Eagle Point Credit Q1 2024 Earnings Report

Eagle Point Credit EPS Results

• Actual EPS: $0.29
• Consensus EPS: $0.35
• Beat/Miss: Missed by -$0.06
• One Year Ago EPS: N/A

Eagle Point Credit Revenue Results

• Actual Revenue: $40.81 million
• Expected Revenue: $42.30 million
• Beat/Miss: Missed by -$1.49 million
• YoY Revenue Growth: N/A

Eagle Point Credit Announcement Details

• Quarter: Q1 2024
• Date: 5/21/2024
• Time: N/A
• Conference Call Date: Tuesday, May 21, 2024
• Conference Call Time: 10:00AM ET

Eagle Point Credit (NYSE:ECC) Company is a closed-end, non-diversified management investment company that seeks to generate attractive risk-adjusted returns primarily through investments in collateralized loan obligations (CLOs) and related structured credit instruments. The firm is externally managed by Eagle Point Credit Management, LLC, a specialized credit asset manager focused on the structured credit markets. Eagle Point Credit Company’s shares trade on the New York Stock Exchange under the ticker symbol ECC.

The company’s investment strategy centers on acquiring both equity and debt tranches of actively managed CLOs alongside opportunistic positions in senior secured loans, high-yield bonds and credit derivatives. By focusing on floating-rate assets and employing hedging techniques, Eagle Point Credit Company aims to deliver current income and total return potential in various credit environments. The portfolio is constructed to balance yield generation from CLO equity with risk mitigation provided by debt and derivative exposures.

Since its inception in 2015, Eagle Point Credit Company has grown its asset base by leveraging the deep market relationships and credit-structuring expertise of its manager. The fund’s investments span North America and select European markets, providing diversification across underlying corporate borrowers and collateral pools. Ongoing monitoring and active portfolio management seek to capitalize on market dislocations and credit-cycle opportunities.

Based in Connecticut, the management team supporting Eagle Point Credit Company brings decades of experience in structured credit, leveraged finance and risk management. The firm’s governance and oversight framework are designed to align the interests of shareholders with those of its external manager, reinforcing a disciplined approach to credit selection and portfolio construction.

Eagle Point Credit Q1 2024 Earnings Call Transcript

Key Takeaways

• During Q1 the company generated net investment income and realized capital gains of $0.31 per share (ex-nonrecurring expenses) and paid $0.48 per share in cash distributions.
• Recurring cash flows totaled $56.2 M in Q1 and normalized to $65.7 M in April, reflecting improved CLO loan prepayments.
• Management deployed $131 M of net new capital into higher-yield CLO equity, lifted its weighted average remaining reinvestment period to 2.5 years (56% above market) and completed resets/refis to extend reinvestment periods and lower funding costs.
• The company raised capital through ATM issuance of ~7.9 M common shares (NAV accretion of $0.06/share), a new Series F preferred raising $47 M, and launched Series AA/AB 7% convertible perpetual preferred stock.
• As of March 31, the CLO equity portfolio yield averaged 16.43% (new purchases at 19.4%) with a market-value expected yield of ~24%, a junior OC cushion of 4.09% vs. 3.26% market avg, and default exposure of 68 bps.

Presentation

[Operator]

Greetings, and welcome to the Eagle Point Credit Company first quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you, sir. You may begin.

[Garrett Edson, Managing Director at ICR]

Thank you, and good morning. By now, everyone should have access to our earnings announcement investor presentation, which was released prior to this call, and which may also be found on our website at eaglepointcreditcompany.com. As a reminder, before we begin our formal remarks, the matters discussed on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call.

[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 30 days via the company's website, eaglepointcreditcompany.com. Earlier today, we filed our first quarter 2024 financial statements and our first quarter investor presentation with the Securities and Exchange Commission. The financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company's website. The financial statements can be found by following the Financial Statements and Reports link, and the investor presentation can be found by following the Presentations and Events link. I will now turn it over to Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.

[Tom Majewski, CEO at Eagle Point Credit Company]

Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's first quarter earnings call. If you haven't done so already, I invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. The company had a solid start to 2024. Our investment portfolio is performing well and we improved our balance sheet during the first quarter. We believe the company remains well positioned for continued upside moving forward. Let me take you through some highlights from the first quarter. The company generated net investment income and realized capital gains of $0.31 per share, excluding non-recurring expenses related to a preferred stock offering. We received recurring cash flows on our portfolio in the first quarter of $56.2 million, or $0.70 per share.

[Tom Majewski, CEO at Eagle Point Credit Company]

We previously noted that recurring cash flows in the first quarter were impacted by higher loan prepayments in the fourth quarter of 2023, which led to a bit of cash drag within many CLOs. This has since normalized. Indeed, during the month of April, we received recurring cash flows of $65.7 million, well in excess of the recurring cash flows received in each of the two prior quarters. With roughly 2.6% of our CLOs underlying portfolios now invested in bonds, and remember that bonds typically pay interest on a semiannual basis, we do expect some ups and downs in cash flows from quarter to quarter. NAV per share as of March 31st was $9.16, a modest decrease from year-end. During the quarter, we paid $0.48 per share of cash distributions to our common shareholders.

[Tom Majewski, CEO at Eagle Point Credit Company]

We are very active in managing our portfolio during the quarter, deploying over $131 million in net new capital into investments that we believe will increase the earnings power of our portfolio. As the prices for CLO BBs increased during the quarter, we began selling some of the positions we held in our portfolio that we had purchased opportunistically over the last year or two. This helped generate some of our realized gains. We plan to continue rotating some of our CLO BBs back into CLO equity over the coming months. Along with our overall portfolio performance, we continued to raise capital through our at-the-market program and issued approximately 7.9 million common shares at a premium, generating NAV accretion of $0.06 per share. We also issued a modest amount of preferred stock through the ATM.

[Tom Majewski, CEO at Eagle Point Credit Company]

We were also pleased to raise an additional $47 million of net proceeds in the quarter through the issuance of a new Series F term preferred stock, which will be due in 2029. As of March 31, 2024, the weighted average effective yield on our CLO equity portfolio was 16.43%, and this compares to 16.7% at the end of the year. The new CLO equity we purchased during the first quarter had a weighted average effective yield of 19.4%, which should help bolster the portfolio's weighted average effective yield prospectively. Additionally, the weighted average expected yield of our CLO equity portfolio at quarter end, based on market value, stood at approximately 24%. Additionally, the company had a number of meaningful subsequent events so far after quarter end that I'd like to highlight.

[Tom Majewski, CEO at Eagle Point Credit Company]

We estimate that our NAV as of April month-end to be between $8.94 and $9.04 per share. Along with our regular monthly common distribution of $0.14 per share, we declared an additional variable supplemental distribution of $0.02 per share for an aggregate monthly distribution of $0.16 per share, now going all the way through September of 2024. Earlier this month, we successfully launched our new Series AA and Series AB non-traded 7% convertible perpetual preferred stock offering. This has started to generate net proceeds for the company, and we believe this will be significantly accretive to ECC over time. Consistent with our longtime strategy for operating the company, all of our financing, it remains fixed rate, and we have no financing maturities prior to April 2028.

[Tom Majewski, CEO at Eagle Point Credit Company]

In fact, some of our preferred stock financing is even perpetual now, with no set maturity date. While we continue to focus the majority of our investment efforts on the secondary market during the quarter, we did deploy capital into a few attractive primary investments as well, as debt spreads tightened during the first quarter. We also continue to focus on improving our weighted average remaining reinvestment period, or WARP, via investing in CLO equity with longer reinvestment periods in the secondary market. Further, with CLO debt spreads tightening, refinancing and reset volumes picked up during the first quarter. And indeed, we took advantage of this environment and completed two resets and one refinancing during the quarter. These had the effect of extending the reinvestment periods of the reset CLOs to a new five-year reinvestment period, and for the refinancing, lowering the cost of debt by about 13 basis points.

[Tom Majewski, CEO at Eagle Point Credit Company]

As a result of our consistently proactive portfolio management, as of March 31st, our CLO equity portfolio's weighted average remaining reinvestment period, or WARP, stood at 2.5 years. This is ahead of where it stood at year-end 2023, despite the passage of three months. Our portfolio's WARP is 56% above the market average of 1.6 years. We expect to remain active in completing resets and refinancings where attractive, and have a full pipeline of CLOs to tackle. We believe keeping our WARP as long as possible is one of our best defenses against future market volatility. EIC invests primarily in CLO junior debt, and I'm pleased to share that it won the Creditflux Industry Award for Best Public Closed-End CLO Fund last week. For the first quarter, EIC generated net investment income and realized gains, excluding non-recurring expenses, of $0.57 per share.

[Tom Majewski, CEO at Eagle Point Credit Company]

EIC raised its monthly common distribution at the beginning of the year by 11% to $0.20 per share, which is the highest rate in that company's history. EIC has performed very well over the last couple of years, and we believe remains well positioned to continue generating strong net investment income. We invite you to join EIC's investor call at 11:30 A.M. today after this call, and to visit the company's website, eaglepointincome.com, to learn more. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO market. I'll now turn the call over to Ken.

[Ken Onorio, CFO and COO at Eagle Point Credit Company]

Thanks, Tom, and thanks everyone for joining our call. For the first quarter, the company recorded net investment income and realized gains of approximately $24 million or $0.29 per share. When excluding non-recurring expenses related to the issuance of the company's 8% Series F Term Preferred Stock due 2029, net investment income and realized gains were $0.31 per share. This compares to NII and realized gains of $0.33 per share in the fourth quarter of 2023, and NII less realized losses of $0.32 per share in the first quarter of 2023. When unrealized portfolio appreciation is included for the first quarter, the company recorded GAAP net income of approximately $35 million or $0.43 per share.

[Ken Onorio, CFO and COO at Eagle Point Credit Company]

This compares to GAAP net income of $0.37 per share in the fourth quarter of 2023, and GAAP net income of $0.35 per share in the first quarter of 2023. The company's first quarter GAAP net income was comprised of total investment income of $40.8 million, net unrealized appreciation on investments of $7.8 million, net unrealized appreciation on certain liabilities held at fair value of $2.9 million, and realized capital gains of $1.1 million, all of which were partially offset by expenses of $17.4 million and distributions on the Series B Preferred Stock of $0.5 million. Additionally, the company recorded an other comprehensive loss of $4.6 million for the quarter.

[Ken Onorio, CFO and COO at Eagle Point Credit Company]

The company's asset coverage ratios at March 31st for preferred stock and debt, calculated pursuant to Investment Company Act requirements, were 343% and 629%, respectively. These measures are comfortably above statutory requirements. Our debt and preferred securities outstanding at quarter end totaled approximately 29% of the company's total assets, less current liabilities, in line with our target range of generally operating the company with leverage between 25%-35% of total assets under normal market conditions. Last week, we declared distributions for the third quarter in line with our recent distributions. We will continue to review our variable supplemental distribution on a quarterly basis.

[Ken Onorio, CFO and COO at Eagle Point Credit Company]

Moving on to our portfolio activity in the second quarter, through April 30th, the company received recurring cash flows on its investment portfolio of $65.7 million, comfortably above our first quarter recurring cash flows of $56.2 million. I will now hand the call back over to Tom.

[Tom Majewski, CEO at Eagle Point Credit Company]

Thanks, Ken. I'll now share some updates on the loan and CLO markets. The Credit Suisse Leveraged Loan Index continued strong momentum from 2023 and generated a total return of 2.52% for the first quarter. The index continued that trajectory, with loans now being up 3.22% for the year as of April 30. During the first quarter, we saw only six leveraged loan defaults. As of quarter end, the trailing twelve-month default rate declined to 1.14%, which is well below the historic average of 2.7%.

[Tom Majewski, CEO at Eagle Point Credit Company]

While the default rate may increase from these levels as the year progresses, we also continue to believe research desks are significantly overestimating the near-term default risk, as many of the underlying loan borrowers in our CLOs have continued to see revenue and EBITDA growth, which helps offset the impact of higher rates. ECC's portfolio's default exposure as of March 31st stood at 68 basis points, which is well below the trailing 12-month default rate. Also, during the first quarter, approximately 7% of leveraged loans, or about 27% annualized, were repaid at par. While there has been some opportunistic loan repricing activity in recent weeks, with many loans now trading around or even above par, most loan issuers remain very proactive in tackling their near-term maturities in an effort to further push out their debt maturities.

[Tom Majewski, CEO at Eagle Point Credit Company]

On a look-through basis, the weighted average spread of our CLOs underlying loan portfolios was 3.74% at the end of the quarter, and this compares to 3.79% at the end of last year. Still, we've seen a beneficial increase on the weighted average spread of 16 basis points over the last two years. Meanwhile, spreads on debt tranches issued by our CLOs that were locked in two years ago remain unchanged and frankly have the potential now to tighten as we refinance and reset CLOs in our portfolio. CCCs within our CLOs stood at about 6.6% on average as of March 31st, and the percentage of loans trading below 80 within our CLOs was about 4.5% as of quarter end.

[Tom Majewski, CEO at Eagle Point Credit Company]

Our portfolio's weighted average junior OC cushion was 4.09% as of March thirty-first, which we believe gives us ample room to withstand potential future downgrades or losses within CLOs. Our portfolio's junior OC cushion remains a fair bit higher than the market average of 3.26%. In terms of CLO issuance, we saw $49 billion of issuance in the first quarter, the fastest pace on record. This is approximately 45% higher than new issue for the same period last year. As CLO debt spreads have tightened, third-party equity investors like ourselves have returned to the new issue market. Secondary CLO equity also continues to remain quite attractive, and we sourced a number of new investments in both the primary and secondary market for the company.

[Tom Majewski, CEO at Eagle Point Credit Company]

Along with the significant rise in new CLO issuance, the tightening of CLO debt spreads also drove a substantial increase in refinancing and reset activity. Our focus continues to be on improving our weighted average remaining reinvestment period via longer-dated secondary purchases, new issue investments, and resets of existing portfolio holdings. We continue to believe CLO structures, and CLO equity in particular, are set up well to ultimately outperform the broader debt markets over the medium and long term, as they have done in the past. As such, our proactive management of our portfolio and overall investment strategy, we believe, remains well suited for today's market environment. To sum up the quarter for ECC, we generated net investment income and realized capital gains, excluding some non-recurring expenses principally related to preferred stock deal for the quarter of $0.31 per common share.

[Tom Majewski, CEO at Eagle Point Credit Company]

We continued to receive solid recurring cash flows on our portfolio during the quarter, and our second quarter cash flows were well above the first quarter 2024 levels. We sourced a significant amount of new investments with attractive yields, both primary and secondary market, and we invested $131 million of net capital during the quarter. Our portfolio continues to maintain a weighted average remaining reinvestment period, which is considerably longer than the market average, and this has been aided by recent new investments that we've put in the portfolio. Our existing regular monthly common distributions and our variable supplemental common distributions have now been declared and extended all the way through September 2024. We significantly strengthened our liquidity position through the ATM issuance, generating NAV accretion of $0.06 per common share.

[Tom Majewski, CEO at Eagle Point Credit Company]

We also completed the Series F Term Preferred Stock issuance, which we talked about earlier. During the second quarter, we launched our non-traded 7% convertible perpetual preferred stock, which has started to generate proceeds for the company and we believe will be significantly accretive to ECC over time. We're very excited about this new offering. Importantly, we continue to maintain 100% fixed rate financing with no financing maturities prior to 2028. This provides us with protection from any future increases in rates and locks us into an attractive cost of capital for years to come. We continue to see a strong pipeline of both secondary and primary CLO equity investments, as well as multiple refinancing and reset opportunities for existing positions in our portfolio to further enhance the overall quality and portfolio mix that we have.

[Tom Majewski, CEO at Eagle Point Credit Company]

Overall, we believe the company's investment portfolio continues to be well positioned given our proactive management, the portfolio's above average WARP, its strong OC cushions, and consistently recurring cash flows. Moving ahead, we will remain opportunistic and proactive as we manage our investment portfolio with a long-term mindset. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions. Operator?

[Operator]

Thank you. We will now 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 poll for questions. Thank you. 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 at Ladenburg Thalmann]

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

[Tom Majewski, CEO at Eagle Point Credit Company]

Sure. Good morning, Mickey. Really good question. The good news and the bad news is we think the market's kind of pricing things reasonably efficiently, and valuing reinvestment period. One of the things you, you've heard us say over the last decade is we think a long remaining reinvestment period is very, very valuable. Unfortunately, maybe we've said it too many times, and people are starting to pick that up. Broadly, what we see as a trend in the market is that the CLO equity trades at a much wider yield, the shorter your remaining reinvestment period is, or even to the extent you're out of the reinvestment period, and you're in the amortization period.

[Tom Majewski, CEO at Eagle Point Credit Company]

While there is some ability to reinvest afterwards, and we'll talk about that maybe in a minute, what we're seeing is yields, in general, on post-RP paper, are gonna be mid-20s in general. Some might be higher, some may be lower, but it's a good generalization. But then, as you get more reinvestment period, let's say you're looking at a secondary opportunity with two years of RP or four years of RP, the yield opportunity, holding all else constant, assuming the same portfolio, you know, same collateral manager, blah, blah, blah, same MVOC, you're gonna see the secondary equity trade at lower and lower yields, the shorter the remaining reinvestment period is.

[Tom Majewski, CEO at Eagle Point Credit Company]

Finally, getting to new issue, which typically has a five-year reinvestment period, in many cases there, what we're seeing is, you know, those are gonna be the lowest yields, but really in line with the kind of opposite term curve that we're seeing in the secondary market. So generically, I think of new issue CLO equity as about a 15% return opportunity today, which kind of makes sense. It's a pretty attractive return. If you would have asked me that question a year ago, I would have told you 10%-12%. So it's kind of gotten to the point of being interesting. But then as you kind of work your way down the term curve and have less and less RP, the market yield goes up and up and up.

[Tom Majewski, CEO at Eagle Point Credit Company]

And in our opinion, oftentimes the risk goes up, and certainly post-RP, you're at, you have the greatest risk, so therefore, getting the greatest yield. So short answer, new issue, generically 15%. Sometimes it's better, sometimes it's worse. But if you had to throw a number on it, and then as you work your way out to end of reinvestment period equity or post-RP equity, all of a sudden you're looking at probably a 25% return opportunity, but obviously a much shorter investment and largely predicated on, you know, if loan prices go up a little bit, that could help you a ton. If they go down a little bit on that post-RP equity, it hurts you. Versus if you're in a new CLO or have a lot of reinvestment period, prices going down actually may help you overall. So does that answer your question?

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

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

[Tom Majewski, CEO at Eagle Point Credit Company]

No, no, it's actually very easy. In general, we kind of like two and a half year RP or longer secondary, all the way through select new issue today.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Okay.

[Tom Majewski, CEO at Eagle Point Credit Company]

One of the things that makes new issue really attractive is if you bought your assets proverbially yesterday or a bunch of them. One of the things going on in the market, I haven't said this in a while, but I'll say it again, I'll resume saying it: you know, the price of loans is too darn high right now. You know, a fair number of loans are trading in the par area, sometimes even higher. While there's still discounted opportunities, don't get me wrong,

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Yeah

[Tom Majewski, CEO at Eagle Point Credit Company]

... there's a non-trivial amount of loans, a meaningful amount, frankly, trading in the par area.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Right.

[Tom Majewski, CEO at Eagle Point Credit Company]

We like it... Our best case is, like, loans are 98. When the good loans trade around 98, that's obviously, lower is better, but that kind of means the market's orderly, not too frothy, not too distressed. So we're seeing a bunch of loans kind of inch their way up. So that said, if you bought a bunch of loans into a loan accumulation facility three months ago, your deal is gonna look better than a new deal coming together today. And I think having assets bought proverbially yesterday is an important part of making new CLOs look attractive, and that's part of our strategy with loan accumulation facilities.

[Tom Majewski, CEO at Eagle Point Credit Company]

We'll seek to put in plenty of, you know, what I'll say, we have a number of tickets punched with different collateral managers, such that when we're You know, we don't wanna have a fully ramped CLO, but maybe building up $50 million, $75 million, $100 million of assets in a long-term loan accumulation facility, that when we see AAAs tighten, boom, we can go print. And even if we have to buy the other assets closer to par, the good news is we got a lot of stuff we already bought at a discounted price.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Fair enough.

[Tom Majewski, CEO at Eagle Point Credit Company]

The flip side, obviously, it could go wrong. If the price of loans goes down, we might regret those purchases, but you've got long-term financing in place for the multi-year financing, so you've got the ability to kind of pick your timing. But equally importantly, to be in the queue with your favorite collateral managers, such that when you wanna go, you kind of have all the, you know, all the papers and plumbing are already in place.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Right. Right. Tom, in terms of CLO debt, AAA spreads, my sense is they're somewhere around 150 basis points. I know that varies by collateral manager, but-

[Tom Majewski, CEO at Eagle Point Credit Company]

And going lower.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Going lower, so that-

[Tom Majewski, CEO at Eagle Point Credit Company]

EIC number, though.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

So with that in mind, what's sort of the remaining opportunity in the portfolio to refinance and reset? I know there was a big wave of refinance and reset in your portfolio. I think it was 2018, if I'm not mistaken.

[Tom Majewski, CEO at Eagle Point Credit Company]

Yeah

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

... what would the impact be on the fund's cash flows and NAV as you, you know, progress through that process?

[Tom Majewski, CEO at Eagle Point Credit Company]

Well, it would certainly be generally good. I almost said only there, but I know someone's listening, so I didn't say that. You'll notice, this is on page 26 of our investor deck, our weighted average AAA spread is 146. That's across all, you know, the myriad of CLOs in the portfolio.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Yeah.

[Tom Majewski, CEO at Eagle Point Credit Company]

How many pages of CLOs do we have here? There's a lot. Now, I just saw a headline, like the new top-tier CLOs are getting printed today at 146, it looks like. So, so we're, our, our average is right at the heights of the market. That said, what you then start looking at is, well, what are the ones above the average? And-

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Yeah

[Tom Majewski, CEO at Eagle Point Credit Company]

... what is the non-call period left on this? Because we published that, over in the left-hand column, years remaining in non-call, and ideally, I mean, we only on average have a 0.2 non-call, so a lot of stuff is workable. So what we do, you know, is a combination of looking through how the CLOs have performed, focusing on those with the highest debt costs, and then looking at the non-call dates, and either looking to reset them or refinance them, depending on what makes sense. A number of the CLOs in our portfolio have been reset or refinanced already this year. You can kind of figure that out from watching the trade publications and looking at our...

[Tom Majewski, CEO at Eagle Point Credit Company]

You know, we don't publish which ones we've done per se, but if you like read Bloomberg News, you can look for our deals and see them. You know, we, we're continually seeking to reset as many CLOs as possible, and with CLO debt spreads coming in, it's certainly making every time that ticks in another basis point, it makes more of our CLOs more powerful. What that does, it invariably increases the value of CLO equity to the extent you complete a reset, and it nearly always improves the yield on that CLO as well. Sometimes it creates a markup. So any of these things would be. Typically, we would only undertake one of these if it's accretive to NAV or NII, or ideally both. And we're gonna look at the ones that are the most potent.

[Tom Majewski, CEO at Eagle Point Credit Company]

There's no one right answer. Then you also have to talk to the collateral manager, what's their pipeline. You know, these folks wanna be doing new deals, not necessarily resetting the old ones, if there's still some runway on them. So it's a conscious negotiation with the market. The good news is, we have so many CLOs, there's always something to do when the market's in our favor.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

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

[Tom Majewski, CEO at Eagle Point Credit Company]

Well, that's a, that's a very good question, and you take very good notes. So when you conduct a reset or refi, or even a call-

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

Mm-hmm

[Tom Majewski, CEO at Eagle Point Credit Company]

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

[Tom Majewski, CEO at Eagle Point Credit Company]

Maybe it was 2018, Ken?

[Ken Onorio, CFO and COO at Eagle Point Credit Company]

2018 or 2017 and 2018.

[Tom Majewski, CEO at Eagle Point Credit Company]

2017 and 2018. One of those years, we had a really low, I think, you know, in theory, this is great. Most of our distribution was treated as a return of capital for tax. Obviously, the best distributions are those that are, you know... Well, you could cut it either way. The best distributions are the ones you don't have to pay tax on at the time, in my opinion. So now that said, this time around, with the resets, the cost of issuing a CLO has gone down. So those-- in that 2018 reset mania, those were a lot of proverbially 2015 CLOs, and over the time from 2015 to kind of the batches that we're looking at, kind of the immediately pre- and immediately post-COVID CLOs, deal issuance costs have gone way down.

[Tom Majewski, CEO at Eagle Point Credit Company]

So unfortunately or fortunately, we have less unamortized issuance costs per CLO in general, so the tax shelter from that activity would certainly reduce—would be less this time than last time, generically. That said, when we predict out taxable income and mindful, it's always very difficult in any one year to predict taxable income for CLOs. The two things we kind of think out there are the two big variables, the amount of reset and refi activity for us, which would most likely have an effect of lowering our taxable income.

[Tom Majewski, CEO at Eagle Point Credit Company]

The offset is, while I, I lamented earlier that the price of loans is too darn high, at the same time, many of those loans were loans that were purchased at discounts and CLOs, and to the extent those loans are refinanced or sold, it could start flashing through a lot of gains on those CLOs, which would create immediate taxable income for us... even though we don't get cash flow related to those gains, because it gets trapped in the CLO. So Ken been pulling his hair out a little bit as we think about this, but we've kind of got two things, and Ken doesn't have a lot of hair, if anyone's met him here. But, we're kind of balancing it two ways. We know the resets are low.

[Tom Majewski, CEO at Eagle Point Credit Company]

We believe the resets are likely to increase, which is gonna create some additional tax loss or tax write-off. All else equal is always good. The bad part, but I know again, it's good and bad, if loans are being sold at gains, I wish we did that every day in our CLOs. The only bad part is, and that creates taxable income. We don't get it out as cash, because it gets trapped in the CLO. So we got two of those things. We got a yin and a yang. I don't have-- we don't have a definitive view, which is gonna be more powerful.

[Tom Majewski, CEO at Eagle Point Credit Company]

One of them might be one of them is probably going to be more powerful than the other, but they're probably correlated in that the more reset activity we're doing, it's probably because the price of loans is going up and the market's strong. But maybe they offset each other. But those are the two things that'll be the big factors. It won't be as big this time in my expectation versus the 2018 tax write-offs that we're able to take, just because the unamortized costs are a lot lower this time.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann]

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

[Tom Majewski, CEO at Eagle Point Credit Company]

Great. Thank you.

[Operator]

As a reminder, if you would like to ask a question, press star one on your telephone keypad. One moment please, while we re-poll for any additional questions. Thank you. Mr. Majewski, it appears we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

[Tom Majewski, CEO at Eagle Point Credit Company]

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

[Operator]

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

Participants

Executives

• Ken Onorio, CFO and COO
• Tom Majewski, CEO

Analysts

• Garrett Edson, Managing Director at ICR
• Mickey Schleien, Managing Director of Equity Research at Ladenburg Thalmann