Eagle Point Credit Company - Q2 2024
August 6, 2024
Transcript
Operator (participant)
Welcome to the Eagle Point Credit Company Inc. second quarter 2024 financial results call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the conference over to your host, Garrett Edson of ICR. You may begin.
Garrett Edson (Managing Director)
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 involves risk 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 Form N-CSR, half year 2024 financial statements, and our second quarter investor presentation with the Securities and Exchange Commission. The financial statements and our second 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 (CEO)
Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's second 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 increased on both an absolute and per share basis in the quarter to $71.4 million or $0.79 per share. This is up from $56.2 million, or $0.70 per share in the first quarter and exceeded our quarterly aggregate common distributions and total expenses by $0.13 per share. The higher recurring cash flows were in part due to the growth of our portfolio, as well as the results of semiannual interest payments received from certain of our assets in our CLOs during the second quarter.
It's worth noting that roughly 3% of our CLOs' underlying portfolios are now invested in bonds, which typically pay interest on a semiannual basis, and we do expect some fluctuations in cash flows from quarter to quarter. The company generated net investment income less realized capital losses of $0.16 per share, which comprised of $0.28 of net investment income and $0.12 of realized losses. The realized losses included $0.15 per share related to the write-down of amortized cost to fair value associated with two legacy CLO equity positions, which had already been reflected in NAV as unrealized losses. This was basically a reclassification on our balance sheet from unrealized to realized. Excluding this, we realized $0.03 per share of gains, principally from selling appreciated CLO debt positions during the quarter.
Excluding the reclassifications, net investment income and realized gains would have been $0.31 per common share. NAV per share as of June thirtieth was $8.75. Ken will walk you through more of our financial results shortly, but first, I'd like to take you through some additional highlights from the second quarter. We deployed over $135 million in net capital into new investments. The new CLO equity purchases that we made during the quarter had a weighted average effective yield of 19.4%. During the quarter, we completed four resets and two refinancings. Also, we launched our new Series AA and Series AB non-traded convertible preferred perpetual stock offering. The offering so far has generated proceeds for the company of approximately $9 million. The total program size is expected to be $100 million.
We believe the non-traded perpetual program will be significantly accretive to ECC over time, and we're very excited about it. We were able to issue approximately 12 million common shares through our At-the-Market program, or ATM. These shares were issued at a premium to NAV and it generated NAV accretion of $0.11 per share. We also issued a smaller amount of preferred stock under the ATM. Over the previous quarters, we had opportunistically purchased CLO BBs at discounts, which we started selling this quarter, harvesting gains and beginning to rotate the proceeds from those sales back into CLO equity. We expect to continue this rotation over the coming months and expect to invest the proceeds of those CLO BB sales into higher-yielding CLO equity.
During the second 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-term financing strategy for operating the company, all of our financing is 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. As we've stated consistently in the past, we actively manage our portfolio towards having a long remaining reinvestment period, and this drives performance, we believe, and guards against future market volatility. Similarly, rotating CLO BBs back into CLO equity, we believe remains highly attractive in today's market. In this prolonged environment of tightening CLO debt spreads, the refinancing and reset market has also returned.
We completed 4 resets and 2 refinancings in our portfolio during the quarter. These actions have extended the reinvestment period of the reset CLOs to 5 years and lowered the debt cost of the refinance CLOs by approximately 20 basis points. We have a robust pipeline of additional reset and refinancing opportunities under negotiation. As of June thirtieth, our CLO equity portfolio's weighted average remaining reinvestment period, or WARP, stood at 2.7 years, which is 0.2 years longer than where it stood on March thirty-first, and this is despite the passage of 3 months time. Our portfolio's WARP is 59% above the market average of 1.7 years. 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 the ticker symbol EIC. EIC invests principally in CLO debt. For the second quarter, EIC generated net investment income and realized gains, excluding non-recurring expenses of $0.54 per share. EIC continues to perform well and we believe remains well-positioned to continue generating strong NII. We invite you to join EIC's investor call today at 11:30 A.M. after this call, and to visit the company's website, Eagle Point Income, 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 (CFO and COO)
Thank you, Tom, and thanks everyone for joining our call. For the second quarter, the company recorded net investment income less net realized capital losses of approximately $15 million or $0.16 per share. This compares to NII and realized gains of $0.29 per share in the first quarter of 2024, and NII less realized losses of $0.05 per share in the second quarter of 2023. Second quarter results include the effect of $0.15 per share of realized losses due to the write-down of amortized cost to fair value for two legacy CLO equity investments. The two investments are no longer generating cash flow, have a 0 effective yield, and were at least one year past their reinvestment period end date.
Since the fair value of these investments had already been previously reflected in the company's NAV, the realized loss was a reclassification from an unrealized loss. There was no impact to NAV as a result of the write-down. Excluding the write-down, our second quarter NII and realized gains would have been $0.31 per share. When unrealized portfolio depreciation is included for the second quarter, the company recorded a GAAP net loss of approximately $4 million or $0.04 per share. This compares to GAAP net income of $0.43 per share in the first quarter of 2024, and GAAP net income of $0.11 per share in the second quarter of 2023.
The company's second quarter GAAP net loss was comprised of total investment income of $42.3 million and net unrealized appreciation on certain liabilities held at fair value of $1.1 million, offset by net unrealized appreciation on investments of $19.4 million, realized capital losses of $10.8 million, expenses of $16.1 million, distributions on the Series D preferred stock of $0.6 million, and distributions on the convertible preferred stock of $0.1 million. Additionally, the company recorded an other comprehensive loss of $2.8 million for the quarter. The company's asset coverage ratios at June 30 for preferred stock and debt, calculated pursuant to Investment Company Act requirements, were 352% and 682% 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, below the midpoint of our target range of generally operating the company with leverage between 25%-35% of total assets under normal market conditions. Last week, we declared monthly common distributions for the fourth quarter in line with our recent distributions. The $0.16 per share monthly aggregate distribution is comprised of $0.14 per share regular distribution and a $0.02 per share supplemental distribution. We will continue to review our variable supplemental distribution on a quarterly basis. Moving on to our portfolio activity. So far in the current quarter through July 31, the company received recurring cash flows on its investment portfolio of $60.4 million.
The lower recurring third quarter cash flow figure compared to the second quarter is driven by approximately $80 million in new CLO equity investments, which have not yet made their first payment, some spread compression and off-cycle semiannual paying loans and bonds in the underlying portfolios. We do expect our portfolio cash flows to move higher in the fourth quarter. I will now hand the call back over to Tom for his market insights and updates.
Tom Majewski (CEO)
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 Credit Suisse Leveraged Loan Index continued to perform well in the second quarter, generating a total return of 1.87% for the quarter and 4.44% for the first half of 2024. The index continued its trajectory in July, with loans up 5.21% through July 31. We continue to believe dealer research desks are significantly overstating overall corporate default risk, as the underlying loan borrowers that we see have continued to see revenue and EBITDA growth on average, despite the current elevated rate environment. Dealer research desk default forecast for 2024 are now typically between 4% and 6%.
However, during the second quarter, we saw only 6 loans actually default, which was the same number as the prior quarter. As of quarter end, the trailing twelve-month default rate was 92 basis points, remaining well below the historic average of 2.65% and even farther below dealer forecasts. As of June 30, ECC's portfolio's exposure to defaulted loans stood at 53 basis points. Also, during the second quarter, approximately 9% of all leveraged loans, or roughly 35% annualized, were repaid at par. While there has been some opportunistic repricing activity within the nearly 45% of loans trading at or above par, many loan issuers remain very proactive in tackling their near-term maturities through these repayments and refinancings in an effort to further push out their debt maturities. We view this as another sign of the loan market's resiliency.
On a look-through basis, the weighted average spread of our CLOs' underlying loan portfolios was 3.63% at the end of the quarter, and that's down from 3.74% at the end of the prior quarter. Meanwhile, spreads on debt tranches issued by our CLOs that were locked in two years ago remain unchanged and have the potential to tighten significantly as they roll off their non-call periods later this year and early next. Over the past few days, there has been some softness in the loan market in line with the broader market volatility. The price movement we've seen in the loan market has been relatively modest to date. In terms of new CLO issuance, we saw $53 billion in the second quarter of 2024, and $102 billion for the first half of 2024.
This is the fastest pace on record and approximately 82% higher than the new issue CLO volume for all of the first half of 2023. As CLO debt spreads have tightened, third-party CLO equity investors, including us, have returned to the new issue market. During the second quarter, we invested significant amounts of capital into both primary and secondary CLO equity, as well as other attractive investments. Market-wide, CCC concentrations within CLOs stood at 6.6% as of June 30, and the percentage of loans trading below 80 within CLOs in the market was about 5.5%. Our portfolio's weighted average junior OC cushion was 4.2% as of June 30, which gives us ample room to withstand potential future downgrades or losses. To compare this, our portfolio's OC cushion remains well higher than the market average of 3.2%.
We continue to believe CLO structures, and CLO equity in particular, are set up well to buy loans at discounts during periods of volatility, and ultimately outperform the corporate debt markets over the medium term, as they have done in the past. To sum up the quarter for ECC, we generated net investment income and realized capital gains, excluding the write-down reclassification for the quarter, totaling $0.31 per weighted average common share. Recurring cash flows were solid in the second quarter, both up on a quarter-over-quarter basis and comfortably exceeding our regular common distributions and expenses. We sourced a significant number of attractive new investments, investing $135 million of net capital during the second quarter. Our portfolio's WARP of 2.7 years increased during the second quarter and remains significantly longer than the market average.
We expect our WARP to increase further as our new issue investing and reset activity continues. Our existing regular monthly common distributions and variable supplemental distributions were declared through the end of 2024. We've also significantly strengthened our balance sheet through the launch of our non-traded 7% perpetual convertible preferred stock, as well as NAV accretive issuances through our ATM program. We continue to maintain 100% fixed-rate financing with no financing maturities before 2028, providing protection from any future rise in rates and locking us into an attractive cost of capital for years to come. Further, an increasing amount of our preferred financing is now perpetual, with no repayment date obligated. Importantly, we still see an abundance of primary and secondary CLO equity opportunities and have a robust pipeline of refinancing and reset opportunities under consideration to further enhance the value of our portfolio.
In closing, we're encouraged by the performance in the first half of the year. Our proactive investment approach has resulted in the portfolio's significantly greater than market average warp, strong OC cushions, and high recurring cash flows. We believe our portfolio is well-positioned for continued strong performance through the second half of the year. We appreciate your time and interest in Eagle Point. Ken and I will now open the call to your questions. Operator?
Operator (participant)
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.
Mickey Schleien (Managing Director of Equity Research)
Yes, good morning, everyone. Tom, there's been a leveraged loan repricing wave, which we're all aware of, that's been driving down loan spreads. I see that your portfolio's weighted average AAA spread is near the market average. So how much of an opportunity do you have left to refinance or reset the liabilities in your CLO equity portfolio, to help defend your yields against that spread compression?
Tom Majewski (CEO)
Hey, Mickey. Good morning. Excellent question. A couple of things in there. The definitely loan spreads tightening. I forget the exact number, tighter about 10 basis points ± quarter-over-quarter. Flip side of that, of course, defaults, very few in a spread tightening world. But to your specific question of how do we manage the right side of our CLO balance sheets, while the average is about the market average, we give you line-by-line detail in the investor presentation, there's a tremendous dispersion. And I don't know the exact number, but about half of them are probably above the average. And some of the highest cost CLOs start running off of non-call later this year.
So we have been very proactive, in—I think we had four resets and two refis, in the second quarter. And we continue to be active with those, here in the third quarter, and we have an active pipeline. Obviously, market conditions can change at any time, but what I would, less focus on the average and more focus on, kind of sorting by the highest AAA ones and looking at the non-call dates on those, and, and those are the ones we're most focused on, particularly as they run off of non-call.
Mickey Schleien (Managing Director of Equity Research)
I appreciate that. Thanks for that clarification. You mentioned that default forecasts seem fairly pessimistic, and the ratings agencies have also remained pretty conservative and haven't seemed to accept, you know, what I would probably say are decent odds of a soft landing. And they also don't seem to recognize the amount of capital available to lower quality borrowers, so the downgrade to upgrade ratio is still a problem. That situation can obviously pressure CCC buckets, so how are your portfolio managers dealing with that trend?
Tom Majewski (CEO)
Yeah, I mean, there's always too many CCC. As long as there's one CCC, I guess there's too many. Against that, our CLOs, in general, have tons of cushion. We provide the average in our deck for our CCC bucket. Let me just pull up the number here. Bear with me. We had CCCs. This is on, looking at the right deck here, page 28 of the master presentation. Like, 6.37% is the weighted average CCCs, which is, I think, slightly better than the overall market, which is good. Across our CLOs, again, there's an average and a dispersion. You'll see some of them have higher numbers, others lower. The higher ones are typically later in life, and in many cases are amortizing.
Against that, we also have 4.2% junior OC cushion on a weighted average basis. And that is very, very powerful in that you'd need to have CCCs on a typical CLO go over 7.5%, and then you start taking a haircut above 7.5%, the lower of your market or a stated number in a given CLO. But in general, you could probably cuff it that we could have 15% CCCs on average, give or take, before we actually faced interruption on CLO equity payments. Now, if we got to a market where there was 15% CCCs, the current market's in the 6s, there's clearly something going on in the world and a continued downdraft.
What that would suggest is, while a nontrivial amount of loans right now are priced at pretty heavy prices, they're relatively high prices, although coming down a little bit lately, you'd imagine you'd see a drawdown in all loan prices, which would then help discounted reinvesting in non-CCC loans to help build back par. Quite a few of the CLO managers in our portfolio, frankly, have never missed a payment to the equity through COVID, through the financial crisis. These OC tests are very important. I hope there's no AAA investors on the call right now, but they only matter four minutes a year. You know, they matter on the end, the close of business on the quarterly determination dates.
So it's a known target, and good CLO managers, you know, they have a schedule. They know when they need to be passing that OC test. And the folks we work with have a pretty good knack of doing that. Obviously, who knows what the future brings, but having been involved in CLO management here over the years at Eagle Point as well, those are relatively manageable tests. But we've got a better than average portfolio, and I think the collateral managers we partner with have a real good knack at maintaining these, of beating these tests, and they really just matter four minutes a year.
Mickey Schleien (Managing Director of Equity Research)
Tom, in terms of the folks you work with, Eagle Point has grown, you know, significantly over the years. So I'm curious whether you can still focus on just, you know, top-tier managers, or have you grown to a point where you need to consider, you know, tapping into maybe second and third-tier managers, assuming the pricing is right, to be able to deploy capital?
Tom Majewski (CEO)
Yeah. So I would say over an extended period of time, we've had collateral managers that the market would rank in varying tiers. What we're focused on at ECC are CLO collateral managers that have the DNA to deliver superior equity returns. On the surface, you'd think all CLO collateral managers want to deliver superior equity returns. The equity investors are the owners or the residual holders, you know, they're-- all companies work for the owners. In our opinion, some purportedly tier one CLO collateral managers think of the equity as nice, but not really important. So, one of the things our investment process is focused on is honing in on CLO collateral managers who have the DNA to outperform for the equity class while respecting their creditors, A.
Then B, while ECC has certainly grown, and Eagle Point, our overall CLO equity holdings, which are far greater than just what's in ECC, have grown, we still remain what we believe to be a single-digit percentage of the market. The CLO market itself is about $1 trillion outstanding, give or take, in just the U.S. And, the nice thing is, when you look through our portfolio, I'm just looking at that same page 28, like Octagon, which is a CLO manager, we've worked with a bunch. You can see we've got 26, 27, 29, 37, 44, 45, so on and so on and so on, you know, all the way up to Octagon 58, and old Octagon 14, our original investment, back when they used Roman numerals.
So the good news is the chefs we like, so to speak, are always in the kitchen, and there's always another one coming. So sometimes we buy new, sometimes we buy used, depending on what's better in the market condition. But we have not struggled to find access to the collateral managers that we've wanted to. And frankly, our continued size and scale has net helped us in that we're in many cases, their most relevant equity investor.
Mickey Schleien (Managing Director of Equity Research)
That's very helpful, Tom. Thanks for your time this morning.
Tom Majewski (CEO)
Great. Thanks so much, Mickey.
Operator (participant)
Thank you. Our next question comes from the line of Mitchel Penn with Oppenheimer & Co. Please proceed with your question.
Mitchel Penn (Managing Director)
Thanks so much. Quick question, just to follow up on Mickey's question. The impact of spread compression during the quarter, you said, was around 10 basis points. Is that just the loans that were repriced, or is that taking the amount that was repriced and spreading it over the total portfolio?
Tom Majewski (CEO)
I had used the number 10 earlier. I said, approximately. The exact number is 11 basis points, just to be clear, and good morning.
Mitchel Penn (Managing Director)
Good morning.
Tom Majewski (CEO)
That's just the Weighted Average Spread of the loans in our portfolio. It doesn't matter if it was a repricing, if a loan was sold, a loan was bought, whatever. The Weighted Average Spread as of the prior quarter, Weighted Average Spread out of this quarter, taking into account all changes in the portfolio.
Mitchel Penn (Managing Director)
Got it. Got it-
Tom Majewski (CEO)
New CLOs-
Mitchel Penn (Managing Director)
So we had heard-
Tom Majewski (CEO)
Both changes in the CLOs and different CLOs that we bought and sold during the quarter as well.
Mitchel Penn (Managing Director)
Got it. 'Cause we had heard a higher number mentioned, and I assume that's just on the few deals or whatever deals repriced. It was a higher number, but then when you-
Tom Majewski (CEO)
Oh, I'm sure, I'm sure some loans reprice 50, 100 basis points tighter.
Mitchel Penn (Managing Director)
Got it. That makes more sense.
Tom Majewski (CEO)
Others may have repriced wider if they were kicking out their maturity. So that-
Mitchel Penn (Managing Director)
Got it.
Tom Majewski (CEO)
But that's just overall what our portfolio did in aggregate.
Mitchel Penn (Managing Director)
you said the research guys are at, like, their street's like 4%-6% default forecast, and
Tom Majewski (CEO)
Yes
Mitchel Penn (Managing Director)
... you guys thought it was lower. I think, and tell me if I'm wrong, if you're looking at just defaults, you're not including distressed exchanges. Is that correct? Because distressed exchanges are running over 4% right now.
Tom Majewski (CEO)
Correct. So the number we cite and what triggers a D, a D rating, some distressed exchanges do trigger a D rating, others don't. Facts and circumstances vary. Our number is anything, I believe, that's rated D, or failed-
Mitchel Penn (Managing Director)
Got it
Tom Majewski (CEO)
... to pay, would be immediately rated D.
Mitchel Penn (Managing Director)
But that would be-
Tom Majewski (CEO)
Sometimes distressed exchanges happen below us, sometimes they do happen at the loan level as well.
Mitchel Penn (Managing Director)
Got it. But that would probably be why the Street estimating a higher number, probably because they're including those distressed exchanges?
Tom Majewski (CEO)
Different dealers include different things in their measures. You know, as long as your par is not impaired.
Mitchel Penn (Managing Director)
Got it.
Tom Majewski (CEO)
I don't know. That, I mean, that to me seems like the most important thing. And some distressed exchanges, you do take less par back, but in many you don't.
Mitchel Penn (Managing Director)
Got it. That's all for me. Thank you.
Tom Majewski (CEO)
Great. Thanks, Mitchel.
Operator (participant)
Thank you. Again, as a reminder, if anyone has any questions, you may press star one on your telephone keypad. Our next question comes from the line of Matt Howlett with B. Riley Securities. Please proceed with your question.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Good morning. Hey, Tom.
Tom Majewski (CEO)
How are you?
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Good. Thanks. Thanks for taking my question, and congratulations again. I'll just first start on a follow-up. I mean, how much do you look at these analyst forecasts or default rates? I mean, they've been dead wrong for a number of years. I'm just curious, like, when you look at that stuff, what'd you said your portfolio is of 50 basis points of loans?
Tom Majewski (CEO)
Yeah, we don't really... We don't really care about it. I mean, it's just interesting to see. I mean, in 2022, one leading investment bank predicted 11% defaults for 2024.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah.
Tom Majewski (CEO)
I mean, it's fascinating, but it doesn't, you know, doesn't really make a difference one way or the other for us. As long as our loans keep paying, that's the relevant measure.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah, I mean, and that's why I want to kind of dovetail into my question here. I mean, you have this incredible phenomenon that you have recurring cash flows that are way above the dividend, way above what you report for, you know, GAAP NII. And this has been going on ever since I've been covering the company, I mean, really for several years now. I know at some point, you know, GAAP, and cash flow, and tax, all kind of converge. Just what can you, I mean, tell us about, you know, what you really believe is the economic earnings power? Like, what metric? You know, what should we look at? Should we just, you know... I'm assuming that we're not going to get this huge recurring cash flows above dividends forever, and otherwise, you'd have to raise the dividend a lot over time.
Just walk me through how to think about it, because the last several... I mean, it's been great. Ever since I've covered the company, we've seen this phenomenon.
Tom Majewski (CEO)
Yeah, how do I put it? CLOs generate gobs of cash, as a general rule. And even when loans are defaulting, something that's really powerful and important to remember is the default. Let's say you have a 50 basis point position in a CLO and it defaults. And let's just say it's a total wipeout, a 0 recovery. Let's, you know, take the most conservative position here. If that all happens, you get a little bit less interest on an ongoing basis, but your principal loss is 5-7 years from now when you ultimately redeem the CLO. And so interest income is far more important in the CLO equity IRR than principal income.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Right.
Tom Majewski (CEO)
Frankly, in many of our investments, we would have a positive IRR, even if we never got $1 of principal at the end of the CLO. Because in many cases, the cash flows, not all cases, but in many cases, the cash flows on an ongoing basis from the CLO, frankly, outweigh the, you know, or are greater than the principal we invested at the beginning. So now along the way, if we have a bunch of those defaults where the 0 recoveries are very bad recoveries, again, we're not predicting 0 recoveries, the price of loans is going to be down, nearly certainly on that day, if you're having a bunch of those. And that's what gives us, as long as you're in the reinvestment period, gives the CLO collateral managers the opportunity to reinvest.
So if you look at, like, the performance of ECC from January 1, 2020 through the end of December 2021, so a 24-month period, our NAV grew somewhere between 25% and 35% during that timeframe. NAV grew. And obviously, we continued paying distributions throughout that period, never failed the ACR or anything like that on a measurement date. So it's, you know, CLO's equity is very nice in that it generates cash flow on an ongoing basis pretty robustly. When things go haywire, COVID, financial crisis, what you want to have is a long RP so you can continue reinvesting. In April 2020, approximately 2% of the loan market paid off at par.
No CFO like Ken walked in and said: "Hey, why don't we optionally pay down our debt today?" But, you know, they previously announced M&A. I remember, I think it was the T-Mobile loan paid off that month. You know, just stuff keeps happening. If you're a CLO manager, you're just opening the mail, getting money at $1.00, when loans are for sale on $0.80. If you're in the RP, you're able to take advantage of that. So, so that's the formula that makes this work. The drawback of CLO equity, the prices move around far greater than the fair value, in my opinion. But the, the very nice thing of it is the, the cash flow just keeps coming. And, you know, we've, we've seen that, you know, we're- it will be 10 years public in October of this year.
you know, a lot of things have happened, and what hasn't changed is the cash flows continue being very robust.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah, look, in my opinion, it's better. In my opinion, that number is more important than the GAAP number. I don't know how. I mean, I know you give everything-
Tom Majewski (CEO)
Cash pays the bills. We don't send out GAAP dividends.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah.
Tom Majewski (CEO)
We send out cash dividends. So-
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Look, I've covered-
Tom Majewski (CEO)
Or distributions, sorry.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
... I've covered REITs and closed-end funds that have only focused, they only give a CAD or a FAD number, and that's all we really focus on in a given quarter, and almost ignore the GAAP. But, you know, certainly that, that's the number that's just remarkable and really, I think, speaks to the value inside ECC. So, you know, congrats on that, and hopefully you keep it up. The next question, I mean, your capital structure is evolving as you really mature here and grow. You just with more perpetual and preferred and this non-traded exchange or convertible note, I mean, how do you feel about targeted leverage? Do you think about that differently as the capital structure evolves?
Tom Majewski (CEO)
Obviously, the best financing is financing you don't have to pay back. So those are, you know, from a common equity perspective, that's great. We have issued a little bit of the Preferred D, which is the traded perpetual via the ATM, from time to time, there's activity there. The Series AA and AB, which we're issuing through a non-traded channel, really, really nice. You know, we don't have any maturities, I think, until April 2028 at this point. Our target leverage is unchanged between 25%-35%, and I've always roughly thought of that, roughly half debt, half equity. It's moved around a little bit, but that's always kind of been the benchmark in the back of my mind.
I don't think we—although, obviously, with perpetuals, in theory, you have a little more wiggle room. In general, I've tried to avoid... Something I'm very proud of, let's put it this way, we didn't fail the ACR during COVID, and that's something on any measurement date, we, we passed. And there's no scientific rule for this other than, you know, 30 years of experience in this market and in the securitization markets to say, you know, I, I've never been through a pandemic before. No one had, but kind of gut feel when things get really ugly, really fast, this is kind of what's going to happen. And that's honestly how we sized it, purely based on judgment. Obviously, we know the statutory limits, we have to be within those.
But when we've sized it—so while I certainly have more flexibility without, you know, ever worrying about repaying this, the perpetuals, it's still we always want to be able—we, you know, our goal is never to fail the ACR. So that's an equal governor on how much leverage we would add to the company. So I don't see us going above 25, above that 35 band in normal market conditions. But I certainly love pushing out, you know, taking away the maturity wall. How about that?
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah. No, in theory, someone should use a lower discount rate on your—on the cash, on the dividend stream because of it. On that note, you can do up to $100 million on that new exchangeable convertible series. I mean, can you—what's the term? What are the terms? Can you force conversion or call it when the stock trades over a certain price for a period of time?
Tom Majewski (CEO)
So, the exact details, I'm gonna start here, and then maybe Ken will finish. He's been a little closer to this one. So it's perpetual, like, so that's always nice. If people – and the conversion, the owner of the security has the conversion option. Anytime after four years, they can call us up and say, "I'd rather like – I'd like to get rid of my security," and we have two choices as a company: We can either pay them cash or give them stock equal to ECC common stock, equal to the market value of that, equal to the par amount of their preferred, their $25.
So if the stock is, you know, $10 a share, we'd have to give them 2.5 shares in exchange for that new shares in exchange for that $25 of preferred. We can also call it after a certain date. I don't recall what that call date is, Ken. Five?
Ken Onorio (CFO and COO)
Five years. Yeah.
Tom Majewski (CEO)
And we can mandatorily repay it if we want, after five years.
Ken Onorio (CFO and COO)
Yeah.
Tom Majewski (CEO)
But at 7% perpetual, obviously, we'll happily have that option. I would struggle to see a scenario where we, you know, in current conditions where we'd exercise that, but it's nice to have, and obviously, if we got offsides on the ACR, things like that. And if investors wanted to redeem or convert prior to four years, there's a penalty, 8, 6, 5, 4, or something like that, over the first four years. So, you know, it's a great piece of paper for, you know, it's investment grade rated, for investors who might want to hold it. It's because it's non-traded, you know, it sits in people's accounts that are typically people just carry it at par.
You get a monthly coupon of 7%, investment-grade rated, a ton of capital beneath you, really good assets underlying. It's a nice piece of paper unto itself, frankly, but it's a great tool for the company to keep a very stable balance sheet. And I think one of the things-
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
You said perpetual?
Tom Majewski (CEO)
I'm sorry?
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
It's perpetual, did you say?
Tom Majewski (CEO)
Yeah, it's perpetual.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah.
Tom Majewski (CEO)
But you have a path out after four years if you want.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Right. Well, I would assume-
Tom Majewski (CEO)
We give you cash for stock at our option. But, you know, not a lot of things paying 7% on a monthly pay basis that don't move around, that don't have really any NAV volatility.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Right.
Tom Majewski (CEO)
So it's an interesting or a very interesting, people usually carry it at par. So it's, it's one of those kind of really feels like if someone can invest their cash for 4+ years, it feels like win-win. Win for the person who invests in that security, and win for the company because it's a great and stable piece of financing.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah, and I bet a lot of, you know, elect the conversion feature, the dividend is that much higher, you know, dividend's 15% or something, but-
Tom Majewski (CEO)
If they might, I mean, it's, you know, they're welcome- we're always, you know, we're welcome to do that. People are welcome to do that. I think if you're buying the 7%, you're probably seeking just that, you know-
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Right
Tom Majewski (CEO)
... kind of more - you're focused more on the stable price on your statement, if I had to guess, but, you know, we'll see you in 3.75 years, what people do.
Ken Onorio (CFO and COO)
... Yeah, just, it's Ken here. Just to clarify, the call option, it's actually two years.
Tom Majewski (CEO)
Oh, sorry.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah.
Tom Majewski (CEO)
Oh, even better. Oh, great, apologies. Yeah, because our other preferred, the Ds are five years.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah.
Tom Majewski (CEO)
Yeah.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
You can call that a par in two years. So I mean, that you could be reissuing this stuff at 6% or something in two years.
Tom Majewski (CEO)
Yeah.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Okay, great.
Tom Majewski (CEO)
We can only hope.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Yeah, exactly. Look, look, the same here. Well, look, congrats on that. And the last question, what is the opportunity, the BB opportunity to sell those at premiums? And it's been obviously a great trade. Just any way to quantify what's left and what could be sold.
Tom Majewski (CEO)
Yeah, we still have everything in the BB portfolio is certainly available for sale, shall we say, to use an accounting term. You know, we bought most of that when BBs were in the eighties and nineties. Just looking at the portfolio here, we are at-
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Fifteen percent.
Tom Majewski (CEO)
We're about 15% still. We'll continue. That was as of mid-June month end. We'll continue. The market's off this last couple of days has probably brought things down a little bit, but through, you know, through July, you know, we bought this stuff at discounts, thinking it would get back to par, close to par. Our theory has been correct. I think we mentioned we had $0.03 of realized gains from sales in the quarter, last quarter. And we certainly, you know, our goal is to continue reducing that. We increased it when there was some nice convexity, and now that the convexity is largely gone, well, we're continuing to reduce it.
Hopefully, you know, hopefully, I don't think we'll get rid of everything, but, you know, ask the team, please get rid of everything, so.
Matt Howlett (Senior Managing Director and Senior Equity Research Analyst)
Well, it's certainly accretive to our model. Really appreciate it. Congrats. Thanks, Ken and Tom.
Tom Majewski (CEO)
Thanks so much, Matt.
Operator (participant)
Thank you. Our next question comes from the line of Paul Johnson with KBW. Please proceed with your question.
Paul Johnson (VP of Equity Research)
Yeah, good morning. Thank you for taking my questions. I'm just wondering to get your thoughts, kind of, on how you think broadly on kind of new investments. You know, obviously there's some interplay here between the effective yield and, and cash yield on, on what's realized over investments, but the, the cost of equity, for ECC has, you know, been, been increasing, increasing. That's, that's hard to deny. I mean, the cost of equity is getting close to 20%. The effective yield on new investments this quarter was around 19%.
Tom Majewski (CEO)
Nineteen, yeah.
Paul Johnson (VP of Equity Research)
Give us kind of in your thoughts-
Tom Majewski (CEO)
How does that math work? Yeah. No, no, very good question, Paul. When we look at the bogeys we're trying to meet, we look at it on a blended basis. And, you know, that if you just say the distribution rate, I'm just putting a number, is 20%, we're investing at 19%, you know, that that's not a formula for success. Overlay, there's costs and expenses as well. But just looking at just the raw equity cost obviously is not the full picture. We look at the blended cost of capital on the right side of our balance sheet, which includes stuff that has, you know, coupons in the sixes. Even those, the old perpetuals, the Ds are 6.75%, if memory serves. And we have other coupons.
Probably the highest is 8 across the stack. But so we've got, you know, roughly a little less than a third of the portfolio financed in the 8s. So the actual, you know, cost is an average of the distribution rate on the common, in our opinion, and the attractive debt cost that we have at the top of the stack. Without the attractive debt, our distribution yield would need to be lower, frankly. The debt and preferred.
Paul Johnson (VP of Equity Research)
Got it. Thanks for that. And then, lastly, just out of curiosity, I mean, just with the development of, you know, some liability management exercises in the leveraged loan market, lender-on-lender violence, in some of those workout situations. I'm just curious, how is that dealt with, I guess, at a CLO manager level? I mean, obviously, you would assume you're in a minority position, you know, within CLO. How is that dealt with? Or is that just a situation where it's just basically never comes to fruition because it's, you know, an investment that would probably be exited, you know, due to downgrades or whatever?
Tom Majewski (CEO)
Yeah, a very good question. So the good news, lender-on-lender violence is certainly... That proverbial lender-on-lender violence is certainly down versus where it was 1-3 years ago. The market's kind of calmed a little bit, in terms of that. It's not zero, but it feels, you know, judgmentally to me, like it's less than it's been in the past. A. And B, while any given CLO, you know, if you think of a CLO as a $500 million CLO, typical position size is 60 basis points or something, you know, a big one, so that's $3 million. Against that, these collateral managers manage $10s of billions of dollars, so some of them might own $100 million, $200 million, $300 million of a loan. So there, there's good and bad of that.
The bad part is if they wanted to exit the loan, that would take them a little while. The good part is CLOs, you know, own roughly two-thirds of the loan market. That now that percentage moves up and down a little bit, but directionally, I think that number is accurate. And many of the collateral managers that we work with are some of the largest investors in loans. So while our any one CLO might be a little pipsqueak of a holder, when you aggregate any given many of the collateral managers we work with, you're going to see they're really quite relevant, in here. And one of the things that happens in the loan market, though. You know, and this is something, this is a bad part.
It's all worked out over the last 10 years, but it's, you know, if a new loan is issued at 99.5, you know, CLOs buy it there. Let's say it trades down to 60, you know, other, you know, distressed funds, you know, purported, you know, bad guys come in and buy it at 60. For them, getting out at 80 is a nice win. For us, a recovery at 80 kind of stinks. We just lost 20 at a roughly 20%. So one of the things that does cause a problem sometimes, you know, you get these people with divergent starting points, the same outcome can be a win or a loss for different people.
That said, I think the loan market is getting better at not being intimidated and bullied by distressed funds as much as perhaps used to be. So while there will continue to be some degree of lender-on-lender violence in some situations where the CLO community the CLO collateral manager community gets a little outsmarted by these distressed guys, it feels like the tide has been turning in the CLO market's favor for a while now.
Paul Johnson (VP of Equity Research)
Very interesting, Tom. Thanks, thanks for taking my questions, helping me.
Tom Majewski (CEO)
Great. Thanks so much, Paul.
Operator (participant)
Thank you. Our next question comes from the line of Steven Bavaria, with Inside the Income Factory. Please proceed with your question.
Steve Bavaria (Author)
Hi, Tom.
Tom Majewski (CEO)
Hey, Steve. Good morning.
Steve Bavaria (Author)
Say, since typical syndicated loans, you know, partially amortized principal over the term of the loan, at least they did when I was doing them, you know, then with a balloon payment of the unamortized principal at the end, at the loan maturity, what is your estimate of... Within your recurring cash distributions, what's your estimate of the percentage of that, that consists of principal payments? And then sort of follow up, to the extent that that would cause any erosion over time of the ultimate principal, of that particular CLO, how much is that then offset through building par, you know, resets, portfolio trading, buying new loans at 70 cents, you know, when old ones mature at 100 cents, that kind of thing?
Tom Majewski (CEO)
Well, it's an easy estimate, zero. With-
Steve Bavaria (Author)
Zero?
Tom Majewski (CEO)
With one asterisk, zero. Yes. So, within a CLO, I will explain the asterisk. When money comes in to the CLO, there's a trustee, you know, Wells Fargo Bank or Citibank, you know, serves as trustee for the CLOs. When the money comes in, they put it in two accounts. There's an interest account and a principal account, and the interest is what gets paid out to us as the equity after the AAAs and all the debt holders get paid. The money that comes to us is purely from the interest account. All the principal that comes in, whatever amortization a loan makes, or sale proceeds, or recoveries on defaults, or anything, goes in the principal account, which is, during the reinvestment period, entirely used for reinvesting into new loans.
So even if a loan makes a 1% quarterly amortization payment, that's gonna be trapped in the principal account and not used to pay out current income distributions to the equity. There is one exception. I did mention an asterisk, and this is something called the principal flush. And on one hand, that sounds bad, but if you're the receiver of it, it's actually pretty good. In many CLOs, on the first and second payment date, if the collateral manager was able to buy the loans cheaper than the targeted price, that savings... Let's say they modeled buying them at 99.75, they bought them at 99.5. That 0.25 point, which is left over in the principal account, can be reclassified into interest, and it's paid out as a one-time or two-time special distribution to the equity.
That would be the only situation when that occurs, but, like, randomly, on the seventh payment date of a CLO, if some of the loans are amortizing, all that money's trapped in the system, and we don't get any of it. So it's all the latter parts of your question kind of go away, frankly, other than that one special distribution at the beginning, or one or two, to the extent we can buy loans cheaper or have some trading gains early, the balance of the principal stays within the system.
Steve Bavaria (Author)
So, is there a simple answer to the question then of what accounts for the big difference between your NII plus your capital gains and then the much larger recurring-
Tom Majewski (CEO)
Cash flow?
Steve Bavaria (Author)
-distributions? Yeah.
Tom Majewski (CEO)
So, you were a banker back when bankers made loans in the old-fashioned days?
Steve Bavaria (Author)
Yep.
Tom Majewski (CEO)
Loan loss—Basically, loan loss reserves. You know, so, so when we calculate an effective yield on a CLO, there's a, there's a provision for losses baked into there, whether or not those losses actually happen. So we might be getting cash far and great. We—If we're accruing, I think that was 19.4% was the new purchases this quarter.
Steve Bavaria (Author)
Sure.
Tom Majewski (CEO)
So those investments, on average, you know, Ken's gonna book 19.4%, you know, divided by four is gonna be the income in the q-
Steve Bavaria (Author)
Mm-hmm.
Tom Majewski (CEO)
third quarter on those. We expect to get more cash than that, but we're taking a reserve for losses along the way. To the extent those losses don't occur, we might get a little more at the end. To the extent the losses are greater, we'll get a little less at the end. But it's,
Steve Bavaria (Author)
Your reserve... As you take that reserve, I assume that's not part of your pre-tax income from which you're supposed to pay, whatever, 90%. So in other words, the losses don't actually get taken for tax purposes until later on when you-
Tom Majewski (CEO)
Till they're incurred.
Steve Bavaria (Author)
Yeah.
Tom Majewski (CEO)
Yeah. So it's basically accrual accounting for GAAP. And, you know, the cash accounting for tax, I guess, would be a pretty basic, simple way to put it.
Steve Bavaria (Author)
Perfect. Thank you so much. That's gonna—that, that's a question that a lot of people have, and I think now maybe won't. I don't. I mean, that really-
Tom Majewski (CEO)
Yeah, well, I mean, there's cash, GAAP, and tax. They've never equaled in any given period, but over the life of a CLO, absent a few slightly nondeductible, you know, a handful of nondeductible items, cash, cash profit, tax profit, and GAAP profit will equal in aggregate, but sadly, not in any given quarter.
Steve Bavaria (Author)
You put out an explanation of that about five years ago or so that was-
Tom Majewski (CEO)
I think it was nine years ago. I think it was August 2015 or 2016.
Steve Bavaria (Author)
Exactly, yeah. And it'd be great-
Tom Majewski (CEO)
It's the most downloaded thing on our website.
Steve Bavaria (Author)
I'll go take a look. One other quick question or point is, I don't know how many of your investors realize that even a 4% default rate, which you would probably never achieve, even though that's being accepted in a real recession. After 60% or so recoveries, you're talking about a loss rate that's only 1.5% or so. Big difference.
Tom Majewski (CEO)
In that direction. And I would also then say, well, Steve, if 4% of the corporate loan market's defaulting every year, what's the price of loans on that day? It's probably not par.
Steve Bavaria (Author)
Yeah. Anyway-
Tom Majewski (CEO)
Every loan that doesn't default pays off at par.
Steve Bavaria (Author)
That's right.
Tom Majewski (CEO)
Binary outcome. So.
Steve Bavaria (Author)
Thanks a lot.
Tom Majewski (CEO)
Appreciate it. Thanks for your time, Steve.
Steve Bavaria (Author)
Pleasure.
Operator (participant)
Thank you. Again, as a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. It looks like we have reached the end of the question and answer session. I will now turn the call back over to Tom Majewski for closing remarks.
Tom Majewski (CEO)
Great. Thank you very much for joining, Ken, and I appreciate your time and interest in Eagle Point Credit Company. For those interested in Eagle Point Income Company, we invite you to join me, Lena, and Dan at 11:30 A.M. this morning. Thank you very much.
Operator (participant)
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.