Sound Point Meridian Capital, Inc.

Good morning, ladies and gentlemen, and welcome to the SoundPoint Meridian Capital Inc. third fiscal quarter ended December 31st, 2024 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call has been recorded on Wednesday, February 12th, 2025. I would now like to turn the conference over to Peter with Investor Relations. Please go ahead.

Good day, ladies and gentlemen. Thank you for standing by. SoundPoint Meridian Capital refers participants on this call to the investor webpage, www.soundpointmeridiancap.com, for the press release, investor information, and filings with the Securities and Exchange Commission for a discussion of the risks that can affect the business. SoundPoint Meridian Capital specifically refers participants to the presentation furnished today on the Form 8K 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, can materially affect results. Reference is made to the section titled Forward-Looking Statements in the company's earnings press release for the period ended December 31, 2024, which is incorporated herein by reference. We note forward-looking statements, whether written or oral, include, but are not limited to, SoundPoint 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, can materially affect results. And such forward-looking statements do not guarantee performance, and SoundPoint Meridian Capital gives no such assurances. SoundPoint 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.

Thank you to everyone joining us today for your interest in Sound Point Meridian Capital. and welcome to our earnings call for the third fiscal quarter ended December 31, 2024. We would 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're happy to report that for our third fiscal quarter, SPMC delivered strong results. For the quarter, we generated net investment income, or NII, of $12.5 million, or 62 cents per common share, and net realized gain on exited investments of 10 cents per common share, while we paid dividends during the quarter of 66 cents per share. Net asset value per share ended the quarter at 20.52, up from where it stood on September 30th at 19.59, driven mainly by value created from resets of CLOs in the portfolio and a mark-to-market increase due to CLO equity trading at tighter yields in the market. During the quarter, we deployed approximately $43.4 million in eight CLO warehouse investments. We closed six new warehouses that generated six new equity positions with an amortized cost of $66.7 million as of December 31, 2024, and a weighted average gap yield of 15.4%. We priced two new warehouses resulting in the commitment to purchase two CLO equity positions with a cost of $28.4 million. We refinanced the liabilities of eight CLO equity investments in the portfolio, significantly reducing liability costs in those transactions. As of December 31, the weighted average gap yield on our equity portfolio was 15.2% versus 15.7% as of September 30th. The decrease in gap yield was mainly the result of loan repricing in the underlying CLO portfolios, which reduced estimated feature 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 December 31, was diversified across 74 CLO investments managed by 23 CLO managers. The underlying loan portfolio consisted of roughly 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. Subsequent to quarter end, as of Jan 31, 2025, our estimated net asset value per common share was 20.56, a slight increase from December 31 at 20.52. On February 5th, we announced monthly distributions for calendar Q2 2025 of 25 cents per share, an increase of 4.2% over the calendar Q1 2025 monthly distribution rate of 24 cents per share. This announcement is consistent with our IPO strategy of raising our distribution steadily over time as we deploy the proceeds from our IPO offering, our senior financing facility, and our Series A preferred stock. With that, I'll now turn the call over to Kevin for a more detailed review of our financial highlights for the quarter.

Thanks, Ujjval, and hello, everyone. As Ujjval mentioned, for the quarter ended December 31, 2024, we delivered net investment income of $12.5 million, or $0.62 per share. For the quarter ended December 31, 2024, we recorded net realized gains of $2 million and unrealized gains on investments of $17.7 million. Total expenses for the period ended December 31, 2024, were $7.5 million. Gap net income for the quarter was $32.2 million, or $1.59 per share. Moving to our balance sheet, as of December 31st, 2024, total assets were $523.4 million. Net assets were $415.9 million, and our net asset value stood at $20.52 per share. fair value of our investment portfolio stood at 503.7 million dollars while available liquidity consisting of cash was approximately 19.7 million dollars at the end of the quarter as of december 31st 2024 the company had outstanding debt that totaled 18.6 percent of total assets during the quarter we declared monthly income distributions of 24 cents per share payable at the end of January, February, and March. Based on our share price as of December 31st, 2024, this represents an annualized dividend yield of 13.8%. 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, Ujwal 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 equities. Primary loan activity climbed to $400 billion in calendar Q4, the second largest quarter on record. This capped off a record-breaking year of $1.4 trillion of primary activity, 41% higher than the prior record year of 2017. That said, Of the $400 billion of activity in the quarter, only 12% came from new issuance unrelated to refinancing or repricing, adding about $50 billion of net loan supply to the market. The majority of activity in the quarter came from loan repricing with approximately $250 billion of activity. In December alone, borrowers launched $153 billion worth of amendments to lower the spread on existing term loans, the busiest month ever recorded. Turning to CLOs, demand for new issue CLOs heated up in calendar Q4. New CLO issuance volume was $60 billion during the quarter, a significant increase compared to $41 billion in calendar Q3. For the full calendar year 2024, new CLO issuance of $202 billion set a new annual record, exceeding the prior annual record of $187 billion set in 2021. Along with strong new issue CLO activity in the quarter, refinancing and reset activity saw another quarter of significant momentum. For the fourth calendar quarter, refinancing activity totaled $23 billion and reset activity totaled $80 billion. This was a strong end to a 2024 that saw full year refinancing activity of $84 billion, the second highest year on record, and reset activity of $223 billion, shattering the prior annual reset record of $138 billion in 2021. The heavy refinance and reset activity throughout 2024 was driven by compression of CLO liability costs, creating a significant window for CLO managers to improve liability costs and lengthen reinvestment periods of existing CLO deals. As we noted on our last call, this reset and refinancing activity presents a significant opportunity as the reduction in liability costs helps to offset the reduction in yields from loan repricing. thereby increasing the excess cash flow available to CLO equity holders, which is what we commonly refer to as a CLO's arbitrage. Furthermore, an extension of the CLO reinvestment period provides a longer runway for CLO managers to optimize the underlying loan portfolios during times of volatility, which can provide further upside to CLO equity returns. With the Fed cutting rates twice more before the end of the year, CLO equity yields were modestly impacted in the near term. That said, as we previously mentioned, while it's true that lower base rates mean slightly less cash flow available to CLO equity, it is the spread between loan yields and a CLO's liability costs coupled with the CLO's structural leverage which determines the bulk of the CLO equity returns. In the medium term, we continue to view rate cuts as a net positive for CLO equity as interest costs decrease for floating rate loan issuers which may be a catalyst for lower corporate default rates. As of calendar year end, the trailing 12-month default rate stood at 1.5%, still remaining below the historical 27-year average of 2.8%. We continue to monitor the Fed closely to observe its appetite for any further cuts in 2025 as it looks to stave off a return toward more elevated inflation. In summary, It was an excellent third quarter for SoundPoint Meridian Capital, and we remain excited about the abundant opportunities in the CLO market. We remain bullish on CLO equity as an effective and attractive way to invest in senior secured corporate loans. We will continue to leverage our disciplined investment approach, SoundPoint's unique sourcing capabilities, and the expertise of our team to drive attractive risk adjusted returns for our shareholders. With that, we thank you for your time. and would like to open up the call for Q&A. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Randy Biner with B Reilly. Your line is now open.

Yeah, thanks. Good morning. So it was a solid quarter and appreciate the comments on the market overall at the tail end of the call there. I guess, you know, with the primary Cielo market being very active from a new issue perspective, how does that affect your process in your view of credit quality of these new issues? And I apologize if I missed it, but do you have any stats on default activity that you're seeing versus the market at large? It's a very open market, but I always think about credit and kind of what's going on underneath all of this. So I'd love to get your perspective on the credit environment.

Sure. Thanks for the call, Randy. I think you're right, the market is very busy. A lot of new issuance going on. A lot of that new issuance is not necessarily new activity. It is a lot of old deals getting called, deals getting resets and refied. So the net new issuance of CLOs is not as high as it looks. But regardless of that, we're obviously very focused on credit quality of loans. Um, you know, we think that, you know, the quality is pretty strong right now. Um, default rates are still sort of range bound. I mean, one and a half percentage, uh, on the entire portfolio on the entire market. Um, so rates are still staying low. Uh, default rates are still staying low. Um, so we're not super concerned about the credit quality. I think, uh, you know, the main thing for us is just making sure that, you know, we pick the right underlying managers who can keep default rates low. You know, we're focused on the underlying portfolios, trying to make sure that, you know, tail risk is kept at a minimum, because that's where defaults are going to come from, right? You know, the good quality loans trading, you know, close to par, those are not the companies we worry about. But there is, you know, 5%, 6% of the market trading below $0.90 on the dollar. Those are the loans that will actually, you know, cause default rates to increase, and that's what we are hyper-focused on making sure that that portion of our portfolio is as low as possible. So we are, you know, fairly comfortable with the credit quality in the loan market right now and feel that, you know, we should be able to outperform some of the, you know, the base case assumptions that are made to model CLI equity going forward.

Yeah, and that's helpful. And I guess the other question is because you're able to leverage the kind of scale and resources of SoundPoint. Is there kind of like a quantitative screen or other kind of non-fundamental approach or systems or process that you use to just help kind of identify, because there's so many sponsors now that you would think they'd be dropping into different cohorts. Can you describe how you're able to leverage the broader platform to help with that?

Yeah, absolutely. So we have, you know, we've got to use our proprietary system called Compass, which allows us to really, you know, systematically look at all the information that's available. So you're right, there are a lot of CLO sponsors, there's a lot of old CLOs, a lot of portfolios out there. So there's a huge amount of data that's available. So we're able to screen all that data, slice and dice it, and come up with really um you know flags that tell us which managers are doing well which deals which vintages are doing well and we're able to then you know focus on those deals there's a lot of uh kind of data analysis that goes on in uh in identifying the right investment opportunities and that is absolutely critical and so our you know our platform allows us to do that um this is kind of all on uh you know on just looking at the numbers there's a lot of fundamental work that goes in as well in you know utilizing sound points uh you know credit platforms so you know we are uh you know we have a lot of expertise in in loans and in you know credit in general and so there's a lot of insights we're able to glean from uh the rest of the platform in terms of kind of industry um you know performance and kind of risks in the overall system and so we're able to use that We also talk to all our manager partners and get color from them as well in terms of where risks are developing. And with the help of our systems, we're able to then risk manage our portfolio, not just in what we buy, but also then actively trade the portfolio. So that's also a big aspect of our investment process is active trading and repositioning of the portfolio. And we do that quite actively throughout the year. And I think all of those things are absolutely essential if you want to maintain the credit quality of your portfolio.

All right. Great. Thank you. Of course.

Your next question comes from Eric Zwick with Lucid Capital Markets. Your line is now open.

Thank you. Good morning. In your previous kind of discussion this morning, you talked a lot about the volume and activity in the primary market. you know, just in your last comments indicated that, you know, do make some trades within the portfolio throughout the year. So I'm wondering if you could just kind of maybe compare, you know, the risk-reward from your seat today in terms of the primary and secondary markets.

Yep. Yep. Great question, Eric. So we're, you know, we like the risk-reward in primary equity more than what we see in the secondary market today. And the reason for that is number one, you know, primary portfolios are by definition cleaner, right? Because they're being selected today by the manager of the CLO. And so they tend to be much cleaner, which means sort of lower risk, you know, low risk parameters, loans trading below, you know, kind of 90 cents would be much lower in a clean portfolio today. So we like that. Also, the way we've, find these new issue deals. You know that the sourcing angle is very important for us. So we, given our size and our relationship with our counterparts in the market, that would be the managers and the banks were able to see transactions early, identify the right deals and negotiate the right terms with all the counterparties, cut costs and all that. Make sure the documentation is correct. Make sure that the loans are ramped, the warehouses in the CLOs Ramping at the right time, uh, make sure that that execution happens correctly. So all of that work gets done. Um, and that ends up resulting in significantly higher returns for what we buy in the new issue market. Um, and you can see from our results today, the deals we're doing, we're booking, you know, 17% plus, uh, yields on new issue investments, um, that we did recently, as opposed to kind of the secondary market, uh, the returns are, you know, three to 400 basis points lower. Um, so. That's kind of the arbitrage between new issue and secondary. And we think that is, you know, that makes new issue very attractive. So, you know, we tend to focus predominantly on the new issue market, although we're constantly looking at secondary as well. And to the extent secondary looks interesting, you know, the overall, it may not look interesting, but there are kind of pockets of, you know, interesting transactions that we can do. So we'll pick up secondary from time to time as well. So it's really just, you know, being totally open, being totally, you know, very diligent in looking at both markets, consider the relative value differences between the two and picking your spots. And that's really how we source our investments. And then very actively, we're shifting risks by selling out in the secondary market when appropriate, you know, at those tighter yields I mentioned, and then redeploying in the primary market. So that sort of rotation of the portfolio is absolutely critical for us. That's kind of what we've been doing since our inception here of the strategy at some point, and you should expect to see that going forward as well.

Thank you. That's great, Kalar. I truly appreciate your insights there. Maybe switching gears a little bit, I think in the last quarter's call, you mentioned something in the range of 160 million, kind of an appropriate pace of deployment. still below your leverage target. So got a little bit more room to go there than I think you'd previously said, a quarter or two before you kind of put all that capital to work. So given how active and how attractive your comments have indicated that the primary market are today, once you've put all that capital to work, it sounds like there's potentially opportunity to maybe raise additional capital, continue to grow the portfolio. If I'm right on that assumption there, I'm curious, given, I mean, it looks like the the market expectations for short-term rates. We're kind of going to stay in this higher for longer. You know, the next potential Fed cut keeps getting pushed out further. So curious how you think about your source of funding going forward and the mix between, you know, fixed versus floating, kind of given where we are in the current state of the interest rate cycle.

Yeah, no, another good question there, Eric. You are right. We have been deploying at a steady pace. The capital we raised, as you know, we did prefishments last year. We spent that money already. And you can see in our numbers as of end of January, we've drawn 60 million of the senior financing facility that we have out of the 100. So we have 40 left there, which we'll be deploying very, very soon. So we'll be fully deployed very shortly here. And then after that, you know, markets permitting, you know, we'll look to raise additional capital, you know, and that can come from, you know, all formats, right? It could be certainly preferred. It could be, you know, we'll look to, you know, think about sort of the senior facility, whether it's fixed or not. And then, you know, we'll be looking to raise additional, you know, equity capital as well over time to continue to grow the platform, given how attractive the opportunity set looks today. So it's going to be a mix of all those. You know, we're certainly um you know rates you know we're you know we think rates are going to be you know higher for longer so um which is actually good for cielo equity since you know all the underlying investments are floating rates so our that that means the the income on the investment side you know should should do better um and you know we can use that to um to uh that'll support issuance of liabilities whether fixed or floating we'll have to see where the where the market is, right? There is a trade-off between fixed and floating. So we'll have to evaluate that when we get there. But, you know, we still have some wood to chop in terms of spending the existing facilities. And then after that, we'll evaluate whether it's fixed or floating that we want to do.

Great. Thanks for the thoughts there. And one last one for me. Just in terms of the unrealized gain in this quarter, can you talk about what drove that?

Yeah, absolutely. So, so there, you know, the unrealized gain comes from two sources. One is, you know, as you know, a lot of Meridian's portfolio, you know, was invested, the lead to seed portfolio is invested in 22 and 23 vintage CLOs. Those CLOs are now up for reset and the liability costs were pretty high back then. So those, you know, all of those deals, Some have been reset already and some are getting reset now. So as that reset happens, value is unlocked in these CLOs and that moves the valuation up of the CLO equity position and that generates, you know, unrealized gains. And then also the fact that CLO equity is trading at tighter yields in the market, which means the secondary market valuation is also higher and that also generates sort of the unrealized gain. So obviously, we had a pretty strong quarter where we had significant unrealized gains, and that's resulted in the NAV going up to 2052. And now for January, as we just released this morning, it's now 2056 at the end of Jan. So, you know, there's significant, obviously, unrealized gains built into the portfolio, which is something that we're quite happy with. That's, you know, part of our investment process philosophy from the beginning has been to make sure that we can preserve our NAV while paying attractive dividends. And, you know, we are continuing to do that. And, you know, going forward, there's still a lot of reset optionality left in the portfolio. Assuming, you know, the markets stay where they are right now, you know, there should be additional reset optionality that'll get unlocked. And, you know, and we'll continue to manage the portfolio accordingly.

Understood. Thanks so much for taking my questions today. Of course. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. There are no further questions at this time. I will now turn the call over to Jeval Desai, CEO.

Great. Well, thank you, everyone, for your time today. Appreciate your support for SoundPoint Meridian Capital. And we'll see you guys on the next call in a quarter. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.