Eagle Point Credit Company Inc. (NYSE:ECC) Q3 2024 Earnings Call Transcript

Eagle Point Credit Company Inc. (NYSE:ECC) Q3 2024 Earnings Call Transcript November 14, 2024

Operator: Greetings. Welcome to the Eagle Point Credit Company’s Third Quarter 2024 Financial Results Call. At this time, all participants will be in list only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I will now turn the conference over to Garrett Edson of ICR. Thank you. You may now begin.

Garrett Edson: Thank you, 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. As a reminder, before we begin our formal remarks, the matters discussed in this call include forward-looking statements of 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 the 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 2024 financial statements and our third 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.

I will now turn it over to 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. We’d like to invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. Recurring cash flows from our portfolio for the third quarter were $68.2 million, or $0.66 per share, in line with our quarterly aggregate common distributions and total expenses. This compares to $71.4 million, or $0.79 per share, in the previous quarter. The lower recurring cash flows were driven in part by loan spread compression and off-cycle semi-annual interest payments received from certain of the assets in our CLOs. Additionally, approximately 10% of our CLOs, principally new issue investments and refis and resets, hadn’t yet made their first payment dates in the third quarter.

Some fluctuations are expected in our cash flows from quarter-to-quarter due to new investing activity and some semi-annual payers in our CLOs portfolios. Cash flows received in the fourth quarter so far totaled $73 million, outpacing both the second and third quarters. The company generated net investment income less realized losses of $0.23 per share, which comprised of $0.29 of net investment income per share and about $0.06 per share of realized losses. The realized losses included an $0.08 per share write-down of amortized costs to fair value associated with three legacy CLO equity positions, which had already been reflected in the company’s NAV as an unrealized loss. We also realized $0.02 per share of gains, principally from selling appreciated CLO debt positions as part of our portfolio rotation strategy.

Excluding the accounting reclassifications, net investment income and realized gains were $0.31 per share, in line with our second quarter results. NAV as of September 30 was $8.44 per share, and it rose approximately 1.9% to $8.60 per share at the midpoint of our range as of October 31. The third quarter was very active for us in deploying capital. Two of our major portfolio objectives were to rotate from BBs into more CLO equity and to continue lengthening our portfolio’s weighted average remaining reinvestment period. While there’s debate in the market right now if rates will go up or down from here, it’s an important reminder that the vast majority of both the assets and liabilities are floating rate within CLOs. The impact of moderate rate moves up or down typically does not have a big impact on CLO equity cash flows.

Ken will walk you through more of our financial results shortly, but I’d like to take you through some additional highlights from the third quarter. We deployed over $171 million in net capital into new investments. The new CLO equity purchases that we made during the third quarter had a weighted average effective yield of about 18.5%. During the quarter, we also completed 14 reset transactions, lengthening the portfolio’s weighted average remaining period to about three years. This is 47% above the market average of about two years. Our Series AA and Series AB non-traded 7% convertible perpetual preferred stock offering generated net proceeds to the company of approximately $10 million, and we believe this offering will continue to be significantly accretive to ECC over time.

We issued approximately 7.5 million additional common shares through our at-the-market program, or ATM. These shares were issued at a premium to NAV, generating NAV accretion of $0.08 per share. We also issued some preferred stock under the ATM program during the quarter. We continue to sell CLO BBs from our portfolio during the quarter to harvest gains and rotate the proceeds into CLO equity and other investments that we expect to generate additional yield. We expect to continue this rotation in the near term. During the third quarter, along with our regular monthly common distribution of $0.14 per share, we paid an additional variable supplemental monthly distribution of $0.02 per share for an aggregate monthly distribution of $0.16 per share.

Consistent with our long-time financing strategy for operating the company, all of our financing remains fixed rate, and we have no financing maturities prior to April 2028. In addition, some of our preferred stock financing is perpetual with no set maturity date. Our portfolio is actively managed towards long remaining reinvestment periods to drive performance and guard against periods of future market volatility. In this prolonged environment of tightening CLO debt spreads, we have been active in refinancing and resetting our investments throughout the year. As I mentioned earlier, during the quarter we completed 14 resets and refinancings, and which successfully extended the reinvestment period of each of the reset CLOs to five years. Even with a large number of resets in the quarter, our current pipeline of additional resets and refinancing opportunities remains robust.

Our proactive focus on these specific areas leads us to where we stand as of September 30, with our CLO equities weighted average remaining reinvestment period, or WARP, standing at 3.0 years. This is 0.3 years longer than where it stood on June 30, despite the lapse of three months time, and 0.6 years longer than where it stood at the beginning of the year. Our portfolio is 47% above the market average of 2.0 years. In my opinion, that’s very important. We continue to believe keeping our WARP as long as possible is our best defense against future market volatility. I would also like to take a moment to highlight Eagle Point Income Company, which trades on the New York Stock Exchange under symbol EIC. EIC primarily invests in CLO junior debt.

EIC continues to perform well, and we believe remains well-positioned to continue generating strong net investment income. We invite you to join EIC’s investor call, which will be at 11.30 a.m. 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 loan and CLO markets. I’ll now turn the call over to Ken.

Ken Onorio: Thanks, Tom, and thanks, everyone, for joining our call. For the third quarter, the company recorded NII less net realized losses of approximately $24 million or $0.23 per share. This compares to NII less net realized losses of $0.16 per share in the second quarter of 2024 and NII unrealized gains of $0.35 per share in the third quarter of 2023. The third quarter of 2024 included the effect of $0.08 per share of realized losses as a result of the write-down of amortized costs to fair value of three legacy CLO equity investments. Since the fair value of these investments had already been previously reflected in the company’s NAV, the realized loss was an accounting reclassification from an unrealized loss. There was little to no impact to NAV as a result of the write-down.

Excluding the reclassification, our third quarter NII unrealized gains would have been $0.31 per share. When unrealized portfolio depreciation is included for the third quarter, the company recorded GAAP net income of approximately $4 million or $0.04 per share. This compares to GAAP net loss of $0.04 per share in the second quarter of 2024 and GAAP net income of $0.93 per share in the third quarter of 2023. The company’s third quarter net income was comprised of total investment income of $47.1 million offset by unrealized depreciation on certain liabilities held at fair value of $9.8 million, unrealized depreciation on investments of $6.8 million, realized losses of $6.4 million, expenses of $17 million, and distributions and amortization of offering costs on temporary equity of $3.2 million.

Additionally, the company recorded other comprehensive income of $4.4 million for the quarter. The company’s asset coverage ratios on September 30 for preferred stock and debt calculated pursuant to Investment Company Act requirements were 326% and 735% respectively. These measures are comfortably above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 31% of the company’s total assets less current liabilities, just above the midpoint of 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 common regular monthly distributions for the first quarter of 2025 of $0.14 per share.

The company’s current estimated taxable income for the 2024 tax year is expected to be fully distributed to common stockholders for the same tax year. As a result, the company will conclude its monthly variable supplemental distribution as of December 31, 2024. Moving on to our portfolio activity, so far in the current quarter through October 31, the company received recurring cash flows on its investment portfolio of $73 million. This is above the full second quarter and full third quarter cash flow amounts driven by new investments making initial distributions and certain assets and underlying portfolios making their semiannual payments. As Tom noted earlier, since a portion of our CLO’s underlying portfolios are now invested in bonds, which typically pay interest on a semiannual basis, we do expect some fluctuations in cash flows from quarter-to-quarter.

I will now hand the call back over to Tom for his market insights and updates.

Tom Majewski: Thanks, Ken. Let me walk everyone through the trends we’re seeing in the loan and CLO markets. Starting off with loan performance, the Credit Suisse Leveraged Loan Index continued to perform well in the third quarter, generating a total return of 2.08% and 6.6% year-to-date as of September 30. The index continued its upward trajectory in October, and loans are now up about 7.5% for the year through October 31. During the third quarter of 2024, we saw only three leveraged loan defaults, and that’s down from six defaults in the prior quarter. As of quarter end, the trailing 12-month default rate declined to 80 basis points, remaining well below the historical average of 2.63% and most dealer forecasts. ECC’s portfolio’s default exposure as of September 30 stood at 0.49%.

Throughout the year, we have noted how research desks have overestimated corporate default risk for 2024. Also during the third quarter, approximately 6% of all leveraged loans, or roughly 23% annualized, were repaid at par as loan issuers remained proactive in tackling their near-term maturities in an effort to further push out their debt maturity schedule. Unfortunately, some of the repayments were also part of refinancing by companies where they were able to tighten the spreads on their loans. On a look-through basis, the weighted average spread of our CLO’s underlying loan portfolios was 3.54% at the end of September, and this compares to 3.63% at the end of June. Partially offsetting this, however, our portfolio’s AAA spread also tightened partially due to our refinancing and reset activity to 1.44%, and that’s a 3-basis point decline from the 1.47% where it stood at June 30.

In terms of new CLO issuance, we saw $41 billion issued during the third quarter and $142 billion year-to-date through September 2024, leaving us on pace to eclipse the record of $187 billion set in 2021. During the third quarter, we continued to invest a significant amount of capital in both primary and secondary CLO equity, which was weighted more towards the secondary market as the primary market saw a run-up in loan prices during the quarter. CCC concentrations within CLOs market-wide stood at about 6.7% as of September 30, and the percentage of loans trading below 80 within CLOs was about 4.3%, both improvements from the prior quarter. Our portfolio’s weighted average junior OC cushion was 4.3% as of September 30, which gives us ample room to withstand potential future downgrades or losses.

Our portfolio’s OC cushion remains well higher than the market average of 3.3%. We continue to believe CLO structures and CLO equity in particular are set up well to buy loans at discounts to par during periods of volatility and ultimately outperform the broader corporate debt markets over the medium term, as they have done in the past. To sum up, we generated net investment income and realized gains for the quarter of $0.31 per common share, excluding the accounting reclassifications we mentioned earlier. Recurring cash flows remain solid in the third quarter, in line with our regular common distribution and total expenses, and we’ve seen a nice increase in recurring cash flows so far in the fourth quarter. We sourced a significant number of new investments with attractive yields, investing $171 million in net new capital during the third quarter.

Our portfolio’s current WARP of 3.0 years increased considerably during the third quarter and is just less than 50% longer than the market average. We expect this measure to increase further as our new issue investing and reset activity continues, which is laying the groundwork for enhanced net investment income over time. Our existing regular $0.14 monthly common distribution was declared through the end of March 2025. We also significantly strengthened our balance sheet through our non-traded 7% perpetual convertible preferred stock offerings and NAV accretive common stock issuances through our ATM program. We continue to maintain 100% fixed rate financing with no maturities prior to 2028, locking us into an attractive cost of capital for many years to come.

Further, an increasing amount of our capital is now in the form of preferred perpetual financing with no set repayment date. Importantly, we still see an abundance of primary and secondary CLO investment opportunities and have a robust pipeline of refinancing and reset opportunities to further enhance the value of our portfolio. In closing, we continue to make significant headway towards enhancing our net investment income over time. Our proactive investment approach has resulted in the portfolio’s greater-than-market-average WARP, strong OC cushions, and strong recurring cash flows. We believe our portfolio is well-positioned for strong performance moving ahead. We thank you for your time and interest in Eagle Point. Ken and I will now open the calls to your questions.

Operator?

Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. And our first question today is from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your questions.

Mickey Schleien: A couple of questions this morning. The high level of out-of-court restructurings we’re seeing is creating these sort of zombie companies with unsustainable capital structures, and that effectively just kicks the can down the road. I’m curious how you see those transactions potentially impacting the CLO market in the future, and how are CLO managers contending with these deals and that risk?

Tom Majewski: That’s a really good question. What you’re talking about is what I guess is loosely called LMEs or liability management exercises. And what we’re seeing is the pendulum is swinging back and forth between borrowers and companies, depending on the tone in the market. While the vast majority of companies are not facing problems and indeed the default rate is very, very low, literally three defaults out of well over a thousand companies in the quarter, there are some companies additionally that are going back and modifying their debt or taking what was the senior secured piece and putting a partially senior, partially junior, whatever it may be. In some cases, creditors agreeing to take even a haircut in an out-of-court manner to keep things going by doing things out of court, which all is equal is probably cleaner and more efficient.

So that is kind of perhaps an unreported default number. When these things happen, typically you’re not losing all your money within a CLO, but you might take a little bit of a write-down on any individual piece. So it’s net a bad fact in the market that said it’s still measured in a very low percent of all companies that are kind of going through those sort of exercises right now. So on one hand, it’s not that big of a deal, but it is greater than zero of a deal, frankly. And one of the things that we focus on in our strategy, we obviously like collateral managers who go for loans with the tightest documents. Getting tight documents is important, but not every loan is going to have those, frankly. And the better the credit, probably the looser the documents will be.

So it’s a two-edged sword there. But many of the collateral managers we work with are some of the largest in the market and by virtue of their scale can have the most influence amongst the group of lenders when going through these things. So it’s not in the good news category. That said, it’s not, in my opinion, it’s not a dire situation. And certainly the overall default rate of failure to pay or bankruptcy we’re counting on one hand this quarter the number of companies that went through that process.

Mickey Schleien: Thanks, Tom. I appreciate that clarification. And just one follow-up question. I think you said something in your prepared remarks about the attractiveness of the secondary versus the primary market, but I didn’t quite catch it. I did see that there was an uptick in CLO AAA spreads toward the end of the third quarter. I don’t know if that’s continued into October, but how is that impacting the opportunity to refinance deals in your portfolio, which obviously would help you defend the arbitrage?

Tom Majewski: Sure. So we net lost a little bit of ground, I guess, in the quarter in that the loan spreads tightened more than we were able to lower our weighted average AAA spread. So that’s not our favorite. We did quite a few resets during the quarter. Our weighted average AAA spread is down to 144 over. The market right now broadly for Tier 1 AAAs, mid-130s would be the number I’d put on it. Obviously, any given CLO can vary. It might have ticked up a tiny little bit in the end of October, but since certainly post the election, we’re not seeing any sort of widening trend and, if anything, a little bit of tightening trend in CLO debt. Now, when we look across our portfolio, obviously that 144 is a weighted average. I’m looking right now.

There are CLOs in some cases with 190 over AAAs in our portfolio. We might even have one or two left that still have a 2 handle. There’s a couple, actually, that still have AAAs well over 200. One of those actually priced a reset earlier this month, and we lowered the weighted average liability cost by over 100 basis points on that CLO. That’s not reflected in the Q3 numbers. You can see the next CLO in that series has, I think, 232 senior AAAs and rolls off of non-call next year. So even if AAAs widen 10 basis points or something like that, I’ve still got 80 or 90 bps of tightening that I can do there. Overall, it feels like spreads are tightening again. The risk on post-election trade that’s permeating across many assets generally moving that way, certainly in the CLO market as well, but even if it stays flat or widens, absent by some sort of exponential widening, which I wouldn’t expect, we’ve got a lot of room to continue tightening on the liability side of our CLO balance sheet.

The other portion about that, though, which is important, on a reset, we love the cost savings, don’t get me wrong, and that’s great. Getting the weighted average remaining reinvestment period longer is so, so important. It is a very real long-term risk mitigant in our investment strategy. What I mean by that is, let’s go back in time to March of 2020. There’s no CLO collateral manager who didn’t wish they had more reinvestment period remaining in their CLO. While we’re certainly not predicting a March 2020, April 2020 event anytime soon, we know exogenous events do happen from time to time. The number one thing that, in our opinion, is the defensive measure is to have as much RP left when things go off sides in the market. And if you look at the chart, which is in our investor presentation, I know we’ve got it in here somewhere.

I think we do. Our weighted average, maybe we don’t have it, but you can see, over time, our weighted average remaining reinvestment period has been as low as around two years. We’ve gotten it up to three years, and even just in the last quarter, we got it up by 0.3, despite the passage of 0.3 the other way. Right now, in strong markets like this, we’re working on lengthening the weighted average remaining reinvestment period as a very important priority in our portfolio.

Mickey Schleien: Thanks for that, Tom. That’s very helpful. I take the opportunity to wish you and your team a happy Thanksgiving. That’s it for me this morning.

Operator: [Operator Instructions]. The next question is from the line of Matthew Howlett with B. Riley Securities. Please proceed with your question.

Matthew Howlett: Let’s talk about NII, sort of X, many type of realized gain or realized loss. What’s the expectations going forward? I mean, I’d look at it and say with sort of the 18 plus percent yields you’re seeing on the acquisition side plus the recycling of some lower yielding bonds plus obviously these accretive deals you’re doing out there, it should continue to grow. I mean, just talk a little bit about what we should think about. I noticed the existing yield came down on the board. I want to hear what’s driving that but talk a little bit about the NII trajectory going forward.

Tom Majewski: Sure. A very, very good question. What we’ve been working on is a multipronged strategy to get NII up. It’s something we do every quarter. We made a lot of progress on a bunch of things, and we faced some headwinds as well. To kind of walk you through the menu of things that we’re working through, and these will continue to change and evolve over time, is keeping cash as low as possible. We make good investments, but sometimes cash has gotten a little higher than it should have, frankly, and we’re doing our absolute best to keep the company as fully invested as possible. Due to the RIC rules, because we have term unsecured debt outstanding, we can’t also have a secured revolver, so it makes it a little tricky. But we’re doing it as best as possible to keep cash employed.

The weighted average effective yield on many of the CLOs that were reset or re-fied actually went up a bunch quarter-over-quarter. That’s very good, and that adds to net investment income right away. One of the other things we’ve been working on is selling down our CLO debt. And we talked about that. We actually realized a couple of pennies of gains from selling CLO debt and rotating back into CLO equity. Meanwhile, in general ECC is a CLO equity fund, we did buy some CLO debt when it was typically in the 80s and low 90s. Now most CLO debt has rallied back to around par, so we’re taking those gains that turn out to be usually very accretive investments, where if you make a 5 to 15 point gain in price, and now rotating that back into CLO equity, which is certainly going to have a higher yield in nearly all cases than the CLO debt that we’re selling.

A couple other things going on, the continued issuance of the non-traded Series AA and Series AB perpetual convertible preferred. That has a 7% monthly distribution rate on it, so that’s highly attractive for the company and is obviously perpetual as well, which is great, so we don’t ever have to worry about repaying it. We like that. Then finally, as we look at our debt capacity where we look, we target running the company between 25% and 35% leverage, and we set that as a band. I think we’re at 31% right now, which would suggest we have some room to add potentially more debt over time, maybe in the near to medium term. One of the things, and we have a mix of baby bonds and preferred stock, and while we obviously love perpetual preferreds, those are great investments unto themselves and very accretive for the company.

We have a very shareholder-friendly fee structure, unlike several of the other CLO equity-oriented funds in the market, where we don’t charge any management fees on assets invested, which are funded through baby bonds. One of the things that we’re always considering as we manage the right side of our balance sheet would be potentially adding some new baby bonds into the stack. We certainly have plenty of headroom in our overall ratios. The flip side, which moved against us, is this darned loan spread compression, and the loan spreads were down, I think, about nine basis points, memory serves?

Ken Onorio: Yes.

Tom Majewski: Nine was the number, and that was due to the good, I love saying only three companies defaulted. That’s great news. When that’s happened, sometimes that means the market’s pretty good, and a lot of other companies are refinancing their debt tighter while also kicking out their maturities. So we did all of those things I talked about in varying degrees of rotating the portfolio, getting cash as close to zero as possible, continuing the Series AA issuance. The flip side, and resetting and refinancing, we did all those things. The headwind we faced was spreads tightening on our overall portfolio, and that was probably the number one thing we did not like happening in the quarter. What I will say is that has abated, in my judgmental opinion, post-quarter end, whereas over the summer, I get news updates on loans repricing, repricing, repricing, and extension, and I never liked those.

That has slowed, and you can see the prepayment rate on loans has begun to slow since quarter end. My expectation is that the loan repricing wave is, while it’s not over, it’s certainly slowed significantly versus the summer. Where I sit right now, it feels like the headwinds are lightening, and then we’re pushing the gas as hard as we can on the refis and resets, and some of these late 2022 vintage CLOs have some of the highest debt costs, so we’re working very hard to get those ripped out. It’s always a balance. The flip side, I wouldn’t be talking about loan spread compression if we were talking about defaults. It would be one of the two. This is probably the more fun version to deal with, I guess, between the two, but we’ve been really focused on a lot of different levers to get NII up.

We’ve got more arrows in the quiver. We have faced some headwinds, but those headwinds are abating. Long answer, but the number one reason I gave you such a long answer is those are all the things we’re working on, and a key takeaway I’d like you to leave with is, we’ve got a lot of different things we can do, and we’re continuing to pull on each of those levers. The flip side, we did have a headwind pushing us back.

Matthew Howlett: I appreciate the explanation and the thoroughness of this. I know you don’t provide guidance, but the trajectory with that $0.31 is clearly upwards if you could continue to execute.

Tom Majewski: That is certainly our objective, yes. We don’t provide guidance, but we’d like it to be exponentially higher. We’ve got a lot of wood to chop to get there, but we have a lot of levers to pull to continue to get that number up, and it’s a very important focus for us here.

Matthew Howlett: Great. The next question is the cash flows, since I’ve covered the companies, have always run above GAAP. I know they’re down a little bit in the quarter. You explained why they were down, but they’re back up in October. I’ve asked this before. How long is this phenomenon going to continue? And then, two, I’ve got more questions about why the supplemental dividend was discontinued than I ever thought it would be possible. Walk me through how you think about dividends high enough. What about the supplemental and excess dividends? Just for a first start with the excess cash flows. This is an incredible phenomenon. It’s been going on for a long time. It’s back up in October. Is this just going to stay high as long as defaults remain low?

Tom Majewski: In my expectation, yes. The nice thing about CLO equity in general is it generates gobs and gobs of cash flow. That’s a scientific and quantitative term, but it really just generates tons of cash. There are a few alternative investments in the world, in my opinion, that generate so much front-loaded cash flow. It moves around a little bit from time-to-time. The semiannual pay on the sum of the bonds underlying. We have a small portion of bonds in the CLOs. It moves around a little bit. Then we deploy a lot of cash. There’s $171 million of net cash in a quarter, but most of that was after the July payment dates. Hence, the October cash flows were up quite a bit versus the prior quarter, both due to semiannual payers, but also due to the early investments we made in the third quarter making payments.

So that’s good. I’ve been doing this 25, 30 years and, in my experience, the CLO cash flow machine just keeps going. The marks may move up and down a little bit here and there, but the cash has a pretty good habit of just keeping coming. It’s interesting you talk about defaults. Defaults have very little impact on CLO equity cash flows. Odd as that sounds, as long as we don’t trip an OC test, the principal impact of a default on CLO equity cash flows is that the terminal value is less. Let’s say we bought a loan at par at default. We recover $70. The collateral manager takes that $70 and goes and reinvests and buys a new loan, probably around par. Unless it’s a market-wide sell-off, maybe they can buy a new loan, a secondary loan around $70.

But a default doesn’t come dollar for dollar out of CLO equity cash flows. So even if you look back to 2020 when defaults picked up or back to 2015 or things like that, and we publish all this on our website, you have to click back a few pages, it doesn’t have a big impact on the ongoing cash flows. Defaults really just impact your terminal value. One of the things that kind of gets lost when you’re thinking about CLO and putting loans into CLOs, interest income is far more valuable than return of principal on the underlying loans. Because we get the interest every single quarter, whatever principal’s left over, we’re going to get 3, 5, 7, 10 years in the future. Just throw generically a 15% discount rate on it. Cash flows today versus cash flows five years from now, assuming 15% is the right number, I’m just picking that number out of the air, there’s a big difference in value.

Any pickup in defaults, we wouldn’t expect to have a meaningful impact on CLO equity cash flows absent some OC test failures. Bu we have a very good track record of minimizing those. Then you had the second question around the variable supplemental distribution, which concludes at the end of this year. That was an additional $0.02 a share. One of the things that as we’ve grappled with managing the company, and Ken and I, we debate this, we kick this around, taxable income, GAAP income, and cash flow in CLOs, in my experience, has never been equal in any given year. We have a page presentation on our website back from, I think, August of 2015, which is the most downloaded thing ever on our website, which has the GAAP tax cash reconciliation for any one specific generic CLO.

I invite you to take a look at that. There are times when we’ve had almost no taxable income because of some losses realized in CLOs that were made up by other things bought at discounts, and there’s been times when we’ve had taxable income far greater than the cash that we’ve received and have had to declare specials. We’ve done everything from doing lump sum, maybe did a $0.50 special one time, it varies. What we saw, though, when we declared that $0.50 special was, the stock went up $0.50 proverbially the next day, and what that did, in our opinion, was rewarded all shareholders, but someone who randomly bought the stock at 3.59 p.m. that day, voila, they had a little windfall. What we moved to, and this is an advice from research analysts and investors, is if you look like you’re going to have a spillover situation, pay a variable over a period of time, which is what we’ve done.

Due to a lot of the refis and resets that we’re doing right now, this is a plus and a minus, when you do a reset of a CLO, you get to take a write off of the previously unadvertised issuance cost related to the old CLO debt. So, while I think we’re getting a tax deduction is great, everyone likes tax deductions, so that’s good, the flip side of that is that it’s lowering our taxable income a little bit this year, and right now, based on our current projections, we don’t anticipate having any spillover income into 2025 from our current tax year, which ends November 30, 2024. So, we made the decision to discontinue the variable supplemental. We were very careful. We used as many caveated words and naming that thing as possible because we knew it might come and go.

We think of the company as paying out $0.14 a share per month, that’s the bogey we’re working towards. We had that overage to deal with some spillover from last year and even the year prior, maybe, but where we sit right now, it looks like we might have a little distribution excess of taxable income. What happens next year, it’s hard to say. Taxable income is very difficult to predict in a CLO because things that happen in the last month of a tax year of a CLO can change its entire taxable trajectory for a year. So, we do the best we can and we’ll continue monitoring. I think our base case though is to the extent we do have spillover income in future years, which we’re not predicting for this year, is to have those little drips coming out versus a big bang because it seems we’d rather reward long-term shareholders than that proverbial 359 buyer.

Matthew Howlett: Right. The old adage is that stocks don’t get credit for special dividends. They just never really do, no matter what industry it is. I hear you. I guess you won’t be paying a big excise tax then, which I guess is a good thing.

Tom Majewski: No excise tax is forecast at this point, correct.

Matthew Howlett: If people aren’t happy with an [18-add percent] [ph] yield, I don’t know what will get them excited. I hear you. The regular dividend is great as it is and we look forward to continued success and continued growth. I appreciate all those answers, Tom. Thank you very much. Great.

Operator: The next question is coming from the line of Paul Johnson with KBW. Please proceed with your questions.

Paul Johnson: I was just wondering, maybe trying to get your thoughts on next year sounding like activity could potentially really have a chance to be a big year overall for the loan market as well as just the private credit markets, but obviously more so for the loan market. For you guys, how are you feeling about an upcoming vintage if we get such an environment? What does that mean for our CLO equity investors?

Tom Majewski: Sure. Overall, what we look at is with the changes going on in Washington, probably more business activity in general, certainly a very pro-business setup in Washington coming up for next year. Does that ultimately turn back on M&A, which certainly has been slower generically than it has been in prior years? I think that’s a very good fact, which will continue providing increased flow of loans, although CLOs can buy loans in the secondary market just as well. We’re not dependent on new loan flow. And then overall, it certainly feels like very much a risk-on market, which the way we manage our portfolios is going to be focusing on optimizing both the right side of the balance sheet of the company and optimizing the right side of the balance sheet of our CLOs where possible.

We’ve completed as a firm over the last decade well over 100 corporate actions within our CLOs, whereas the majority investor, we have the protective rights to go and do resets and refis. My expectation is CLO debt spreads continue to tighten from here and into the new year, and that will open up additional opportunities for us to continue to keep ripping out costs on the right side of the balance sheet. Now the flip side, if I’m right in my prediction, that probably means loan spreads continue to tighten a little bit. My sense is that pace is slowing, and maybe my hope would be, I can’t assure anyone of this, we’re able to rip more costs out than get taken out on the asset side of the spreads. But we’ve got a very robust calendar for the balance of this year and into next year for more resets on the right side of the balance sheet.

One of the things we also see in the first quarter in many years is kind of by mid to late January, in many years we’ll see a nice tightening wave in CLO debt levels, and many insurance companies and other kind of more traditional corporate investors might have an annual investment budget. A phrase you’ll hear on a lot of bank trading desks is, so and so has spent their budget this year by November or December, which sometimes slows tightening. Against that, if you’re a bond buyer at an insurance company or a bank CIO office, you turn up January 1, you probably have a new budget to deploy X billion dollars into CLOs, and they get to work right away. So there’s often a Q1 tightening environment on CLOs, and we’re queuing up, both we have a number of loan accumulation facilities, which are slated market conditions dependent to be issued into new CLOs in the new year, and to the extent spreads tighten, we’ll expect to continue to reset, refi calendar here, which is quite robust.

So net, we’re pretty optimistic on the market. Rate movements, maybe we’ll see a little more cut, maybe not. Doesn’t really impact us that much. I think a more pro-business, business friendly, reduced regulation environment, all else equal, is certainly a catalyst for more M&A, which would net be a good fact for us. So we see a lot of good facts out there, and we’re going to do our best to capitalize on all of them.

Operator: The next question is from the line of Greg Kraut with KPG Funds. Please proceed with your question.

Greg Kraut: Thank you for your presentation. Very simplistic question. How do you increase the share price?

Tom Majewski: A combination of continued cash flow to the shareholders, increase in NAV. Those are the two things that we can do. We think the share price is depressed to where it should be, frankly, on a certainty of cash flows basis. If you look back over years and years, we’ve published — we’ve got a decade of data on the cash that our portfolio generates through the COVID period, through the energy challenges in 2015, through some China questions in 2015 and 2016. What keeps coming is strong and consistent cash flows on our portfolio. We try and do as best as we can to keep people educated about that. We’re a decade in and the cash has kept coming. Against that, the moniker of CLO, we still get questions, aren’t these CDOs and didn’t 2008 happen as a result of this product, which certainly it did not.

Our job is to get as much cash coming through the system and getting as much cash out to our investors when we can. Subject to all the different [rec] [ph] rules and things like that. We try our best to publicize the long-term stable cash flows and, frankly, then how well the company did during periods of COVID. You look at the increase in NAV from January 1 of 2020 to the end of December 2021, a big pickup in NAV, despite the challenges in the market and the world. People hear the tough stuff about CLO. Our job is to both generate cash and keep educating people, which we’re doing our best on, frankly. We’ll keep trying to do better.

Operator: At this time, we have a question coming from the line of Paul Johnson, KBW.

Paul Johnson: Thanks. Just one more, if I could. What sort of conditions could exist, I guess I’m talking about next year, if any, for the potential for, I guess, NAV upside to CLO equity investments or, I guess, has the spread compression both on the asset and liability side just basically created more of a neutral impact for CLO equity? But if any, is there any sort of NAV upside that’s embedded either in CLO equity in general or just ECC’s portfolio?

Tom Majewski: Sure. It’s important. There’s two different NAVs out there. Each CLO has a NAV unto itself, which is a factor in the valuation of a CLO, but a CLO equity trades at a price which may be higher or lower than the NAV, in many cases, higher. And our NAV is based on the fair value of the securities we hold, which is the price at which we believe we can sell the CLO securities. So if we focus within CLOs to see those NAVs go up, it’s loans at discounts paying off at par, buying things at discounts that go up in price. Loans are, in many cases, around par these days, so a lot of stuff hasn’t, a lot of the upside in NAV on the underlying CLOs has happened. That said, there still are discounted names, many of which will ultimately pay off at par, in my expectation, that can have the potential to further increase NAVs and CLOs. When we get to ECC’s NAV, the things that we look at are basically getting the price of the securities in our portfolio up and buying securities that will gain in price.

Some of the things that are challenges to us, I remember that $0.50 special distribution we paid ages ago, that was due to a tax GAA cash mismatch. That’s just dollar for dollar, outside it reduces NAV. We didn’t have gap earnings to support that, that’s just one particular thing. Obviously, getting cash to shareholders, if that’s the worst thing we do, we’ll be guilty. In our case, the best period for NAV we had, frankly, was the COVID period. One of the best periods from January 1, 2020 to December 2021, NAV of the company went up significantly over time there because we were able to proactively manage the portfolio quite aggressively. The things that we can do to get the value of our securities up, frankly, are the refis and resets. While CLO equity trades on a CLO that could be reset, the price the market would pay for that factors in that some of that is going to happen, but you don’t really crystallize it until you’ve actually consummated and priced or closed the reset.

The number one thing we can keep doing to get the value of our portfolio up is tending it very carefully, continuing to buy things that on the right side of the balance sheet we can improve upon, and then buying CLOs that will outperform the effective yield assumption that we’re making. The number one thing we focus on is getting as much cash off the portfolio as possible. That’s first and foremost if you invested at the stock, at the IPO, you’ve gotten about 107% of your IPO price paid back in cash dividends, so that unto itself is very good. We like that. We want to make that number even higher and higher. The things we’ve got to keep focusing on are how do we get the prices of the securities in our portfolio up, which we’re doing through our proactive management, particularly on the reset and refi side.

Operator: At this time, I’d like to turn the floor back to Tom Majewski for closing remarks.

Tom Majewski: Great. Thank you, everyone, very much for your time and attention. Ken and I are available later today if anyone has any follow-up calls, and we appreciate your interest in Eagle Point Credit Company. Thank you.

Operator: Thank you. This does conclude today’s teleconference. We thank you for your participation. You may now disconnect your lines at this time.