Sound Point Meridian Waives Fees and Cuts Dividend as AI Disruption Compresses CLO Equity

The BDC slashed its monthly payout to $0.13 and got a temporary fee cut from its adviser, betting on portfolio rotation and refinancings to restore NII coverage.

SPMC · Earnings Call · 2026-08-12

A Quarter of Two Halves

Sound Point Meridian Capital (SPMC) closed its fiscal first quarter with a net asset value (NAV) increase to $9.88 per share from $9.63, yet the income side told a very different story. Net investment income (NII) came in at just $0.24 per share against the quarterly distribution of $0.60. The gap was not accidental — it was the symptom of a market the CEO admits is one of the worst for CLO equity outside a true credit crisis. “The second quarter of 26 saw the bifurcation across US credit markets become more pronounced.” — Ujjaval Desai, CEO · 2026-08-12 That bifurcation — between investment-grade and the lower rungs of leveraged loans — has crushed the arbitrage that CLO equity relies on.

Subsequent to quarter end, SoundPoint, the adviser for SPMC, proposed a base management and incentive fee waiver for the 6-month period beginning 07/01/2026 and ending on 12/31/2026. The fee waiver will reduce the annual base management fee from 1.75% to 1.5% and will reduce the annual incentive fee from 20% to 15% of preincentive net investment income.
Ujjaval Desai, CEO · 2026-08-12

The fee waiver is a direct acknowledgment that the fee waiver is necessary to keep the vehicle attractive while it works through a period of compressed cash flows. The board also cut the monthly distribution to $0.13 for Q4, down from $0.20, a move that still leaves the payout above current NII but signals a reset in expectations.

The AI Squeeze

The persistent drag on SPMC's portfolio is the same theme rattling markets globally: AI driven disruption in software. The company's exposure on a look-through basis is roughly 10–12% of the portfolio, but the impact is outsized because the loans are concentrated in the riskiest tranches. As CEO Ujjaval Desai put it, "NII remained below common distributions due to spread tightening and higher modeled loss reserves for AI impacted software loans within our CLO collateral portfolios." The market's pricing shift has been brutal: the average bid on performing software loans slipped to 85.62 by quarter end, down more than 2 points from March, while the broader loan index was actually up 1.29%. This stark divergence is the core problem. Software issuance has fallen to a decade low, and loan spreads at the bottom of the credit spectrum widened by 55 basis points, while higher-quality paper barely moved. The result is a collapse in the income that CLO equity can distribute.

Rotating for Yield

Management's answer is aggressive portfolio rotation. In the quarter, SPMC sold $35 million of lower-yield, higher-tail-risk positions and bought $50 million of secondary CLO equity, adding roughly 100 basis points to the portfolio yield through the trades. Secondary opportunities still offer mid-to-high teens returns, whereas new-issue equity is stuck at high single digits — a gap that continues to favor the secondary market. As Desai noted, “We have sold about $35 million and purchased around 50 million of secondary positions. And that rotation has been very accretive. We have added about 100 basis points of yield through that rotation.” — Ujjaval Desai, CEO · 2026-08-12 The portfolio yield ticked up to 9.8% from 9.1%, and management expects it to reach around 10.1% on a go-forward basis. The goal is to get NII to cover the new $0.13 monthly distribution — a level that implies roughly a 15% annualized yield on the current share price. The rotation also extends to liability management. SPMC refinanced 13 CLOs, cutting debt costs by an average of 37 basis points, and has substantial optionality for further resets. This is a theme that has run for several quarters, but the urgency is new. In the prior call, Desai was more measured: “So if you do that sort of look-through analysis, the portfolio is roughly around the kind of low teens. In terms of exposure to those types of credits.” — Ujjaval Desai, CEO or Senior Executive · 2026-05-27 That was in February. Now the language is about survival and alignment.

A Proactive Fee Waiver

The fee waiver is the most telling signal. It is explicitly designed to "reduce the expense burden on the company" while the portfolio rotates and refinancings take effect. Desai was candid about the motive: “So our focus right now is really on reducing expenses in the structure. While we work to improve the income. Of the portfolio.” — Ujjaval Desai, CEO · 2026-08-12 This is a clear acknowledgment that the market dislocation could last longer than previously expected. The waiver runs through December 31, 2026, and the board will reassess at year-end. The dividend cut is equally significant. At $0.13 per month, the annualized distribution rate is around 15.5%, which is more sustainable but still not covered by trailing NII. Management argues that the combination of improved secondary yields, liability refinancings, and a gradual recovery in loan markets could push NII to that level. But it's a bet on the market stabilizing. SPMC is not alone in struggling with AI-related credit stress, but its response is distinctive. Unlike many BDCs that have cut dividends sharply, SPMC has layered on a fee waiver to cushion the blow — a move that looks designed to preserve investor loyalty and buy time for the rotation to pay off. The market capitalization is just $220 million, so every basis point of yield matters. If the AI disruption continues, the dividend may need another cut. If the market heals, the portfolio could be positioned for a strong rebound. Either way, the company has signaled that it is willing to act decisively to protect shareholder value. The next few quarters will show whether that faith is rewarded.