Oppenheimer downgrades Sound Point Meridian Capital to Perform

As previously reported, Oppenheimer downgraded Sound Point Meridian Capital (SPMC) to Perform from Outperform and removed the firm’s price target of $20. The firm says the negative impact of the borrower call option on earnings has been much higher than it had estimated, as evidenced by the company’s 2.0% return on equity since IPO. Oppenheimer believes collateralized loan obligation equity is unable to price for the borrower call option in the CLO structure. Loans are non-callable for six months while the debt on the CLO is non-call for two years. If borrowers can refinance their loans in that year-and-a-half window, it would lower future excess cash flows. Once the two-year window opens, the CLO may be able to lower borrowing costs if credit spreads have narrowed, the firm adds.