Sound Point Meridian Capital, Inc. Q3 FY2025 earnings call

• CEO Ujjaval Desai mentioned strong results for the quarter, including net investment income, net realized gains, and dividend payments. - Net asset value per share increased due to value created from CLO resets and mark-to-market increase in CLO equity. - $43.4 million deployed in CLO warehouse investments, with new warehouses closed and priced. - Refinancing of CLO equity investment liabilities reduced costs. - Portfolio diversified across many CLO investments and industries. - Market environment: Primary loan activity in 2024 Q4 was $400 billion, a record year with $1.4 trillion in primary activity. CLO new issuance in 2024 Q4 was $60 billion, full year $202 billion, a record. Refinancing and reset activity was significant in 2024. - Fed rate cuts impact CLO equity, but rate cuts seen as net positive for CLO equity in medium term with lower corporate default rates.

For the third fiscal quarter, SPMC generated net investment income (NII) of $12.5 million, or $0.62 per common share, and net realized gain on exited investments of $0.10 per common share. Dividends paid during the quarter were $0.66 per share. Net asset value per share ended the quarter at $20.52, up from $19.59 on September 30. During the quarter, approximately $43.4 million was deployed in eight CLO warehouse investments. Six new warehouses were closed, generating six new equity positions with an amortized cost of $66.7 million as of December 31, 2024, and a weighted average GAAP yield of 15.4%. Two new warehouses were priced, committing to purchase two CLO equity positions with a cost of $28.4 million. Liabilities of eight CLO equity investments in the portfolio were refinanced, reducing liability costs. The weighted average GAAP yield on the equity portfolio was 15.2% as of December 31, down from 15.7% on September 30, mainly due to loan repricings but offset by CLO refinancing and reset activity. The portfolio was diversified across 74 CLO investments managed by 23 CLO managers, with the underlying loan portfolio consisting of roughly 1,500 loan issuers across 30-plus industries.

• Announced monthly distributions for calendar Q2 2025 of $0.25 per share, an increase of 4.2% over Q1 2025. - Plan to continue raising distributions steadily as proceeds from IPO, senior financing facility, and Series A preferred stock are deployed. - Deployed $60 million of the $100 million senior financing facility as of end of January 2025, with $40 million left to deploy. - After fully deploying existing capital, will look to raise additional capital in market-permitting conditions, including preferred, senior facility, and equity capital.

• Forward-looking statements are subject to risks, uncertainties, and assumptions. - Historical data not necessarily indicative of future results. - Market environment changes, interest rate fluctuations, and credit quality changes could materially affect results.

Q: How does the active primary CLO market affect your process and view of credit quality, and any stats on default activity?

A: Net new issuance of CLOs is not as high as it looks. Focus on credit quality of loans, default rates are range bound at ~1.5%. Focus on picking right managers to keep default rates low and minimize tail risk.

Q: How do you leverage the broader platform to identify investments?

A: Use proprietary system Compass to screen data, slice and dice it to find flags on good managers, deals, and vintages. Use Sound Point's credit platform expertise, talk to manager partners, and actively trade the portfolio using systems to manage risk.

Q: Compare risk reward in primary and secondary markets?

A: Prefer primary equity risk reward as primary portfolios are cleaner, lower risk parameters. Use platform to identify early transactions, negotiate terms, and get higher returns. Primary new issue investments have 17%+ yields vs 300-400 basis points lower in secondary. Rotate portfolio between markets.

Q: What drove the unrealized gain in the quarter?

A: Unrealized gain comes from CLOs being reset (unlocking value as liability costs were high before) and CLO equity trading at tighter yields in the market, leading to higher secondary market valuations.