Sound Point Meridian Capital, Inc. Q2 FY2026 earnings call

• Financial results: Net investment income of $11 million, net realized loss, distributions, and NAV changes discussed.
• Capital deployment: Approximately $9.2 million deployed in warehouse investments, $14 million in new issue equity, $31.6 million in secondary equity.
• CFO change: Dan Fabian appointed as chief financial officer effective December 31, 2025.
• Market environment: U.S. leverage loan market expected to have steady new issue supply, CLO market AAA spreads poised to tighten with expanding investor base, interest rate path uncertain but table-based rates constructive for CLO capital structure.
• Portfolio positioning: Approximately 70% of the portfolio to exit non-call period by year-end 2026, providing refinancing optionality.

For the second fiscal quarter ended September 30, 2025, Sound Point Meridian Capital generated net investment income (NII) of $11 million or $0.54 a share. They recorded a net realized loss of $0.05 per share on exited investments and paid distributions of $0.75 per share. Net asset value (NAV) per share ended the quarter at $16.91, down from $18.50 as of June 30. The company deployed approximately $9.2 million across two warehouse investments, purchased $14 million in new issue equity positions with a weighted average GAAP yield of 15.3%, and $31.6 million in 12 new equity investments in the secondary market with a yield of 14.2%. The CLO equity portfolio's weighted average GAAP yield was 12% versus 12.9% in the prior quarter, reflecting loan repricing. The portfolio was highly diversified with 94 CLOs managed by 27 managers and exposure to over 1,600 loan issuers.

• Announced monthly distributions for calendar Q1 2026 of $0.25 per share unchanged from Q4 2025 monthly distributions.
• Approximately 70% of the portfolio will exit its non-call period by year-end 2026, providing optionality to refinance debt at lower spreads, which may offset loan spread tightening and increase equity arbitrage.

• Uncertainty in interest rate path which could affect the ability to realize cost savings from refinancing.
• Market volatility could lead to spread widening, potentially eroding refinancing opportunities and affecting portfolio performance.

Q: Can you discuss what you guys are seeing in the market for primary and secondary loan investment opportunities?

A: Focus has been mostly on the secondary side this year due to constrained primary market arbitrage, but primary market arbitrage is slowly getting better. The loan market pipeline is improving with M&A activity, which should stabilize spreads.

Q: Is the refinancing opportunity enough to offset yield compression?

A: About 70% of the portfolio has refinancing opportunities. Savings on liability cost for that portion could offset much of the spread tightening, though variables exist and it's not perfect.

Q: How would you describe the balance of supply and demand in the loan market and medium-term outlook for loan spreads?

A: Year-to-date there was imbalance with demand outpacing supply causing spread tightening, but increased new issue loan market activity and M&A pipeline could bring supply-demand into balance, pausing spread tightening in the loan market.

Q: How much confidence do you have in extracting cost savings to offset asset side compression?

A: Confident in longer-term arbitrage opportunity, with tools to take advantage of market volatility. Timing may be affected by short-term dislocations, but medium-term outlook is positive.

Q: What are the drivers behind the substantial decline in net asset value per share?

A: Spread tightening in the underlying loan market not matched by liability spread tightening, leading to less income for equity and a drop in NAV as CLO equity is marked based on discounting future cash flows at a required market yield.