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Operator
Greetings and welcome to Eagle Point Credit Company's fourth quarter and year-end 2020 financial results. At this time, all participants are in 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Garrett Edson of ICR. Thank you. You may begin.
Garrett Edson
Thank you, Rob, 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. Before we begin our formal remarks, we need to remind everyone that 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. Further information on factors that could impact the company and the statements and projections contained herein. Please refer to the company's Finances, 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, update, or forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website, equalpointcreditcompany.com. Earlier today, we filed our form NCSR, our full year 2020 audited financial statements, and our fourth quarter investor presentation with the Securities and Exchange Commission. Financial statements and our fourth quarter investor presentation are also available within the investor relations section of the company's website. 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. As a reminder, Eagle Point Income Company will also be holding its conference call this morning at 1130 a.m. Eastern Time. A web link for that event can be found at the investor relations section of www.eaglepointincome.com, or you can dial in by calling 877-407-0789 and reference conference ID 1371-5044.
Rob
I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company. Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's fourth quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company, including information about our portfolio and the underlying corporate loan obligors. For today's call, I'll provide some high-level commentary on the fourth quarter, the full year 2020, and some recent events. Ken will then walk us through the fourth quarter financials in a little more detail. I'll then return to talk about the market environment, our strategy, and provide some other updates on recent activity. And, of course, we'll be happy to open the call to your questions at the end. Simply put, we believe 2020 validated our approach to investing the company's assets and managing the company's liabilities. We make investments that, frankly, some in the media have panned. After the depths of a pandemic and a double-digit decline in GDP, The company generated an ROE just shy of 20% last year. We had no forced sales. We had no liquidations. To the contrary, because of how the company and our investments were structured, most of the time we were on the offense, buying when others were forced to sell. Our NAV ended 2020 higher than where it began the year. We were even able to take advantage of market dynamics to buy back a portion of our own debt at deep discounts during the year. While there is risk in all investments, we believe our performance in 2020 is an excellent case study as to how our portfolio can handle economic stress. Looking to 2021, by a number of important measures, the year is already off to a very good start. Recurring cash flows received on our portfolio in January 21 were $30.7 million. This is up from Q4. And even more notably, it's 21% greater than our collections in January of 2020. Our NAV went up again during January to begin between $11.95 and $12.05 a share at the midpoint. This represents a 7% gain from where the NAV stood as of December. Not a single company in the U.S. syndicated loan market defaulted in January. Truly remarkable. And through Friday, only one retailer that had been trading at distressed prices long before anyone knew what COVID was sought bankruptcy protection so far in February. So the default cycle is close to nonexistent so far in 2021. We remain mindful that COVID is still with us, and frankly, uncertainties remain, but it appears there are far more tailwinds today than headwinds. and we could be in the early stages of the next expansionary period. Our net investment income for the fourth quarter was 24 cents per share, in line with our common distribution level. If you look through our quarterly investor deck, you'll see we also had a reversal of some previously accrued income, principally related to CLO debt. Without that, NII would have actually been two cents higher. During the quarter, there were certain holdings in our portfolio that were already marked down to fair value where we determined that any future cash flows were either to be nonexistent or de minimis. Several of these investments were seasoned CLOs that unfortunately ended their reinvestment periods during the depth of the COVID uncertainty, or were 2014 vintage CLOs that had heavy energy exposure and suffered losses a few years ago. We decided to write them off. moving from an unrealized loss to a realized loss for these positions. Because we fair value our investments regularly and mark our books accurately, these amounts had largely been factored into NAV already, so despite the optical realized loss, there wasn't a meaningful impact on our NAV. You could think of this really as an accounting reclassification moving from one category to the other. Thus, for the quarter, we had NII less realized losses for a loss of $0.80 per common share. Along with our NII performance, we've been able to find attractive CLO opportunities in both the secondary and primary markets. During the quarter, we've deployed over $10 million in net capital, including five secondary and two primary CLO equity purchases. The new CLO equity that we purchased had a weighted average effective yield of a little over 19.25%. and the two primary purchases were conversions of existing loan accumulation facilities that we held. Beyond the positive trends in our cash flows and earnings, we continue to maintain a very solid balance sheet. We have no financing maturities prior to October of 26. All of our financing is unsecured, and we have no repo-style financing or unfunded revolver commitments. Going through the depths of the COVID uncertainty earlier in 2020, the company's balance sheet proved to be a very steady hand. Frankly, our balance sheet even provided us with opportunity through the debt buybacks we executed. We made about a million dollars for our shareholders through those buybacks. When I was writing the script, originally I was going to say we were lucky how our balance sheet was structured. However, I think it's really more accurate to say that it was good planning that put us in a very fortunate position that we were in during the depths of the market. Looking forward, pro forma for January's performance, we're actually closing in on the low end of our long-term leverage band. We have ample dry powder, just shy of $30 million in the bank as of February 9th, allowing us to continue to be on the offense. Earlier this month, we declared common distributions of $0.08 a month for April, May, and June. That's keeping with the rate we've been at for the last few quarters. As we've also done, I want to highlight the value of the right side of our CLO equity portfolios balance sheets. Within each of the CLOs, we continue to believe our portfolio could withstand a prolonged recession and, frankly, thrive in it. This is not because we're blind to defaults, but we're very mindful of the value that can be created through reinvesting within our CLO structures. We saw some of this play out last year. The money to reinvest within a CLO comes from relative value sales and repayments on loans. You may be surprised to know that after the start of the pandemic, kind of beginning on April 1st through the end of the year, 12% of the loan market prepaid at par. Many of our CLO collateral managers during the depths of the crisis were able to use these par paydowns to reinvest in high-quality loans, which were at the time trading in the 80s and 90s. This had the effect of building PAR and offsetting other losses that might have needed to be taken. A key metric to evaluate our reinvestment optionality is how much reinvestment period we have left in our portfolio. At year end, our equity portfolio's weighted average remaining reinvestment period stood at 2.4 years. This allows our CLOs to continue to be on the offense in volatile markets. This measure was 2.9 years at the beginning of 2020. So, despite the passage of a year's time, through our proactive management, our portfolio decayed by only half a year. With the CLO reset market open as it is today, frankly, we have a path to potentially lengthen the tenor of a number of investments that we already have in the ground. I also want to highlight something on our schedule of investments that's new and a bit unusual for us. If you look at the SOI, you'll see we have approximately 679,000 shares of common stock in McDermott International. McDermott is a design and construction firm for the energy industry, not something we normally have on our SOI. One of the things you may have heard about over the last two years relates to restructurings of bankrupt companies, which are designed by the distressed fund community to be unfriendly to CLOs. McDermott is a prime example of that. In this case, as part of the workout, Lenders were given the option to buy common stock at 50 cents a share, kind of post-bankruptcy common stock. Yet the stock was trading around 85 cents a share at the time, so this was a very valuable option. Unfortunately, due to restrictions within CLOs, while CLOs can typically receive and hold common stock as part of a workout, if they can't write a check to purchase common stock, And in this case, the restructuring was set up in such a way by people who knew CLOs couldn't write that check. As we became aware of the situation, we contacted our CLO collateral managers and said since the CLOs couldn't take advantage of the situation, we would. Most, unfortunately not all, but most of the collateral managers were very cooperative, and we bought several blocks of the McDermott stock that was assigned to the CLOs that ECC was the owner of. We promptly sold enough stock in early January to cover our cost basis but have held on to the balance. Now we're sort of working with house money would be a good way to think of it. We're still evaluating what to do with this holding, but since we sold enough to cover our costs already, we can be more opportunistic with the remaining position. In this case, the amounts involved aren't tremendously large. Nevertheless, it's an important statement to the market for CLOs not to be pushed around. CLOs own the majority of the loan market, and by definition, they have the heft and scale to drive things, particularly when the CLO market works in unison. We've seen several examples over the last year where the CLO market ultimately had the upper hand over distressed investors. The best solution, of course, is not to get involved with companies that go through restructurings, but it's inevitable in our business, and you can be confident that we'll seek to use any tool available to us to capture value for the company And this is a prime example. There's one other item that's slightly unusual that I also wanted to highlight. It's in the good news category. We finalized our taxable income for 2020, and it looks like roughly 80% of our common distributions from last year will be treated as a return of capital for tax purposes. While we had nearly a 20% ROE, that's for GAAP purposes, the taxable income on your 1099 will reflect only about 20% of the cash distributions you received last year. So those distributions perhaps were a little greener, so to speak. While cash flow is the most important part of investment, our investment program, there's also gap earnings and tax measures which are important to understand. In my experience, there's never been a year for CLOs where cash, gap, and tax all equaled each other. They each work under different rules, And while an aggregate for the life of an investment, it will ultimately all tie out. In any given year, things can and will vary. And in the case of 2020, they vary widely. Of course, nearly all investors want to pay as little tax as possible, so we consider this good news. What gave rise to the low taxable income was principally trading activity within our underlying CLOs. Within PFICs, or Passive Foreign Investment Corporations, which many CLOs are, capital losses can be offset against interest income. This is a fairly novel provision of the U.S. tax code and one that worked tremendously to our advantage last year. To give an example, let's say a CLO bought a loan at par a few years ago and sold it last year at 85 in the uncertainty around COVID. That CLO used the sale proceeds and went and bought a different loan that they might have liked better, also at 85. In this example, the CLO would have reported a loss for the 15 related to the first sale, and it wouldn't have to pick up much income related to the buy at 85. It might be a little bit of accretion income, but they don't have to pick up the full 15 as income right away. So, of course, there is no free lunch, and if that new loan pays off at par in 2021, we'll have to pick up roughly $15 of gain as taxable income this year. So where we sit today, we don't expect 2020's low taxable income scenario to repeat itself in 2021. One of the things I've said in the past is that taxable income provides a floor on our distributions, which it functionally does due to RIC rules governing taxable income distributions. But importantly, it doesn't serve as our only guidepost for distributions, and I want to make sure investors are very aware of that. A fortunate year last year, we likely will see a higher tax bill coming in 2021. Since the time of our IPO in 2014 through the end of 2020, on average, our common stock has traded at a double-digit premium to NAV. That's something we've been quite proud of over time. Ken and I are keenly aware that where we stand today, our stock is at a single-digit discount to NAV. We have some ideas as to why, but thankfully know that there are a number of levers available to us to help address the share price We can share more details on our plans and approach when appropriate, but please know that Ken and I are highly focused on the share price of the stock. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets and then share a bit more on our outlook for 2021. I'll now turn the call over to Ken.
Tom Majewski
Thanks, Tom. For the fourth quarter of 2020, the company recorded net investment income of approximately $7.5 million, or 24 cents per share. NII and realized losses for the quarter resulted in a net loss of 80 cents per share. As Tom mentioned before, the bulk of the realized loss had already been factored into NAV, and this was effectively an accounting reclassification of an unrealized loss to a realized loss as the impact of COVID eliminated any last hope of future cash flows from these investments. This compares to net investment income, net of realized losses of 23 cents per share in the third quarter of 2020, and net investment income, net of realized losses also of 23 cents per share in the fourth quarter of 2019. When unrealized portfolio appreciation is included, the company recorded GAAP net income in the fourth quarter of approximately $95 million, or just about $3 per share. This compares to GAAP net income of $1.40 per share in the third quarter of 2020 and a GAAP net loss of 47 cents per share in the fourth quarter of 2019. Just as a reminder, our short-term cash flow generation is largely unaffected by the unrealized appreciation or depreciation we record at the end of each quarter. The company's fourth quarter GAAP net income was comprised of total investment income of $14.5 million and unrealized mark-to-market gains of approximately $121 million, partially offset by realized losses of $33.3 million and expenses of $6.9 million. As of February 9th, we had $29.5 million of cash on hand, net of pending settlements. As of December 31st, the company's net asset value was approximately $362 million, or $11.18 per share. Management's unaudited estimated range of the company's NAV as of January 31st was between $11.95 and $12.05 per share, which at the midpoint is a 7% increase compared to December's NAV per share. The company's asset coverage ratios at December 31st for preferred stock and debt calculated pursuant to Investment Company Act requirements were 354% and 534% respectively. These measures are comfortably above the statutory requirements of 200% and 300% respectively. As of December 31st, The company had debt and preferred securities outstanding, totaling approximately 28.3 percent of the company's total assets, less current liabilities, which is within our range of generally operating the company with leverage between 25 to 35 percent of total assets under normal market conditions. Based on the midpoint of January's NAV estimate, this measure stood at 27.5 percent, approaching the low end of our range. Moving on to our portfolio activity in the first quarter through February 9th, the company received recurring cash flows on its investment portfolio of 30.7 million or 95 cents per share. This compares to 27.6 million or 87 cents per share received during the full fourth quarter of 2020. Consistent with prior periods, we want to highlight that some of our investments are expected to make payments later this quarter. During the fourth quarter, we paid three monthly distributions of eight cents per share of common stock and are paying the same amount for each month in the first quarter. Additionally, in February, we declared common distributions for each of April, May, and June also in the amount of eight cents per share. Through our at-the-market offering program in the fourth quarter, the company issued approximately 598,000 shares of its common stock and approximately 30,000 shares of its Series B term preferred stock for total net proceeds to the company of approximately $6 million. During the first quarter through February 9th, the company has issued approximately 242,000 additional shares of its Series B term preferred stock for total net proceeds to the company of approximately $6 million. And we'll now hand the call back over to Tom.
Rob
Great. Thank you, Ken. Let me take everyone to walk through on where we see kind of the macro loan and CLO market and touch a bit further on our recent portfolio activity. In the face of a very difficult economic climate for much of 2020, the Credit Suisse Leverage Loan Index generated a total return of nearly 3%. This was the index's 27th year of positive returns out of its 29 years of existence. When you consider these are typically speculative-grade credits, these loans, these are the loans that generate the raw materials within our CLO that generate the cash flow. Spanning nearly three decades, a 90% success rate in investing, in our view, is very, very good. And this is what generates the cash that flows into our CLOs. Thanks to the rally in loan prices over the last few months, according to data from S&P, a little more than a quarter of the loan market is actually trading above par at the end of January. Despite the ongoing improvement in the loan market, the significant majority of loans still trade at discounts, even if more modest today, and we believe there continue to be opportunities for our CLOs to reinvest and build par through buying loans at discounted prices, both in the secondary market and new issue loans with OID. Our CLO equity investments should be well positioned to continue generating strong cash flows as we enter what we believe to be the early innings of the next expansionary period. Retail loan outflows continued early in the fourth quarter with total outflows for the quarter of a little over half a billion dollars. That trend reversed in December of 2020 with retail inflows picking up and investors became more and more focused on the risks of investing in fixed rate bonds. Frankly, December was the first monthly inflow to loan funds in some time. and that trend has continued into 2021. On a look-through basis, the weighted average spread in our portfolio increased slightly from 3.59% in September to 3.61% at the end of December. Frankly, we might see this trickle down a little bit in the coming months as demand for loans remains strong. As I noted on our last call, an increasing number of loans in the market now include LIBOR floors, which further increases our interest collections when short-term rates are as low as they are at present. The trailing 12-month default rate at the end of December stood at 3.83%, according to S&P Capital IQ, well below what was initially feared by many at the onset of the pandemic. While many of the borrowers that defaulted in 2020 were actually on thin ice before the onset of COVID, and thus COVID just accelerated the default process for these weaker borrowers, there were some COVID-related defaults ultimately. Notably, in January, as I mentioned earlier, there were zero defaults or distressed transactions in the U.S., and only one company has filed so far in February through Friday of last week. We still expect additional defaults in the coming months, and most dealer research desks are forecasting 3% to 3.5% default rate in 2021, certainly much better than initially anticipated. However, when you look at the loan market, only about 2% of the market is trading below 80. So frankly, perhaps there is some potential upside to those default forecasts too. By definition, they're sort of assuming every loan below 80 defaults and a bunch of others do. Maybe that's too conservative. Time will tell. While defaults may continue at slightly elevated levels in the short term, we believe the corporate default rate will remain lower than it otherwise would have, frankly. had more of these loans had financial maintenance governance. Also, corporate liquidity has been continually strengthened through both ability to access the bond and loan markets, and this provides additional buffers for companies against future economic setbacks. The company's default exposure as of year-end stood at about 1.24%, certainly well below the trailing 12-month default rate. Further, only about 11.7% of our loans in our underlying portfolios mature prior to 2024, providing the significant majority of our corporate borrowers with years and years of runway before their debt is due. And just about 3% of our portfolio is trading below 80 at present. Our portfolio's weighted average junior OC cushion, this is on a CLO by CLO level weighted average, is about 1.84% as of December. and that's up from 1.12% at the end of September, but still below where it was on a pre-COVID level, reflecting that some CLOs did lose par during the year. I do note that many of our largest holdings have significantly greater OC cushion than the average. In the CLO market in 2020, we saw about 93 billion of new issuance, which when you consider the environment through much of 2020 is really very good performance. We also saw $11 billion of resets and $20 billion of refis. Most of those were kind of anchored at the very beginning and end of the year as spreads were wider in the middle of the year. For 2021, Eagle Point, our advisor, expects about $100 billion of new issuance volume, about $60 billion of resets, and about $75 billion of refinancings. With the market continuing to have plenty of liquidity and rates having to start really reflect more of an inflationary view here in 2021, we're watching this closely. We think there'll be plenty of reset opportunities and refi opportunities for us. And with many companies having ample liquidity, even if rates do rise, we certainly don't anticipate many inflation-driven defaults in 2021. CLO debt spreads have tightened significantly since the beginning of the year. While it feels like junior mezzanine might have reached a resistance point lately, the demand for floating rate AAAs and AAs continues to feel quite robust. You might have read in the media that some of the large Japanese AAA players are on the sidelines. Something interesting about the way many of those investors behave is they often take all or nearly all of the AAA class when they invest. The AAAs and some of the recently issued CLOs off of our platform have had much more broadly syndicated investor books, sometimes with 10 or more investors in the AAA class. We think this is very good for the market, and it allows for many more investors to participate. Frankly, AAAs are often well oversubscribed these days. Taking advantage of this debt demand, as I mentioned a minute ago, we're actively working on resets and refinancings of quite a few of our CLOs in the portfolio for the first half of 2021. We have a calendar slated out for quite some time. More recently, AAAs have tightened roughly to the 105 level. Maybe you've even seen one or two prints inside of that. This provides our CLOs with ample opportunities to pay off the old, now expensive, AAAs and issue new, tighter paper. Ninety-eight percent of our equity positions by market value that were scheduled to make payments in January did so. Think about this. Less than one year after one of the largest crises we've seen in a long, long time, 98 percent of our CLO equity is paying current distributions. Our recurring cash collections in January of 2021 were 21 percent greater than our recurring collections a year ago in January 2020. If you followed us for a while, you're certainly aware that the marks can move around on our portfolio. No question about that. But for the vast majority of our portfolio, the cash just keeps coming, and that's the name of the game here. To sum up, our portfolio generated a gap total return, or ROE, of nearly 20% last year. Cash flows on our portfolio continue to increase in January 2021, with cash flows higher than they were a year ago. Our balance sheet remains strong, and we have no debt maturities for nearly six years. We've got just shy of $30 million of dry powder available. Demand for floating rate assets, what we own, is increasing, and more and more investors are shifting out of fixed rate bonds into floating rate paper, be it loans, CLO debt, even CLO equity. So we've got what the market wants. And we know where our stock has historically been and where it is now. And Ken and I have several tools available to use on this front and know that we're focused there. While certainly not a straight line, which would have been a lot easier, 2020 proved to be a very good year for the company. 2021 is off to a strong start, and it feels like we're in the early innings of a new expansionary period. We're continuing to closely manage our investment portfolio, and frankly, we're quite confident in the future. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to questions.
Operator
Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd 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. Our first question comes from Mickey Schleen with Ladenburg-Solomon. Please proceed with your question. Hey, Mickey.
Mickey Schleen
Good morning. Hey, good morning. How are you? Tom, a high-level question. I want to ask how you feel about the loan market's equilibrium when you think about the very high level of CLO warehouses that are in place versus the level of M&A and LBO activity. You mentioned the level of loans trading at a premium level. in the market, and that may indicate prepayment risk. And as you show on your presentation on page 18, loan spreads are still above their long-term average. How do you feel about the risk that loan spreads could decline more quickly than the CLOs' ability to refinance their liabilities?
Rob
Good question. And you're dusting off your notes from Q1 of 2018, if I were to suspect, where we saw both spread compression into a lesser degree. We saw loans tighten, and we saw CLO debt tighten more slowly. This time, as we look at where the loan market is, we are seeing some tightening, and I alluded to, it's not crazy to think that weighted average spread will trickle down a little bit. I don't think it behaves as rapidly. If you look at that chart on 18, this is our current outlook. If you look at the compression from 16 to 18, going from 391 to 348, this is market-wide data. We don't anticipate something like that playing out. Frankly, of those loans at premium, certainly a fair number of them have stolen a soft call provision where they would have to pay a prepayment penalty to do anything. That said, one or two loans have opted to pay the prepayment penalty, which I guess gets paid through to CLOs at least, which is nice. The key difference this time, I don't think we're gonna see as much repricing as we did in certainly 17 and 18. We will see some. A key difference though is on the right side of CLO balance sheets, I think the market is in much better shape and has the potential to tighten even greater. We started the year with AAAs kind of in around 130 area, and deals are kind of getting done around 105 area. This is just at the AAA level today. And some of that, I guess a couple of things. When you have some of those large players who come in and just take the whole class, it's hard to get a lot of pricing tension when you're just dealing with one guy. We've seen deals. One CLO we were involved in earlier in January, we went out with the AAAs, kind of talked at 120, low 120s. We ended up pricing it at 114. Market's coming even since. But that kind of movement really is very unusual in the CLO market. But that's attributable to that deal had over 10 different investors in it. And that gives the syndicate manager strength to, and I don't think anyone was more than $60 million on a, say, $300 million class. That gives the syndicate manager strength to be able to kind of flex things tighter. At the same time, we have two other market trends. It's not an extreme view. It's a pretty common view to think right now rates are going up. While we think three-month LIBOR probably stays low for longer, The longer end of the curve, 5, 10, 20-year stuff, certainly keeps trickling up. So if you're someone who's got to buy structured products, buying fixed-rate CMBS or autos and things like that, frankly, there's a lot of paths to downside versus the CLOs, at least you don't have any substantive rate risk in your portfolio. And then the final variable, which we think augers favorably, is there's far less captive or risk retention capital in the market today. And roll the clock back to 2017, 18, while the majority of CLOs were made compliant using vertical risk retention, that was where the sponsor took 5% of every class, maybe 40 to 45%, give or take, of those CLOs were taken using horizontal retention, where all the retention capital was put in the equity. To be polite, what I would say is much of that capital was, shall we say, return insensitive, in that often cases there's a conflict of interest and that the collateral manager decides when to print using just calling down LP money. That has the added benefit of starting their fees when they print a CLO. So we saw a lot of CLOs get printed in 17 and 18 that, in our opinion, probably were too tight of a return profile. But that had the effect of creating so much AAA supply that AAAs didn't tighten anywhere near as much as they have lately. So that's largely history in the rearview mirror. So net, we've got a loan universe that's probably going to behave more slowly. They've got more lockouts. If anything, they're more focused on lengthening tenor than cutting costs in general. As a borrower, there will be exceptions. we've got a driving force into floating rate product, and then we have much more disciplined issuers with third-party profit-oriented capital investors like ourselves driving issuance. So I think those three things will help. And then when we look into our portfolio, if you look through way back in, let's see, pages 25 and 26, You can see the vast majority of our portfolio is out of the non-call period at this point. And that's very, very good. We've spent a lot of time mapping refis and resets, whatever makes sense to do, or calls in some cases of each of these investments. And whereas in 2017 or 18, I would have said, you know, a fair number of our CLOs are still in the non-call period. Our weighted average non-call period across our portfolio is only two-tenths of a year right now. So that means we've got a lot more flexibility when we're managing the right side of CLO balance sheets. So here you're loud and clear. Compression was something we lamented a lot in 2017 and 18. I think there's some pretty strong facts to suggest it won't reoccur anywhere near it did two to three years ago.
Mickey Schleen
Thank you for that, Tom. That's very helpful. And it actually has generated a follow-up question for me. If anything, if we look at the market today relative to a few years ago, CLOs on a relative basis are representing even a larger share of demand. Do you think CLOs are a large enough proportion of the market to actually dictate terms? In other words, they'll look at the arbitrage and accept a certain level of, spread compression relative to where they think they can price the liabilities, and obviously they want to keep the arbitrage in place. Is that effect strong enough to sort of mitigate the spread compression amongst loans?
Rob
I wish. That unto itself is not, frankly, in my opinion. In that while if you look at our data on page 15, CLOs control 62% of the loan market, you think we could just dictate terms. it's a law of large numbers and that there's often 100 to 200 different players in a given loan. And invariably one of them, more than one of them, has to act a little more keenly than the others. So while it's good that we have such a big position, I think that's more helpful in workouts because there's so many folks in hitting the buy button or considering things, sadly, I don't think we are able to act in unison to drive terms. The one thing I will say which will be better this time, and we've seen it already, is the folks buying CLO equity are much more like us today and far less in the way of risk retention or captive funds. And when we start buying loans into a loan accumulation facility, We print when we want to, not because we want to turn on the collateral manager fees. So the community of investors that's supporting CLOs today is much more profit-oriented than some of the capital that was chasing deals a few years ago. So the thing I think that will be the discipline-gating factor to not having a mismatch, frankly, is the behavior of equity investors, which I think the market's much better positioned where we sit today.
Mickey Schleen
I understand. Tom, your portfolio is now marked above pre-pandemic levels when we look at fair value versus cost, and the portfolio's cash flows increased sharply in the fourth quarter and are also back to pre-pandemic levels on a per share basis. But your average gap effective yields really haven't improved. What accounts for that divergence, and does that reflect some pessimism on your part in terms of valuation?
Tom
No.
Rob
There's always a bit of a lag between... We reset the effective yields every single quarter at this point. In fairness, there's a bit of a lag between how things get projected. We refresh the assumptions each quarter, and you can see that in our financial statements. One of the challenges, if anything, to be critical of ourselves, perhaps our default assumptions are overstated in the near term. If I were to be critical, obviously we like to be conservative on that, and to the extent defaults don't happen, if we continue with one default every six months or every six weeks, that's certainly a much more tolerable pace. I could see some path to further upside in the effective yields, but it moves around a little more slowly than all else equal we would like it to. Maybe it reflects a little conservatism, but not pessimism.
Mickey Schleen
Okay. A couple simpler questions, Tom. Do you believe it would be economical for you to redeem the 2027 notes and perhaps upsize them to increase your balance sheet leverage back towards the center of your target?
Rob
Certainly, we're mindful of where we are in leverage versus our target, and we are comfortably below it. As we look across other 40-act vehicles, notably BDCs, all the cool kids have been issuing left, right, and center, so we're mindful the market seems open. One thing we're also mindful of is I don't think there's been a deal done longer than five years. And right now all of our paper outstanding is original 10-year tenor. So as we kind of balance and everything actually becomes callable, one of them is callable already, the Xs I think run off a non-call in April, and the Bs actually run off non-call later this year. So we have tremendous optionality over our debt. whether we issue new bonds or preferreds or refinance stuff. We grapple with all of those things. Mindful, your colleagues in banking like to charge a few points to issue those deals as well. On a five-year deal, the tenor over which you're amortizing that cost starts to get a little punitive. So we're looking at all different options and issuing debt or preferred is certainly one of the levers in our tool chest. To the extent we did that and invested at a higher rate, that would obviously be accretive to NII.
Mickey Schleen
I understand. I have one more question, my last question. Besides capital allocation, was the decision to take the realized losses this quarter also driven in any way by tax? And what is the outlook for return of capital in terms of your distributions going forward?
Rob
Sure. So, no, the realized loss was purely an accounting reclassification. The positions had been – hopefully everyone is comfortable we fairly mark our book. The positions had been fairly marked going into year end, anticipating little or no future cash flows from any of these investments. And just kind of the reality of assessing the portfolios, you know, whereas some of them, and this obviously is the benefit of a large, diverse portfolio, there will be a few challenge names that pop up. Whereas at the beginning of the year, you could at least make a credible argument on some of them having some further value, kind of post-COVID, you know, everyone took a little pain in COVID. some more than others. If CLOs were late in life, in some cases we just decided it wasn't, you know, you couldn't make a credible case. So that was something we rolled out. But it really was just an accounting reclassification, moving from one bucket to the other. We already took the unrealized loss, so that's why there was essentially no NAV impact from this. But we didn't actually sell the securities. We still hang on to them. I mean, in theory, they could Phoenix. We wouldn't bet on it. So that didn't trigger any sort of tax consequence unto itself. The bulk of the sheltering of taxable income related to activity and, frankly, stuff that we help encourage, and I think many of the collateral managers we invest with, appreciate we have a heightened sensitivity and knowledge around tax. A lot of the trading activity in CLOs last year really proved to shelter a lot of interest income. So we got gobs and gobs of cash because there were some realized losses. Even if they were just relative value trades, we sheltered the vast majority of income last year. I think there will be far, where we sit today, assuming market conditions stay similar to where they are, I think there will be far fewer realized losses this year within CLOs and potentially realized gains, which could flash through a significant amount of income up to ECC. We know gap tax and cash will equal over the life of a CLO. That's probably the most read downloaded report on our website from 2015. What I don't... But what we have not figured out, and I can tell you why, and no one has, is accurately modeling taxable income into the future in that a big driver of that is collateral manager behavior. And I can't say accurately exactly what buys and sells will be doing in the fourth quarter of 2021, which would have a big impact. Safe to say, where we sit today, it looks like taxable income should be up year over year. It could be meaningful. In theory, it could be above the distribution level, frankly, but it's too soon to tell.
Mickey Schleen
That's very helpful. Thank you for all your time this morning, Tom.
Rob
Thank you for your questions, Mickey.
Mickey Schleen
You're welcome.
Operator
Our next question comes from Randy Binner with B Reilly. Please proceed with your question.
Tom
Hi, Randy.
Randy
Hey, Tom, good morning. So I, yeah, just on the reclass for the realized loss, what exactly are the buckets that those, you know, those items moved from? And two, was it, I understand that you already marked them, so there was already an unrealized loss. Was it they moved from how the maturity are available for sale? I'm just trying to understand the mechanics of where the reclass was.
Tom
Ken, do you mind driving on that a little bit, maybe where we can see it on the balance sheet?
Tom Majewski
Sure. So it really is just a reclassification of categories. And if you go to our income statement on the annual report, it's page 19. Okay. And you'll see that there are the two largest buckets. One is net realized gain loss. of $37 million, and then there's a net change in unrealized appreciation of $61 million at the bottom of the income statement. All that happened, and this is a net amount, is the unrealized loss and that net change in unrealized appreciation depreciation moved into a realized bucket on the income statement. The other thing to be mindful of is I would say this goes from kind of below the line as an unrealized event to above the line as a realized event, meaning that it's being noted through our earnings per share. But on the face of the balance, you just went from unrealized to realized, and then it's being reported as part of our earnings per share for the quarter.
Randy
Okay. So, yeah, when you say buckets, you're saying unrealized to realized. Yeah. Which is fine. So I was just curious if you were saying it was more like held to maturity to available for sale or something like that. No, no, it's just not the case.
Tom Majewski
Correct. It's just an accounting line item.
Randy
I mean, everything's available for sale for you all, right? I mean, do you have stuff that's held to maturity? No, it's all available for sale. Yeah, okay. And then so then the actual – $33 million is the residual or final amount of the loss, or is that tax impact? That was just whatever was not previously marked down?
Tom Majewski
Correct. It had been marked down.
Rob
It just was temporary previously. Got it. Yeah, that's correct.
Randy
On the incentive fee... I don't know, Tom, if you covered this in the opening comments. You said something would have been two cents higher if not for something. I didn't know if that was related to NII or incentive fees, but the incentive fee was lower than we modeled this quarter, but it can tend to be a little bit lower in the fourth quarter, just seeing if there's kind of a structural shift lower on incentive fees or if that's normal fluctuation. And then the two-cent item from your script, I didn't place that. So those are just kind of two cleanup questions.
Rob
Let me drive on the latter. Maybe if you look at page 29 of our investor deck, you can see in the middle section there, accrued income during Q4 2020. It's a negative 31. What is that? 31. cents but that's probably in millions and millions so it's 310 000 of and you can see it's from a couple of positions of interest yeah and these are mainly clo debt that just accrues interest but um we uh we did similar with the clo equity a couple of these like flagship which is a deutsche asset management deal that unfortunately has has not turned out as well as we could have hoped we had some accrual on the interest, but that bond is picking. And we said, let's just write that off. We're not sure we're ever going to be able to collect that. So that $0.02 was a reversal. So prior periods accrual, had that not happened, NII would have been $0.26. Got it. And then on the incentive fee, that's a pretty straightforward calc subject to meeting the hurdle. It's the pre-incentive fee NII times the incentive fee rate.
Randy
Is there any change in the incentive fee rate?
Rob
No.
Randy
For planning purposes. Yeah, I guess that's the more precise way to ask that. Okay. I think that's all we have. I mean, I think I'll ask one more. It's a little higher level, but you went through that McDermott example, which is pretty, you know, I think interesting about where the workout environment is. We're pretty friendly, I guess. And I don't, I don't know if you take sides in the market or you kind of accept the market for what it is, but I mean, do you, do you see that environment changing? I mean, it seems like it's just, you know, it's pretty friendly credit environment in general and, you know, I think case studies like that would be really supportive of your business model. Yeah, obviously there's a lot of volatility in the market. Do you see that as sustainable in 2021? Like, is that the backdrop we should plan on when we think about ETC?
Rob
Yeah, hopefully not having a lot of E&P common stock. That's certainly, you know, we'll figure out how to dispose of that is my broad assumption. We've already, I mentioned earlier, we already sold enough to take our cost basis off the table. So now it's just optimizing the profits, but if we invested 100, we sold 100 in proceeds already and just have the balance where we stand today. So what's gone on? There's a common misperception. CLOs can't hold defaults. CLOs can't hold triple Cs. All this stuff is largely incorrect. One thing that is correct is CLOs in general can't put out money for things other than loans. While there's some relief on the Volcker rule that allows some bonds and things, that's still just trickling into the ecosystem. So here, we knew this was going on. Operationally, it was a real challenge to figure out how to get these collateral managers to assign the right to do this to us, but we did it. I think all but one cooperated. And in this case, the good guys, us, won. You know, that was a bad situation. We probably lost money through the CLOs on McDermott overall. It was a workout, so that's bad. But in light of a bad situation, we at least offset a good bit of it. Another example, this didn't come into our portfolio directly but was in there indirectly. was like Serta Simmons. And there were some top stories on Bloomberg for a while about this, between Eaton Vance, who's a large holder of loans, leading one side, and Apollo's distressed fund was on the other side. And ultimately, Eaton Vance and the CLO band, you know, outwitted Apollo. Apollo sued, and, you know, and they lost. And ultimately, the CLO's were able to kind of get in front of and stop what was contemplated to be something that would have been very CLO unfriendly and actually made it something that was very unfriendly to the distressed fund. So the markets opened up to it. Our CLO market's eyes have opened to it, and we're doing things to beat it. It's not going to be perfect, and there's going to be situations we lose, and there's going to be some new trick up someone's sleeve that come our way. But by and large, I think we've seen a meaningful shift through the course of 2020 where the CLO community can act more in concert and in unison. Obviously, we want to get the best outcome for all of our investors. You know, all CLOs are substantially aligned in that. And while we're not directly buying and selling the loans in CLOs, Because of our standing in the market, we've got the added ability to help make sure people are talking to each other that need to, which is a thing we can do to pull all in the same direction. The underlying loan world, this kind of intraclass creditor warfare, is something that's going to be around for a while, is our view, in that many loans today have provisions that say, 51% of the holders of a loan can consent to be primed, to have someone else come in front of you. And like in the case of that Serta Simmons, what do you know, 51% was held by CLOs, and they consented to put new money in at a fat coupon in front of the existing seniors. That all came from the loan community, the par loan community, in many cases CLOs, which had the advantage of or the benefit of disadvantaging other people subordinate in the capital structure where that distressed debt fund was. So that's in a lot of loan documents today. Even loans today in many cases still have that. And that really just tees up a path for credit. It used to be the loans versus the bonds or the bonds versus the MES. It's now loan on loan. Thankfully, that goes back to CLOs owning 62% of loans in aggregate to the extent we work as a group. we should be able to be on the winning end of more and more of those. But where there's situations where there's security kickouts and things like that, if it makes sense to do, be assured we're going to do everything we can to try and do them. And in the meantime, we're learning about energy-related engineering companies very quickly.
Randy
There you go. There you go. All right. Well, thanks for all the call. I appreciate it.
Rob
No worries. We appreciate your time. Thank you.
Operator
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Ryan Lynch with KBW. Please proceed with your question.
Tom
Hey, Ryan.
Ryan
Hey, good morning, Tom. Just had a couple of questions. Number one, congrats on the really strong year in 2020, really good results. And kind of on that point, 2020 was a very strong year. It was much stronger than the results that you guys have even put up over the last couple of years and certainly stronger, I think, from the results that you guys put up kind of in the mini kind of downturns driven by the energy markets back in late 2015, early 2016. So despite the pandemic, results were really good this year for Eagle Points. And so I'm just wondering from a higher level, can you just talk about what about this pandemic allowed you guys to, you know, despite, you know, the volatility and a lot of, you know, a lot of damage being done from an economic standpoint, you guys being able to generate really good results? And then also, depending on your answer to that question, do you think, you know, obviously nobody knows what's going to cause the next downturn, but do you think that there's something about the markets that you guys plan, whether it's the volatility and your ability to take advantage of that volatility? Do you think that there's the opportunity that you guys will be able to, you know, continue to generate, you know, strong results in future downturns because of your guys' capital structure and the asset classes that you guys play and your opportunistic capabilities?
Rob
Yes. So let me kind of walk through. You've got a couple of questions in there. Let me just make a note here. Energy, RR, return, speed. So at a high level, probably the best analogy, and nothing's perfect, 2020 was kind of 2008 and 2009 all in one. Cycles just get faster and faster. If you go back to like the REIT cycle in the early 90s, You know, in the RTC days, you know, that's a years and years to work out. You go to 2000, the tech, you know, and unfortunately tech and terrorism kind of 00 to 03, you know, it took two plus years to work out. 08, 09, yeah, it's kind of 15 months. Here it's like six months now. A couple things helped. The Fed, you know, I think Hank Paulson left something in the top drawer, you know, opening case of emergency, the playbook. They pulled it out. They just did it. Not a lot of congressional wrangling. So that helped. And there also wasn't a bad guy. Or if it was a bad guy, it was a bad guy overseas. So it wasn't, you know, people weren't looking for a scapegoat of, you know, Wall Street or anything like that. So all that helped. And we made it through a cycle, which we're not completely out of, but we're pretty far through it, far faster than So if you were to just have taken this performance and spread it out over two years, I think you'd see it pretty similar to 08 and 09. Something that helped it, similar to 08 and 09, which is different than the 15-16 energy cycle, although 16 was a really good year for us as well, here kind of all companies were impacted to some degree. You know, obviously some companies will never come back, but the vast majority will. but everything traded off, and that compares to 15, 16, where you had energy kind of trade off, but a lot of other stuff didn't. So there you have problems with some stuff, but you didn't have a lot of flex, a lot of other deep discount ways to make it back. Here you had deep discount ways to make it back across lots of different industries. You had to reevaluate companies based on their liquidity and real future profiles, but In general, people are going to still buy cars. Eventually, people are going to get on airplanes. Airplane parts need to be made, and so on and so forth. You could form a view and find discounted purchases, which was something that was harder to do in 2015. The other thing, and we kind of look at performance across the asset class broadly in our portfolios in 2018 and 2019, and I can't understate the impact of the distortive impact that the captive risk retention capital had on the market. This was return insensitive capital by and large. One of the things you've heard us say, the interest, and this is the case with any business, the interest between management and ownership will vary at some point. Either when do you start the business and when do you end the business? In the case of those captive vehicles, the keys to the kingdom were given all to management. And frankly, there were many, many CLOs that were printed in the 17-18 period that, in our opinion, were just too tight and didn't really warrant creation. But that had the effect of keeping debt levels wide. There was an unnatural supply of CLO debt. because there was a big, big block, kind of 40 to 50% of the market of captive retention capital that was largely return insensitive. That money, it's not completely gone, but very few of those folks have been able to raise second funds, in many cases, in our expectation, because they didn't perform so well, because they did deals that might not have deserved to work out. That money is largely gone from the market today, and We're seeing issuance, and as we issue CLOs and as our competitors issue CLOs, folks being much, much more disciplined with the pace of issuance and the upsizing and things like that, such that I think the tougher performance for the asset class broadly in 18 and 19 is something that's largely behind us. If you look at 2020, albeit with a cycle in between, my hope is that's kind of like an average year. Obviously with that, let's not have the cycle in between, but just on a straight line basis, that's kind of where we'd like to be. When we look at our overall portfolio, the marks on it on the CLO equity in many cases are still below where they were pre-pandemic. To the extent you look at our marks broadly from 17 and 18 and think of that weighted average price as probably an applicable appropriate run rate price, there's the potential for future upside in the price of our portfolio. And if you look at the metrics in terms of defaults, obviously who knows what can happen and lots of things can change. Certainly the way the market feels today, defaults is not going to be the big factor that we face today. There will be some degree of spread tightening on the loans, I think that's a likely outcome. Against that, if our weighted average AAA, let me find that number, is, we've got it in here. Weighted average AAA spread is 122 over. New deals today are getting issued around 105, and the vast majority of our deals are callable. So we've got a lot of paths there. We've been handing out a lot of mandates lately to get those things done. So our objective, whereas we came into the year, let's say that 122 was year end, we were 10 to 15 basis points in the money. Frankly, now our debt is expensive and we're gonna do everything we can to rip out costs. One deal of note, I know people have asked in the past about some of our ZEISS exposure. Even ZEISS 5, which had 153 AAAs in January, I think we refied that around 125 already this year. So even that deal I think is still failing as OC test. We're able to refinance deals like that a whole bunch tighter. So we're going to drive very hard on the right side of our balance sheet, and I think we're going to do it faster than the loan market comes in where we sit today.
Ryan
That's helpful. That's very comprehensive and thorough response to a complicated and deep question, so I appreciate that. This next one, again, I kind of asked you to maybe bust out your crystal ball. You know, at the end of December, you guys have a weighted average portfolio yield of about 11%, 11.05%. There are a lot of moving factors that may go into how this can shift. Obviously, you did some opportunistic purchases at 19% in this quarter, so there may be some more opportunistic purchases in the future. There's primary issuance yield as well as evaluating effective yield on your current portfolio on a quarterly basis. Would you anticipate, you know, and then obviously there's trends in loan spreads and in CLO, you know, pricing spreads, how those kind of move throughout the year. Would you expect, though, the overall yield on your portfolio of around 11% to trend higher or lower throughout 2021?
Rob
Where we sit today, I think there's more of a positive bias on that. And the reason I say that is to the extent our default assumptions kind of prove too conservative, I think there's some potential there. And then to the extent rates stay lower longer, although we're floating rate due to the oddities of LIBOR floors and loans, we like LIBOR kind of the average, what is the average LIBOR floor today? It's south of one. I'm not sure we publish it. But let's say the average LIBOR floor is kind of 60 or 70 basis points today. We like LIBOR as far away, holding all else constant, as LIBOR as far away from 60 basis points as possible. And right now, we're actually seeing a trend down. Even today, three-month LIBOR is down almost another basis point to 17.5%. So for loans with... For loans with LIBOR floors, to the extent our CLO debt is earning LIBOR with a floor of, we only have to pay them LIBOR with a floor of zero, that excess also counts as spread. The difference between actual LIBOR and the floor and the loans comes through as additional spread for us. So we see a number of paths to some further upside besides what the models show today. To the extent that plays out, over time that manifests just itself in higher and higher yields, holding all else constant, because the cash turns out to be better than remodeled. And you're absolutely seeing it. We're seeing it in the cash trends, whereas July of last year was a toughie because we had a mismatch in LIBOR. LIBOR was set high for the debt, and then all the loans kind of plummeted in rate. Here it's now working back in our favor, and we think that's going to continue for, you know, for at least some time. Got it. Potential upside, more upside bias than downside bias, where we sit today.
Ryan
That makes sense. That's helpful commentary. Appreciate the time today.
Operator
Great.
Tom
Thanks so much, Ryan.
Operator
Our next question comes from Mickey Sheelan with Leidenberg-Solomon. Please proceed with your question.
Mickey Schleen
Ken, just a quick follow-up on the accounting of the realized loss. I don't want to beat a dead horse, but I don't see any new CLO equity positions. I do see that you exited – I'm sorry, I don't see any exited CLO equity positions. I do see that you exited several CLO debt positions. Were those CLO debt exits what caused the realized loss that you're discussing?
Tom Majewski
No, these would be – investments still on our balance sheet, on our schedule of investments. So it's really just marking down the amortized cost of those investments to fair value. And that change or that differential between the cost and fair value is what's being recorded as a realized loss. But the positions themselves, a great example I can give you is Flagship. If you look at the cost for where it was in September 30th versus where it was at 1231, you'll see a significant decrease with the position, the fair value roughly about the same, but the position is still on the balance sheet. Because, you know, there is, you know, not that Tom and I would think, but they could Phoenix. There is some option value to that position. We already took, you know, the hit. So it's still on our scheduled investments.
Mickey Schleen
Okay, so in other words, under GAAP, you don't necessarily need to sell a security to book that realized loss.
Tom Majewski
That's correct.
Mickey Schleen
Okay.
Tom Majewski
Mickey, it's around impairment accounting.
Mickey Schleen
I understand. That's helpful. Thanks, Ken.
Operator
Sure.
Mickey Schleen
That's it.
Operator
We have reached the end of the question and answer session. At this time, I'd like to turn the call back over to Thomas Majewski for closing comments.
Rob
Great. Thank you very much, everyone. We appreciate your time and attention on Eagle Point Credit Company. Obviously, a year with some pretty dramatic swings, but from the starting point to the ending point, a year we're quite proud of with nearly 20% ROE. As we talk about the outlook for 2021, while there's always risks and uncertainties, hopefully you get a flavor of management's confidence looking into the future. as we do believe right now we're at the early stages of the next expansionary period. Ken and I are available today. If anyone has any further questions, happy to speak further. And we do invite you to stick around and join us in 15 minutes for the Eagle Point Income Company call as well. Thank you very much. This concludes today's conference.
Operator
You may disconnect your lines at this time, and we thank you for your participation.
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