Sound Point Meridian Capital, Inc. Q1 FY2027 earnings call

Quarter-End Financial and Portfolio Updates

• NII remained below common quarterly distributions due to spread tightening across credit markets and higher modeled loss reserves for AI-impacted software loans held within the company's CLO collateral portfolios.
• The increase in NAV from the prior quarter was driven by net unrealized appreciation in the fair value of CLO equity investments, partially offset by distributions paid in excess of NII.
• During the quarter, the company purchased 13 secondary-market CLO equity investments for a total cost of $16.1 million, with a weighted average purchase yield of 20.2%. It sold 7 CLO equity investments, generating $23.3 million in cash proceeds from sales, which carried a weighted average yield of 8.5%.
• The company refinanced liabilities for 13 CLO equity investments in the portfolio, achieving an average 37 basis point reduction in weighted average debt costs.

Market Environment

• US credit markets saw increased bifurcation in Q2 2026, with a pronounced slowdown in private equity-backed M&A deal volume, which fell 38% quarter-over-quarter to its lowest level in 2.5 years. 75% of first half 2026 primary market activity was extend-and-amend transactions as sponsors address the 2028 loan maturity wall.
• Institutional leveraged loan volume totaled $24 billion in Q2 2026, down 7% from Q1 but 17% above the 5-year quarterly average. CLO issuance slowed to $33.3 billion (72 transactions), the lowest quarterly volume since Q4 2023, 20% behind 2025's pace, while CLO refinancing and reset activity remained strong at $93.7 billion, up from $56.2 billion in Q1.
• Spreads widened meaningfully at the bottom of the credit spectrum: B- spreads widened 55 basis points since Q4 2025 to 409 basis points over SOFR, while higher-rated credit spreads moved less than 5 basis points. Average prices for performing software loans fell 2 points to 85.62 by quarter end, reflecting ongoing AI disruption concerns, while the broader loan index is up 1.29% year-to-date.

Strategic Actions

• Subsequent to quarter end, the board reduced monthly distributions to $0.13 per share for calendar Q4 2026, down from the prior $0.20 per share monthly rate. The reduction reflects a focus on maintaining balance sheet flexibility and aligning distributions with expected future NII to support long-term NAV.
• The company's external adviser announced a 6-month (July 1 to December 31, 2026) management and incentive fee waiver: the annual base management fee is reduced from 1.75% to 1.5%, and the annual incentive fee is cut from 20% to 15% of pre-incentive NII. The waiver reduces the company's expense burden amid unprecedented income compression for the CLO equity asset class.
• Management is actively rotating the portfolio: selling lower-quality CLO equity positions with limited upside optionality and higher downside risk, and adding higher-quality secondary CLO investments to boost risk-adjusted yields. The secondary market currently offers more attractive relative value than primary CLO equity due to compressed primary market arbitrage.

SoundPoint Meridian Capital is a business development company focused on CLO equity investments, with no separate disclosed product segments. For the first fiscal quarter ended June 30, 2026: Net investment income (NII) was $5 million, or $0.24 per share. Net realized loss was $12.8 million, and net unrealized gain on investments was $25.2 million. Total quarterly expenses were $7.4 million. GAAP net income was $17.5 million, or $0.83 per share. As of quarter end, total assets were $384.7 million, net assets were $208.1 million, and net asset value (NAV) per share was $9.88, up from $9.63 at March 31, 2026. The fair value of the investment portfolio was $363.2 million, available cash liquidity was approximately $21 million, and the company's leverage ratio was 45.7% of total assets. Portfolio yield rose to 9.8% from 9.1% in the prior quarter. The portfolio holds investments across 108 CLOs managed by 31 different managers, with exposure to over 1,500 underlying loans spanning more than 30 industries on a look-through basis.

• Management expects continued credit market volatility in the second half of 2026, with market direction dependent on a recovery in private equity deal-making (the primary driver of new leveraged loan supply), the evolution of interest rates, geopolitical developments, and AI disruption concerns.
• Management forecasts that increased corporate borrowing to fund AI spending will grow loan supply available for CLO portfolios in the second half of 2026 and beyond.
• The current portfolio rotation strategy is expected to continue boosting portfolio yields over time, with management targeting a level of NII sufficient to cover the new $0.13 per share monthly distribution. Portfolio yield has already risen to 9.8% from 9.1% last quarter, with current forward yields estimated at 10.1%.
• Stable CLO funding costs support continued refinancing and reset optionality across the portfolio for the remainder of 2026, which will further improve portfolio yields.
• The 6-month fee waiver is timed to align with the expected completion of the current portfolio rotation (market conditions permitting), and management will review the waiver at the end of 2026 to determine next steps.

• Spread compression across credit markets and elevated loss reserves for AI-disrupted software sector loans have reduced NII below distribution levels, pressuring near-term returns.
• Persistently low CLO issuance and weak investor demand have kept arbitrage economics for primary CLO equity unattractive, limiting investment opportunities in the primary market.
• Geopolitical conflict in the Middle East has created energy-driven inflation uncertainty, while a lasting resolution to the conflict has not yet been reached. The Federal Reserve has paused planned rate cuts, adding to market uncertainty.
• AI-driven disruption continues to pressure valuations and credit quality of software sector loans, creating downside tail risk for portfolios holding these assets.
• A slowdown in private equity deal-making has reduced net new supply of higher-yielding leveraged loans, with new supply heavily concentrated in lower-yielding higher-rated credits that further compress CLO equity arbitrage spreads.

Q: What factors led management to set the new $0.13 per share monthly distribution, which is still higher than the quarter's $0.24 per share NII (equal to $0.08 per share monthly)?

A: Management based the new distribution on expected future portfolio yields from three sources: improving loan spreads that directly boost CLO equity bottom lines, additional yield gains from future portfolio refinancing and resets, and accretive portfolio rotation that has already added 100 basis points of portfolio yield year-to-date. Current forward portfolio yields have already risen to 10.1%, up from 9.8% at quarter end and 9.1% in the prior quarter, and management expects this improvement will lift NII to cover the distribution over time.

Q: What is the company's AI-impacted software sector exposure, and how is that exposure being managed?

A: On a look-through basis, 10-12% of the portfolio consists of software credits. Management does not target a reduction to overall sector exposure, but instead conducted name-by-name credit re-underwriting to identify individual names at highest risk from AI disruption, and has sold those high-risk exposures to reduce portfolio tail risk.

Q: How is the company approaching near-term capital deployment with $21 million in cash, between new investments and paying down revolver balances?

A: Management is exclusively focused on deploying available cash into secondary CLO equity investments, which currently offer high-teens yields, versus primary CLO equity which only delivers high single-digit returns due to poor arbitrage economics. There are abundant attractive high-quality secondary opportunities from tier 1 managers, so capital will be deployed carefully to these assets. Revolver leverage will be managed dynamically, with the ability to pay down and re-draw as opportunities arise.

Q: What drove the realized losses from asset sales this quarter, and what types of assets were sold?

A: Almost all sold assets still had roughly three years remaining in their reinvestment period, so nearing the end of the investment period was not a driver of sales. Assets were sold for two core reasons: they had unattractive forward-looking yields even at current market prices, allowing the company to rotate into higher-yielding assets, or management had concerns about deteriorating portfolio quality from either manager underperformance or credit risk of underlying holdings (including high-risk AI-exposed software names).