Sound Point Meridian Capital Inc (SPMC) Earnings

Management highlights

### Quarter Financial Results - Generated net investment income of $5 million (24 cents per share), which remained below the quarterly distribution per share of 60 cents, driven by spread tightening and higher model loss reserves for AI-impacted software loans in CLO collateral portfolios. - Net asset value (NAV) per share rose to $9.88 from $9.63 at the end of the prior quarter, driven by net unrealized appreciation on CLO equity investments, partially offset by distributions paid in excess of NII. - The CLO equity portfolio’s weighted average gap yield increased to 9.8% from 9.1% in the prior quarter, and as of July 2026, forward portfolio yield reached 10.1%. ### Portfolio Activity - Purchased 13 secondary CLO equity investments for a total cost of $16.1 million at a weighted average yield of 20.2%, and sold 7 existing positions for $23.3 million in cash proceeds at a weighted average yield of 8.5%. - Refinanced liabilities for 13 CLO equity investments, delivering an average 37 basis point reduction in debt costs. - The portfolio remains highly diversified: investments across 108 CLOs managed by 31 different managers, with look-through exposure to over 1,500 underlying loans across more than 30 industries. ### Capital and Distribution Updates - Subsequent to quarter end, the board set a monthly distribution of 13 cents per share for calendar Q4 2026, down from the prior 20 cents per share monthly distribution for Q3 2026. - The advisor proposed a six-month base and incentive fee waiver effective July 1, 2026 through December 31, 2026, cutting the annual base management fee from 1.75% to 1.5% and the annual incentive fee from 20% to 15% of pre-incentive NII to offset unprecedented income compression in CLO equity. ### Market Backdrop - U.S. institutional leveraged loan volume totaled $224 billion in Q2 2026, down 7% quarter-over-quarter but 17% above the 5-year quarterly average, with the decline driven by a 38% QoQ drop in private equity M&A deal volume, the lowest in two and a half years. - Bifurcation in credit markets widened: spreads widened meaningfully at the bottom of the credit spectrum and for AI-impacted software loans, while spreads remained largely unchanged for higher-rated credits. The average bid on performing software loans fell to 85.62 at quarter end, down more than 2 points from March, while the broader loan index is up 1.29% year-to-date. - Quarterly CLO issuance fell to $33.3 billion across 72 transactions, the lowest volume since Q4 2023 and 20% below 2025 levels, but refinancing and reset activity rose to $93.7 billion, up from $56.2 billion in Q1, as managers prefer to roll existing deals rather than liquidate structures.

Guidance

- Management expects continued near-term volatility in credit and CLO equity markets, but sees improving sentiment for CLO equity, with prospects for higher cash flow driven by loan spread improvement and ongoing liability refinancing across the portfolio. - Management expects portfolio rotation into higher-quality secondary CLO equity positions will continue to boost portfolio yield and improve downside risk protection, with the full effect of the current rotation expected to materialize over the second half of 2026. - Management expects that increased corporate borrowing to fund AI spending will expand loan supply for CLO portfolios starting in H2 2026 and beyond. - The six-month fee waiver is scheduled to end December 31, 2026; management will review market and portfolio conditions at that time to determine whether an extension is appropriate. - No formal numerical financial guidance was provided for full-year 2026, but management targets growing NII to match the new 13 cent monthly distribution per share over time.

Segment performance

SoundPoint Meridian Capital operates as a business development company focused exclusively on CLO equity investments. For the first quarter ended June 30, 2026: total net investment income (NII) from the entire CLO equity portfolio was $5 million (24 cents per share). Net realized loss on investments was $12.8 million, and net unrealized gain on investments was $25.2 million. Total operating expenses for the firm were $7.4 million, resulting in gap net income of $17.5 million (83 cents per share). As of quarter end, total assets were $384.7 million, total investment portfolio fair value was $363.2 million, and net assets were $208.1 million, with 100% of revenue generated from the single CLO equity investment segment.

Risks & headwinds

- Persistent spread compression in the leveraged loan market, driven by a supply-demand imbalance skewed to higher-rated, lower-yielding credits, has reduced CLO equity arbitrage returns, limiting income generation. - AI-driven disruption in the software sector has created significant downside risk for software loans held in CLO collateral portfolios, requiring increased loss reserves and pressuring portfolio valuations. - Geopolitical conflict in the Middle East has created energy-driven inflation uncertainty, and while oil prices have stabilized recently, a lasting resolution to the conflict has not been reached, creating ongoing macro uncertainty. - The Federal Reserve has delayed interest rate cuts, keeping funding costs higher for longer and contributing to market volatility. - Weak private equity dealmaking has reduced net new supply of attractive leveraged loans for CLO portfolios, prolonging the arbitrage compression environment. - Distribution levels currently exceed net investment income, which could pressure net asset value if portfolio yield does not improve as expected.

Analyst Q&A

• Q: Why did the company set the new monthly distribution at 13 cents per share, which is still higher than the latest quarterly NII per share, and what factors were considered for this level?

  A: Management based the new distribution on expected future portfolio yield, accounting for three key drivers of improving income: gradually rising loan spreads, ongoing refinancing activity that reduces debt costs across a large portion of the portfolio, and active portfolio rotation that has already added 100 basis points of portfolio yield year-to-date. The company has already seen yield rise from 9.1% to 9.8% last quarter, reaching 10.1% in July, and expects this improvement to continue and lift NII over time.

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

  A: On a look-through basis, total software sector exposure is 10% to 12% of the portfolio. Management has conducted credit-by-credit re-underwriting to identify individual names at high risk of AI disruption, and is reducing exposure to those high-risk names rather than cutting broad sector exposure. This approach leaves the overall sector share roughly unchanged while reducing portfolio tail risk.

• Q: With $21 million in cash at quarter end, how is the firm approaching near-term capital deployment, relative to paying down debt?

  A: The current top priority is active portfolio rotation: selling lower-quality, lower-yield positions and deploying cash into attractive high-yield opportunities in the secondary CLO equity market. Secondary CLO equity currently yields high teens percentages, compared to high single-digit yields for new issue primary CLO equity due to poor primary arbitrage conditions, so all deployment is focused on secondary. Management will hold cash until attractive opportunities are identified, and continues to carefully evaluate leverage levels, with flexibility to pay down the revolver if needed.

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

  A: Most sold assets still had roughly three years remaining in their reinvestment period, so end-of-reinvestment window was not a primary driver. Sales fell into two categories: 1) Low-yielding positions where the sale price was attractive, allowing rotation into higher-yield assets; 2) Positions with deteriorating portfolio quality, driven either by manager underperformance or negative outlooks on underlying credits (including high-risk AI-exposed software names). Newer purchased assets provide stronger downside protection in addition to higher base yields.