Sound Point Meridian Capital Inc (SPMC) Earnings

Management highlights

- **Quarterly Financial & Portfolio Results** • NII of $7 million (34 cents per share) remained below the quarterly common distribution of 75 cents per share due to spread tightening and a 12-18 month decline in CLO equity arbitrage. • NAV per share dropped to $9.63 from $14.02 at the end of Q3 FY2026, driven by weaker market valuations for CLO equity and underlying leverage loans, plus lower projected CLO equity cash flows. • During the quarter, the firm purchased one new issue CLO equity position for $4.5 million (weighted average gap yield of 10.65%), three secondary CLO equity positions for $7.4 million (weighted average yield of 31.37%), sold two positions for $8.4 million in cash proceeds, refinanced liabilities for two CLO equity investments to cut average debt costs by 34 basis points, and redeemed two CLOs for $14.9 million in additional cash. - **Distribution Update** • Subsequent to quarter end, management announced unchanged monthly distributions of 20 cents per share for calendar Q3 2026, matching the prior Q2 2026 level. Distribution levels will continue to be evaluated as market conditions and portfolio performance evolve, with a full reassessment of distribution strategy planned as market visibility improves. - **Market Backdrop** • Q1 2026 saw a sharp shift in U.S. credit markets: after a year of spread compression, macro uncertainty, geopolitical volatility, and a sector-wide sell-off in software loans drove negative sentiment. Total U.S. institutional leverage loan issuance hit $241 billion, 32% below the prior year's pace, with M&A-related issuance reaching a four-year high (concentrated in a small number of mega deals) while refinancing activity fell sharply. • Investor demand for loans dropped to a three-year low, and the loan market saw a $19 billion contraction, leading to widened spreads across all credit ratings: B-rated loan spreads widened 100 basis points from January levels, and the benchmark loan index posted its weakest first quarter performance since 2020. The software sector saw the steepest price declines, dropping from 95.2 to 87.97 over the quarter amid AI disruption concerns. • Post-quarter end, market sentiment improved: loan prices rebounded as AI displacement fears eased and a U.S.-Iran ceasefire was announced, pushing the estimated NAV per share up to $10.57 as of April 30, 2026. CLO liability costs also retraced to January levels, reopening refinancing optionality for the portfolio.

Guidance

- Management expects portfolio performance direction to depend on macroeconomic stabilization and a recovery in investor demand for credit products. • Management is targeting stabilization and potential improvement in portfolio weighted average gap yield going forward, supported by secondary market repositioning, refinancing of liabilities at lower costs, and rotation into higher-quality, higher-yield positions. • Distribution strategy will be reassessed in the coming months as market visibility improves, with current monthly distributions held steady at 20 cents per share for calendar Q3 2026. • Management expects continued attractive investment opportunities in the secondary CLO equity market for the foreseeable future, and does not see attractive arbitrage for new primary issues at this time.

Segment performance

SoundPoint Meridian Capital operates a single investment segment focused on CLO equity investments. For the quarter: Net Investment Income (NII) was $7 million, or 34 cents per diluted share. Total expenses reached $8.2 million. The company recorded a net realized loss of $4.1 million on exited investments and an unrealized loss on investments of $77.6 million, resulting in a total net loss of $74.7 million ($3.63 per share). As of quarter end, total assets were $374.5 million, net assets were $198.7 million, and net asset value (NAV) per share was $9.63. The fair value of the investment portfolio was $368.2 million, with $5.8 million in available cash liquidity. The company's leverage ratio was 46.8% of total assets. The CLO equity portfolio held positions across 98 CLOs managed by 29 different managers, with look-through exposure to over 1,500 underlying loans across more than 30 industries. The weighted average gap yield for the portfolio was 9.1% (down from 11% in the prior quarter).

Risks & headwinds

- Persistently weak CLO equity arbitrage and spread tightening have kept net investment income below distribution levels. • Volatility in credit markets, driven by macro uncertainty, geopolitical instability, and AI disruption concerns for software and other exposed sectors, has led to sharp declines in loan prices and portfolio NAV. • Overexposure to AI-disrupted credits and underperformance by CLO managers can create material downside tail risk for the portfolio. • Widening CLO liability spreads can eliminate refinancing optionality and reduce projected portfolio cash flows. • Sustained weak demand for leverage loans and low new issue issuance could prevent spread stabilization and hurt portfolio performance.

Analyst Q&A

• Q: What is SoundPoint's exposure to AI-disrupted credits including software, and does the firm plan to reduce this exposure?

  A: On a look-through basis, ~12-13% of the portfolio's underlying loans are exposed to potential AI disruption, spanning software, business services, and healthcare. Management completed a full re-underwrite of all 54 credits in this bucket, finding most are strong companies that can either withstand AI disruption or benefit from AI adoption. Rather than fully reducing sector exposure, management is rebalancing the CLO equity portfolio: cutting exposure to CLOs with high concentrations of at-risk credits and adding exposure to CLOs with higher-quality credits in the space, which will result in a modest net reduction in overall high-risk exposure.

• Q: Are the high-yield secondary CLO investments made this quarter one-time opportunities from the software sell-off, and what is the opportunity landscape for primary versus secondary CLO investments today?

  A: Most portfolio repositioning activity took place in April and May 2026 after quarter end, so the full impact will not appear until the next quarter's results. The current market dislocation created attractive opportunities to acquire high-quality discounted CLO equity positions, and management is actively using this window to reduce portfolio tail risk. At this time, primary new issue CLO equity arbitrage remains unattractive due to widened liability spreads, so the majority of attractive opportunities are currently in the secondary market.

• Q: What drove the $4.1 million in net realized losses this quarter, and what common risks did the sold positions share?

  A: The realized losses came from proactive sales of underperforming CLO equity positions that management identified as having outsized downside tail risk, even though selling them crystallized losses relative to original cost. Most sold positions held high concentrations of stressed, deeply discounted loans, with a large share being software-related credits at high risk of default or further price declines. Some sales also reflected decisions to exit positions managed by underperforming CLO managers that took on too much AI-related exposure. Management used the post-quarter price rebound to execute these repositioning trades to improve long-term portfolio returns.

• Q: What drove the April NAV increase, and has the positive trend continued into May? What is the outlook for portfolio yield?

  A: The April NAV increase was driven by two factors: a broad rebound in loan prices (including for AI-exposed software sector credits) after the February sell-off, and a retracement of widened CLO liability spreads back to December 2025 levels. This positive trend has continued into May 2026, as of the call date. Management expects the combination of secondary market repositioning into higher-yielding, lower-risk positions, liability refinancing at lower costs, and potential stabilization of loan spreads should allow portfolio yield to stabilize or increase over time, which is the firm's current core focus.