Sound Point Meridian Capital Inc (NYSE:SPMC) Q4 2025 Earnings Call Transcript

Sound Point Meridian Capital Inc (NYSE:SPMC) Q4 2025 Earnings Call Transcript May 29, 2025

Operator: Good morning, ladies and gentlemen, and welcome to the Sound Point Meridian Capital Inc Fourth Fiscal Quarter Ended March 31, 2025 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, May 29, 2025. I would now like to turn the conference over to Julie Smith, Head of Investor Relations. Please go ahead.

Julie Smith: Ladies and gentlemen, thank you for standing by. Sound Point Meridian Capital refers participants on this call to the Investor web page at www.soundpointmeridiancap.com for the press release, investor information and filings with the Securities and Exchange Commission and for a discussion of the risks that can affect the business. Sound Point Meridian Capital specifically refers participants to the presentation furnished today on the Form 8-K with the SEC and to remind listeners that some of the comments today may contain forward-looking statements and as such will be subject to risks and uncertainties, which if they materialize, could materially affect results. Reference is made to the section titled Forward-Looking Statements in the company’s earnings press release for the period ended March 31, 2025, which is incorporated herein by reference.

We note forward-looking statements, whether written or oral, include, but are not limited to Sound Point Meridian Capital’s expectation or prediction of financial and business performance and conditions, as well as its competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and assumptions, which if they materialize, could materially affect results, and such forward-looking statements do not guarantee performance, and Sound Point Meridian Capital gives no such assurances. Sound Point Meridian Capital is under no obligation and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

In addition, historical data pertaining to the operating results and other performance indicators applicable to Sound Point Meridian Capital are not necessarily indicative of results to be achieved in succeeding periods. I will now turn the call over to Ujjaval Desai, Chief Executive Officer of Sound Point Meridian Capital.

Ujjaval Desai: Thank you to everyone joining us today, and welcome to the Sound Point Meridian Capital earnings call for the fiscal fourth quarter ended March 31, 2025. We’d like to invite you to download our Investor Presentation from our website, which provides additional information about the company and our portfolio. With me today is our Chief Financial Officer, Kevin Gerlitz. And after our prepared remarks, we will open it up to your questions. We are happy to report our results for the fourth fiscal quarter, as well as summary highlights for SPMC’s first year of operations. For the quarter, we generated net investment income or NII of $13.4 million or $0.66 per share and net realized loss on exited investments of $0.08 per common share, while we paid dividends during the quarter of $0.72 per share.

Net asset value per share ended the quarter at $18.78 down from where it stood on December 31 at $20.52, driven mainly by unrealized losses in the portfolio as a result of uncertainty surrounding the new administration’s tariff rollout and reduction in government spending. During the quarter, we deployed approximately $70.6 million in six CLO warehouse investments. We purchased four CLO equity investments in the primary market with an amortized cost and weighted average GAAP yield of $16.9 million and 16.15%, respectively. We refinanced the liabilities of three CLO equity investments in the portfolio and had one outstanding warehouse investment as of March 31, with one unfunded commitment to purchase CLO equity with a cost of $12.3 million.

For the year ended March 31, 2025, we deployed 291.8 million into CLO equity investments across 17 new issue transactions, 19 refinancing transactions and eight secondary market purchases. Additionally, we participated in 18 CLO warehouses. We recorded NII of $2.22 per share compared to distributions of $2.08 per share. As of March 31, the weighted average GAAP yield on our CLO equity portfolio was 14.0% versus 15.2% as of December 31. The decrease in GAAP yield was mainly the result of loan repricings in the underlying CLO portfolios, which reduced estimated future cash flows available to CLO equity holders. This was slightly offset by CLO refinancing and reset activity, which lowered the CLO liability costs on certain CLO investments in the portfolio.

Our portfolio as of March 31 was diversified across 75 CLO investments, managed by 23 CLO managers. The underlying loan portfolio consisted of over 1,500 loan issuers across 30 plus industries on a look-through basis. We believe this strategy of broad diversification enables us to manage risk effectively, providing us with dividend sustainability and downside protection through changing market conditions. Turning to the right side of our balance sheet. During our first year of operations, we entered into a two year $100 million revolving credit facility at a floating financing rate of SOFR plus 3.75%, providing us with the flexibility to patiently deploy capital in attractive investment opportunities over time. Additionally, we issued a five year $57.5 million Series A preferred offering with an 8% stated rate resulting in net proceeds of $55.7 million.

On March 14, 2025, the company commenced a committed equity financing agreement with B. Riley Principal Capital II LLC. Under this agreement, the company has the right, but not the obligation to direct B. Riley to purchase up to roughly 4 million shares of common stock over a 36 month period. As of March 31, B. Riley purchased approximately 5,700 shares resulting in about $113,000 of net proceeds to the company. Subsequent to quarter end, as of April 30, 2025, our estimated net asset value per common share was $17.55. On May 29, we announced monthly distributions for calendar Q3 2025 of $0.25 per share, unchanged from our previously announced Q2 2025 monthly distributions. With that, I’ll now turn the call over to Kevin for a more detailed review of our financial highlights for the quarter.

Kevin Gerlitz: Thank you, Ujjaval, and hello, everyone. As Ujjaval mentioned, for the quarter ended March 31, 2025, we delivered net investment income of $13.4 million or $0.66 per share. For the quarter ended March 31, we recorded net realized losses of $1.7 million and unrealized losses on investments of $32.3 million. Total expenses for the period ended March 31 were $9.3 million. GAAP net income loss for the quarter was $20.7 million or a loss of $1.02 per share. Moving to our balance sheet. As of March 31, total assets were $514.1 million. Net assets were $381.6 million and our net asset value stood at $18.78 per share. The fair value of our investment portfolio stood at $503.7 million, while available liquidity consisting of cash was approximately $9.9 million at the end of the quarter.

As of March 31, the company had outstanding debt that totaled 24.5% of total assets. During the quarter, we declared monthly income distributions of $0.25 per share payable at the end of April, May and June. Based on our share price as of March 31, this represents an annualized dividend yield of 15%. Overall, we are pleased with our strong results this quarter and believe we are well positioned to sustain our momentum going forward. I will now turn it back to our CEO, Ujjaval Desai.

Ujjaval Desai: Thanks, Kevin. Before opening up for questions, I want to give a quick update on the overall market environment for corporate loans and CLO activity. At the beginning of 2025, repricing activity continued in the corporate loan market, while CLO liability spreads approached record tight levels. The CLO machine continued firing on all cylinders in January and early February 2025, coming off a record year of new issuance in 2024. As we approach March, tariff and geopolitical headlines dominated the CLO market and the resulting market uncertainty effectively froze CLO new issue activity. Through March 31, the Morningstar LSTA U.S. Leveraged Loan Index returned 48 basis points, which was the weakest quarterly performance since Q2 2022.

Loans kicked-off 2025 on a strong note, reaching their recent tights (ph) by the January as the market continued to experience spread compression driven by repricing. Market uncertainty shifted investor sentiment in February and March, resulting in a secondary sell-off in the loan market. For context, 66% of the loan market was priced at par or higher in January, but by the end of March, this had fallen to just 10%. This dynamic has brought about a reprieve from further spec compression within the loan asset class as the heavy amount of repricing finally came to an end in March. Turning to the CLO market. Demand for newly issued CLOs remained strong in the first quarter, with CLO creations reaching $153 billion through March 31, the second largest quarterly activity in CLO 2.0 history.

Elevated issuance was primarily driven by the rally in CLO debt spreads to 2.0 types, fueling a wave of resets and refinancings in January and February, which accounted for approximately 70% of new issue activity. Tariffs induced volatility subsequently widened CLO spreads in March, effectively pausing reset and refinancing activity. On the asset side of the equation, the reprieve from repricings in loan market along with the price drop described above has improved the difference between the spread on debt tranches and where CLO managers can buy loans. This difference is commonly referred to as a CLO’s arbitrage and benefits CLO equity as it increases. Given our portfolio still (ph) to recently issued CLOs, we believe that we are well-positioned to benefit from continued volatility as top-tier active CLO managers have the ability to take advantage of relative value trading opportunities in the loan market.

Looking ahead with the expectation for continued volatility under an uncertain tariff regime, we believe our portfolio is defensively positioned in investments with longer reinvestment periods, allowing CLO managers to actively manage the underlying loan portfolios to avoid defaults and buy loans at discounted prices. With our focus on newer CLO investments, we also believe that our CLO equity investments will continue to make strong quarterly cash flow distributions, allowing us to continue paying monthly distributions to our common shareholders. With that, we thank you for your time and would like to open up the call for Q&A. Operator?

Operator: Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Erik Zwick from Lucid Capital Markets. Your line is open.

Q&A Session

Erik Zwick: Thank you. Good morning, everyone. Wanted to start, just with a question mentioned in your prepared remarks that loan repricing is likely finished in the near-term. Curious about the opportunity, I guess kind of more on the liability side and opportunity for refis and resets that remain in your portfolio today?

Ujjaval Desai: Sure, Eric. Thanks for the question. So yes, you’re right. The reset — the repricings on the loan side has paused for now. The liability side, the activity was also pretty slow in, kind of, March, April of this year given the volatility. But we’re seeing now liability spreads tightening back again. If you look at AAA’s for instance sort of Tier 1 AAA’s which were — which reached about 110, 115 basis points over SOFR in February, those widened out to call it 150, in April and now AAAs are back to 130 area for Tier 1. So we have seen spreads, compressed not all the way back to the tights we saw earlier, but getting there. And so we think that the reset activity is going to start up again and that will help reduce costs of debt in our portfolios.

We have quite a few positions in our funds that were issued in ‘23 and ‘24, which will be up for a reset this year and early next year. And so we expect to take advantage of that and that should certainly be very helpful to our portfolio.

Erik Zwick: That’s helpful. And you have a fair amount of liquidity available to you at this point, and as you noted, just due to the revolver and some recent capital you’ve raised. So, curious as you look at the opportunities for deployment, today and you kind of, mentioned the deem (ph) that given that you’ve got a number of newer issues, you have the opportunity to take advantage of market volatility. So I’m reading that as maybe you’re seeing some attractive opportunities in the secondary market to get, some CLO securities that you deem are, you have very attractive risk, adjusted possible returns. So just curious kind of as you frame deployment opportunities between primary and secondary today?

Ujjaval Desai: Yes. So I think, there is sort of a couple of points I want to mention there. One is, we have been very focused on trading our portfolio, reacting to the market. So earlier this year, in Jan and Feb, we actually sold a bunch of positions in our portfolio at very tight levels where we thought the market was not pricing risk correctly. And that allowed us to generate cash in our funds in the case of Meridian. We didn’t have to draw on the facility as much. And so we kept that sort of $30 million or so of the facility undrawn. So we kind of delevered the fund if you will. And then in — since the end of the quarter, so in kind of end of April and most of May, we have been adding risk in the portfolio. We’ve been able to find a lot of very interesting secondary investments as well as some primary investments as well.

So that’s kind of our overall approach to managing these portfolios is to kind of take risk on and off depending on market opportunities. And today, we certainly do like the market conditions. Secondary is active. Primary is also open now, but, it’s a little bit harder to execute primary deals because the liabilities and loan spreads prices have moved so fast over the last few weeks that you got to time it correctly. So we are cautiously, involved in a bunch of new issue transactions as well.

Erik Zwick: That’s great color. Thank you. And just looking at the unrealized losses in the most recent quarter, curious, if you could provide a little commentary in terms of how much was just market related moving to loan prices dropping versus maybe company specific fundamentals that may have had some changes. And, I suspect it’s more of the former, which hopefully is more of a temporary nature, but just curious to hear your thoughts there?

Ujjaval Desai: Yeah, absolutely. Great question there. So there were two factors that impacted the, that created this unrealized loss. One was, as we mentioned earlier, the spread compression in the underlying loan portfolios through refinancings. And so, obviously, whenever the underlying portfolio has lower spread going forward that means equity cash flows are going to be lower. So that reduces cash flows coming in and you’ve seen our GAAP yields become tighter with the rest of the market. So that was one thing. The second thing that happened was because of general market wall (ph), CLO equity was trading at wider yields. So the cash flows were getting discounted at higher discount rates. So that was again purely technical.

We haven’t seen any material increase in defaults or stress in our portfolios that we have in Meridian. So we feel that most of the drop we have seen is because of general market volatility and certainly we will – we expect that to recover and we’ve already seen market sentiment improve significantly in May. So we hope to capture a lot of that track fairly soon.

Erik Zwick: Great. And one last question [indiscernible] if just a kind of a record keeping note. I noticed in the press release and presentation, you indicated for the month of April, a figure for recurring cash flows. Do you have that figure for the three months ended March 31? I may have missed it, but didn’t see that.

Ujjaval Desai: Yes. So, Josh (ph), go ahead.

Kevin Gerlitz: Yeah. Sorry. That’s $21 million of cash we received for [Technical Difficulty] in April.

Ujjaval Desai: You’re asking about the quarter or for April?

Erik Zwick: Yes. I saw the April figure. I didn’t see a similar figure for the three months for the quarter that ended March 31. I don’t know if you had that number on hand as well.

Ujjaval Desai: Yeah. We’ll grab that. Just, I’ll come back to you. We’re just, pulling it up.

Erik Zwick: Okay. Great. Thank you. That’s all I had today. I appreciate it.

Ujjaval Desai: Sure.

Operator: [Operator Instructions] Our next question comes from the line of Randy Binner from B. Riley Securities. Your line is open.

Tim D’Agostino: Hi. Thank you for taking the question. This is Tim D’Agostino on for Randy Binner. It looks like the portfolio is underweight health care relative to peers. Do you have any view on changes to HHS and/or CMS funding? Thank you.

Ujjaval Desai: Hi there. Thanks for the question. Yeah. I mean, look, that is a very specific question that impacts individual companies. We’re not taking a view necessarily at this stage on being under weight (ph) healthcare over healthcare. We are selecting managers that are taking that view themselves. And I think it comes down to really, name by name sort of idiosyncratic analysis that you have to do in terms of the impact of, cuts to healthcare, kind of funding, DOGE cuts and all that. So I think it’s more of a name by name analysis. And then on that basis, that then gets reflected into portfolio construction at the CLO level and then at our fund level. So, we’re not taking a particular view on that right now. I think, what we are more focused on from our perspective is looking at sort of where loans are trading in each sector and kind of these risks are already factored into the loan prices and we’re tracking that to see how much sort of stressed exposure we have in our portfolios and whether we want to adjust that risk manage that or not.

Tim D’Agostino: Okay. Thank you so much. And then a quick — another quick question. Was there any issuance of common or preferred shares in the quarter? Thank you.

Ujjaval Desai: Not in Q1. There was no issuance of the preferred. We obviously have the B. Riley facility, which we had a small I think I mentioned $113,000 was raised in March because that facility started in early March. And so we only had a couple of weeks of that facility.

Tim D’Agostino: Okay. Thank you so much. That’s all for me.

Ujjaval Desai: Yeah. Great. Thank you for the question. And just going back to a question from Eric on the free cash flow for the quarter.

Kevin Gerlitz: Yes. For quarter ending March 31, it was $16.6 million, that’s for the full quarter.

Ujjaval Desai: Okay. $16.6 million.

Operator: There are no further questions at this time. Please continue.

Ujjaval Desai: Okay. Great. Well, thank you very much, again for attending the call and your support for SPMC and we look forward to talk to everyone next quarter. Thank you. Bye-bye.

Operator: This concludes today’s conference call. You may disconnect your lines.