Sound Point Meridian Capital (NYSE:SPMC) reported net investment income of $5 million, or $0.24 per share, for its fiscal first quarter ended June 30, 2026, as spread tightening and higher modeled loss reserves on AI-impacted software loans continued to pressure income from its CLO equity portfolio.
The company paid distributions of $0.60 per share during the quarter. Chief Executive Officer Ujjaval Desai said net investment income remained below common distributions despite refinancing activity across the portfolio, citing income compression in the CLO equity asset class.
Quarterly Results and Portfolio Activity
Chief Financial Officer Dan Fabian said the company recorded a net realized loss of $12.8 million and unrealized gains on investments of $25.2 million during the quarter. GAAP net income totaled $17.5 million, or $0.83 per share, while total expenses were $7.4 million.
Sound Point Meridian Capital’s CLO equity portfolio had a weighted average GAAP yield of 9.8% at quarter-end, up from 9.1% in the prior quarter. Desai said the portfolio held investments in 108 CLOs managed by 31 managers, providing look-through exposure to more than 1,500 loans across over 30 industries.
- Purchased 13 secondary-market equity investments for $16.1 million at a weighted average yield of 20.2%.
- Sold seven equity investments for $23.3 million in cash proceeds at a weighted average yield of 8.5%.
- Refinanced liabilities on 13 CLO equity investments, generating weighted average debt-cost savings of 37 basis points.
- Reported total assets of $384.7 million, net assets of $208.1 million, and investment portfolio fair value of $363.2 million.
- Ended the quarter with about $21 million in cash and a leverage ratio of 45.7% of total assets.
Desai said portfolio rotation has been a central focus. Year to date, the company sold about $35 million of positions and purchased roughly $50 million of secondary positions, adding approximately 100 basis points of yield through the rotation. He said the portfolio’s current forward yield for July was about 10.1%.
The company is selling positions with limited near-term optionality, lower expected yields or greater downside risks, while buying higher-quality secondary investments. Desai said secondary CLO equity opportunities were offering mid- to high-teen yields, compared with estimated high-single-digit returns of roughly 8% to 9% in primary CLO equity issuance.
Distribution Cut and Fee Waiver
Following the quarter, the company announced monthly distributions of $0.13 per share for the fourth quarter of calendar 2026, down from $0.20 per share monthly for the third quarter. The board considered current and expected portfolio yield, balance-sheet flexibility, NAV support and the objective of earning distributions through net investment income, Desai said.
The revised monthly distribution equates to $0.39 per share for the quarter. Desai said the company’s goal is for net investment income to reach the $0.13-per-share monthly distribution level over time.
Sound Point, the company’s adviser, also proposed a fee waiver for the six months from July 1 through Dec. 31, 2026. The proposal would lower the annual base management fee to 1.5% from 1.75% and reduce the annual incentive fee to 15% from 20% of pre-incentive net investment income.
Desai characterized the waiver as a response to unusually severe CLO equity income compression. He said management expects the period to provide time to complete portfolio rotation, subject to market conditions, and would review the waiver at year-end.
Software Exposure and Credit-Market Backdrop
Desai said approximately 10% to 12% of the portfolio, on a look-through basis, was exposed to software credits. The company has conducted credit-by-credit re-underwriting to identify companies most likely to face AI-related disruption and has used the results to reduce exposure to the names it considers most vulnerable.
“At a sector level, we’re more concerned about the individual names, not the sector exposure itself,” Desai said. He added that the company may maintain similar overall software exposure while reducing tail risk within the sector.
In discussing the broader market, Desai said U.S. institutional leveraged loan activity totaled about $224 billion in the second quarter, down 7% sequentially but 17% above the five-year quarterly average. Private-equity deal volume fell 38% from the first quarter, however, and sponsors concentrated on extend-and-amend transactions ahead of the 2028 maturity wall.
He said lower-rated credits experienced greater pressure, while software loan prices declined amid AI-related concerns. The average bid on performing software loans fell to 85.62 by quarter-end, down more than two points from March, even as the broader loan index rose 1.29% year to date.
CLO issuance totaled $33.3 billion across 72 transactions during the quarter, the lowest quarterly volume since the fourth quarter of 2023, according to Desai. Refinancing and reset activity remained stronger, with combined volume of $93.7 billion, compared with $56.2 billion in the first quarter.
Looking ahead, Desai said the direction of credit markets will depend on private-equity deal activity, interest rates, geopolitical developments and the evolution of AI-related software concerns. He said the company sees potential for increased loan supply as companies access public and private markets to fund artificial intelligence spending, while loan-spread improvement and liability refinancings could support future CLO equity cash flows.
About Sound Point Meridian Capital (NYSE:SPMC)
Sound Point Meridian Capital Inc is an externally managed, non-diversified closed-end management investment company. Its investment objective is to generate high current income, with a secondary objective to generate capital appreciation, by investing primarily in third-party collateralized loan obligation equity and mezzanine tranches. Sound Point Meridian Capital Inc is based in NEW YORK.
