Eagle Point Credit Company Inc. (NYSE:ECC) Q3 2023 Earnings Call Transcript

Eagle Point Credit Company Inc. (NYSE:ECC) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Greetings, and welcome to the Eagle Point Credit Company’s Third Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Garrett Edson with ICR. Please go ahead.

Garrett Edson: Thank you, Melissa, and good morning. By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call and which may also be found on our website at eaglepointcreditcompany.com. Before we begin our formal remarks, we need to remind everyone that the matters discussed in this call include forward-looking statements or projected 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 the 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, eaglepointcreditcompany.com. Earlier today, we filed our third quarter 2023 financial statements and our second quarter investor presentation with the Securities and Exchange Commission. The financial statements and our third 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.

A close-up of a hand holding a credit card, representing the companies multi-level payment services.

I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.

Tom Majewski: Thank you, Garrett, and welcome, everyone, to Eagle Point Credit Company’s third quarter earnings call. If you haven’t done so already, we invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. The company continues to perform solidly despite concerns about macro volatility in the market. Our NAV grew by 7% during the quarter. We paid $32.5 million in cash distributions to shareholders and we deployed $119 million of net capital into new attractive investments. Recurring cash flows remain robust as we received $51.9 million or $0.70 per common share of cash flow, which is well in excess of our common distribution and expenses.

CLO equity investments purchased during the quarter had a weighted average effective yield of 20.3%. As of quarter end, our CLO equity portfolio had a weighted average remaining reinvestment period of 2.7 years, which is steady from the last quarter despite the passage of three months. As we have stated in the past, we believe keeping our weighted average remaining reinvestment period as long as possible is our best defense against future market volatility. For the third quarter, our net investment income and realized gains totaled $0.35 per common share. NAV per share as of September 30 was $9.33, which again is a 7% increase from June 30. Since the end of the quarter, we estimate our NAV at October month end to be between $8.98 and $9.08 per share.

We continue to actively manage our portfolio, deploying $119 million in net new capital into new portfolio investments during the quarter. We received recurring cash flows on our portfolio of $51.9 million or $0.77 per common share, exceeding our aggregate common distributions and total expenses by roughly $0.10 per share. We have already received cash flows from our portfolio in October, which were greater than all of our third quarter collections as we benefit from rising rates, strong investment performance and continued growth of our portfolio. Along with our regular monthly common distribution of $0.14 per share, we declared an additional variable supplemental distribution of $0.02 per share for an aggregate monthly distribution of $0.16 per share for each month during the first quarter of 2024.

Inclusive of the October 31st distributions, we’ve now distributed cash to our investors equal to $19.67 per share since our IPO. We also continue to prudently raise capital through our at-the-market program and issued approximately 8.8 million common shares at a premium, generating a NAV accretion of $0.14 per share. These sales generated proceeds of approximately $90 million during the quarter. At the end of October, we had $59.3 million of cash on our balance sheet, thanks in part to the strong October cash flows, providing us with ample dry powder to deploy into new investments. All of our financing remains fixed rate, which gives us continued protection in a rising rate environment. Importantly, we have no financing maturities prior to April 2028.

As of September 30th, the weighted average effective yield on our CLO equity portfolio was 16.29%, and that’s a meaningful increase from the 15.23% at the end of June. New CLO equity that we purchased during the third quarter had a weighted average effective yield of 20.3%, which should help bolster the portfolio’s weighted average effective yield prospectively. Additionally, the weighted average expected yield of our CLO equity portfolio based on market value, held relatively steady just over 27% as of September 30th. As I mentioned previously, during the quarter, we deployed $119 million of net new capital into primary and secondary CLO equity, CLO junior debt, loan accumulation facilities, and certain other related investments. While there are select primary CLO equity opportunities that represented attractive value, by and large, we focus most of our investment effort on the secondary market and for other investments that we believe offer appealing returns.

As of September 30th, our CLO equity portfolio’s weighted average remaining reinvestment period stood at 2.7 years, unchanged from the prior quarter and we remain focused on finding opportunities to invest in CLO equity with generally longer reinvestment periods to enable us to navigate through periods of volatility. I would also like to take a moment to highlight Eagle Point Income Company, our sister company, which trades under the symbol EIC. EIC invests primarily in CLO junior debt. For the third quarter, EIC generated net investment income of $0.51 per share, excluding certain non-recurring items, once again exceeding its common distribution for the quarter. Additionally, EIC just increased its common distribution by 11% to $0.20 per share beginning in January.

EIC has performed very well through the rising rate environment and remains well-positioned to generate strong NII and we invite you to join EIC’s investor call at 11:30 A.M. to hear more. Overall, after we remain active in managing our portfolio and continue to keep a close eye on the broader economy, 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.

Ken Onorio: Thanks Tom. For the third quarter of 2023, the company recorded net investment income and realized gains of approximately $23 million or $0.35 per common share, which is inclusive of a non-recurring excise tax refund of $0.01 per share. This compares to NII and realized losses of $0.05 per share in the second quarter of 2023 and NII and realized gains of $0.47 per share for the quarter ending September 30, 2022. When unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $63.2 million or $0.93 per share for the third quarter. This compares to GAAP net income of $0.11 per share in the second quarter of 2023 and GAAP net income of $0.21 per share in the third quarter of 2022.

The company’s third quarter GAAP net income was comprised of total investment income of $36 million, net unrealized appreciation on investments of $34.8 million, net unrealized appreciation on certain liabilities held at fair value of $4.9 million and realized capital gains of $0.6 million, partially offset by expenses of $12.6 million and distributions on the Series D preferred stock of $0.5 million. Additionally, for the quarter, the company recorded other comprehensive income of $0.6 million. The company’s asset coverage ratios at September 30 for preferred stock and debt calculated pursuant to Investment Company Act requirements or 354% and 524%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%.

Our debt and preferred securities outstanding at quarter end totaled approximately 28% of the company’s total assets less current liabilities. This is within our target range of generally operating the company, which will leverage between 25% to 35% of total assets under normal market conditions. Moving on to our portfolio activity in the fourth quarter through October 31, the company received recurring cash flows on its investment portfolio of $55.3 million. Note that some of our investments are expected to make payments later in the quarter. As of October 31, we had 59.3 million of cash available for investment. Management’s estimated range of the company’s NAV as of October 31 was $8.98 to $9.08 per share reflecting a 3.2% decrease at the midpoint from September 30 as spreads widened.

During the quarter, we paid three monthly common distributions of $0.14 per share and three monthly variable supplemental common distributions of $0.02 per share or aggregate common monthly distributions of $0.16 per share. We have also declared aggregate common monthly distributions of $0.16 per share through the end of March 2024. I will now hand the call back over to Tom.

Tom Majewski: Thanks, Ken. Let me provide a quick update on the loan and CLO markets from the Credit Suisse Leveraged Loan Index generated a total return of 3.37% in the quarter and is at 9.91% year-to-date through September 30 as loans continue to perform strongly. It’s far better than many other fixed income indices. The index had another solid month in October and remains on pace to have its best full year return in nearly 15 years. During the quarter, we actually saw only five leveraged loan defaults, down from 15% in the second quarter. In fact, there was not a single corporate loan default in the month of September, again, evidence of the resilience of senior secured loans and as a result, CLOs despite the various macro concerns that people write about in headlines.

While some recent market reports have expressed concern over loans rising interest rates, the actual data, the default rate and the number of defaults paints a very different picture than the headlines in our view. As a result, at quarter end, the trailing 12-month default rate declined to 1.3%, remaining well-below historical averages. Barring a shock in the next few weeks, we expect 2023 to be a far better than average year for defaults. The company’s exposure to defaulted loans as of September 30th stood at only 40 basis points further proof of the strength of our active portfolio management and construction. Approximately 5% of all leveraged loans are roughly 19% annualized repaid at par during the quarter. This represents a quarter-over-quarter increase and provides our CLOs with valuable par dollars to reinvest in today’s discounted loan market and to offset losses from the few defaults that are occurring.

With a large number of high-quality issuers continuing to trade at discounted prices, CLO collateral managers remain well-positioned to improve underlying loan portfolios through relative value credit selection in the secondary market. Most loan issuers have become proactive in tackling their near-term maturities in an effort to further extend the maturity of their debt, and they continue to offer lenders higher spreads and OID on their newly refinanced loans. As a result, our portfolios continue to have numerous opportunities to build par and increase their weighted average spread, which in turn increases the excess spread we receive on our CLO equity portfolio. On a look-through basis, the weighted average spread of our CLO’s underlying loan portfolios was 3.78% at the end of September.

Notably, that’s an 11 basis point increase compared to the end of June. This measure has actually increased by 20 basis points in the last 18 months. Meanwhile, spreads on the debt tranches issued by our CLOs that were locked in 18 months ago remain unchanged. CCC concentrations within our CLO stood at 6.7% as of September 30th, and the percentage of loans trading below 80 within CLOs is at about 4.4%. Our portfolio’s weighted average junior OC cushion was 4.41% as of September 30th, which gives us ample room in our opinion to withstand potential downgrades or future losses. Our portfolio’s OC cushion remains much higher than the market average, which stands at 3.44%. One of the trends that we are seeing increasingly in the loan market is having private credit funds and BDCs refinance CCC-rated loans out of the syndicated loan market.

A recent example of this would be MISys [ph], which is a large software company. For our CLOs, this represents a par repayment and a reduction in CCC exposure. This is great. We hope more of this happens. We wish MISys frankly, and their new lenders well in the future as private credit funds and BDCs continue to expand, we expect this favorable trend to continue. In the CLO market, we saw $28 billion of new CLO issuance in the third quarter of 2023 and $84 billion year-to-date through September 30th, remaining on pace to eclipse $100 billion once again, while tracking a little below 2022’s pace. We continue to believe that a fair bit of this volume was backed by captive CLO equity funds, which in our view are far less return sensitive than we are, reset and refinancing activity related to CLOs issued during the second half of 2022, which was a small period of CLOs, where quite a few were issued with one-year non-call periods have picked up, but otherwise, there’s essentially no refi reset activity in the market.

Indeed, the AAA weighted average level on our CLO equity portfolio is well tied to where CLOs could be issued today. While the market does give the in-the-money nature of our CLOs financing some credit, we believe the market doesn’t give it full credit and that this represents hidden value embedded in our portfolio. Our weighted average AAA spread is about 144 basis points, and this is roughly 39 basis points in the money today. As we have consistently noted, it’s an environment of loan price volatility where we believe CLO equity or CLO structures and CLO equity in particular, are set up well to buy loans at discounts to par with a very stable financing structure using par paydowns from other loans and outperformed the broader corporate debt markets over the medium term as they have done in the past.

We’re seeing that happen right now and expect that to continue. To sum up, we grew our NAV by 7% during the quarter. We generated net investment income and realized capital gains for the quarter of $0.35 per weighted average common share. We continue to receive robust cash flows during the third quarter and have already collected more cash flow from our portfolio in the fourth quarter than we did in the third quarter. We remain very active in terms of sourcing and deploying investments at attractive yields, investing about $119 million of net new capital and we continue our existing regular monthly distribution and variable supplemental distributions through March of 2024. We further strengthened our liquidity position, generating NAV accretion of $0.14 per share through our ATM program.

And at the end of October, we have about $59 million of cash to deploy into new investments. We continue to maintain 100% fixed rate financing, entirely unsecured, and we have no maturities prior to 2028. This gives us protection from any further increase in interest rates and locks in a very attractive cost of funding for many years to come. We believe the company’s investment portfolio continues to be well positioned, giving our proactive management, the portfolio’s long weighted average remaining reinvestment period at strong OC cushion and consistent recurring cash flows. We also remain pleased to return extra cash to our investors in the form of special or variable distributions and remain opportunistic and proactive as we manage the 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.

See also Ken Fisher Portfolio: 12 Biggest Positions and 13 Best Performing S&P 500 Stocks in the Last 5 Years.

Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

Mickey Schleien: Yes, good morning, Tom and Ken. Tom, I wanted to follow up on your comments about the primary market. You noted that it’s been spotty. And with captive funds holding the majority of the new issue volume that we’re seeing. And that’s clearly a function of the high — or I should say, wide AAA spreads. That process or that lack of primary market puts pressure on your financial performance in that, it makes it more difficult for existing CLOs to refinance or reset as you noted. So what’s it going to take for that primary market to finally start to operate on a more normal basis, which is something you would expect given that the overall fundamentals, as you mentioned, in the data are pretty good?

Tom Majewski: Yes. Good morning, Mickey, good question. AAA is ebb and flow, I guess, over the years, if you think back to our performance, again, we’ve been public for 9 years now. There are periods of time where the market’s ripe and we’re resetting and refinancing absolutely everything. The bad news during those times is if you look at our weighted average loan spread, it’s typically going down. And if you look at 2017 and 2018, you’ll see we had — I think of it as reset Mania here, at the same time, if you look at the portfolio decks, and these are all on our website going back ages ago, you’ll see in many quarters, the loan spread is trickling downward. So the bad news today, we didn’t do any refis or resets. The good news today is we picked up 11 basis points in spread in the quarter as loans keep getting reset and loans themselves get refinanced wider.

So it’s a little bit of — while I wish we were resetting stuff as well. I’m also very happy that our weighted average loan spread went up 11 bps, multiplied by the leverage of CLOs, that’s obviously very impactful to our portfolio and certainly one of the drivers of NAV going up 7% during the quarter. Some of the things going on in the world broadly of AAA investing. Obviously, there’s always currency fluctuation, certain of the regulators in Japan. We continue to ask questions, although we do note that there are quite a number of Japanese banks that are active some of the new Basel rules as proposed, we believe will make holding CLO AAAs more attractive for banks all around the world. Also some of the NAIC considerations underway, last we’ve heard also suggests AAAs will become even more attractive to hold.

So there’s some good news there. Probably the one segment of the market that’s missing that might be the most impactful or some of the large US money center banks. And indeed, if you look in their filings, you can see many of the largest banks in the country have in some cases, 1%, perhaps even more of their portfolio and CLO securities. That’s the one market participant. Frankly, that would be nice to see more of. But while we’re obviously disappointed, we’re not resetting and refinancing at the end of the day, what we care about is the difference between the spread on our assets and the spread of our liabilities. And this quarter, we made it through the spread of our assets going up. So — we like to win both ways, but we typically have a good habit of having one of them go in our direction, which we’re seeing on loan spreads right now.

Mickey Schleien: That’s very helpful, Tom. That’s it for me this morning. Thank you for your time.

Tom Majewski: Great. Thanks, Mickey.

Operator: Thank you. Our next question comes from the line of Ryan Lynch with KBW. Please proceed with your question.

Ryan Lynch: Hey, good morning. My first question just has to do with some combination of you guys raised quite a bit of equity this quarter in combination with you’re talking about kind of most of that was deployed in the secondary market. And so can you just talk about what sort of secondary opportunities you guys are seeing that drove the decision to raise quite a bit of equity this quarter? And do you see those trends continuing thus far into the fourth quarter?

Tom Majewski: Yes is the answer to the last question in terms of attractive secondary opportunities. The pickup in the — the difference in the spread that I was just talking about with Mickey, of loan spreads versus CLO debt spreads in general, is moving in our favor. Typically, when someone models the CLO, they model spread tightening over time, we’re actually getting spread widening, which is great. They’re a pretty robust supply of secondary CLO equity opportunities, both majority positions and in some cases, minority positions or minority where we see a path to build to majority where, frankly, the yield opportunities there, loss adjusted applying punitive portfolio stresses for the tails and portfolios, typically pencil out, frankly, to stuff well into the 20s on a loss-adjusted basis, There was one investment that came in at — a new investment that came in at a lower yield where there’s other strategic reasons for the company to be participating.