Eagle Point Credit Q4 2024 Earnings Report

Eagle Point Credit EPS Results

• Actual EPS: $0.27
• Consensus EPS: $0.28
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: N/A

Eagle Point Credit Revenue Results

• Actual Revenue: $49.55 million
• Expected Revenue: $49.76 million
• Beat/Miss: Missed by -$210.00 thousand
• YoY Revenue Growth: N/A

Eagle Point Credit Announcement Details

• Quarter: Q4 2024
• Date: 2/20/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, February 20, 2025
• Conference Call Time: 10:00AM ET

Eagle Point Credit (NYSE:ECC) is a closed ended fund launched and managed by Eagle Point Credit Management LLC. It invests in fixed income markets of the United States. The fund invests equity and junior debt tranches of collateralized loan obligations consisting primarily of below investment grade U.S. senior secured loans. Eagle Point Credit Company Inc. was formed on March 24, 2014 and is domiciled in the United States.

Eagle Point Credit Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Greetings and welcome to Eagle Point Credit Company Inc. Fourth Quarter twenty twenty four Financial Results Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

[Operator]

Garett Edson, ICR. Thank you, Mr. Edson. You may begin.

[Garrett Edson, Managing Director at ICR]

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, 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 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 in 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.

[Garrett Edson, Managing Director at ICR]

We disclaim any obligation to update our forward looking statements unless required by law. A replay of this call can be accessed for thirty days via the company's website, eaglepointcreditcompany.com. Earlier today, we filed our Form N CSR, which includes our full year 2024 audited financial statements and our fourth quarter investor presentation with the Securities and Exchange Commission. Financial statements in our fourth 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 followed by following the Presentations and Events link.

[Garrett Edson, Managing Director at ICR]

I will now turn it over to Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's fourth 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. The company had a solid 2024. For the year, holders of our common stock had a total return of 14.7% assuming reinvestment of their distribution. The company generated a GAAP return on equity of 10.1 during the year and paid a total of $1.92 per common share in distributions during 2024.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

An investor who purchased our common stock as part of our IPO and held their shares through December 31 has received total distributions of 21.91 per share, nearly 110% of their initial investment. We believe the portfolio remains well positioned for 2025. We've been making attractive new investments, actively resetting many of the CLOs in our portfolio and capitalizing on the unique competitive advantage that our three series of perpetual preferred stock offer us. Among our highlights for the fourth quarter, recurring cash flows from our portfolio were $82,000,000 or $0.74 per share and this exceeded our quarterly aggregate common distributions and total expenses. These cash flows represent an increase from $68,200,000 or $0.66 per share in the third quarter.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Higher recurring cash flows were driven in part by first time equity payments from some of the newly purchased CLOs in prior quarters as well as on cycle semi annual interest payments received from certain assets in our CLOs. That said, approximately 22% of the CLOs in our CLO equity portfolio based on fair value are new investments or investments which were recently reset and didn't make a payment during the fourth quarter. As we've previously noted, some fluctuations are expected in cash flows from quarter to quarter due to new investing activity and some semi annual paying assets in our CLOs portfolios. Cash flows received in the first quarter this year total approximately $72,000,000 and I note that some of the CLOs in our portfolio won't make their first payment to us until April. During the fourth quarter, the company generated net investment income less realized losses of $0.12 per share, which was comprised of $0.24 of net investment income per share and $0.12 of realized losses.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Realized losses included a $0.14 per share reclassification of unrealized losses related to eight older CLO equity positions in our portfolio. This amount had been captured in our NAV in previous quarters and had little to no NAV impact during the fourth quarter. We also realized $0.02 per share of gains through trading activity by selling appreciated securities as part of our portfolio rotation strategy moving from CLO debt to CLO equity. Excluding the accounting reclassifications and non recurring expenses related to our recent ECCU notes offering, NII and realized gains were $0.29 per share. We continue to be very active in deploying capital and rotating from CLO debt to CLO equity.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

We are also focused on lengthening our CLO equity's weighted average remaining reinvestment period through resets, making new issue investments and purchasing lightly seasoned CLO positions in the secondary market. As mentioned on our prior call, it's worth a reminder that the vast majority of both the assets and liabilities within a CLO are floating rate and interest rate moves up or down typically have minimal impact on CLO equity cash flows. We recently decided to change the company's target leverage ratio to 27.5% to 37.5%. This is up 2.5% from our prior 25% to 35% range. When we think about the company's use of leverage, two areas we give a lot of consideration to are the concentration of maturities and our statutory asset coverage ratios.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

As we now have over $100,000,000 of our financing in perpetual preferred stock, maturities become a little less of a risk for us. This is a change from how we've operated the company in the past and reflects the evolution of our balance sheet. We'll continue to monitor our financing very carefully. Ken will walk you through more of our financial results shortly, but I'd like to take you through some additional highlights from the fourth quarter. During the quarter, we deployed over $223,000,000 in net capital into new investments.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

New CLO equity purchased during the fourth quarter had a weighted average effective yield of 17.8%. During the quarter, very importantly, we also completed 16 resets, lengthening our portfolio's weighted average remaining reinvestment period to three point four years. This is over 50% above the market average of two point two years. We also refinanced two CLOs and called three CLOs during the quarter. Our Series AA and Series AB non traded 7% convertible perpetual preferred stock offering generated total proceeds for the company of about $20,000,000 and we continue to believe this will be significantly accretive to ECC over time.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

We issued approximately 5,200,000.0 additional common shares through our program. These shares were issued at a premium to NAV generating NAV accretion of about $0.05 per share. We also issued some additional Series B perpetual preferred stock during the quarter under the ATM program. We continue to rotate the CLO debt portion of our portfolio into CLO equity and other investments that we expect to generate additional yield. We plan to continue this rotation in the near term.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

In December, we completed our ECCU seven point seven five percent notes offering. This was our largest ever notes offering. With the full exercise of the underwriters over allotment option or Green Shoe, we generated net proceeds of 111,000,000 We've deployed this capital into new investments, which we believe will further enhance our net investment income. Consistent with our long time financing strategy for the company, all of our financing remains fixed rate and we have no financing maturities prior to April 2028. In addition, a meaningful amount of our preferred stock financing is perpetual, as I mentioned before, with no set maturity date.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Our portfolio is actively managed towards long remaining reinvestment periods to drive performance and guard against future market volatility. In this prolonged environment of tightening CLO debt spreads, we have been very active in resetting and refinancing our investments throughout the year. As I mentioned earlier, during the quarter, we completed 16 resets,

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

each

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

of which extended the reinvestment period of those CLOs to five years and also completed two refinancing, which lowered the AAA debt spread by an average of 26 basis points. For the full year of 2024, we completed 36 resets and five refinancings. Even with the large number of actions we completed during the fourth quarter, our pipeline of new reset and refinancing opportunities in 2025 remains robust. Our proactive focus on resets leads us to where we stand as of December 31 with our CLO equity portfolio's weighted average remaining reinvestment period or WARP standing at three point four years and this is zero point four years longer than where it stood on September 30 despite the passage of three months' time. And it's nearly a year longer from where it stood at the beginning of twenty twenty four.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Our portfolio's warp is over 50% above the market average and we believe keeping that warp as long as possible is our best defense against future market volatility. I'd also like to take a moment to highlight Eagle Point Income Company, which trades on the New York Stock Exchange under a symbol EIC. EIC invests principally in junior CLO debt. EIC continues to perform well and we believe remains well positioned to continue generating strong net investment income and realized gains. We'll have an investor call for EIC at 11:30AM today, and we invite you to join us or visit the company's website at eaglepointincome.com to learn more.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

After Ken's remarks, I'll take you through the current state of the loan and CLO market. I will now turn the call over to Ken.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Thanks, Tom, and thanks everyone for joining our call. For the fourth quarter, the company recorded NII less net realized losses of approximately $13,000,000 or $0.12 per share. This compares to NII less net realized losses of $0.23 per share in the third quarter of twenty twenty four and NII and realized gains of $0.33 per share in the fourth quarter of twenty twenty three. The fourth quarter of twenty twenty four included the effect of $0.14 per share of realized losses as a result of the write down of amortized cost to fair value for eight 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.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

There was little to no impact to NAV. We also incurred $0.03 per share of non recurring expenses related to our ECCU notes offering. Excluding the reclassification and non recurring expenses, our fourth quarter NII and realized gains would have been $0.29 per share. When unrealized portfolio appreciation and distributions and amortization related to temporary equity are included for the fourth quarter, the company recorded GAAP net income of approximately $45,000,000 or $0.41 per share. This compares to GAAP net income of $0.04 per share in the third quarter of twenty twenty four and $0.37 per share in the fourth quarter of twenty twenty three.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

The company's fourth quarter GAAP net income was comprised of total investment income of $49,500,000 net unrealized appreciation on investments of $21,800,000 and net unrealized appreciation on certain liabilities held at fair value of $11,200,000 offset by expenses of $22,800,000 realized capital losses of 13,700,000 and distributions and amortization of offering costs on temporary equity of $700,000 Additionally, the company recorded an other comprehensive loss of $4,400,000 for the quarter. The company's asset coverage ratios at year end for preferred stock and debt calculated pursuant to Investment Company Act requirements were 263506% respectively. These measures are comfortably above the statutory requirements of 200300%. Our debt and preferred securities outstanding at quarter end totaled approximately 38% of the company's total assets less current liabilities, slightly above our target range of generally operating the company with leverage between 27.5% to 37.5% of total assets under normal market conditions. This is driven largely by our ECCU notes offering in December.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

As of January 31, our debt and preferred securities totaled approximately 37% of the company's total assets less current liabilities, which is within our target band. Last week, we declared common monthly distributions for the second quarter of twenty twenty five of $0.14 per share. Moving on to our portfolio activity. So far in the current quarter, through January 31, the company received the recurring cash flows on its investment portfolio of $71,500,000 As Tom noted, a portion of our CLOs underlying portfolios are invested in bonds, which typically pay interest on a semi annual basis. We expect this will contribute to the fluctuations in cash flows from quarter to quarter.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

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

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Thanks, Ken. I'll now update everyone on the trends we're seeing in the loan and CLO markets. Starting off with loan performance, the S and P UBS Leveraged Loan Index, formerly known as the Credit Suisse Leveraged Loan Index, had a solid finish to 2024, generating a total return of 2.3% in the quarter and a 9.1 total return for the full year of 2024. The index continued its upward trajectory in January with loans up another 70 basis points for the month. During the fourth quarter of twenty twenty four, only nine leveraged loans defaulted and as of year end, the trailing twelve month default rate stood at 91 basis points, well below the long term historic average of 2.6% and certainly below most dealer forecasts.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

ECC's portfolio's default exposure as of December stood at 34 basis points. While many bank research desks are forecasting defaults in the 2% to 4% range for 2025, we'd remind you that most desks significantly overestimated corporate default risk throughout 2024, and we believe they're overestimating it in 2025. Also, during the fourth quarter, approximately 7% of leveraged loans or roughly 26 annualized repaid at par. Many loan issuers have been proactively tackling their near term maturities and the maturity wall of the market continues to get pushed out further and further. In terms of new CLO issuance, we saw $59,000,000,000 in the fourth quarter of twenty twenty four, leading to a record $2.00 $2,000,000,000 for the full year.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

This exceeds the previous record of $187,000,000,000 set in 2021. Despite the record issuance, due to calls, resets and refinancing, net issuance was much more measured at only $70,000,000,000 which compares to $36,000,000,000 in 2023. We continue to see a significant increase in the count of resets and refinancings of CLOs driven in large part by the tighter CLO debt spreads in the market today. Similarly breaking 2021 records, total issuance volume including refinancing and resets exceeded $500,000,000,000 for the year above the high watermark of $438,000,000,000 set a few years ago. On a look through basis, the weighted average spread of our CLO's underlying loan portfolios stood at 3.49 at the December, and this compares to 3.54% at the September.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

At the same time, our portfolio's AAA spread tightened by about four basis points over the quarter to 1.4%, primarily due to our reset and refinancing activity. CCC concentrations within our CLOs for ECC stood at 5% as of December 31, and the percentage of loans trading below 80% within our CLOs stood at 3.2%. Our portfolio's weighted average junior OC cushion stood at 4.5% at year end and we believe this gives us ample room to withstand potential downgrades or future losses. Our portfolio's OC cushion remains significantly higher than the market average of 3.5%. 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.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Maintaining a long weighted average reinvestment period gives us the optionality to capture that when periods of volatility occur. And we believe CLO equity is an attractive asset class in today's market. To sum up the quarter for ECC, we generated net investment income and realized gains for the quarter of $0.29 per weighted average common share, excluding the accounting reclassifications and non recurring expenses. Recurring cash flows remained solid in the fourth quarter, exceeding our regular common distribution and total expenses. We sourced a significant number of new investments with attractive yields, investing $223,000,000 of net capital during the quarter.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Our portfolio's WARP of three point four years increased considerably in the fourth quarter and is more than 50% above the market average. We expect this to further increase as our new issue investing and reset activity increases, which is laying the groundwork for enhanced net investment income over time. Our regular $0.14 monthly common distribution was declared through the June 2025. We also continue to strengthen our balance sheet through our ECCU notes issuance, our 7% perpetual convertible preferred stock offering and our NAV accretive common stock issuances through our ATM program. Indeed, we believe our Series D and Series AA and AD perpetual preferred stock give the company a meaningful competitive advantage versus other public companies with CLO investment strategies.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

We continue to remain 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 financing is in the form of perpetual preferred stock with no set repayment date. Importantly, we see an abundance of primary and secondary CLO equity investment opportunities and continue to have a robust pipeline of reset and refinancing opportunities that we're working on. We believe all of these will further enhance the value of our portfolio. In closing, we are continuing to make significant progress towards enhancing our net investment income even in the face of some loan spread compression.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Our proactive investment approach has resulted in the portfolio's greater than average work, strong OC cushion and strong recurring cash flows. We believe our portfolio is well positioned to continue for strong performance moving ahead. We thank you for your time and interest in Eagle Point Credit Company. Ken and I will now open the call to your questions. Operator?

[Operator]

Thank you. We will now be conducting a question and answer session. The first question comes from the line of Randy Binner with B. Riley. Please go ahead.

[Randy Binner, Managing Director at B.Riley Securities]

Hey there, good morning. I have a couple it's a very comprehensive call, so we appreciate that. But I think I apologize if I missed it, but did you cover the commission expense line in the model? It was elevated at least versus our expectations. So I don't know if there's anything unusual going on there in this quarter.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Sure. So the commission expense would be a combination of commissions paid for the ATM as well as issuing our perpetual preferred Series AA and AB equity.

[Randy Binner, Managing Director at B.Riley Securities]

All right, understood. Thank you. And then I guess

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

And just on that point, let me jump into obviously the ATM common is always at a premium. So when we talk about NAV accretion, I think it was 0.05 That's obviously net of the commission expense that we incur. So when we look at that premium, we still issue at a premium even after paying that. On the Series AA perpetual, there is a sales charge which the company pays on that. However, when we think about the obviously the coupon at 7% or the dividend rate is very attractive for a perpetual, both for the buyer and the issuer.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

When we think about using that, we obviously we have to repay the commission, although if people leave early, there's basically a surrender charge on the Series AA. But we think of our all in costs as an eight handle number when you factor in the commission on a kind of cost to worse basis. So still for getting perpetual financing, we think is a very attractive return.

[Randy Binner, Managing Director at B.Riley Securities]

No, agreed. And that's just one piece of it, but it's more earnings related whereas the overall cost of capital and accretion is reflected more in the balance sheet. So I understand.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Yes, but that's everything. Every year that's obviously we want to keep all costs as low as possible, but that is those are profit generating costs, shall we say.

[Randy Binner, Managing Director at B.Riley Securities]

Yes, no, absolutely. And it seems that in general, the theme from a lot of calls we've had this quarter that there's the market's more competitive for putting money to work, but there's just a lot of demand out there for fixed income instruments and CLOs included. And so I guess, you give a very comprehensive view for kind of credit and how you manage the book. But I guess, is there kind of on the front end, there's just the CLO issuance and levered loan issuance markets are cooking, right? They're very active.

[Randy Binner, Managing Director at B.Riley Securities]

And so it's just creating kind of an unprecedented number of CLO structures out there. So is there beyond kind of like your kind of tried and true credit analysis and processes, is there are there other ways you're trying to just kind of address the kind of the volume of data and kind of liquidity that's in this market now that really kind of wasn't the case looking back three or five years ago?

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Yes, a really good question. Certainly when we talk about the I'll talk particularly about CLO issuance, I think if you add up every new issue reset and refi last year was over $500,000,000,000 I think that was the number we presented. That's a lot. Okay. That's a lot, yes.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Yes, dollars 500,000,000,000 if anything is a lot. The flip side is, I think the net issuance was in the double digits and I think the CLO market grew by about 7% last year. So about $70,000,000,000 give or take might be off a little bit on that. So a lot of that, let's just it's more than $500,000,000 was the total gross, but let's just use that as a number as a gross $70,000,000 net, that's 4.3 stuff that was either called and paid off at par or everything was paid off at par, I guess, between that. But B, or reset or refi at lower spreads, which is all good news for CLO equity.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

So net, if you hear our markets growing by $500,000,000,000 that's a giant number. The reality is it's growing by 7%. That's a reasonable number in our opinion. Then B, how do we deal with that information? It's a ton.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

We have our own system called Valatana, which we use our traders have it open. I can probably if I were to stand up and look all the way over to where the traders are, probably could see it open on seven people screens right now, where we use that as our central tool to look at and evaluate every CLO that we're thinking of buying and things that are in our portfolio that maybe we're thinking about selling. So it's a great tool, but your point is very fair. There is a ton of information that we absolutely need to keep track of and I think we have best in class tools. We can see the NAV on a CLO on a daily basis.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Not that there's a lot of downgrades right now, but like during COVID when stuff was getting downgraded real time, while we get a monthly trustee report like that system rolls forward, the ratings actions between trustee reports. So we know a company owned $3,000,000 of the American Airlines loan, a CLO did and let's say American Airlines was downgraded, which probably was during COVID, our system would reflect that even if it hadn't been captured in the trustee report. So that's the kind of stuff we try and have real time. And it also brings us a ton of liquidity, which is great. The good news, the bad news is more buyers than sellers right now in our market as there are in many markets.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

But the ability to trade to get out of things we might want to trade, there's certainly a bid for nearly everything today across CLO debt and equity. And Ken's got more.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Randy, just to add to what Tom mentioned earlier, the main driver for the fourth quarter commissions above the line in the income statement would be the ECCU issuance.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Okay.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Our baby bonds. And just for clarification, the common issuance would be below the line of the ATM paid in capital.

[Randy Binner, Managing Director at B.Riley Securities]

Okay. So then that is more that is a kind of more of an episodic item that would not recur at that level even if you continue to

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Yes, sorry, yes. So I think you're referring to above the line income statement commissions.

[Randy Binner, Managing Director at B.Riley Securities]

Thanks for the clarification. And, yes, I appreciate all the comments. Good result. Thank you.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Okay. Got you. Glad we caught that.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Mr. Feynman,

[Operator]

are you done with the questions?

[Randy Binner, Managing Director at B.Riley Securities]

I am. Thank you.

[Operator]

Thank you. Next question comes from the line of Eric Zwick with Lucid Capital Markets. Please go ahead.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Thanks. Good morning, everyone.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Good morning.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

I wanted to start first with just a question in terms of the recurring cash flow. You've done a really nice job continuing to grow that and it seems like based on the disclosure so far for January that that number continues to grow. I wonder if you can just maybe help me understand how much of that is or some number of those paid earlier in the quarter or there's some timing issues. I'm guessing it's probably not appropriate to just kind of triple that number for expectation for the third quarter. Help me just kind of frame like how those come in?

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

You just made Ken and me smile, I'll say. Sadly, no, on your tripling, but Ken will walk you through it.

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Yes, sure. So the 22% that we noted that have not paid at year end, approximately two thirds of those CLOs paid in the first quarter, an additional third including the ones that are paid in the first quarter would pay in the second quarter.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

And kind of what drives that when new CLOs are issued oftentimes there might be a instead while CLOs pay quarterly, there's often a long first period. So let's say we made an investment on November 15 and a new CLO, that CLO is probably not going to make its first payment till around April 15. Judgmentally, 80% to 90% of cash flows come in, in the first month of the quarter, probably at the higher end of that range, would you say?

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Correct. Yes.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

So while we'd love to triple it, sadly we can't do that. But most CLOs pay on a January, April, July, October cycle.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Got it. That's very helpful. And that's what I assume from looking back at past quarters from the numbers you had kind of disclosed and then what actually further through the first month of each quarter and then what actually hit. So, but thank you for the additional clarification there.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Yes. And let me just further the variability there. So, in the first payment is usually bigger. So, when we talk about like we had a few first payments in the fourth quarter, that's great news. Those payments will usually come down.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

And if you look at some of our schedule of investments, we give you the cash flow on an investment by investment basis in our presentation. If you look at new investments segment, we have the purchase year in there as well, maybe even purchase quarter. But so you can see stuff that's new. You can see the first payment. If you look at the next period, you can see it's probably the second payment is probably going to be less and that's a little more normalized.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

And then with some of these bonds, we do get a little bit whipping around because some of them pay semi annually underlying. But overall, hopefully, we want the line heading up into the right for cash flow.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Yes. No, that makes sense. And then just another one in terms of understanding the portfolio yield dynamics that you disclosed in the press release. The press release today indicated that the weighted average effective yield for the fourth quarter relative to amortized cost was 14.61 and then their kind of weighted average expected yield relative to fair value is 19.31. So some of that difference may be the fact that there's one is amortized cost and one is fair value, but that doesn't account for all of it.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

So can you just kind of help me understand the factors that can contribute to the differences in those two different yield measures that you disclosed?

[Kenneth Onorio, CFO & COO at Eagle Point Credit Company]

Yes. So the expected cash flows would be the same for effective yield and expected yield. The difference is the base, which as you mentioned for weighted average effective yield would be amortized cost and for expected yield, it would be the fair value of the investments. So it would be the divergence between cost and fair value.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

That accounts for the entire difference. Okay. Okay. The same

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

cash flow is just a different starting point. So when you're forecasting income for us, if you're modeling that out and you're working off of NAV, then you'd use the one based on market value. You could also add up the sum of amortized cost and then you'd use the lower number. But if you're working off of NAV, you should be thinking of the higher number. Yes.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Okay. Great. And then just looking at Slide 32, and Tom, you addressed a number of these factors in your comments. Over the past year, there's been a nice improvement in the portfolio characteristics, lower exposure to individual obligors, higher over collateralization cushion, remaining CLO reinvestment period has increased. So just curious from your perspective, how much of that is related to just market opportunity and maybe how much was a direct kind of from your perspective, maybe just kind of changing the CLOs that you were choosing to invest in and obviously stronger new issuance allows you to kind of push out the reinvestment period.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

So just curious to how much of that is market related versus maybe something that you guys decided to do to improve the portfolio?

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Yes. So, I guess the biggest change we've consciously been making is rotating from CLO debt over to CLO equity, as a starting point. We bought a bunch of CLO debt that was certainly a double digit percentage of the portfolio. If you roll the clock back a year or something like that, obviously please check the numbers on the filings to get the exact numbers. CLO debt you could buy at 0.9 on the dollar.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

And we were of the view that the market was unduly bearish on credit. And while market was demanding wide spreads, we thought it was going to correct quickly and it did. And while we had excluding the reclassifications, we had a couple of cents of realized gains this quarter, a fair bit of that was or at least a reasonable amount of that was attributable to selling CLO debt at gains. So a lot of stuff we bought back in six to twenty four months ago, thankfully has all many cases, not all, but a lot of it has rallied to at or near par in the CLO debt book. So we've been legging out of that and moving back into equity.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

When we bought it at 90, it was an equity like return and now it's kind of gone. It's a fine return, but not equity like. I'm just looking at our schedule of investments in the annual report. You can see our cost for CLO debt is $102,000,000 fair value is $106,000,000 So there's still more gas in the tank in terms of capturing some of those gains. What we're doing is when we see CLO equity opportunities, obviously there's a lot of cash coming off the portfolio, that's our first use for investing.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Then, honestly proceeds from sales and pay downs of CLO debt and rotating that into equity, that's been the biggest change we've made. We said in the prepared remarks, we expect that trend to continue.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Yes. Thanks. And I guess maybe just trying to tie it all together, there's still some opportunity to rotate debt into equity, maybe still some yield compression in the market. But as you kind of weigh those two factors directionally, do you feel there's an opportunity to continue improving the yield on the portfolio? We're working towards that.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Yes, every single day. And as we look at ways to increase NII, which is a big area of focus for us, that we've done a lot and we've had some one headwind basically. We've reset dozens of CLOs over the last six months, the second half of the year, refied a bunch as well, called some that made sense to call and just punch out liquidate. But you'll see the weighted average spread on our loans is down more than I would like and I'm looking at the report here, this is on our investor presentation. As of Q4, it's 3.49%, roll the clock back Q4 twenty twenty three, it was 3.79%.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

So that 30 bps, that's escaped the system, that borrowers have refinanced tighter and tighter. So that stinks. The flip side, and the decline from Q3 to Q4 was five basis points. It went from 3.54 to 3.49. That said, we're returning the favor to the people who lend to the CLOs and I think we shared the AAA, weighted average AAA spread was down four basis points quarter over quarter.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

So as we're getting tightened on our assets and each CLO, we're trying to where we can squeeze and this is what the resets and refis do squeeze the costs on the other side. AAAs have only continued tightening this year, even from the beginning of the year. So there's certainly more to come, we believe in our tightening. One analogy I like to make and this is kind of similar to like 2018 where loan spreads came in a bunch and CLO debt spreads came in a bunch. We've got exposure to 1,800 or 1,900 different loans and we've got positions in between 102 CLOs give or take.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

So we've got a wall of sand coming at us on the loans refinancing and we're pushing big rocks the other way. That sand kind of hits you really big and all at once, While we're amongst the most active resetters and refires in the market, the loans come at us a little faster than we can do sometimes. So we've still got an active pipeline of resets. I think we've completed some already this year, but we're trying our best to rip out costs on the right side of the balance sheet. Now the good news about that the bad news is the loans come quicker than we can do the CLOs.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

If you find our script or transcripts from 2018, you hear me say the same thing, similar market. The flip side is once we get those lower CLO debt spreads locked in place, they're here for another five to seven years if we do a reset. The loans are all going to keep changing and loan spreads can widen frankly faster than CLO debt spreads widen. So right now, we're working hard to keep ahead of keep up with it and maybe get ahead of it. It's tough, but we're locking in five year reinvestment periods with every reset.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

And if we want to keep those deals around seven years, we can. If spreads gap out tomorrow, for whatever reason, not that we're predicting that, you'd expect to see our loan spreads start going up while our CLO debt is locked in for a long period of time.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

I appreciate all the commentary. Thank you. That's it for me.

[Garrett Edson, Managing Director at ICR]

Great.

[Operator]

Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Thomas Matejewski for closing comments.

[Thomas Majewski, Founder & CEO at Eagle Point Credit Company]

Great. Thank you everyone for your time and interest in Eagle Point Credit Company. Ken and I are around today if anyone has any follow-up questions and we also invite you to join the call for Eagle Point Income Company, our BB oriented fund, it begins at 11:30 this morning. Thank you very much.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Thomas Majewski, Founder & CEO
• Kenneth Onorio, CFO & COO

Analysts

• Garrett Edson, Managing Director at ICR
• Randy Binner, Managing Director at B.Riley Securities
• Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC