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spk03: Greetings and welcome to Eagle Point Credit Company's first quarter 2021 financial results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Garrett Edson with ICR. Thank you. You may begin.
spk06: 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 and 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 and 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. We just claim any obligation to update or forward linking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website, evilpointcreditcompany.com. Earlier today, we filed our first quarter 2021 financial statements and our first quarter investor presentation with the Securities and Exchange Commission. Financial statements and our first 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 13719174. I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.
spk07: Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's first 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 our portfolio and the underlying corporate loan obligors. For today's call, I'll provide some high-level commentary on the first quarter and some recent events. I'll then turn the call over to Ken, who will walk us through the first quarter financials. I'll then return to talk a little bit more about the market environment, and of course, we'll open the call to your questions. We've had a great start to 2021, and frankly, the company is hitting on all cylinders. During the first quarter, NAV per share increased by approximately 8%, ending the quarter at $12.02 per share. That trend continued in April, and we estimate our NAV at month end to be between $12.62 and $12.72 per share per reflecting an additional gain in April of about 5% at the midpoint of that range. Recurring cash flows on our portfolio in the first quarter were $32.5 million. April's total was $34.2 million, representing a quarter-over-quarter increase of about 5%. Perhaps even more notably, April 2021's total was about 70% greater than our collections in April 2020. Almost all of our CLOs that were scheduled to make payments in April did so as planned. Our net investment income and realized capital gains for the first quarter was $0.28 per share, exceeding the total distributions on our common stock pay during the first quarter. That number is net of a $0.04 per share charge incurred for non-recurring expenses related to the ECCW 6.75% note issuance. Without those non-recurring expenses, NII and realized gains for the quarter would have actually been 32 cents per common share. We strengthened our balance sheet during the quarter with our new 10-year fixed rate issuance. The notes have a 6.75% coupon. They trade under ticker symbol ECCW. And from that issuance, we generated about $43 million of proceeds. Importantly, issuing new 10-year paper and it materially extends our weighted average debt maturity. Looking a little at the broader market, the corporate default rate that we're looking at continues to decline. The 12-month default rate has fallen significantly. During the first four months of 2020, less than five companies have defaulted on their loans, frankly. So we're in a very, very low default environment. With the year off to an excellent start and the economy growing at levels frankly seen more commonly in developing markets, coupled with our strong NII, we were pleased to increase our common distribution by 25% beginning in July 2021, increasing from $0.08 a month to $0.10 a month. As of March 31st, the weighted average effective yield on our overall CLO equity portfolio was 14.4%. and that's a significant increase from the 11.05% at the end of 2020. This increase was aided by strong cash flows on our portfolio, very few defaults, as well as proactive reset and refinancing activity by our advisor. It was also helped by our ability to put new investments in the ground at very attractive levels. During the quarter, we deployed a little over $41 million of net capital We continue to find attractive CLO opportunities in both the secondary and primary markets. Indeed, across eight secondary and four primary CLO equity purchases that we made during the first quarter, the weighted average effective yield was in excess of 20%. On the monetization side, we opportunistically sold a little over $7 million of CLO equity and just shy of $3 million of CLO debt securities. Together, these sales allowed us to realize $1.1 million of net gains over amortized costs. While we typically underwrite investments with a long-term hold mindset, we do sell investments when our advisor believes the price available exceeds fair value or where we see attractive rotation opportunities. In addition to our deployment of capital, we were active and focused during the quarter on resets and refinancings to take advantage of tightening CLO debt spreads. In the first quarter of 2021, we priced three resets and seven refinancings. Our advisor has a robust pipeline of future resets and refinancings under evaluation and is actively working on additional resets and refinancings throughout the portfolio. As I've noticed on previous calls, this is part of our advisor's value proposition for our CLO majority equity strategy. Proactive involvement with each investment, both at the time of purchase and throughout its lifecycle, seeking to create additional value for our shareholders. In this respect, ongoing active management throughout an investment's lifecycle, frankly, is just as important as investment selection at the outset. As a refresher, to clarify some of our industry jargon, a reset typically renews a CLO's reinvestment period and usually lowers the future cost of funding. It allows our advisor to reopen and refresh a transaction's governing documents, adding in new, more modern features when appropriate. In a CLO refinancing, typically the only thing that changes is the spread on a CLO's debt. And that's reduced, obviously, as part of the refinancing, which lowers the future cost of funding, and most other terms of the CLO remain unchanged. For our seven refinancings during the first quarter, we lowered the cost of debt on the refinance tranches by an average of 30 basis points. So a very, very powerful reduction. As of March 31st, our CLO equities weighted average remaining reinvestment period stood at 2.3 years. This allows our CLO investments to continue to be on the offense during these volatile markets. This measure was 2.4 years at the beginning of 2021. And so despite the passage of a quarter's time, Through our proactive management of our portfolio, the reinvestment period on our CLO equity positions decayed by only one month. As we manage the company's portfolio, we seek to keep this measure as high as possible. Beyond the trends with respect to cash flows, yields, and earnings, we continue to maintain a solid balance sheet. We have no financing maturities prior to October 2026, All of our financing is unsecured, and we have no repo-style financing or any sort of unfunded revolver commitments, many things that got others into some trouble last year. Our new 10-year ECCW notes further extended the weighted average maturity of our financing and provides us with additional capital at an attractive cost to remain on the offense and seeking to increase our earnings further. When we reflect upon the past 16 months, The company's portfolio delivered just as we expected it would during a time of volatility. We did not expect COVID at the beginning of, certainly at the end of 2019. We know curveballs will come. We never know exactly what they'll be, but we certainly had one. And to frame what played out in our portfolio, our CLO equity portfolio, our NAV started the beginning of 2020 at $10.59 a share. The midpoint of our April 2021 estimate is $12.67 a share, and that's an increase of 20% in our NAV from pre-COVID levels. There are few, if any, BDCs or REITs that were able to deliver such strong NAV growth over the span of the COVID pandemic, and that's something we're very proud of. Equally importantly, along the way, we also paid $1.64 per share in distribution to our stockholders. Looking forward, when combining the increased weighted average effective yield of our CLO equity portfolio, our proactive reset and refi activity, and the earnings potential from investments from the new ECCW capital, we believe the company is favorably positioned to continue increasing NII in the coming quarters. Overall, we remain very bullish on our portfolio and the broader economy. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets and share our outlook for the balance of 2021. I'll now turn the call over to Ken.
spk01: Thanks, Tom. For the first quarter of 2021, the company recorded net investment income and realized capital gains of approximately $9.2 million, or $0.28 per share. Our first quarter net investment income is net of non-recurring cost related to the issuance of our ECCW notes. Excluding these non-recurring items, our net investment income and realized capital gains for the quarter would have been 32 cents per share. This compares to an 80 cents per share loss in the fourth quarter of 2020 as net investment income was offset by realized losses and net investment income net of realized losses of 33 cents per share in the first quarter of 2020. When unrealized portfolio appreciation is included, the company recorded GAAP net income in the first quarter of approximately $35.2 million for $1.09 per share. This compares the GAAP net income of $2.98 per share in the fourth quarter of 2020 and a GAAP net loss of $4.42 per share in the first quarter of 2020. The company's first quarter GAAP net income was comprised of total investment income of $17.2 million, net unrealized mark-to-market gains of $26 million, and realized gains of $1.1 million, partially offset by expenses of $9.1 million. As of April 30th, we had $13.4 million of cash on hand net of pending settlements. As of March 31st, the company's net asset value was approximately $389 million, or $12.02 per share. Management's unaudited estimated range of the company's NAV as of April 30th was between $12.62 and $12.72 per share, which at the midpoint is a 5% increase over the March NAV. The company's asset coverage ratios at March 31st for preferred stock and debt calculated pursuant to Investment Company Act requirements were 307% and 432%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%. As of March 31st, the company had debt and preferred securities outstanding, totaling approximately 32.6% 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% of total assets under normal market conditions. Moving on to our portfolio activity in the second quarter through April 30th, the company received recurring cash flows on its investment portfolio of $34.2 million or $1.03 per share. This compares to 35, excuse me, this compares to $32.5 million or $1 per share received during the full first quarter of 2021. Consistent with prior periods, we want to highlight that some of our investments are expected to make payments later in the quarter. During the first quarter, we paid three monthly distributions of $0.08 per share, and we'll pay the same amount for each month in the second quarter. Last week, we were pleased to announce a 25% increase in our monthly common stock distribution to $0.10 per share beginning in July. Through our at-the-market offering program in the first quarter, the company issued approximately 242,000 shares of its Series B term preferred stock for total net proceeds to the company of approximately $6 million. During the second quarter, through April 30th, the company has issued approximately 1 million shares of its common stock for total net proceeds to the company of approximately $12.6 million. I will now hand the call back over to Tom.
spk07: Great. Thanks, Ken. Let's take our call participants through some of our thoughts on the loan and CLO markets next. The Credit Suisse Leveraged Loan Index continued its momentum from the end of 2020 and generated a total return of 2% for the first quarter of 2021. Thankfully, despite the ongoing improvement in the economy in the loan market, only 16% of the loan market was trading above par at the end of April. We believe this creates opportunities for our CLOs to continue reinvesting and building PAR through buying loans at discounted prices. Further, as a result of few loans trading at premiums to PAR, loan repricings, which can cause spread compression, as bad for our portfolio, have remained quite muted. During the first four months of 2021, only less than five companies have defaulted on their loans. The trailing 12-month default rate continues to fall and stood at 3.15% at the end of March. It declined further to 2.61% at the end of April, which is well below the long-term average loan default rate. To frame this, this is truly a remarkable turnaround from where things stood a year ago today. Looking for signals related to potential future defaults, at the end of April 2021, the Only 1% of the loan market was trading below 80 cents on the dollar. Below 80 prices are a common benchmark to evaluate loans that are stressed. While we still expect some defaults in the coming months, most dealer research desks are now forecasting 2% to 3% default rates in 2021, down from earlier projections of 3% to 3.5% or even higher. As liquidity has been considerably strengthened for many borrowers and the economy continues to grow at a rapid clip, we see a path to potentially more and a more optimistic default outlook than street forecasts for the balance of the year. Put more simply, we think defaults might even be lower. To further frame the significance of 1% of loans trading below 80, that metric stood at 4% at the end of December 2019. and 17% at the end of April 2020. And what that's saying is the market, which provides real-time information on each loan through its price, is saying very, very few loans are in a risk category. And we're seeing that across our portfolio, and the market prices prove it out. For the first time since 2018, retail loan flows saw net inflows for the quarter, and it appears investors are becoming increasingly focused on the investing in fixed-rate bonds. Instead, they're favoring investments with floating rate attributes such as loans and CLO securities. Total inflows for the quarter were $14 billion into loan funds. That's a big number, but to frame it, this is only about 1% of the total loans outstanding in the market, and it's not a needle mover in our opinion. That said, this could become more of a factor should the magnitude of flows grow. On a look-through basis, The weighted average spread on our portfolio reduced slightly from 3.61% in December to 3.56% at the end of March. This decline, however, was somewhat offset by an increasing number of loans in the market, now including LIBOR floors. And with three-month LIBOR hovering around 15 basis points, those floors can be quite potent to our cash flows. Our portfolio's weighted average junior OC cushion was 2.43%. as of March, and that's up from 1.84% at the end of December, although it's still below the 3.86% where it stood prior to COVID at the end of 2019. This reflects that some CLOs did lose par during 2020, although mindful our base case always assumes CLOs are going to have some sort of par loss. In addition, many of our largest holdings, which could generate the most cash flow, have significantly greater OC cushion than the average. In the CLO market, we saw $39 billion of new issuance in the first quarter of 2021, which is a record for first quarter issuance. We also saw $32 billion of resets and $38 billion of refinancings. For the full year, Eagle Point continues to expect about $100 billion of new issue volume, approximately $60 billion of resets, and perhaps $75 billion of refinancings, although I admit we do see some flex to the upside on each of those levels the way the market's standing at present. Almost all of our CLO equity positions that were scheduled to make payments in April did so, and our recurring cash collections in April 2021 were 70% greater than our recurring cash flows a year ago. Truly remarkable. We were pleased to increase our monthly common stock distribution by 25% in July, moving back to $0.10 a share per month. Cash flows in our portfolio continue to increase in April versus prior quarters. New CLO equity that went into the portfolio during the first quarter had a weighted average effective yield of over 20%. We're actively managing our portfolio and continue to direct resets and refinancings that we believe will drive additional net investment income for the company over time. We further strengthened our balance sheet with the new ECCW notes. This new capital also provides a further path to increasing NII and As of a recent date, we've got about 13 million of dry powder available, allowing us to be on the offense in the market today. Demand for floating rate assets, the stuff that we own, is increasing as more and more investors shift out of fixed rate products, knowing they'll want to be in a floater as rates rise. That backdrop, coupled with robust economic growth, gives us good reason to believe our portfolio has room for further price appreciation and while it continues to generate strong cash flows to us. We thank you for your time and interest in Eagle Point. Ken and I will now pause, and we'd be happy to open the call to questions.
spk03: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, excuse me, 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 Shlian with Ladenburg-Solomon. Please proceed with your question.
spk02: Hey, Mickey. Good morning. Hey, good morning, Tom and Ken. Tom, I completely agree with you. It's pretty amazing to see where we are today. relative to a year ago, and certainly the loan markets reflecting that with terms having returned to pre-pandemic levels, particularly when you look at more elevated multiples than a couple of quarters ago. And looking at page 31 of the presentation, I see that within your top 10 industries in the portfolio, you know, some may be exposed to inflation pressure like gaming and chemicals and construction. And personally, I think the Fed will probably have to raise rates sooner rather than later. So the combination of inflation and higher interest rates could potentially burden these types of borrowers in those industries. So how concerned are you about their ability to service their debt in that scenario? And are you seeing the portfolio managers you work with try to rotate to other industries to protect against that risk?
spk07: A very good question. Inflation both helps and hurts every company. It certainly gives them more pricing power. Against that, their supplies and raw materials go up, and in many cases, labor becomes an even greater constraint. We're certainly seeing all of those play out to some degree. My experience working with levered borrowers is net, a rising tide helps all ships. After some period of time, the systems can get out of whack and perhaps expenses out or overrides a company's ability to move prices. Against that, generally, in my experience, it takes a period of time measured in years, not in months, before that kind of fully realizes itself. And many companies have probably more pricing power today than they would have before. So what you're talking about is certainly a fair concern. We think of it as a much longer, you know, a multiple year out type concern. But it is something we have our eye on. We're not seeing, in general, companies get out of balance right now. And as to your second question in terms of interest rate coverage, and let's say we wake up and short-term rates are 1% or even 2%, which is where they were two years ago. I mean, it's not an unthinkable thing. If you look at page 34 of the presentation, this has some very, very important data. And if you look at the right-hand charts, the top and bottom on the right, this is interest coverage multiples of all outstanding loans This is from S&P, but I'll note this is just public borrowers, so it's a subset of the market in that many borrowers have private financials only, and right now that data is not readily available, although it may soon be in the future. You'll see in 2020, companies had 4.8 times interest coverage, and that's far greater than it would have been if you go back to 2003 to 2007. So even if rates were to, this means for every $100 of interest they're spending, they've got 480 of EBITDA. So even if their interest costs were to double, they're still with plenty of coverage on their debt service. So we feel pretty good that that's not a near-term risk. Similarly, you can see for newly issued loans, the table down at the bottom, that's just the set of loans issued in a given quarter. but paints a similar picture of rolling average of kind of around high three times. So if you were to think of the company average spread, maybe 350, LIBOR is a small component. Many of them have floors. The first few rate increases won't even impact the companies. As you start getting up to 1%, 2%, it has a little bit of impact, but you've got gobs and gobs of cushion before it becomes a real issue.
spk02: Thank you for that, Tom. That's very helpful. My next question is about estimated yields. You know, you and I in the past have sort of talked about the lag in the trend of estimated yields versus cash flows in CLO equity. And obviously, there was a big move in your financials this quarter in terms of estimated yields, and you mentioned, you know, some of the catalysts for that. But it was fairly dramatic. Could you walk us through the principal changes in your assumptions this quarter versus the previous quarter? And is there more upside in terms of estimated yield versus where you see cash flows today?
spk07: So overall, we obviously disclosed at a high level some of the assumptions in the footnotes of the financials. There weren't significant changes, Ken, one or two?
spk01: Yeah, nothing significant.
spk07: This was not really, hey, let's change the assumptions and everything looks better? When you talk about the lag, one of the things you would have heard from us is in kind of the October payments and the January payments were all up a whole bunch. And the way the accounting works on any individual investment, you have an amortized cost and you accrue income at the effective yield off of that. And any cash you get in excessive, let's say you have a $100 position and let's just make it easy, you have a 12% effective yield, so you're earning 4% a quarter on that, so you're earning $4 of interest on that $100. But if you get $9 a payment, that extra $5 goes as a return of capital and writes the basis down to $95. And then let's say that same thing happened again in January, you did the same thing again. So the cash flows themselves are predicted to get better, as there's fewer distressed loans, which means fewer haircuts for deep discounted loans. The methodology is the same. We take a haircut for loans trading below 70 in our default rates, but with almost nothing below 70, there's a lot less to take a haircut. So while the assumption stayed the same, the market kind of moved into it. And then as our investments have generated more and more cash flow, frankly, more than the models would have suggested nine months ago, That reduces the basis, which then not only do we have a higher future cash flows, we have that coming off an even lower basis. So it's kind of a one-two punch that helped the yields, coupled with the stuff we've been able to create right now. Weighted average portfolio, I mean, going in new issue and secondary with over 20% effective yield, that also helps the portfolio a bunch as well. So it's really a combination of all of those. and then overlay refi and reset activity. We got 10 of those done in the quarter, and nearly every one, maybe not, I'm fairly confident every single one of those, certainly every refi and probably every reset would have helped the weighted average, the effective yield of those investments as well. So to be, parties always end and the lights come on and the punch runs out. Yeah. So we're mindful of that, but it feels like we're in a bit of a golden period for CLO equity in that loans are doing fine. There's only 1% trading at deep discounts, so that's good. Not much is trading at a premium, so loans aren't repricing. When new loans are coming out, frankly, borrowers or lenders have even been able to push back on terms and push MFN and push other things, actually getting our way a little bit, which is novel. without companies defaulting and people wanting to come into floating rate product, pushing CLO debt tighter. So that can't last forever. We hope it lasts for a long, long time. But those features together, you couldn't tee it up much better, in our opinion, for CLO equity investing.
spk02: So, Tom, based on what you just said, can someone argue that perhaps the market has overbooked the amount of return of capital over the last few quarters because estimated yields were, the assumptions or estimates were too low, and that could turn into stronger net realized gains down the road?
spk07: I can't comment as to others' financials, but knowing the way we calculate things, to the extent we got better cash than we modeled, which on quite a few investments we did, that excess cash is treated as a return of capital, which then would suggest, assuming that new higher cash continues, boom, in future periods, much more of that can be treated as yield. And that's why you saw the meaningful, one of the reasons why you saw the meaningful increase in effective yields, cash is higher. And yes, I guess we wrote down more than perhaps in hindsight we should have, but we used the methodology we use, and it's a conservative methodology. but that created a lower basis, which then makes even more of those dollars income going forward.
spk02: I understand. Talking about refis and resets, it looks like most of the portfolio is callable, so those CLOs are in a position to refinance or reset. My question is, when you look at AAA spreads today, could you describe how much of the portfolio could still benefit economically from a refi or reset, and how much that process could support yields, all else equal?
spk07: Yes. And this is on pages 25 and 26 for call participants. You can see the vast majority of the portfolio is out of the non-call, and our weighted average remaining non-call period is 0.2 years. So that's a good position. And then way over on the right, we actually give you the AAA spread as well. In general, You should think of the market for new issue five-year reinvestment period AAAs and the mid to high one-teens. 115 would be a good print, 120 at the wider end, something like that. Now, you can also get a refi done, which would get even lower pricing in that you're issuing a shorter bond. I don't know if we break 100 basis points, but certainly low to mid 100s for many deals would be possible. So when you look at the portfolio here, you can see a fair number of investments are, you know, above those levels and are callable. Some of the most potent ones are actually just rolling off of the non-call. And a good example is, let's see here, Octagon 50, which is kind of in the middle on the second page. Let me just scroll across. This was one we did in middle of 2020. And we've got 136 AAAs. You know, in today's market, we could comfortably shave 20 basis points off of that and add a new reinvestment period. This was a 3-1 deal we did kind of coming right out of COVID. So that's something that's kind of primed and ready to go. Another one, CIFC 20-1, you can see has a usuriously high AAA at 172. That rolls off of non-call this summer. Assuming the market's there, you can reasonably conclude what we're going to be doing. One of the constraints, this has been an interesting dynamic, is the rating agencies. And to a lesser degree, but for us, the banks, in that we have more deals than we want to do, than we want to open, than the market can handle. And there's a backlog for rating agency slots. And frankly, there might even be a secondary market to trade rating agency slots for a reset or a refi. So it's, you know, and one of the things, and this kind of comes to our, while our size is a challenge in some regards, here it's definitely a strength in that when we call up the banks, we're not saying, hey, we might want to do one deal. Let's talk about five resets and refis over the next three months.
spk08: I understand.
spk07: Okay. We're going to, you know, they're going to figure out a way to work with us. and get it done. And we're picking those that will be most potent and doing them first. And it also forces us into some degree of vintage diversification. Because if we reset a deal today, we might be really happy at 117. I don't know, spreads could be 130 tomorrow or they could be 100 tomorrow. And the good news is I know I'll have something to do tomorrow in terms of refining or resetting as well.
spk02: Thank you for that. And one last question. sort of housekeeping question. I might be wrong, but this JP intermediate term loan that you put into the balance sheet, I can't recall a plain vanilla loan ever in your portfolio. You know, what is the nature of that? And is there any change to your investment strategy?
spk00: Bear with me.
spk02: It's very small, but I was just curious.
spk07: Bear with me. Oh, that's Juice Plus. So no, it's not a change to our investment strategy. That was a loan that we had a loan accumulation facility that maybe pre-COVID, somewhere in 2019, we decided to not proceed with the transaction and liquidated the portfolio. Juice Plus at the time, this was a juice store, was at a price that was below fair value in both our opinion and the collateral manager's opinion. That collateral manager had a meaningful co-investment in the loan accumulation facility with us. And rather than, it costs money to keep the boxes alive and audits and custodian fees, blah, blah, blah. So we just, we said, we'll take our share, you take your share. We'll work together when and if we dispose of the name. Our current view is that name has a lot more upside than downside. Obviously, there's risks and uncertainties in any investment, but that was one that we took out of a loan accumulation facility just to shut down the box. So you'll see that there. We also should have our good friend McDermott in there as well, our one common stock in the oil and gas industry. That was yet another one that we took out of... That was one we got. We talked about that last quarter where we took it as an in-kind distribution from a workout because CLOs couldn't take it. We had to buy some, but you can see we're still handsomely in the money on that as well.
spk02: Yeah. Well, that's it for me this morning. Thank you for taking my questions. Congratulations on your quarter.
spk07: Great. Thank you so much, Mickey.
spk03: You're welcome. Our next question comes from Randy Binner with B. Reilly Securities. Please proceed with your question.
spk04: Hey, Randy, good morning. I'm on for Randy. Thanks for taking my questions. Just kind of looking broadly at trends in the CLO market, and you touched on this a little in the prepared remarks, but I think you mentioned that while the quarter showed a pretty strongly positive uptick in flows, that figure still not quite at a totally meaningful magnitude. So could you maybe talk a bit more about maybe what drove the change from outflows to inflows in the quarter, and then also what might be a more meaningful number there.
spk07: And here you're talking about the $14 billion of inflows into loan funds versus outflows in prior quarters?
spk04: Yes, that's correct.
spk07: Yeah, so I'm going to go to the tapes here for a minute. I'll give you a real-time quote on something. I'm going to pull up the Barclays Ag, and let's look at the total return. I don't know how negative it is, but it's, so if you invested in the Barclays Ag, including reinvestment of dividends, you're down 2.8% as of today. And not due to default, simply just due to yields moving the wrong way on you. Fixed rate had a great year last year. The Ag last year was, doesn't even matter, it was up a whole bunch. Today, You know, it's, in our view, just a matter of when, not if, there are rate increases. Right now, we're seeing the long end of the curve move up. The short end has been stubbornly low, and frankly, LIBOR has moved down over the past few weeks. At some point, the Fed does need to start increasing short-term rates. I think, you know, and they've said publicly, we're going to let it run a little hot this time, which is obviously dangerous, potentially dangerous stuff. But to the extent short-term rates stay low, that actually helps us in that our LIBOR floors become much more potent. So people are exiting fixed-rate securities. They're exiting HYG, which is the fixed-rate high-yield ETF, and in general are seeking to move into floating-rate product. Now, these are floaters. Some say they're floaters that don't float because while rates are going up at the long end, the short end isn't moving. But you're not losing at a minimum. It's not like you have securities going the wrong way on you, so that's at least directionally positive. $14 billion of inflows sounds like a lot, but when you measure it over the course of three months, that's 1% of the market. It's not nothing, but it's not going to drive the market heavily. To the extent you start seeing 3%, 4% inflows in a quarter, that starts... that starts beginning to impact the market. And there, I think you'd see an increasing number of loans trading above par in that it's not the, in that case, not the portfolio manager making the deployment decision. It's the retail investor putting money into the fund. And if you're running a fund, an ETF sitting in cash is not really an issue. So someone's made the decision for you, the money comes in and you have to go buy. And then what that does is it pushes more support, more demand pushes the prices up. And then once we see lots of loans trading over par, That can lead to loans starting where companies say, aha, my loan's at par and a half. Why don't we try and reprice it? And that's something we're keen to avoid. I think the market is still, I'm actually surprised at the, that we're only at 1% loan inflows. I would have thought there'd be more demand into floating rate paper. So far it's existed and 14 billion is a lot of money, but it's not been a needle mover. it would need to be, in our opinion, integer multiples of that to become a notable thing.
spk04: Okay, thanks. That all makes sense. And then just kind of looking at, I guess, where ECC shares currently, it seems like they're trading closer to where they have historically or on a pre-COVID level at the multiple of NAV, but they look a little bit lower than that on their forward dividend yield. Do you think it would be fair to interpret that Is the market simply just willing to accept less yield or return here, or how do you all think about that?
spk07: Yeah, it's a good one. So since our IPO in 2014, we've traded at roughly, on average over the life, at roughly a double-digit premium to NAV. And that's a strong statement of confidence from shareholders in us, and we value that confidence every single day. with the distribution rate, the old distribution rate at $0.08, the distribution rate as a percentage of the share price as we were getting up to $0.11, $0.12, started to get on the lean side, frankly. And as we look across the market at other CLO equity funds and fine firms and with great, very good teams, some of those were, it was interesting trading at a premium to NAV but at a much wider yield than we were. So we were sort of the most sought after yield, but at that distribution rate, there's just a finite, in my opinion, there's just a finite level. I struggle to see people interested in ECC if the distribution rate is 5%. That feels a little too low. I don't think we ever got there, but we had a dynamic of perhaps the distribution rate was a headwind for the stock, We're fortunate the stock is up today. It was up a bunch yesterday. It was up a bunch on Friday as well. And one of the things when we take calls from shareholders certainly was, hey, it'd be nice to get a little more cash coming out. Of course, we have to do that balancing any number of things. Analysts like yourselves like to see NII equal to or greater than the distribution rate. That's a common question we get and a very fair one. We obviously need enough cash in our portfolio to service it and pay all the expenses and debt costs and keep some to keep rebuilding. And then we also have the master of taxable income, which ultimately sets a floor that we need to distribute. So it's a careful collage of all of those. Hopefully what you heard in some of our messaging, that refis and resets will continue to increase NII, we believe, getting the ECCW proceeds deployed. And our fee structure is very shareholder-friendly in that, unlike most BDCs, we don't charge any management fees on assets purchased with debt. So we have well over 150 million, give or take a little shy, 150 million of debt. We don't charge any management fees on that. So the potency... There are performance fees that that can trigger, but there's no base management fee. So the potency of borrowing at 6.75% for 10 years to go buy things at 15, 20-plus percent yields, assuming we pick the right investments, that should be a path to further drive NII. I'm sure there's no shareholder who wouldn't like us to increase distributions further. We have to balance all of NII, cash flow, gap, tax, you know, the myriad of them, but wherever it's prudent to, we want to get a bunch of current cash flow to shareholders, and we believe this 25% increase is a very good step in that direction. Okay, great.
spk04: That's helpful. I'll leave it there. Thank you.
spk07: Great. Thank you very much for calling in.
spk03: Our next question is from Chris Katowski with Oppenheimer. Please proceed with your question.
spk00: Hi, Chris. Yeah, on this... Hey, on the subject of balancing leave and all that, I'm trying to scope out how much capacity you have to grow the balance sheet. Just looking at it, you had like $36 million in cash from the proceeds, $12.6 at the market, the $5.7 over allotment, and just based on your NAV disclosures, it looks like you know, your loans appreciated by $20, $25 million, something like that. So, you know, that's like $75, $80 million of, it seems like, dry powder. You said you've deployed 62. But, I mean, how does it all settle out? And I guess, you know, from what we saw at quarter end in March, like, how should we think about your capacity to grow the balance sheet with your current resources?
spk07: Of quarter end from March 20 or 21? From 21. Okay. So broadly, when we think about things, our long-term target for managing the company is 25% to 35% leverage. Right. And we're just a hair over the midpoint of that. And to translate that into asset coverage ratios, what are we – We're in good shape on both of them. What are we? I always forget the numbers. We're 300 and 432 against the 200 and 300 asset coverage ratio. The 25 to 35 just makes it, some people understand it better that way, but it's the same number, just cut different ways. Broadly, or historically, we've largely run the company with an equal amount of debt and preferred stock. Right now, And oddly, issuing preferred stock helps the debt asset coverage ratio because the assets you buy with the preferred help benefit the debt as well. We're a little heavier on debt than equity right now, although the overall ratio is kind of near the midpoint, a touch over the midpoint of where we target running the company. So we're pleased with where we are right now. Very little of the ECCW proceeds got in the, you know, there was a lot of cash at, or we issued those in late March. So there was really not much in the ground as it relates to that. So getting all of that in the ground for, you know, substantially all for Q2, obviously we got a ton of payments coming in as well, paid out, you know, dividends and expenses and whatnot. But we've still got the 13 and change. But so very little, or I'd say close to none of the 40 plus million from the ECCW was really realized in any sort of NII in any magnitude during the first quarter. To the extent we get all that in the ground, we're investing everything we put in in the first quarter had a weighted average 20 plus. Maybe it comes down a little this quarter, but that has the potential to be a thousand basis points of excess carry on 40 million, which gets right to the shareholders. So that we think is potent. If I were to guess, If the NAV were to continue to increase and we were at the lower end of our range, what probably would make of our debt target 25% to 35% range, frankly, we might consider issuing a new preferred at some point just to kind of keep the ratio of preferred and debt equal. Obviously, not a forecast. We'll look at what the market offers on that day if we get to that point. But between Matt, just the effective yields increasing because as Mickey kind of got to the effect of the timing, we probably treated too much cash as a return of capital. It had to be critical, but we followed the process. But the rebound, the sharp rebound in cash had us treating a little extra cash as return of capital, which lowers our basis, which increases our effective yield prospectively. The refis and resets are always accretive. The new borrowing at 6.75, not charging management fees on it, and investing in the high teens is definitely accretive. So we've got a lot of levers in front of us to continue to add to NII. Obviously, the market will do what it will do. There's no assurance. But everything we've got in the works, when we look at it, it feels like it's a path in that direction.
spk00: I guess, but overall, you know, in your subsequent events, you had the $62.5 million of deployments in April. I'm kind of curious for the balance of the quarter. Is there continued room to do net deployments beyond that, or has that kind of spoken for most of the near term?
spk07: There's money, continued capacity to keep investing. Yeah, definitely.
spk00: Yeah, no, I mean, I figured that. But I'm trying to think, like, 30, 40 million before you bumped into constraints?
spk07: Well, we've got about 13 of dry powder right now. So absent using the ATM on the equity or the preferred, that's kind of, yeah, that's where we are now. With the stock where it is, to the extent cash runs lower, we do have, if the stock is at a premium, we do have the option to issue off of the ATM, which obviously increases NAV, because if we're issuing stock at a premium, so that's a good situation. But first and foremost right now, the main focus, let's get the remaining 13 in the ground and kind of find the next step from there.
spk00: Okay. All right. Thank you. That's it for me. Great. Thanks so much.
spk03: As a reminder, if you'd like to ask a question, please press star 1 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.
spk05: Hey, Ryan. Good morning. Hey, good morning, Tom. I just had two questions this morning. The first one, you mentioned on the call, eight secondary purchases, four primary purchases in the quarter. But I was curious, though, is a little more detail on that. So you deployed net capital of like 42 million in the quarter. Can you break down kind of a rough estimate of the volume of the capital deployed that was primary issuance versus secondary market purchases? And then also just give us a little color around Obviously, you had a very high yield in that new capital deployed of 21%. What were the yields that you were seeing in the primary purchases versus the secondary? And then based on kind of the capital deployment and the yields that you saw in the first quarter, How does that compare to what you guys are kind of thinking at both from an allocation of primary or secondary and from a yield standpoint kind of the rest of the year? Obviously, that's subject to change, but just where we sit here today, what's that looking like?
spk07: Yeah, so maybe to hit on first primary versus secondary and then a little bit about forward outlook. So I'm looking through here, and this is on an internal report, but if you cross-reference the SOI from December to March, you can figure this out, you know, looking at things that went in the ground of our primaries, Ares 41, Battalion 19, Carlisle 21-1, and then Wind River 17-1, which was actually a reset with new money going in, so that's why it would be flagged as primary here. Each of those, let me make sure I got this right, each of those had a an expected yield over 20%. Now, some of that was due to opportune warehousing or ramping. To the extent we might have been buying loans last year, what do you know? All those loans went up, so that's good. And those CLOs had very, very attractive purchase prices on the underlying portfolios. If you were to think about a new CLO today, maybe it's in the high teens instead of the low 20s, if had a today. At the same time, when I look at our secondary, and so that totaled, of that deployment, the primary looks like it's about 20 million, plus or minus a little bit. On the secondaries, with the exception of the St. Paul 11, which is a Euro CLO, which we always like to have one or two of those around, which is actually a 9.9 effective yield, the majority of the secondary positions, some of them were blue 13.2 was a 30% yield. Blue Mountain 23 was a 15% yield. And secondary was a big chunk of capital, a little north of 20. We did buy a little bit of CLO debt and a little bit of loan accumulation facility, put $11 million into loan accumulation facilities, but also took off $11 million in loan accumulation facilities. And some of the debt, frankly, just put in there as placeholders as we had the ECCW cash. In some cases, let's just get that in the ground on stuff and things we can rotate out of as equity investments come. Might as well pick up a little coupon. But broadly, when I look at the purchase blotter here, it's pretty nicely split between primary and secondary. The primary investments all have the benefit of being a majority investment across the Eagle Point family. Some of the secondary ones do. Others do not. But there's not a big difference in yield broadly between the primary and secondary opportunities that we saw in the first quarter. Looking forward, secondary probably continues to get a little bit richer. And you saw, I mean, we talk about our portfolio being up with that 5% net in the In the first quarter, the NAV was up 5% in April. Now that's obviously enhanced by the company has leverage, reduced by fees and expenses, reduced by distributions. You could debate what CLO equity did, but that was certainly a good quarter. That suggests that secondary yields will continue to tighten. And broadly, I would expect our focus will be a little more on the primary side than the secondary side going forward, based on the way the market's trending. Not saying we won't be active in secondary, but we're probably in a point in time where we can start creating consistently primary, a few hundred basis points better than secondary. But what's important is we pivot. We see every opportunity secondary. We create our opportunities primary. We have a number of loan accumulation facilities in the ground right now. If you look at page 29, you can see we had four facilities in the ground, steamboats 8, 14, 12, and 13. One or two others continuing to come online. We take those slow and steady but are able to get deals that are ready to go, and when we like the way the market looks, we're able to pounce and act quickly. So it's a repetitive process. It's the same thing we've been doing for nine years, seven of which as a public company, build these up, and when the market's hot, let them rip. To the extent we see the average loan price in the high 90s with very few loans over par, that's a really good setup for CLO equity, and we're definitely feeling that right now.
spk05: Mm-hmm. Okay, that's helpful backdrop on all that. The other one I had was just kind of a higher level question. You know, if we look at your performance through this downturn, it's obviously very strong. Your guys' NAV is up significantly, you know, almost 20% from pre-COVID levels. So the performance is very strong. We've seen other little mini crashes, the energy downturn in late 2015, 2016. We saw some volatility in the CLO market in late 2018. And the performance wasn't as strong as it has been this time. So was there something about this downturn? Obviously, this downturn was very different. But was there something about the nature of this downturn that allowed you guys to recover so quickly and actually really outperform so strongly? Or was there something that you guys, how you guys operated during this downturn that was different in the past? Just, just any sort of high level thoughts on why their performance was so strong during this COVID downturn versus some of these other previous kind of more mini downturns we've seen in the past.
spk07: No, a really astute observation. Um, The way our portfolio performed and the way we performed to me was very reminiscent of 2008 and 9. And there you had a market-wide sell-off and even DuPont and Kraft and AA and single A-rated companies were trading their paper at 80 cents on the dollar back 12, 13 years ago. And that was the same thing in proverbial April 1 of last year. It didn't matter if you were Carnival Cruises or you were the guy who made face masks. Obviously, different business trajectories at that point, your credit was way down. In March of 2020, senior secured loans fell more in price than the S&P 500, which makes, in my opinion, no sense in that we're first and shareholders are last. But those two, although the timing and cycles get faster, had a lot of look and feel. You know, 08, 09 had a lot of look and feel with similar to 20. Compared to 2015, if we talk about the energy stuff, and we had a drawdown roughly from July of 2015 through February of 2016. Seven, eight months, you know, printer starting to run out of red ink. We were using so much of that. Against that, the cash kept coming, and through all this stuff, cash has always exceeded expenses and distributions, and it thinks that the NAV moves around sometimes, but the cash seems to keep working. That was a sector-specific problem, and some CLOs had more energy than others. We had one, Mountain View 2014-1, I remember. We still have a tiny, tiny, tiny, tiny bit of that left for a particular reason. I wonder if that might not even be in this portfolio. Maybe we missed that. This one might have been in ramp-up mode when that one happened. It was a 2014 vintage deal. A handful of the 2014 vintage deals Here's one, Bain Avery 5, just got so offsides on energy, and there weren't other discounted opportunities to make it up. And that's what went awry. So here, everyone had bad credits in March, but even if 10% of the world defaulted, that meant 90% of the world was going to pay off at par. Every collateral manager should have re-underwritten every name in their portfolio and in late March, early April last year. We have new information. It doesn't matter if this is the best company ever and the management team is great. How are they going to behave in the new world? Re-underwrite, re-evaluate. But you had a market-wide sell-off where you were able to express that view. These loans are all down. I'm going to sell this one at 80 and buy this other loan at 80, which you really couldn't do in a single sector crisis. So these broad sell-offs I wish it lasted longer, frankly, because we'd be even better off than we were, in my opinion. We're obviously happy with our NAV up 20% and $1.64 of dividends over our distributions over the past 15, 14 months. But that market-wide sell-off was the difference between 2015 and the similarity between 2008. And when your colleagues were in, and I think you were in as well when, you know, doing original underwriter due diligence back on 2014, we spent a lot of time looking at how the CLOs performed through the financial crisis. And it was, again, a similar market-wide sell-off does really well. Sector-specific sell-offs can hurt some CLOs that are overweight those sectors. That said, through our diversified portfolio approach and a shareholder who buys one share of ECC today, gets exposure to all of these, which is great, but they're not wed or concentrated in any one sector. If you're in a CLO portfolio with only a few CLOs, there's a chance you're overweight. And if you happen to be overweight 2014 vintage CLOs, you're probably still licking your wounds. While we're not happy with all of those 14s, we have enough other good stuff going on that it more than offset it. So things we did. Everything we didn't buy was a mistake at the bottom. In hindsight, we stick with our discipline. We stick with our knitting. We focused on quality, where we could buy it. Some of the positions in here, like some of these Blue Mountain positions, we bought when they were picking. Seemingly no end in sight, but paying 20, 25 cents on the dollar, buying majority positions with multiple years of reinvestment period. Those are kind of double, hopefully triple our money type investments that we were able to do last year that benefit all shareholders. We should have bought more is the only thing. We should have used every dollar we could to buy more sooner. But we kept with the discipline and we applied the same process that we've known here for a long time. And when we compare ourselves to other BDCs and REITs, Not a lot. I can't think of any that's had their NAV go up 20%. One or two maybe with some equities that merged into SPACs or something. But it's a really short list. And this is the kind of environment, the last 15 months, where our portfolio should thrive. But looking forward, we're equally in a golden period. It's more fun when it's just straight up. We have far fewer people join on our calls, unfortunately. But where we look today, we see every dealer lowering, there are many dealers lowering their default rate statistics, literally just a handful of companies defaulting. Carnival Cruises is out trying to reprice their debt tighter today. The market's open and active, and that bodes well. We want companies to pay plenty of interest and not default. and ideally sell their loans at a little bit of a discount so we can build some OID up. So we're in, we think, a really good situation from a credit perspective. And then us as a portfolio manager, refi, reset, you know, I've kind of challenged the team. We should get half of these reopened at this year. I don't know if we might do better. We might not get there. But anything that does make sense to do, let's triage it and pick the most powerful ones first. But let's just keep powering through this. And if we're doing it too soon, maybe spreads tighten further, we'll look back and say, oh, boy, how foolish we were in May printing at 115. Now we can get it done at 100. We've got more to go then. So the size and scale of our portfolio just gives us so many more options than many other investors, certainly in structured credit, I think even in private credit.
spk05: Mm-hmm. That's helpful commentary, and I think anybody who manages assets, I think, wishes they would have deployed more capital back in April of 2026.
spk07: Number one mistake in investment management, didn't bet the house in April. But, I mean, you had two things. You had the Fed printing money, and they're usually pretty good. Against that, from my office, I can see I-95, and there was no one on I-95. You know, hmm. Those are two pretty powerful things. We know which one prevailed, but things were not free of doubt back then. We were confident with how our portfolio would ultimately perform. I would say we knew the destination. We got there far faster than we expected. Yeah, certainly.
spk05: All right. Well, thanks for taking my questions today, Tom. I appreciate the time.
spk07: We really appreciate it. Any love on that price target we'd love. Appreciate it, all right? Take care. Thank you so much. Bye.
spk03: We've 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.
spk07: Great. Thank you, everyone, for joining the call today. Both Ken and I appreciate your interest in Eagle Point Credit Company. We're obviously very, very proud of the performance over the last 15 months, and it's attributable to the entire team here at Eagle Point. Many, many people behind the scenes that you don't hear from beyond the two of us who just turn up here on the calls. There's obviously a whole team who worked tirelessly through uncharted times. The investment class, you've heard us talk about how the investments have performed in times of distress previously. We had a new thing happen. and we got to the same result. So we hope when the next one happens, well, we know it will. It won't be pleasant the day NAVs fall. Hopefully, if we start looking at repeated performance, you can hopefully have a good feel of how things will shape out in the future. We've got some good stuff ahead here, but I know we've got our head down and working very, very hard. So we thank everyone for their time and interest. We do have a call at 1130 for those interested in Eagle Point Income Company. which is principally a CLO BB-oriented company, also with monthly common distributions. That call is at 1130 for those who wish to join. We appreciate your time this morning. Thank you very much.
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