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spk04: The conference call will start momentarily. We thank you for your patience. Greetings and welcome to Eagle Point Credit Company's second 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, Mr. Garrett Edson with ICR. Thank you. You may begin.
spk03: 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 the matters discussed on this call include forward-looking statements or projected financial information that involve risks and certainties 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 findings with the Securities and Exchange Commission. Each forward-looking statement or projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website, EaglePointCreditCompany.com. Earlier today, we filed our form NCSR half-year 2021 financial statements in our second quarter investor presentation with Securities and Exchange Commission. The financial statements in our second 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. I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.
spk00: Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's second 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 and our portfolio. For today's call, I'll provide some high-level commentary on the quarter and some recent events, I'll then turn the call over to Ken, who will walk us through the quarterly financials in more detail. I'll then return to talk about the market environment. And, of course, we'll open the call to your questions at the end. The company has had a great 2021 so far. Our NAV per share has increased by 16% during the first half of the year, and we increased our common distribution twice so far this year. As we manage our portfolio, we have consistently been able to create and find attractive new investments. Thanks to the new investments going into the ground, coupled with our very active CLO reset program, we've increased the weighted average remaining reinvestment period of our CLO equity portfolio by almost half a year since January. We were positioned well going into the pandemic, and our approach to managing the company is delivering very tangible benefits for shareholders. During the second quarter, NAV increased by another 8%. ending the quarter at $12.97 per share. This trend continued in July, and we estimate our NAV at month end to be between $13.20 and $13.30 a share, reflecting an additional gain in July of over 2% based on the midpoint of that range. Our NAV per share is up 19% year-to-date and up 25% since the end of 2019 before the onset of COVID through July 2021. Frankly, we're very happy with the destination we've gotten to over the past 19 months. Recurring cash flows on our portfolio in the second quarter were $36.4 million. July 2021's total was $35.3 million as we continue to maintain strong recurring cash flows well above our total expenses and common distributions. Notably, July's total collections were more than double our collections in July 2020. Our net investment income and realized gains for the second quarter totaled 32 cents per share, exceeding our common stock distributions paid during the quarter by 33 percent. Further, our quarterly earnings were actually reduced by 3 cents per share due to a non-recurring charge related to the issuance of our ECCC 6.5 percent term preferred stock. Without that non-recurring charge, NII and realized gains for the quarter would have been 35 cents per share, or 46% over the second quarter paid distributions. We further strengthened our balance sheet during the quarter, issuing new 10-year Series C term preferred stock with a 6.5% coupon. 6.5% is our lowest cost of capital to date. These new preferred shares trade under the ticker symbol ECCC. We generated net proceeds of $29 million from the offering, And thanks to its new 10-year maturity, we've actually extended our weighted average financing maturity out to over seven years. We also continue to raise capital through our at-the-market program and issued over 2 million of common shares at a premium to NAV, generating net proceeds of about 27 million during the quarter. This helps us build NAV and further increase diversity within our investment portfolio. Corporate default rates continue to decline, The trailing 12-month default rate is down to 58 basis points as of July 31st, and that's less than a quarter of the long-term historic average. Given the strength of the company's recent financial performance and our confidence in its future outlook, we were pleased to announce a second increase in our common distribution of 20% beginning in October 2021. That increases the distribution to 12 cents per share per month. we have now increased our common monthly distribution by 50% from its level at the beginning of the year. As of June 30, 2021, the weighted average effective yield on our overall portfolio was 14.98%, up from 14.40% at the end of March. This increase was aided by strong cash flows on our portfolio, our proactive reset and refinancing program, our ability to put new investments in the ground at attractive levels, few borrowers defaulting, and muted levels of loan repricing. During the quarter, we deployed over $65 million of net capital into CLO equity and debt investments. We continue to find attractive CLO opportunities principally in the primary market with a few opportunities popping up in the secondary market. Indeed, across the 20 CLO equity purchases we made during the second quarter, the weighted average effective yield was approximately 17 percent. On the monetization side, we opportunistically sold about $30 million of principally CLO debt securities. Collectively, the sale of CLO debt and other securities allowed us to realize $1.1 million of net gains versus amortized cost, or three cents per common share during the quarter. While we typically underwrite investments with a long-term hold mindset, We do sell investments when we see strong bids or where we see attractive rotation opportunities. In addition to our deployment of capital, we were very active with our reset and refinancing program, taking advantage of the strong demand for CLO debt. In the second quarter, we priced six resets and two refinancings. For the entire first half, we completed nine resets and nine refinancings. In fact, over the first half of the year, Our portfolio of CLOs represented 7% of the total CLO reset market. We've been very, very active. At the same time, we have a robust pipeline of future resets and refinancings under evaluation and are actively working on a number of them at present. As I've noticed on prior calls, this is all part of our advisors' value proposition for our CLO majority equity strategy. Proactive involvement with each investment, both at the time of purchase and throughout its lifecycle, always seeking to create value for our shareholders. In this respect, active management throughout an investment's lifecycle is just as important as the investment selection at the outset. As a refresher, a reset typically renews a CLO's reinvestment period and usually lowers the future cost of funding. It allows us to reopen and refresh a transaction's governing documents as well. In a CLO refinancing, typically only the spread on a CLO's debt tranche are reduced, lowering our future cost of funding in that CLO, while most other terms of the CLO remain unchanged. For our two refinancings during the second quarter, we lowered the cost of debt on the refinance tranches by an average of 21 basis points. And for our six resets, we saved an average of 10 basis points and lengthened the remaining reinvestment period of each out to five years. Thanks to our ability to capitalize on this attractive reset and refinancing environment, as of June 30th, our CLO equity portfolio's weighted average remaining reinvestment period stood at 2.8 years. This is an increase of almost half a year since the beginning of 2021. So despite the passage of six months' time, through our proactive portfolio management, the remaining reinvestment period on our CLO equity positions actually increased, and meaningfully so. These actions allow the company to increase prospect of cash flows while also being better positioned to take advantage of future loan price volatility when it eventually reoccurs. As we manage the company's portfolio, we seek to keep the weighted average remaining reinvestment period as high as commercially possible. Beyond the ongoing positive trends with respect to cash flows, effective 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. We have no repo-style financing and no unfunded revolver commitments. Our new 10-year Series C preferred stock further extended the weighted average maturity of our financing out to over seven years and provides us with additional capital to remain on the offense seeking to increase earnings. Looking ahead, When combining our increased weighted average effective yield of our CLO equity portfolio, the favorable cash flow and default trends, reset and refi activity, the earnings potential raised from the new ECCW notes from earlier in the year, and the ECCC preferred stock, we believe the company remains well positioned to continue increasing NII in the coming quarters. I'd also like to take a moment to highlight some of the activity over at our sister company, Eagle Point Income Company. Eagle Point Income Company trades under the ticker symbol EIC. For the second quarter, EIC also generated NII and gains comfortably above its quarterly distributions. Last week, it announced a 33% distribution increase, its third increase this year. EIC also signaled changes in its target portfolio construction and leverage policy, and we believe these actions will continue to support EIC's strong financial performance. You're invited to visit that company's website, eaglepointincome.com, to learn more. Overall, we continue to be 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 remainder of 2021. I'll now turn the call over to Ken.
spk01: Thanks, Tom. For the second quarter of 2021, the company recorded net investment income and realized gains of approximately $10.8 million or 32 cents per share. Our second quarter net investment income is inclusive of a non-recurring charge related to the issuance of our 6.5% Series C term preferred stock. Excluding a non-recurring charge, our net investment income and realized gains for the quarter would have been 35 cents per share. This compares to net investment income and realized gains of 28 cents per share in the first quarter of 2021 and net investment income net of realized losses of $0.28 per share in the second quarter of 2020. When unrealized portfolio appreciation is included, the company recorded GAAP net income for the second quarter of approximately $42 million or $1.26 per share. This compares to GAAP net income of $1.09 per share in the first quarter of 2021 and GAAP net income of $1.71 per share in the second quarter of 2020. The company's second quarter GAAP net income was comprised of total investment income of 19.9 million, net unrealized appreciation of 31.2 million, and realized capital gains of 1.1 million, partially offset by expenses of 10.2 million. As of June 30th, the company's net asset value was approximately $447 million, or $12.97 per share. Management's unaudited estimate of the range of the company's NAV as of July 31st was between $13.20 and $13.30 per share, which is over a 2% increase from the midpoint of the range compared to our June 30th NAV. The company's asset coverage ratios at June 30th for preferred stock and debt calculated pursuant to Investment Company Act requirements were 301% and 484% respectively. These measures are comfortably above the statutory requirements of 200 and 300%. As of June 30th, the company had debt and preferred securities outstanding totaling approximately 33.2% of the company's total assets, less current liabilities. This 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 third quarter through July 31st, the company received recurring cash flows on its investment portfolio of $35.3 million or $1.01 per share. This compares to $36.4 million or $1.09 per share received during the full second quarter of 2021. It's important to highlight that some of our investments are expected to make payments later in the quarter. As of July 31st, we had $54.7 million of cash on hand, net of pending settlements. During the second quarter, we paid three monthly distributions of $0.08 per share. Beginning in July, we increased our monthly common distribution by 25% to $0.10 per share. And last week, we were pleased to announce an additional 20% increase in our monthly common distribution rate. Effective October, our monthly common distribution will further increase to $0.12 per share. Through our at-the-market offering program in the second quarter, the company issued approximately 2.1 million shares of its common stock for total net proceeds of approximately 26.7 million. During the third quarter through July 31st, the company has issued approximately 408,000 shares of common stock and 436,000 shares of its Series C term preferred stock for total net proceeds of approximately 16.3 million. I will now hand the call back to Tom.
spk00: Great. Thank you, Ken. Let me take everyone through some thoughts on our thoughts on the loan and CLO markets, and then we'll open the call to questions. The Credit Suisse Leverage Loan Index had a solid second quarter, generating a total return of about 1.4%. The loan market is really set up very well for CLOs right now. Corporate defaults remain low, and no companies at all defaulted in the index during the second quarter. No companies also defaulted in July. And that, at the month end, brought the trailing 12-month default rate down to 58 basis points. And only 1% of loans were trading below 80% at the end of July. At the same time, despite a strong economy and demand for floating rate investments from many investors, only 12% of the loan market was trading above par at the end of July, suggesting loan repricing activity will remain muted for some time. While we know periods like these won't last forever, the current environment appears to have some room to run. We're capitalizing on the strong market by refinancing and resetting our existing CLOs, and we're continuing to source an attractive new investments to put in the ground. On a look-through basis, the weighted average spread in our portfolio declined modestly to 3.54% at the end of June. That's down two basis points during the quarter. This was somewhat offset, however, by the increasing number of loans in the market that now include LIBOR floors. With three-month LIBOR hovering around 14 basis points, the floors in these loans can be quite potent for us as equity investors. Our portfolio's weighted average junior overcollateralization cushion, or OC cushion, increased to 3.1% as of June 30th. That's up from 2.43% at the end of March. That, in our opinion, is a meaningful increase. In the CLO market, we saw 43 billion of new CLO issuance during the second quarter, 38 billion of resets, and 28 billion of refinancings. All of these figures put the industry on pace to eclipse previous records of issuance for resets as well as refinancings from 2017 and 18. For 2021, Eagle Point now expects 135 billion of new issue CLO volume with approximately 125 billion of resets and approximately 110 billion of refinancings. all which are significant increases from our initial expectations at the beginning of the year. Demand for floating rate assets, that's ultimately what we own, continues to rise as investors shift at a fixed rate product. With that backdrop and the very strong economy, limited loan defaults and muted loan repricings, we believe our portfolio has room for further price appreciation while continuing to generate strong cash flows. To sum up, NII and realized gains have exceeded our common distribution each quarter so far this year. We were pleased to increase our monthly common stock distribution by 20% beginning in October and now have raised our common distribution by 50% in total from the beginning of the year. Our portfolio's NAV per share continues to rise up 19% since the beginning of the year and up 25% since before the onset of COVID through July of 2021. Cash flows in our portfolio remain strong. We shared with you the cash numbers earlier. The new CLO and equity investments that we've been able to source and acquire that have gone into the portfolio during the second quarter had a weighted average effective yield of about 17%. While we're actively managing our portfolio, we'll continue to plan a reset and refi program, which we believe have the potential to drive additional NII over time. And we further strengthened our balance sheet with our new Series C term preferred stock, which was offered at our lowest cost of capital to date and provides us with yet another path towards increasing NII as that capital gets deployed. We have approximately 55 million of dry powder available, allowing us very much to be on the offense in the market, and as this capital deploys, that will generate additional earning assets, a path to further increasing NII. You can hear a pretty consistent theme in all the points I've just outlined. In strong markets like these, we have numerous levers to pull, both within our CLOs and within our company's capital structure to strengthen our balance sheet and increase earnings. We are looking to pull on all of those levers, and we believe this will help us continue in getting cash out, as much cash out to shareholders as possible. So with that, we thank you very much for your time and interest in Eagle Point Credit Company. Ken and I would now be happy to open the call to any questions.
spk04: 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, 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 Schlamm with Ladenburg-Thalmann. Please proceed with your question.
spk02: Good morning, Tom and Ken. Hope you're well. Tom, you know, you mentioned we're sort of in this Goldilocks environment for leveraged loans and CLOs, but, you know, things are never exactly the way they appear in my mind anyway. So if we just think about next year, unfortunately, you know, since there's a still large part of the population that is unvaccinated, we're in another upward COVID cycle, which is disappointing. And at least to me, it's unclear how much more support the federal government will provide beyond the infrastructure bill. So when we think about next year, economic growth will probably normalize, but there's inflation. And at some point, I think the Fed will have to stop quantitative easing and they'll raise rates. So could you describe how CLO managers in which you're invested are managing their portfolios to contain these risks? And how well do you think portfolio companies are prepared for an environment which may not be as benign as it is today?
spk00: Sure. Kind of a big macro question there. And indeed, we're in a bit of a golden period right now with few defaults and few repricings. And for CLO equity investors, We kind of love that. We certainly know those periods don't last forever, and broadly what we're seeking to do is capitalize on them through getting as much remaining reinvestment period as possible. So we're doing our strategy at our level, adding about half a year to our reinvestment period across our portfolio. Our views of what will happen inside of companies becomes certainly a more interesting one. to talk about the Fed's behavior broadly, what we've seen with their active buying program. Certainly many people have recollections of the taper tantrum from 2013. I think the Fed will probably do, with benefit of more experience, better manage and choreograph that than they might have the last time. And then B, within that, The Fed buys, you know, amortizing securities typically. I mean, I guess they buy treasuries, but all the mortgages they buy, they don't really sell them as best I understand. They just kind of buy less and less, and then these are amortizing securities that just run out. So I think they'll do a better job of kind of choreographing that to the market. But indeed, hopefully at some point, we do start to see an increase in interest rates. That's why people are coming to floating rate products. The things I'll say about companies in general, the average leveraged borrower today, I'm just looking at a chart here, this is on page, let me pull up the, point to the right page, this is on page 34 of our investor presentation. What this shows is the average interest coverage of both existing loans and new issued loans. The two things that can go on when interest rates go up, certainly interest costs for companies will go up to the extent we get LIBOR back to 2% or 3% where it was two years ago. Against that, you can see the interest coverage multiples of EBITDA over interest, but the total market and newly issued loans remain at either five or four times, respectively. So there's plenty of interest coverage within these companies, even if we were to see a big interest rate increase. At the same time, then you have the question, what if earnings drop at the same time? At that level of cushion, I think we've got, I think we still have plenty of headroom to have both a drop in EBITDA and an increase in interest expense. In general, I don't think we'd see companies' earnings falling dramatically while at the same time for the Fed increasing rates. It's certainly possible, but those are generally incongruous. And as you can see, the interest coverage multiple on loans today, this is the top right chart on that page in the deck, is well above where it was in 2005, six and seven. And I think that gives us a good bit of headroom going in. When investment managers or collateral managers are looking at any borrower today, certainly their liquidity profile of a borrower is an increasing area of focus than it might have been in 2019. While everyone looked at liquidity, certainly Q2 of last year was the eye-opener, oh geez, this really, really requires looking at liquidity. Companies broadly have more cash on their balance sheet, and as you can see from the maturity wall chart, which is on page 32 of our presentation, only 6% of our underlying loans mature before 2024. If you were to have looked at this chart a year ago, it probably would be the same thing, just shifted one over to the left. So we continue to see the company's maturities pushed out and debt service coverage remains at or near highs. So to the extent we do see either a slowdown in the economy and or an increase in short-term rates, companies have a lot of headroom to handle it. But I think it's an area of increasing focus for the collateral managers that we invest in. I know it is.
spk02: Thank you for that, Tom. That's quite helpful. And it sort of segues into my next question. When you think about your effective yield calculations and the level of effective yield, it seems to me that it's sort of caught up with the cash flows that the CLO equity investments have been generating. But we're in this, like you said, this Goldilocks environment. Do you see more upside in effective yield? Are you going to maintain sort of a cautious approach for the meantime?
spk00: Well, broadly, CLO equity is generating cash well in excess of the effective yield on the portfolio.
spk02: Exactly.
spk00: So that Yeah, so part of that is all those excess payments are still treated as a return of capital. We do continue to refine our assumptions for defaults. Against that, once a portfolio is fully seasoned and ramped up, we're still assuming 2% defaults a year eventually in a typical CLO. Obviously, we're a mile away from that at the current default rate, but we know that will resurface. To the extent we are assuming that 2% default rate and we're not having it, that kind of builds in an additional cushion. That's ultimately an ineffective yield. It's a cumulative assumption. While we apply it annually, we might assume X percent a year times the number of years of the life of a CLO is a cumulative default assumption in the underlying portfolio. So if we don't use it this year, that just helps the amortized costs go down so that next year If defaults were to pick up, let's say, which is not a forecast of ours per se, we'd have more headroom to be able to handle that. So, I struggle to see us moving our forward fully ramped default assumption below 2% for the foreseeable future. We do reevaluate it regularly, but that's kind of a tried and true constant in the market. Obviously, subject to revision in the future, but I expect we'll keep it in that context for some time. and that will add additional reserves embedded in each of the CLOs.
spk02: Tom, in terms of LIBOR or the movements in LIBOR down the road, or whatever replaces LIBOR, what's the average LIBOR floor on the asset side of these CLOs, and what percentage of the loans have LIBOR floors?
spk00: I'm trying to see if we publish that in here.
spk02: If you don't have it, we can follow up.
spk00: Yeah, I'm looking to see. We have published it in the, or I recall publishing it. I'm looking through. I don't see it in the portfolio information right now on page 30. At a broad level, you think of LIBOR floors between kind of the low end is half a point, the high end is a point. probably with an average somewhere below the median and probably the majority of loans have it today. And that both helps and hurts. It helps today in that what do we have? We're getting the benefit where we're lending at a floored rate and we're borrowing at a rate with a floor of zero. Against that CLO equity, we like LIBOR as far away from the floor as possible. So, Broadly, if LIBOR was 2% or 0%, holding all else constant, that's going to be better for us. But floors are a nice part, but they're not as potent as they would have been five years ago when floors were 80% of the market or greater and typically around 1%. They have come down somewhat, but they've been increasing in frequency in the market over the last, say, two years.
spk02: And do you just take the forward LIBOR curve as it is into your or do you adjust it for your own personal views?
spk00: We just use the forward curve, which right now the five-year swap rate is about 85 basis points. So that's kind of the embedded rate over the life of an investment.
spk02: I understand. My last question is the following. Last year, a large portion of the dividend was a return of capital. I suspect a lot of that had to do with costs related to refinancings and resets. But so far this year, dividends have been characterized as 100% ordinary income. I realize there's a lot of moving parts in these calculations, including those refis and resets. But could you update us, at least broadly, on where you stand on undistributed taxable income? And with the new dividend that you've declared, do you have a sense of whether you'll need to consider a special distribution to meet RIC requirements?
spk00: A great question. The short answer is it's hard to predict until the end of the year. On an interim basis, we flag everything as 100% taxable just to be conservative. That's obviously the highest, and last year it ended up being much lower. A big driver of the vast majority of last year's distributions being treated as a return of capital, and I want to say it was over 80%, right, Ken? It was in the 80s, is my recollection, was even less about refis and resets and more about realized losses due to trading within the underlying CLO portfolios. And what I mean by that is if a CLO manager had bought a loan at 100, it's trading down to 80, and he or she sells it and buys another loan at 80 that they like better, it's like if you buy a stock at 100, it goes down to 80. You sell it, you take the loss. Assuming you buy a different company, you don't buy the same company back. At 80, it goes to 100. That's good. That happened a lot in CLOs last year. So broadly, and now within the PFIX, CLOs can offset their ordinary income with capital gains up to the amount of their ordinary income. So both from a limited amount of defaults, but more from trading, a lot of income was sheltered last year. to the extent those loans were bought at 80 last year and prepaid or paid off at par or were sold at par this year, voila, that creates $20 of income on that hypothetical investment that all flashes through into the CLO equity PFIC statements. So if we had to guess, if we were to close the books for the year today for tax purposes, many CLOs would be flashing through both the interest income as well as additional gains that have been realized. That said, between here and the end of the year, we still have four and a half months. While we feel pretty constructive, obviously hard to predict exactly what will happen in the market on a day-to-day trading basis. The other thing that you touched on were the impact of refi and resets on reducing taxable income. And back in the 2017-18 refi reset wave, That was very pronounced, and what that is is a CLO gets to write off its original unamortized issuance costs from the debt that it issued. The flip side, the good news is CLO underwriting fees and issuance expenses continue to fall, and the batch of things that were reset in 2017 and 18 were broadly 14, 15, and 16 investments, which had higher embedded costs. Now when we're doing refis and resets, we're typically refiing and resetting things from 18, 19, and 20 when costs have come down. So the unamortized cost that we're writing off as part of a reset or refi is typically much lower. Really getting deep into the weeds here, but whereas four years ago we would have said, oh, there's a lot of tax write-off related to that, even though we're very active, we are 7% of the reset market, frankly, just a little old us here. it will be less of a tax benefit this year than it was the last wave.
spk02: I appreciate that, Tom, and thanks for your time this morning as usual. Congratulations on a great year so far.
spk00: Great. Thank you so much, Mickey.
spk04: 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, good morning. First question I had was kind of a higher level question. You guys have had really fantastic results, you know, throughout the whole COVID downturn and recovery. You know, when I look at NAV up 25% in your most recently announced monthly data, I mean, that is incredibly impressive. I wanted to kind of turn back and think about how this performance compared to kind of the last kind of semi downturn we had as you guys were a public company during the energy kind of downturn in 2015 and 2016. the performance wasn't as strong during that time period. In fact, the NAV actually came out of that period down. So can you talk about, was there something different about this economic downturn recovery that allowed Eagle Point to perform so well? Or was there something that you guys had done differently as far as the portfolio positioning going into the downturn or how you kind of worked through and opportunistically made investments through this downturn some combination of the both?
spk00: That's a great question. And you offer two possible answers of was the cycle different and was our portfolio different? And the answer is yes and yes to those. Indeed, the 2015-16 downturn, driven by both growth concerns in China and then which led into a bit of an energy cycle, definitely the company performed differently there. The two big differences, let's talk about the cycle first. That was a single industry cycle, principally. Obviously, companies in multiple industries defaulted, but by and large, the defaults were concentrated in the energy industry. And judgmentally, I'm recalling, about 25% of all energy-related leveraged borrowers defaulted during that timeframe. And so while the price of energy loans were down, the broad market was not down anywhere near as much as energy loans. So the ability to make that trade I talked about with Mickey, you bought something at 100, it's down to 80. Well, there's a better one at 80 I like. Let's go make that move. That really didn't exist. It was nowhere near as prevalent of an opportunity within the CLO, within the loan market and for CLO collateral managers. So to that degree, the cycle behaved a little differently in that we had a The cycle behaved differently in that it was sector specific versus broad based. That sector specificness was exacerbated by a couple of things. First, that in 2014, there was a heavy concentration. The number of loans in the energy industry issued were quite high. And a couple of the offshore drillers came to the market. Those are BA2 loans with really giant coupons that kind of fit really well into the CLO model. And the concentration of energy loans was higher of CLOs issued in the 2014 vintage, particularly the summer of 2014. Then if you think about Eagle Point's timeline, what do you know? We went public in 2014, October 7th to be exact, and we had been ramping the portfolio prior to the IPO date and continuing to ramp after the IPO date. And we did not have exemptive relief until I believe late in the first quarter of 2015. So that did not allow us to make joint investments between ECC and our parallel private vehicles, which we also operate. As a result, we had a rotation allocation policy at that point. So client A would get something first, then client B would get the next one. very fair to keep just rotating through because the clients couldn't invest together, ECC and the private fund. Unfortunately, what that got into for ECC was a handful of larger investments that were mid-14 investments that underperformed. While they were not total losses by any stretch, in some cases they didn't return full capital. And ECC, unfortunately, in that early period was still overweighted in those investments. One in particular, a CLO called Flagship 8. That's one where Ken's smiling at me when I say that. I've used some less flattering words about that investment over time internally. That's one that had a very heavy energy exposure and I don't believe will be a positive return overall for the holders. There were a few other investments that was a tough, that summer of 14 in particular was a tough vintage. So one of the things, when we talk about growing the company and continuing to issue stock and some preferreds, when we talk about one of the things I said in the prepared statements was continuing to build out that diversity. The number one thing I wish was different in late 14 or even 15 for us was we had a couple of lumpier positions that in general we would not have sought to have We were ramping a bunch, so we were a little overweight in that vintage, and then coupled with the rotation policy, which we had to have prior to exemptive relief. Roll the clock forward today, we have probably just shy of 100 positions in the portfolio. We have exemptive relief, so ECC can invest inside on equal terms with all our private clients. Bite sizes become much more sociable for ECC, while still having the benefit of being the majority investor. So your observation of the difference between 15-16 and kind of 19-21, in our opinion, is very astute. As we've looked back and diagnosed what's the difference, those really were the differences, broad-based versus sector-specific, and then within our portfolio, less diverse of a portfolio than we would have liked, just owing to being early in the life cycle of the formation and not yet having the exemptive relief approved. Long answer. I hope it kind of lays out the I hope it kind of makes sense to you.
spk05: Yeah, that's a very comprehensive overview of the different movie pieces that you guys kind of worked through.
spk00: We've thought about this 100 ways to Sunday. We obviously like this performance better, and we believe we're positioned. This is what's supposed to happen. We know NAV moves around. That's a risk in our asset class. It says it certainly in clear letters in our prospectus. NAV is going to move around probably more than what BDC investors are used to. Obviously, we're not a BDC company. Against that, with the passage of a little bit of time, what we would hope to happen again is a significant increase in NAV during times of dislocation.
spk05: Yeah. Most important is where that NAV ends. You guys have clearly done a fantastic job during this downturn. The other question, though, I did want to talk about is, obviously, you know, as part of the strong performance, there's been, you know, a couple of dividend increases, you know, sizable dividend increases. And, you know, I've covered you guys for a long time, and I know there's always, you know, been this issue between kind of cash flow or tax, you know, accounting and where to set the dividend distribution at versus kind of the gap size. So if I look at slide number 23, you know, You know, these dividend increases have been very sizable, but you guys are still generating cash significantly above, you know, even the future dividend rate, you know, that's going to occur in the fourth quarter. And so when I ask, you know, how did you guys set this new rate at? And is that a rate that you guys are setting to try to earn with Gap NII? Or is it some combination of, you know, most you're earning with Gap NII, but obviously cash flows, you know, significantly above it? Just kind of talk through, you know, why that new rate was set and what are your expectations from earning that from a Gap standpoint versus it looks like cash flow will, you know, clearly, you know, way over on it. But where does that stand from a Gap standpoint?
spk00: Sure. And obviously, we're slaves to three masters, cash, gap, and tax. If we don't get the cash in, can't pay it out. We were floored that our distributions need to be equal to substantially all of our taxable income. And people often look at us how we're performing versus gap. So we have these three different masters. The most clicked on link on the company's website, I believe, is our August 2015 presentation of gap tax and cash, and we lay out a representative example. If people haven't looked at it, we encourage you to take a look at that. It lays out all the difference. They all equal over time on an individual investment, but they rarely equal in any given period. To your specific question of how did we set the distribution going to $0.10 now and then $0.12 per month in the fourth quarter, That's based on our expectations of gap earnings as the principal driver of that, augmented by the potential for higher than average taxable income based on the trends we're seeing at present. We can't really predict taxable income to the end of the year because to the extent there's a sell-off in November or December, that could lower taxable income again if there's trading in the underlying CLOs. But where we look at it, We know folks like to see distribution rates kind of in the ballpark of gap earnings. We don't think the gap earnings that we're anticipating over the coming months and quarters is meaningfully out of line with the distributions that we're setting. Frankly, we had, when you look at our earnings, take away the special charge, we were 35 cents in the second quarter. We've got 50 bucks of cash on the balance sheet plus, put a reasonable rate of return on that. and you can probably cuff the potential earnings power for the company. So when we set that distribution rate, and obviously working with our board very closely, we believe that's a long-term and sustainable rate supported by cash, tax, and GAAP. Okay.
spk05: Yeah, I understand. And then I just have one more question. You know, it seems like you guys are having a really, you know, a nice nice tailwind as far as you know refis and resets i'm just curious um because obviously you're an expert you know in the clo space and i just don't know this does the economic where we are in the economic cycle influence how easy or hard it is to to refi or reset a clo and just for instance like in the 2018 2019 time period when we were 10 years removed from a you know, last credit cycle, was it harder to refine, reset CLOs versus now where we're kind of, obviously there's still challenges ahead of us, but, you know, the economy is growing. We just ran through a credit cycle. I think most people are a little more bullish going forward at this point. Does basically the economic cycle play into that at all or is that uncorrelated?
spk00: The ease or challenge of getting a refire reset done is purely how much do people want to buy CLO debt? You know, in April of 2020, while lots of people wanted to buy CLO debt, they didn't want to pay prices we wanted to borrow at. Right now, people, certainly this year, CLO debt has been strong, and we're happy to sell it to them as we reset, similarly with new issues. That was the same in 2018. So the real variable is what is the strength of the CLO debt market? period. And then to that, kind of the back and forth, do people factor in where we are in the economic cycle? Undoubtedly. At the same time, I think broadly, they're looking at it more relative to what's going on in the broader markets. And if they're thinking rates are going up, they're probably going to favor more floating rate CLO and maybe deemphasize fixed rate CMBS as one generalization. But it really just comes down to where we are in terms of the demand for debt paper in the market. Right now, as we mentioned, a little bit of a Goldilocks period of people want to buy CLO debt, but loans aren't getting repriced. That's what we love that situation. We share the view you talked about of we're probably in the early stages of the next economic expansion, but the ultimate driver comes down to simply how much demand is there for CLO debt. One thing when we talk about refis and resets, those are big numbers. Let me look back at what the volumes were. The piece of the puzzle that gets overlooked, if we've seen $38 billion of resets and $28 billion of refinancings, that's $66 billion. That means people who own $66 billion of CLO debt got repaid as well. So while those are, in many cases, eye-popping numbers with the potential, our current outlook for $235 billion of resets and refinancings collectively this year That's our expectation. That's also $235 billion of people who own CLO debt at the beginning of the year getting their money back out of a $700 billion market in the U.S. So that's roughly just shy of a third of people getting their money back. In addition, while we don't list it, calls and just letting deals amortize. I talked about that flagship investment. Whoever owns the AAAs on that, they're just getting amortized. So that's kind of still some negative supply there. you know, in the market as well. So it's a combination of all those things. And as long as you see people keen on CLO debt, you know, will be a, very likely will be a keen resetter or refinancer.
spk05: Okay. That makes sense. I appreciate you taking my questions and congrats on the really nice quarter, guys.
spk00: Thank you so much.
spk04: We've reached the end of the question and answer session. I'd now like to turn the call back over to Tom Majewski for closing comments.
spk00: Great. Thank you very much for your time and interest in Eagle Point Credit Company today. Ken and I appreciate the dialogue and all the questions that we get from folks. Obviously, a great start to the year for the first half. And hopefully, you can see management's confidence and hear our outlook for the future for the balance of this year. And we certainly hope the market conditions continue as they are. We're capitalizing on this strength to give us the flexibility to navigate whenever the next tide turns. We know it will. We don't know when, but we're doing everything we can to position the company for that. So we appreciate your time and questions. If anyone has follow-up questions, Ken and I will be in the office and available to speak. Thank you very much.
spk04: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your attention.
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