SPMC - NYSE

Good morning, ladies and gentlemen, and welcome to the Sound Point Meridian Capital, Inc. Third Fiscal Quarter Ended December 31, 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, February 12, 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. Sound Point Meridian Capital refers participants on this call to the Investor web page, 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. 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 December 31, 2024, which is incorporated herein by reference. We note forward-looking statements, whether written or oral, include or 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.

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 $0.62 per common share and net realized gain on exited investments of $0.10 per common share, while we paid dividends during the quarter of $0.66 per share. Net asset value per share ended the quarter at $20.52, up from where it stood on September 30 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 GAAP 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 GAAP yield on our equity portfolio was 15.2% versus 15.7% as of September 30. 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 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 5, we announced monthly distributions for calendar Q2 2025 of $0.25 per share, an increase of 4.2% over the calendar Q1 2025 monthly distribution rate of $0.24 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, Ujjaval, and hello, everyone. As Ujjaval 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. GAAP net income for the quarter was $32.2 million or $1.59 per share. Moving to our balance sheet. As of December 31, 2024, total assets were $523.4 million. Net assets were $415.9 million, and our net asset value stood at $20.52 per share. The fair value of our investment portfolio stood at $503.7 million, while available liquidity consisting of cash was approximately $19.7 million at the end of the quarter. As of December 31, 2024, the company had outstanding debt that totaled 18.6% of total assets. During the quarter, we declared monthly income distributions of $0.24 per share payable at the end of January, February and March. Based on our share price as of December 31, 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, 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 equity. 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 re-pricings 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 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 Sound Point 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, Sound Point'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. [Operator Instructions] Your first question comes from Randy Binner with B. Riley. Your line is now open.

Yeah. Thanks. Good morning. So it was a solid quarter, and I appreciate the comments on the market overall at the tail end of the call there. I guess, with the primary CLO market being very active from a new issue perspective, how does that affect your process and your view of credit quality of these new issues? And I apologize, if I missed it, but is there -- do you have any stats on default activity that you're seeing versus the market at large? Just 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 refi. 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. We think that the quality is pretty strong right now. Default rates are still sort of range bound. I mean, 1.5%-ish on the entire portfolio -- on the entire market. So rates are still staying low -- default rates are still staying low. So we're not super concerned on the credit quality. I think, the main thing for us is just making sure that we pick the right underlying managers, who can keep default rates low. We're focused on the underlying portfolios trying to make sure that tail risk is kept at a minimum because that's where defaults are going to come from, right? They're not -- the good quality loans trading close to par. Those are not the companies to worry about. But there is 5%, 6% of the market trading below $0.90 on the dollar. Those are the loans that will actually 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 fairly comfortable with the credit quality in the loan market right now and feel that we should be able to outperform some of the base case assumptions that are made to model CLO equity going forward.

Yes, that's helpful. And I guess the other question is because you're able to leverage the kind of the scale and resources of SoundPoint, is there -- 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?

Yes, absolutely. So we have -- we've kind of use our proprietary system called Compass, which allows us to really 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 flags that tell us which managers are doing well, which deals, which vintages are doing well. And we are able to then focus on those deals. So there's a lot of kind of data analysis that goes on in identifying the right investment opportunities, and that is absolutely critical. And so, our platform allows us to do that. This is kind of all on just looking at the numbers. There's a lot of fundamental work that goes in as well in utilizing Sound Point's credit platform. So, we are -- we have a lot of expertise in loans, in credit in general. And so there's a lot of insights we're able to glean from the rest of the platform in terms of kind of industry 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.

Your next question comes from Erik

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. Just in your last comments indicated that you do make some trades within the portfolio throughout the year. So I'm wondering, if you could just kind of maybe compare the risk reward from your seat today in terms of the primary and secondary markets.

Yes. Great question, Erik. So we're -- 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, 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 parameters, loans trading below kind of $0.90 would be much lower in a clean portfolio today. So we like that. Also, the way we find these new issue deals, 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, we're 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 ramp -- the warehouses in the CLOs are ramping at the right time, make sure that the debt execution happens correctly. So, all of that work gets done. And that ends up resulting in significantly higher returns for what we buy in the new issue market. And you can see from our results today that the deals we're doing, we're booking 17% plus yields on new issue investments that we did recently as opposed to kind of in the secondary market, the returns are 300 to 400 basis points lower. So that's kind of the arbitrage between new issue and secondary, and we think that is -- that makes new issue very attractive. So 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, overall it may not look interesting, but there are kind of pockets of interesting transactions that we can do. So we'll pick up secondary from time to time as well. So it's really just being totally open, being totally and 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 risk by selling out in the secondary market when appropriate 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 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 color. I truly appreciate your insights there. Maybe switching gears a little bit. I think on 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. You got a little bit more room to go there than I think you previously said a quarter or two before you put all that capital to work. So given how active and how attractive your -- kind of your comments have indicated that the primary market are today, once you've put all of 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 market expectations for short-term rates are going to stay in this higher for longer. The next potential fed cut keeps getting pushed out further. So I'm curious how you think about your source of funding going forward and the mix between fixed versus floating given where we are in the current state of the interest rate cycle?

Yeah. No, another good question there, Erik. So you are right. We have been deploying at a steady pace. The capital we raised. As you know, we did pref issuance 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 million. So we have $40 million left there, which we'll be deploying very, very soon. So we'll be fully deployed very shortly here. And then after that, markets permitting, we'll look to raise additional capital. And that can come from all formats. It could be certainly preferred. It could be -- we'll look to think about the senior facility, whether it's fixed or not. And then we'll be looking to raise additional 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. We're certainly rates -- we're -- we think rates are going to be higher for longer, which is actually good for CLO equity since all the underlying investments are floating rate. So that means the income on the investment side should do better. And we can use that to -- that will support issuance of liabilities, whether fixed or floating, we'll have to see 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 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 thought 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 the unrealized gain comes from two sources. One is, as you know, a lot of Meridian's portfolio was invested -- the least the seed portfolio is invested in 2022 and 2023 vintage CLOs. Those CLOs are now up for reset. And the liability costs were pretty high back then. So those -- 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 unrealized gains. And then also the fact that CLO equity is trading at tighter yields in the market, which means the secondary market valuations are also higher, and that also generates sort of the unrealized gains. 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 $20.56 at the end of Jan. So there's significant, obviously, unrealized gains built into the portfolio, which is something that we're quite happy with. That's 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 we are continuing to do that, and going forward, there's still a lot of reset optionality left in the portfolio. Assuming the markets stay where they are right now, there should be additional reset optionality that will get unlocked, and we'll continue to manage the portfolio accordingly.

Understood. Thanks so much for taking my question today.

Of course. Thank you.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Ujjaval Desai, CEO.

Great. Well, thank you, everyone, for your time today. I appreciate your support for Sound Point Meridian Capital, and we'll see you guys on the next call in a quarter. Thank you.