fell to $9.09 per share from $9.88 at June 30. Desai said realized losses and distributions exceeding net investment income drove the decline, partly offset by unrealized appreciation. The company reported a quarterly net loss of $4.1 million, or $0.19 per share, including $13.5 million in net realized losses and a $3.6 million unrealized gain on investments.
Distribution Coverage and Fees
After quarter-end, Sound Point Meridian announced monthly distributions of $0.13 per share for the first quarter of calendar 2027, unchanged from the declared monthly payments for the fourth quarter of 2026.
Asked about coverage, Desai said net investment income had improved from approximately $0.08 per share per month in the preceding quarter to just over $0.09 in the September quarter and about $0.11 in October. Management’s goal is to generate enough net investment income to cover the distribution, he said, citing portfolio trading, refinancing and expense reductions as measures to narrow the gap.
The company’s adviser, Sound Point, agreed to a temporary fee waiver from July 1 through December 31, 2026. It reduces the annual base management fee to 1.5% from 1.75% and the incentive fee to 15% from 20% of pre-incentive net investment income.
Desai said management would evaluate a potential extension with the board at its January meeting but did not have a specific plan at the time of the call.
Portfolio Trading and Leverage
During the quarter, the company purchased 10 CLO equity investments in the secondary market for $24.1 million at a weighted average yield of 19.1%, CFO Dan Fabian said. It also bought one CLO debt investment for $2.2 million at an all-in rate of 11.23%, sold seven equity investments for $26.2 million in proceeds and invested $4.4 million in resets of existing holdings.
The company refinanced the liabilities of 10 CLO equity investments, achieving weighted average debt cost savings of 28 basis points. Desai said the portfolio rotation was intended to reduce downside risk without materially sacrificing expected returns.
At September 30, the investment portfolio had a fair value of $355.5 million, cash liquidity was approximately $4.5 million and the leverage ratio was 46.2%, Fabian said. The portfolio included investments across 113 CLOs managed by 32 managers, providing look-through exposure to more than 1,500 underlying loans.
In response to an analyst’s question about a separate senior securities coverage measure, Desai said the ratio was 217% at September 30 and had declined as NAV fell in October. He said the company was focused on the 200% threshold and could use portfolio trading, paydowns, resets and refinancing to help repay its $50 million senior financing facility as needed.
Desai said share repurchases remained an option, but would increase leverage and would have to be weighed against the need to maintain the coverage ratio.
Market Pressure on NAV
Fabian said the company estimated its October 31 NAV at between $8.41 and $8.51 per share, below the September figure. Desai attributed the further decline to widening CLO equity spreads and weak investor demand in the secondary market. He said the company obtains third-party marks for its positions based on trading levels, while distinguishing those market valuations from the investments’ income and principal cash flows.
Desai said tighter loan spreads had hurt CLO equity performance over the past 18 months, although he saw potential for improvement as some new loans and maturity extensions came at wider spreads. He cautioned that the outcome depended on market conditions, loan defaults and broader sentiment.
On underlying credit risk, Desai identified software, building materials, retail and chemicals among areas that had underperformed. He said healthcare, financial services, energy and utilities had been stronger, while noting that many software companies continued to produce good earnings despite concerns about AI’s future impact.
About Sound Point Meridian Capital (NYSE:SPMC)
Sound Point Meridian Capital, Inc. is a publicly traded investment company focused on collateralized loan obligations (CLOs). It invests primarily in CLO equity and debt securities, which provide exposure to portfolios of corporate loans. Through these investments, the company participates in the financing of businesses whose loans are held in CLO portfolios. Its investment approach centers on selecting CLO securities rather than directly originating loans to companies. Sound Point Meridian Capital is externally managed by an affiliate of Sound Point Capital Management, a credit-focused investment manager.
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