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Q1 2024 Eagle Point Credit Company Inc Earnings Call

Participants

Garrett Edson; Investor Relations; ICR

Thomas Majewski; Chief Executive Officer, Director; Eagle Point Credit Company Inc

Kenneth Onorio; Chief Financial Officer, Chief Operating Officer; Eagle Point Credit Company Inc

Mickey Schleien; Analyst; Ladenburg Thalmann and Co. Inc.

Presentation

Operator

Greetings, and welcome to the Eagle Point Credit Company first-quarter 2024 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you, sir. You may begin.

Garrett Edson

Thank you and good morning. By now everyone should have access to our earnings announcement, investor presentation, which was released prior to this call, and which may also be found on our website at eaglepointcreditcompany.com.
As a reminder before we begin our formal remarks, the matters discussed on this call include forward-looking statements or projecting financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information.
For further information on factors that could impact the company and statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call.
We disclaim any obligation to update our forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website at eaglepointcreditcompany.com.
Earlier today, we filed our first quarter 2024 financial statements in our first quarter investor presentation with Securities and Exchange Commission. The financial statements and our first quarter investor presentation are also available within the investor relations section of the company's website. The financial statements can be found by following the financial statements and reports link and the investor presentation can be found by following the presentations and events link.
I will now turn it over to Tom Jewski, Chief Executive Officer of Eagle Point Credit Company.

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Thomas Majewski

Thank you, Garrett. And welcome everyone, to Eagle Point Credit Company's first quarter earnings call. If you haven't done so already, I invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio.
The company had a solid start to 2024. Our investment portfolio is performing well and we improved our balance sheet during the first quarter. We believe the company remains well positioned for continued upside moving forward.
Let me take you through some highlights from the first quarter. The company generated net investment income and realized capital gains of $0.31 per share, excluding non-recurring expenses related to a preferred stock offering. We received recurring cash flows on our portfolio in the first quarter of $56.2 million or $0.7 per share.
We previously noted that recurring cash flows in the first quarter were impacted by higher loan prepayments in the fourth quarter of 2023 which led to a bit of cash drag within many CLOs. This has since normalized. Indeed, during the month of April, we received recurring cash flows of $65.7 million well in excess of the recurring cash flows received in each of the two prior quarters.
With roughly 2.6% of our CLOs underlying portfolios now invested in bonds, and remember that bonds typically pay interest on a semi-annual basis, we do expect some ups and downs in cash flows from quarter to quarter.
NAV per share as of March 31, was $9.16, a modest decrease from year-end. During the quarter, we paid $0.48 per share of cash distributions to our common shareholders. We were very active in managing our portfolio during the quarter, deploying over $131 million in net new capital into investments that we believe will increase the earnings power of our portfolio.
As the prices for CLO BB increased during the quarter, we began selling some of the positions we held in our portfolio that we had purchased opportunistically over the last year or two. This helped generate some of our realized gains. We plan to continue rotating some of our CLO BB back into CLO equity over the coming months.
Along with our overall portfolio performance, we continue to raise capital through our at-the-market program and issued approximately 7.9 million common shares at a premium generating NAV accretion of $0.06 per share. We also issued a modest amount of preferred stock through the ATM.
We were also pleased to raise an additional $47 million of net proceeds in the quarter through the issuance of a new Series F term preferred stock, which will be due in 2029. As of March 31, 2024, the weighted average effective yield on our CLO equity portfolio was 16.43% and this compares to 16.7% at the end of the year.
The new CLO equity we purchased during the first quarter had a weighted average effective yield of 19.4%, which should help bolster the portfolio's weighted average effective yield prospectively. Additionally, the weighted average expected yield of our CLO equity portfolio at quarter-end based on market value stood at approximately 24%.
Additionally, the company had a number of meaningful subsequent events so far after quarter end that I'd like to highlight. We estimate that our NAV as of April month end to be between $8.94 and $9.04 per share, along with our regular monthly common distribution of $0.14 per share. We declared an additional variable supplemental distribution of $0.02 per share, or an aggregate monthly distribution of $0.16 per share now going all the way through September of 2024.
Earlier this month, we successfully launched our new Series AA and Series AB non-traded 7% convertible perpetual preferred stock offering. This has started to generate net proceeds for the company, and we believe this will be significantly accretive to ECC over time.
Consistent with our long-term strategy for operating the company, all of our financing it remains fixed rate and we have no financing maturities prior to April 2028. In fact, some of our preferred stock financing is even perpetual now with no set maturity dates.
While we continue to focus the majority of our investment efforts on the secondary market during the quarter, we did deploy capital into a few attractive primary investments as well as debt spreads tightened during the first quarter.
We also continue to focus on improving our weighted average remaining reinvestment periods or our WART via investing in CLO equity with longer reinvestment periods in the secondary market. Further with CLO debt spreads tightening, refinancing and reset volumes picked up during the first quarter.
And indeed, we took advantage of this environment and completed two resets and one refinancing during the quarter. These had the effect of extending the reinvestment periods of the reset CLOs to a new 5 year reinvestment period, and for the refinancing, lowering the cost of debt by about 13 basis points.
As a result of our consistently proactive portfolio management, as of March 31, our CLO equity portfolio's weighted average remaining reinvestment period or WART stood at 2.5 years. This is ahead of where it stood at year-end 2023 despite the passage of three months. Our portfolio's WART is 56% above the market average of 1.6 years. We expect to remain active in completing resets and refinancings where attractive and have a full pipeline of CLOs to tackle.
We believe, keeping our WART as long as possible is one of our best defenses against future market volatility. EIC invest primarily in CLO junior debt, and I'm pleased to share that it won the credit flux Industry Award for best public closed-end CLO fund last week.
For the first quarter, EIC generated net investment income and realized gains, excluding non-recurring expenses of $0.57 per share. EIC raised its monthly common distribution at the beginning of the year by 11% to $0.2 per share, which is the highest rate in that company's history.
And EIC has performed very well over the last couple of years and we believe remains well positioned to continue generating strong net investment income. We invite you to join EIC's investor call at 11:30 AM today after this call and to visit the company's website eaglepointincome.com to learn more.
After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets. I'll now turn the call over to Ken.

Kenneth Onorio

Thanks, Tom, and thanks, everyone, for joining our call. For the first quarter, the company recorded net investment income and realized gains of approximately $24 million or $0.29 per share. When excluding non-recurring expenses related to the issuance of the company's 8% Series F term preferred stock due 2029, net investment income and realized gains were $0.31 per share. This compares to NII and realized gains of $0.33 per share in the fourth quarter of 2023 and NII less realized losses of $0.32 per share in the first quarter of 2023.
When unrealized portfolio appreciation is included for the first quarter, the company recorded GAAP net income of approximately $35 million or $0.43 per share. This compares to GAAP net income of $0.37 per share in the fourth quarter of 2023 and GAAP net income of $0.35 per share in the first quarter of 2023.
The company's first quarter GAAP net income was comprised of total investment income of $40.8 million, net unrealized appreciation on investments of $7.8 million, net unrealized appreciation on certain liabilities held at fair value of $2.9 million, and realized capital gains of $1.1 million, all of which were partially offset by expenses of $17.4 million and distributions on the Series D preferred stock of $0.5 million.
Additionally, the company recorded an other comprehensive loss of $4.6 million for the quarter. The company's asset coverage ratios at March 31 for preferred stock and debt calculated pursuant to Investment Company Act requirements were 343% and 629%, respectively. These measures are comfortably above statutory requirements.
Our debt and preferred securities outstanding at quarter end totaled approximately 29% of the company's total assets, less current liabilities, in line with our target range of generally operating the company with leverage between 25% to 35% of total assets under normal market conditions. Last week, we declared distributions for the third quarter in line with our recent distributions. We will continue to review our variable supplemental distribution on a quarterly basis.
Moving on to our portfolio activity in the second quarter through April 30, the company received recurring cash flows on its investment portfolio of $65.7 million, comfortably above our first quarter recurring cash flows of $56.2 million.
I will now hand the call back over to Tom.

Thomas Majewski

Thanks, Ken. I'll now share some updates on the loan and CLO markets. The Credit Suisse Leveraged Loan Index continued strong momentum from 2023 and generated a total return of 2.52% for the first quarter. The index continued that trajectory with loans now being up 3.22% for the year as of April 30.
During the first quarter, we saw only six leveraged loan defaults. As of quarter end, the trailing 12-month default rate declined to 1.14%, which is well below the historic average of 2.7%. While the default rate may increase from these level as the year progresses, we also continue to believe research desks are significantly overestimating the near term default risks as many of the underlying loan borrowers in our CLOs have continued to see revenue and EBITDA growth, which helps offset the impact of higher rates.
ECC's portfolio's default exposure as of March 31 stood at 68 basis points, which is well below the trailing 12 month default rate. Also during the first quarter, approximately 7% of leveraged loans or about 27% annualized were be paid at par.
While there has been some opportunistic loan repricing activity in recent weeks, with many loans now trading around or even above par, most loan issuers remain very proactive in tackling their near-term maturities in an effort to further push out their debt maturities.
On a look-through basis, the weighted average spread of our CLOs underlying loan portfolios was 3.74% at the end of the quarter, and this compares to 3.79% at the end of last year. Still, we've seen a beneficial increase on the weighted average spread of 16 basis points over the last two years.
Meanwhile, spreads on debt tranches issued by our CLOs that were locked in two years ago, remain unchanged and frankly have the potential now to tighten as we refinance and reset CLOs in our portfolio. CCCs within our CLOs stood at about 6.6% on average as of March 31, and the percentage of loans trading below [$80] within our CLOs was about 4.5% as of quarter-end.
Our portfolios' weighted average junior OC cushion was 4.09% as of March 31, which we believe gives us ample room to withstand potential future downgrades or losses within CLOs. Our portfolio's junior OC cushion remains a fair bit higher than the market average of 3.26%.
In terms of CLO issuance, we saw $49 billion of issuance in the first quarter, the fastest pace on record. This is approximately 45% higher than new-issue for the same period last year. As CLO debt spreads have tightened, third party equity investors like ourselves have returned to the new-issue markets.
Secondary CLO equity also continues to remain quite attractive and we sourced a number of new investments in both the primary and secondary markets for the company. Along with the significant rise in new CLO issuance, the tightening of CLO debt spreads also drove a substantial increase in refinancing and reset activity.
Our focus continues to be on improving our weighted average remaining reinvestment period via longer dated secondary purchases, new issue investments, and resets of existing portfolio holdings. We continue to believe CLO structures and CLO equity in particular are set up well to ultimately outperform the broader debt markets over the medium and long term as they have done in the past. As such, our proactive management of our portfolio and overall investment strategy we believe remains well suited for today's market environment.
To sum up the quarter for ECC, we generated net investment income and realized capital gains, excluding some non-recurring expenses principally related to preferred stock deal for the quarter of $0.31 per common share. We continued to receive solid recurring cash flows on our portfolio during the quarter and our second quarter cash flows were well above the first quarter 2024 levels.
We sourced a significant amount of new investments with attractive yields of primary and secondary markets, and we invested $131 million of net capital during the quarter. Our portfolio continues to maintain a weighted average remaining reinvestment period, which is considerably longer than the market average and this has been aided by recent new investments that we've put in the portfolio.
Our existing regular monthly common distributions and our variable supplemental common distributions have now been declared and extended all the way through September 2024. We significantly strengthened our liquidity position through the ATM issuance, generating NAV accretion of $0.06 per common share. We also completed the Series F term preferred stock issuance which we talked about earlier.
During the second quarter, we launched our non-traded 7% convertible perpetual preferred stock, which has started to generate proceeds for the company and we believe will be significantly accretive to ECC over time. We're very excited about this new offering.
Importantly, we continue to maintain 100% fixed rate financing with no financing maturities prior to 2028. This provides us with protection from any future increases in rates and locks us into an attractive cost of capital for years to come.
We continue to see a strong pipeline of both secondary and primary CLO equity investments as well as multiple refinancing and reset opportunities for existing positions in our portfolio to further enhance the overall quality and portfolio mix that we have.
Overall, we believe the company's investment portfolio continues to be well positioned, given our proactive management, the portfolios' above average WART, its strong OC cushions and consistently recurring cash flows.
Moving ahead we will remain opportunistic and proactive as we manage our investment portfolio with a long-term mindset. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Mickey Schleien, Ladenburg Thalmann.

Mickey Schleien

Yes. Good morning. Hello, everyone. Tom, a couple of questions. Could you give us a sense of the current economics and how they compare between the primary and secondary CLO equity markets?

Thomas Majewski

Sure. Good morning, Mickey. A really good question. The good news and the bad news is we think the market's kind of pricing things reasonably, efficiently, and valuing reinvestment period. One of the things you've heard us say over the last decade is we think a long remaining reinvestment period is very, very valuable.
Unfortunately, maybe we've said it too many times and people are starting to pick that up. Broadly what we see as a trend in the market is that the CLO equity trades at a much wider yield, the shorter your remaining reinvestment period is, or even to the extent you're out of the remaining -- out of the reinvestment period and you're in the amortization period.
While there is some ability to reinvest afterwards and we'll talk about that maybe in a minute, what we're seeing is yields in general on post RP paper are going to be mid-20s in general. some might be higher, some may be lower, but is a good generalization.
But then as you get more reinvestment period, let's say you're looking at a secondary opportunity with two years of RP or four years of RP, the yield opportunity holding all else constant, assuming the same portfolio, same collateral manager, same [MVOC].
You're going to see the second, the equity trade at lower and lower yields, the shorter the remaining reinvestment period is. Finally getting to new issue, which typically has a 5-year reinvestment period. In many cases there, what we're seeing is those are going to be the lowest yields, but really in line with the kind of opposite term curve that we're seeing in the secondary market.
So generically, I think of new issue, CLO equity as about a 15% return opportunity today, which kind of makes sense, that's a pretty attractive return. If you would have asked me that question a year ago, I would have told you 10% to 12%. So it's kind of gotten to the point of being interesting.
But then as you kind of work your way down the term curve and have less and less RP, the market yield goes up and up and up. And in our opinion, oftentimes the risk goes up and certainly post RP you're at the greatest risk, so therefore, getting the greatest yield>
So short answer, new issue, generically 15%, sometimes it's better, sometimes it's worse. But if you had to throw a number on it and then as you work your way out to end the reinvestment period equity or post RP equity, all of a sudden you're looking at probably a 25% return opportunity.
But obviously a much shorter investment and a lot of predication on loan prices go up a little bit that could help you a ton, if they go down a little bit on that post RP equity, it hurts you, versus if you're in a new CLO or have a lot of reinvestment period, prices going down actually may help you overall. So that answer your question.

Mickey Schleien

It does. I guess my follow-up would be sort of where you see the sweet spot. I know that's a hard question. (multiple speakers)

Thomas Majewski

No, that actually very easy. In general, we kind of like 2.5 year RP or longer secondary, all the way through select new issue today. The one of the things that makes new issue really attractive is if you bought your assets proverbially yesterday or a bunch of them.
One of the things going on in the market, I haven't said this in a while, but I'll say it again, I'll resume saying it the price of loans is too darn high right now. And a fair number of loans are trading in the par areas, sometimes even higher, while they're still discounted opportunities, don't get me wrong, doing a non-trivial amount of loans and meaningful amount, frankly trading in the par area.
We like -- our best case like loans are [$98] when the good loans trade around $98, that's obviously lower is better, but that kind of means the market's orderly, not too frothy, not too distressed. So we're seeing a bunch of loans kind of inch their way up. So that said, if you bought ramped your -- bought a bunch of loans into a loan accumulation facility three months ago, your deal is going to look better than a new deal coming together today.
And I think having assets bought proverbially yesterday is an important part of making new CLOs look attractive, and that's part of our strategy with loan accumulation facilities. We'll seek to put in plenty of -- we keep -- what I'll say, we have a number of tickets punched with different collateral managers such that when we don't want to have a fully ramped CLO, but maybe building up $50 million, $75 million, $100 million of assets and a long term loan accumulation facility, that when we see AAA, [tighten] boom, we can go print.
And even if we have to buy the other assets closer to par, the good news is we've got a lot of stuff we already bought at a discounted price.
The flip side obviously you might go wrong if the price of loans goes down, we might regret those purchases. But you've got long-term financing in place or multiyear financing. So you've got the ability to kind of pick your timing. But equally importantly to be in the queue if your favorite collateral managers such that when you want to go you kind of have all the papers and plumbing are ready in place.

Mickey Schleien

Right. Tom, in terms of CLO debt -- AAA spreads, my sense is there's somewhere around 150 basis points. I know that varies by collateral manager, (multiple speakers) going lower. (multiple speakers)
So with that in mind, what's sort of the remaining opportunity in the portfolio to refinance and reset? I know there was a big wave of refinancing, reset in your portfolio, I think it was 2018, if I'm not mistaken. And what would the impact be on the fund's cash flows and NAV as you progress through that process?

Thomas Majewski

It would certainly be generally good. I almost said only there, but I know someone's listening, so I didn't say that. You'll notice -- this is on page 26 of our investor deck, our weighted average AAA spread is [$146]. That's across all the myriad of CLOs in the portfolio.
Pages of CLOs, we have here, it's a lot. Now I just saw a headline like the new top tier CLOs are getting printed today at [$146] it looks like. So our average price is right at the [pipes] of the market. That said, would you then start looking at is well, what are the ones above the average? And what is the non-call period left on us because we publish that I'm over in the left-hand column, years remaining on non-call, and ideally, I mean, we only on average have 0.2 (inaudible) a lot of stuff is workable.
So what we do as a combination of looking through how the CLOs have performed, focusing on those with the highest debt costs and then looking at the noncall dates and either looking to reset them or refinance them, depending on what makes sense.
A number of the CLOs in our portfolio have been reset or refinanced already this year, you can kind of figure that out from watching the trade publications and looking at our -- we don't publish which ones we've done per se. But if you read Bloomberg News, you can look for our deals and see them.
We're continually seeking to reset as many CLOs as possible. And with CLO debt spreads coming in, it's certainly making every time that ticks in another basis point, it makes more of our CLOs more powerful. What that does, it invariably increases the value of CLO equity to the extent you complete a reset, then it nearly always improves the yield on that CLO as well.
Sometimes it's sometimes creates a markup. So any of these things would be -- typically we would only undertake one of these if it's accretive to NAV or NII or ideally both and we're going to look at the ones that are the most potent.
There's no one right answer, then you also have to talk to the collateral manager, what's their pipeline. These folks want to be doing new deals, not necessarily resetting the old loans if there's still some runway on them. So it's a conscious negotiation with the market. The good news is we have so many CLOs is always something to do when the market's in our favor.

Mickey Schleien

Right, right. So with everything you just said about resetting and refinancing, is there a chance that your taxable income given the costs associated with those refinancings and resets could fall below your distributions this year?

Thomas Majewski

Well, that's a very good question. And you take very good notes. So when you conduct a reset or a refi or even a call, what happens is you get a tax deduction for your unamortized issuance expenses. So let's say it costs you a $1 million, driven it's probably more than that, but let's just say it, it costs you $1 million to do a reset three years ago or issued the new deal, you amortize that cost over the expected life of the transaction. The tax people have some complicated methodologies, but you blend that you take a tax deduction for that cost over time.
If you then extinguish the debt and retire, basically terminate the activity, pay off your debt, you can then write off everything else, which when we had our last reset mania, there was one year where we had a significant tax shelter from lots and lots of it was reset mania maybe it was 2018, Ken?

Kenneth Onorio

'18, or '17 I think.

Thomas Majewski

'17, '18, one of those years, we had a really low (inaudible) in theory, this is great. Most of our distribution was treated as a return of capital for tax. Obviously the best distributions are those that are -- you can credit either way the best distributions when you don't have to pay tax on at the time in my opinion.
So now that said, this time around with the resets, the cost of issuing a CLO has gone down. So those in that 2018 reset mania, those were a lot of proverbially 2015 CLOs. And over the time from 2015 to kind of the batches that were looking at kind of immediately pre and immediately post COVID CLOs, deal issuance costs have gone way down.
So unfortunately or fortunately, we have less unamortized issuance cost per CLO in general. So the tax shelter from that activity would certainly reduce -- would be less this time than last time generically. That said, when we predict our taxable income and mindful it's always very difficult in any one year to predict taxable income for CLOs, the two things we kind of think out there are the two big variables, the amount of reset and refi activity for us, which would most likely have an effect of lowering our taxable income.
The offset is while I commented earlier that the price of loans is too darn high, at the same time, many of those loans were loans that were purchased at discounts in CLOs, and to the extent those loans are refinanced or sold, it could start flashing through a lot of gains on those CLOs, which would create immediate taxable income for us, even though we don't get cash flow related to those gains because it gets trapped in the CLO.
So Ken, pulling his hair out a little bit, as we think about this, but we've kind of got two things, and Ken doesn't have a lot of hair if you anyone's met him here. We're kind of balancing it two ways of we know the resets are low -- we believe the resets are likely to increase, which is going to create some additional tax loss or tax write off all else equal is always good. The bad part, again, it's good and bad before loans are being sold at gains, which we did that every day in our CLOs.
The only bad part is that creates taxable income. We don't get it out as cash because it gets trapped in the CLO. So we got to have two of those things. We got a yin and yang. We don't have a definitive view which is going to be more powerful. One of them might be -- one of them is probably going to be more powerful than the other.
But they're probably correlated and that the more reset activity we're doing is probably because the price of loans is going up and the market's strong. But maybe they offset each other. But those are the two things that will be the big factors. It won't be as big this time in my expectations versus the 2018 tax write-offs that we're able to take just cause the amortize -- unamortized costs are a lot lower this time.

Mickey Schleien

I understand. Thanks for that. Explanation is very helpful. Those are all my questions this morning.

Thomas Majewski

Great. Thank you.

Operator

(Operator Instructions) Thank you. Mr. Majeski, it appears we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thomas Majewski

Great. Thank you very much, everyone, for participating on the call today. Both Ken and I appreciate your interest in Eagle Point Credit Company. We'll be around all day today to the extent folks have other questions, feel free to reach out.
In addition, we invite you to join the Eagle Point Income Company call, which will be at 11:30 AM this morning, which Dan Ko, Lena Umnova, and I will be hosting. So thank you for your time and interest, and we'll look forward to speaking again soon.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.