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spk04: Ladies and gentlemen, thank you for your patience. We will begin in about two minutes. Again, thank you for your patience. We will begin in about two minutes. Thank you. Thank you. Thank you. Thank you. Greetings. Welcome to the Eagle Point Credit Company's third quarter 2021 financial results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Gary Edson of ICR. You may begin.
spk05: Thank you, Shamali, 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 or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially, from those projecting such forward-looking statements and projecting financial information. For further information on factors that could impact the company and statements and projections contained herein, please refer to the company's files with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website, EaglePointCreditCompany.com. Earlier today, we filed our third quarter 2021 financial statements and our third quarter investor presentation with the Securities and Exchange Commission. Financial statements and our third quarter investor presentation are also available within the investor relations section of the company's website. The financial statements can be found by following the financial statements and reports link, and the investor presentation can be found by following the presentations and events link. I 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 third 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. Our banner 2021 has continued into the third quarter with excellent performance throughout our portfolio and operations. Our NAV continued to increase. Our portfolio generated very strong recurring cash flows. and our NII rose considerably compared to the second quarter. We were very active in managing the portfolio, both buying and selling securities, as well as resetting and refinancing CLOs in our portfolio. Net, we deployed $68.8 million into CLO equity and debt investments during the quarter, and importantly, we priced a total of 11 resets and refinancings during the quarter. our NAV increased 8% per share, ending the quarter at $13.98 per share. This upward trend continued in October, and we estimate our NAV at month end to be between $14.23 and $14.33 a share, reflecting an additional gain of 2% based on the midpoint of that range. To frame this, our NAV per share is now up 28% this year through October, and 35% since the end of 2019, before the onset of COVID. Recurring cash flows on our portfolio in the third quarter were 43.2 million, which was 61 cents per share above our total expenses and common distributions. This is our largest quarterly excess since we went public in 2014. October's cash collections have totaled 42.2 million, and we continue to maintain strong recurring cash flows on our portfolio. Notably, October's collections were 65% more than our collections in October of 2020. The company's recurring cash flows have fully recovered to pre-pandemic levels, as essentially all CLO equity positions are making quarterly distributions. Cash flows have further been enhanced by the accretive efforts of our proactive reset and refinancing activity during this year. Our net investment income and realized gains for the third quarter totaled 39 cents per share, exceeding our common stock distributions paid during the third quarter by 30%. Earlier today, given the strength of the company's performance, we declared a special distribution of 50 cents to our common stockholders. This is an initial special distribution based on our preliminary projections of taxable income. Upon finalization of the company's 2021 taxable income and based on current estimates, the company expects to declare one or more additional special distributions during 2022. We also continue to prudently raise capital through our At the Market program. We issued approximately 746,000 common shares at a premium to NAV and approximately 436,000 Series C preferred shares at a premium to their liquidation value, generating net proceeds to the company of about $21 million during the third quarter. This helps us build NAV and further increase diversity in our investment portfolio. As of September 30th, the weighted average effective yield of our overall portfolio was 16.35%, and that's up from 14.98% at the end of June. 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 repricings. As I mentioned during the quarter, we deployed $68.8 million of net capital into CLO debt and equity investments. We continue to find attractive CLO opportunities, principally in the primary market, with a few opportunities also in the secondary market. Indeed, across the 12 CLO equity purchases that we made during the quarter, the weighted average effective yield was approximately 18%. On the monetization side, we opportunistically sold several CLO equity securities and other investments. Collectively, these sales allowed us to realize capital gains of $0.02 per common share. While we typically underwrite investments with a long-term hold mindset, we do sell investments where we see strong bids, or other attractive rotation opportunities. In addition to our deployment of capital, we remained very active with our reset and refinancing program during the quarter, taking advantage of strong demand for CLO debt. During the quarter, we priced nine resets and two refinancings, and now have completed 18 resets and 11 refinancings for the first three quarters of the year. We continue to have a robust pipeline of future refinancings and resets under evaluation, and we expect to be actively working this pipeline through the balance of 2021. As a refresher, a reset typically renews a CLO's reinvestment period and usually lowers its future cost of funding. It also allows us to reopen and refresh a transaction's governing documents. In a CLO refinancing, on the other hand, typically only the spread on a CLO's debt tranches are reduced, lowering the cost of funding, while most other CLO terms remain unchanged. For our two refinancings during the third quarter, we lowered the average cost of debt on the refinanced tranches by approximately 25 basis points. And for our nine resets, we saved an average of 29 basis points on the debt and lengthened the remaining reinvestment period of each of those CLOs out another five years. Borrowing from the private equity playbook, in several of the resets, we were also able to structure special cash distributions to the equity class at the time of the reset, lengthening the deals, lowering the cost of funding, and taking money out for the equity. This is a key part of our advisor's value proposition for our majority CLO equity strategy, proactive involvement with each investment, both at the time of purchase and throughout its life cycle. We are always seeking ways to create value for our shareholders. Thanks to our ability to capitalize on the attractive reset and refinancing environment, as of September 30th, our CLO equity portfolio's weighted average remaining reinvestment period stood at 2.9 years. This is an increase from 2.4 years at the beginning of 2021. So despite the passage of nine months of time through our proactive portfolio management, the weighted average remaining reinvestment period on our CLO equity positions actually increased meaningfully. These actions allow the company to increase prospective cash flows while also being better positioned to take advantage of future loan price volatility the next time it occurs. As we manage the company's portfolio, we keep to seek the weighted average remaining reinvestment period as long as possible. Along with the positive trends throughout our portfolio, 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 unfunded revolver commitments. Looking ahead, when combining our increased weighted average effective yield of our CLO equity portfolio, our favorable cash flow, and then the favorable default trends in the market, our reset and refinancing activity and the potential earnings to the portfolio, we believe the company remains very well positioned to continue increasing net investment income in the coming quarters. I would also like to take a moment to highlight our sister company, Eagle Point Income Company, which trades under symbol EIC. For the third quarter, EIC generated NII and gains above its quarterly distributions and raised over $44 million of common and preferred capital to deploy into its CLO junior debt and equity investment strategy. We believe this will help support EIC's strong financial performance as well. EIC also announced a special distribution to its shareholders today. We invite you to join our call at 11.30 a.m. to visit and visit the company's website, eaglepointincome.com, to learn more. Overall, we continue to be quite 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.
spk02: Thanks, Tom. For the third quarter of 2021, the company recorded net investment income and realized gains of approximately $13.7 million, or $0.39 per share. This compares to net investment income and realized gains of $0.32 per share in the second quarter of 2021 and net investment income net of realized losses of 23 cents per share in the third quarter of 2020. When unrealized gains are included, the company recorded gap net income of approximately $47.2 million or $1.35 per share for the third quarter. This compares the net income of $1.26 per share in the second quarter of 2021 and net income of $1.40 per share in the third quarter of 2020. The company's third quarter GAAP net income was comprised of total investment income of $24.3 million, net unrealized gains of $33.5 million, and realized capital gains of $0.6 million, partially offset by company expenses of $11.2 million. The company's asset coverage ratios At September 30th, for preferred stock and debt, calculated pursuant to Investment Company Act requirements were 312% and 526% respectively. These measures are comfortably above the statutory requirements of 200 and 300%. Our debt and preferred securities outstanding at quarter end total approximately 32% 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 portfolio activity in the fourth quarter through October 31st, the company received recurring cash flows on its investment portfolio of $42.2 million or $1.18 per share. This compares to $43.2 million or $1.23 per share received during the full third quarter of 2021. It's important to highlight that some of our investments are expected to make payments later in the quarter. As of October 31st, we had 24.3 million of cash on hand, net of pending settlements. During the third quarter, we paid three monthly distributions of 10 cents per share. Beginning in October, we increased our common distribution by 20% to 12 cents per month. Last week, we declared distributions of 12 cents per month for the first quarter of 2022. And as Tom mentioned earlier, today we declared a special distribution of 50 cents per share. I will now hand the call back over to Tom.
spk00: Great. Thank you, Ken. Let me take the call participants through some thoughts on the loan and CLO market, and then we'll open the call to questions. The Credit Suisse Leverage Loan Index had a solid third quarter, generating a total return of about 1.1 percent. October was also positive for the index, and for the month through the first 10 months of the year, the index is now up 4.9 percent. Bar a sell-off prior to year end, this will mark the index's 28th year of positive total returns in the 30 years that it's been measured. we are aware of no other risk asset class that has generated such consistent positive returns for investors. These loans, of course, are the raw material that drives the returns to CLO investors like ourselves. We believe that the loan market remains positioned very well for CLOs right now. Corporate defaults remain quite low, and indeed only one company defaulted during the third quarter, according to S&P Research. At October month end, the trailing 12-month default rate for corporate loans stood at 20 basis points, which is among historic lows. While the percentage of loans trading over par has been creeping up a bit, repricing activity in the loan market remains generally muted. On a look-through basis, the weighted average spread in our portfolio was substantially unchanged for the quarter, falling one basis point from the end of June. Our portfolio's weighted average junior OC cushion was 3.41% as of the end of the quarter, and that's a meaningful increase from 3.10% at the end of June. In the CLO market, we saw $47 billion of new CLO issuance in the third quarter and $130 billion through September for the full year, already bringing the – besting the prior year record of $129 billion set in 2018. We also saw $32 billion of resets and $22 billion of refinancings as they remain well on pace to eclipse previous record levels set in 2018 and 2017. Demand for floating-rate assets, that's ultimately what we own within ECC, remains strong as investors shift out of fixed-rate products. With that backdrop and a strong economy, very few loan defaults and muted loan repricings We believe our portfolio has room for further price appreciation while it continues to generate strong cash flow for us. We are also very honored to have our work during the pandemic recognized by Credit Flux, which is a leading publication in the CLO market. Eagle Point Credit Company was named their best closed-end CLO fund. This award is a testament to our team's dedication and effort. In addition, our advisor, Eagle Point Credit Management, was voted best U.S. CLO equity investor in a credit flux survey of 242 verified CLO industry experts. We are honored to receive both of those awards. To sum up, NII and realized gains have exceeded our common distribution each quarter so far this year. Our portfolio's net asset value has continued to rise up 28% since the beginning of the year and 35% since before the onset of COVID measured through October 2021. Cash flows in our portfolio remain quite strong. Our excellent performance in 2021 has allowed us to declare a 50-cent special common distribution with a likelihood for additional special distributions to be announced next year once taxable income is finalized. New CLO equity investments that went in the portfolio during the third quarter had a weighted average effective yield of 18%. We are actively managing our portfolio and plan to continue our CLO reset and refinancing program, which we believe has the potential to drive additional NII over time. And we have pressed our advantage and really remained on the offense in this market, deploying significant capital over the past six months into CLO equity and debt, providing us with more paths for attractive risk-adjusted returns and increasing our NII. It's truly been an exceptional year for the company. In strong markets like these, we have multiple levers to pull, both within our CLOs and within our company's capital structure, to strengthen our balance sheet and increase NII. I can assure you we are looking to pull all of them. We believe this will help us continue in distributing out as much cash to our shareholders as possible. With that, we thank you for your time and interest in Eagle Point Credit Company. Ken and I will now open the call to your questions.
spk04: Thank you, and at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the start keys. One moment, please, while we pull forward for questions. And our first question comes from the line of Mickey Schlien with Lattenburg. Please proceed with your question.
spk01: Mickey Schlien, Lattenburg, Yes, good morning, Tom and Ken. Thanks for taking my questions. Tom, we're experiencing inflation rates that we haven't seen in a generation. And during that time, the loan and CLO markets have grown very, very significantly. I realize that loans are floating rate investments and CLOs are generally match funded. But I think it's also important to consider credit risk. So I think it would be helpful to understand your expectations for how loans and CLOs could perform during these inflationary times, given that inflation seems to be more persistent than what the Fed was hoping?
spk00: Sure. A very good question. There's probably two parts to that to address, both just kind of debt service for companies and earnings and profits. To start with the debt service side of things, companies have, on average, across our portfolio, very strong debt service coverage ratios. We have a market-wide charts, which is certainly representative of our portfolio, though not our exact portfolio in our quarterly investor deck. But companies could sustain hundreds of many, substantially all borrowers could sustain hundreds of, holding all else constant, could sustain hundreds of basis points of short-term rate increases before they really face any sort of difficulty servicing their debt. Many companies have between three and six times interest coverage ratios. So the ability to service increases is not something we're spending a lot of time focused on. A good example I can give you, many folks were concerned about the amount of leverage and companies' ability to handle increases in rates. And if you think about what happened between 2017 and 2019 when interest rates really did go up a whole bunch, I can't think of any loan that defaulted due to interest rate movements unto itself. Certainly a handful defaulted, but I don't think it was the interest rate movements that did it. So assuming the bid ask in the market, even the Fed raised rates four times, which I don't think any analyst is predicting, we don't anticipate that being a major issue for companies that we lend money to. Now, the other part of that, though, inflation and how does that trickle through the system? The good news in general, or the bad news, is companies are facing higher supply costs, more difficulty securing products, more difficulty attracting labor. There's not a day that goes by you don't hear an anecdote of companies struggling to hire folks or, and frankly, a little bit of labor unrest even with companies like John Deere right now. facing a large strike. Against that, this is on a limited sample, but when I talk to company CFOs and CEOs, I ask one question. I said, do you have pricing power over your customers? And nearly consistently, the answer has been yes. And we've seen this pretty consistently. I can't think of a company that's gone the wrong way. I'm not saying that's entirely the case for every company, but of those that we've been looking at, certainly a very strong ability at present to pass on those higher costs to their customers. And what we're seeing, you know, we're seeing robust profits, S&P 500 profit margins are up, you know, on a quarter-over-quarter basis and a pretty meaningful amount of some pretty high levels against that consumer sentiment and, you know, consumer confidence with some of these Michigan indices, pretty darn low. reflecting that companies are passing through these pricing increases. At some point, that can't persist, and we would expect to see some trouble percolate in the portfolio. My sense is that is multiple quarters away at the earliest. Do we see a period of hyperinflation in the U.S.? I certainly don't think so, although it wouldn't surprise me, roll the clock forward 12 months Do we get back to a more normalized default rate of 1% to 2%, something like that, I think is in the realm of possibility. Companies being covenant light and with relatively strong markets can continue to borrow even if they are in a bit of trouble. All that debt does eventually need to be repaid. But I think even companies in some degree of distress would find likely at least one last lifeline to borrow, giving them more runway to hopefully get to the other side. But the trends you're seeing with inflation to the extent it continues even at three-quarters of its current level, we think of that as probably positive for our borrowers over the near to medium term. But if it persists for an extended period of time, it has the potential to be a negative.
spk01: Tom, thanks for that comprehensive answer. And you mentioned, you know, down the road defaults climbing. That actually – leads into my next question. You know, this year, really, you know, starting after the pandemic began last year with all the Fed stimulus, there's just been a lot of tailwinds for both the loan and the CLO markets. And, you know, that's evidenced by the economic growth and the low default environment. But looking ahead, as you mentioned, things could get more difficult. Economic growth could decline. The Fed at some point will start to tighten. And as you mentioned, leveraged loan default rates are at historic lows. So they really, over the long run, can only go up. So how are you thinking about those risks in terms of gauging your estimated yields on your CLO equity investments versus their cash flows, which today are very high?
spk00: I mean, our assumptions, we lay them out in the quarterly financials. There's not been a big change quarter over quarter. There might be one or two modest tweaks to it. But one of the things we assume is fairly quickly default rates return back to normal. Obviously, at 20 basis points, that's a kind of default rate we like to see. On page 20 of the quarterly financials, we do lay out the assumptions we use for defaults and prepayments and things like that. And we do assume that the default rate ramps back up over the coming months and quarters back to normalized levels. So if anything, if you were to challenge us, maybe we're a spec conservative on that. That's certainly kind of how the market thinks of things. My sense is we've got probably some better runway to go on defaults. Do you see the first warning sign of that will be the percentage of loans trading below 80? Right now that's around 2% in the market, give or take. I think we'll start to see that number creep up. It'd be an early warning sign if someone wanted to look. With loans being covenant light, the risk of technical default is quite low. In general, companies have better liquidity profiles than they've had in a long time. And with the strong market, even if they had to borrow an additional loan from maybe a more mercenary lender at 700 over, 800 over, my sense is that capital would be available to give companies some additional degree of runway. So, our default assumptions remain relatively consistent as do our prepayment and reinvestment assumptions. And what that does in the interim is it continues to buy down the amortized cost. If we get excess cash flow on an investment above the effective yield, that additional amount is treated as return of capital for GAAP purposes, lowering our amortized cost, which when we go to project cash flows next quarter, holding all else equal would then increase the effective yields prospectively, even holding the default rates constant. So it's something we've got our eye on. It's not a near-term concern. The first warning sign, in my opinion, would be looking at loans trading at distressed prices.
spk01: And, Tom, just a quick follow-up. Do you take forward interest rate curves at face value? when you make these estimates, or do you make your own adjustments to forward interest rates?
spk00: We just use the forward curve. I can't tell you the forward curve has ever been right, but it's a relatively liquid thing, and it's the market. You could buy or sell that curve pretty easily, so we use that as our baseline assumption. When we look at investments, we do stress that to some degree up and down. But for our assumptions, we just use the market-based forward curve that you can pull off of Bloomberg.
spk01: And you're still using the forward LIBOR curve? Are you starting to use an alternate interest rate curve to capture the transition away from LIBOR?
spk00: Yeah. So right now, all of our CLOs are denominated off of our index to LIBOR. a very small number of loans have been issued off of SOFR. And by and large, the way most CLOs are set up is once half of the loan portfolio pays off of SOFR, the CLO debt swaps over to SOFR. In theory, that introduces basis risk. Basis risk is something that's long existed in CLOs and that Even if every loan paid three-month LIBOR, CLOs set their LIBOR rates four times a year. Loans set their LIBOR rates randomly throughout the year. That hurt us in the July 2020 payments. You might recall those were quite low. It's helped us in other quarters when rates have kind of swapped in our favor. And then loans can also pay off a one-month LIBOR or a six-month LIBOR or a prime. There's so many different ways loans can pay. It will be a modest help or hurt. I don't know which, but the important word in that is modest. The interesting question is pretty much all new CLOs will start being issued off of SOFR starting next year in that pretty much the regulators have said no more new debt can be issued off of LIBOR after the turn of this year. Against that, most loans in the market are still LIBOR-based and, you know, There's no general motivation for a company to switch to SOFR until such time as they want to refinance or reissue new debt. So we're debating the time and pace it will take to get to that 50% threshold. Our sense is it's measured in quarters, not in months. But at some point next year, we'll begin to introduce SOFR assumptions into our assumption set. Even there, thankfully, there's beginning to be, although not as liquid as the LIBOR forward curve, beginning to be some degree of forward SOFR curve that the market is looking at.
spk01: I appreciate that explanation, Tom. That's it for me this morning. Thank you.
spk00: Great. Thanks, Mickey.
spk04: And our next question comes from the line of Matthew Howlett with B. Reilly. Please proceed with your question.
spk06: Thanks for taking my question. Tom, you know, you've put out these great results. You've grown the top line. You talked about the stability in the asset class, the CEO equity asset class. Look at your cost of debt. And could you sort of go over, walk me through? I've seen BDCs issuing now at 5%, 5.5%. And I look at your cost of debt up there in the high six and seven. Can you talk about what's the, you know, could you break through and issue lower as the asset class matures? You have a Series B that looks like it's high cost and it's callable. Would you take that out? And what are you going to plan on doing in terms of calling some of your longer data and secured notes, anything with the balance sheet prior to the Fed potentially lifting rates late next year? Just walk me through how do you see the cost of fund and determinant coming down over the next year or so?
spk00: Sure. So to share a couple of points, our sister company, EIC, earlier, I guess last month, issued a 5% preferred EICA, which was investment grade rated and a five-year piece of paper at what we believe is the lowest cost of funds ever achieved for a preferred security issued by a CLO-oriented investment fund. Within ECC's capital structure, we have the Bs, the Cs, the Ys, the Xs, and the Ws. If memory serves, the Bs, Ys, and Xs are callable or soon to be callable. And those have coupons which do seem quite high compared to where EIC issued. One of the things we value tremendously at ECC is tenor. And when the stuff was really ugly in March and April of last year, of all the things Ken and I were worried about, the right side of ECC's balance sheet was not one of them, in that our shortest maturity is 2026. At that point, we had paper out to 2028. Now we've got paper out to 2031. That said, we're mindful the $25 market has come in significantly. We've proven that point with EIC. although admittedly with a five-year tenor, something shorter than we've done with an ECC since the old Zs back in 2016. So it is something we're actively looking at. And when we mentioned in our prepared remarks that we have lots of levers to pull, both within our CLOs and our company structure, we certainly continue to evaluate the company's capital structure. And to the extent we see opportunities to lower that cost, we absolutely would take it. Balancing, we value tenor and stability, but, you know, kind of putting all the pieces of the collage together. To the extent we were to issue at materially lower costs, obviously that would be accretive to NII and beneficial to our shareholders.
spk06: I think it would clearly be significant. And, you know, we talk about below 6% rates. I mean, it gets – you know, things can get really interesting at those levels. So I certainly look forward to hearing more on what you do on that opportunity. Moving towards – I mean you're active in the primary market. What does your crystal ball say in terms of 2022 in terms of issuance, primary issuance? Anything you can tell us and what expectations are? I'm assuming you'd like sort of a healthy, robust calendar looking at 12 months given to keep investment opportunities attractive. Any way to kind of tell what 2022 is going to look like?
spk00: Yeah, a couple of things. You can see I've got to take one quick peek here in our financials. Bear with me just so I can get the count right. I know the trend. You can see on page three of our financials we have six loan accumulation facilities. Those are sometimes commonly called warehouses, portfolios getting slowly accumulated to issue new CLOs. So you could reasonably conclude we've got line of sight as of quarter end into at least six new investments. As I look at our history as our advisor's history going back to kind of 2014, in general, we're involved in the issuance of about 10 CLOs a year. Sometimes it's a little higher. Sometimes it's a little lower. In that time frame, I don't think it's ever been 15, and I don't think it's ever been five. So we kind of go at a kind of a one-a-month basis, maybe not in December and maybe not in August, depending on what's going on in the world. And while I expect CLO issuance will slow in the beginning part of next year, and that's as the market kind of recalibrates, as people start buying SOFR-denominated CLO debt, We're going to have a brief period where we've got to kind of find a balance between what those, if LIBOR AAAs are kind of 115 over today, what is the credit spread adjustment or CSA added into the SOFR paper. There's going to be a little bit of back and forth around that, so I think we'll see a little bit of slowdown in issuance, but not a lot. But, you know, our kind of steady Eddie wins the race has been very much the case here. So we've got six in the ground as of September 30th. And that's kind of our run rate pace that, you know, I'd be surprised if we issued a lot more or far fewer than 10 next year. We also look to the secondary market. And frankly, a number of the buys we made in the third quarter were still very attractive secondary opportunities. While we're primarily known for buying new issue equity, when I look across our firm and how we've invested over different years, 2019 was a principally primary year. 2020, across our firm, probably almost half the equity money we put in the ground was secondary. 2021, the majority of it's back to primary. So we'll go wherever the best value is. In general, we've got a pretty good edge at creating things cheap in the primary market. But when we see things at attractive levels in the secondary market, we don't hesitate to pounce. And a couple of the new positions that came in this quarter were secondary buys. Gotcha. Great.
spk06: Thanks for pointing both those points out. Last question on the special dividends. Congrats on the special dividends. I mean, I know you earned the Core NII. It's always been well above the dividend. What can you tell us in terms of how to think about the special dividends. You said you might have to pay one or two more up before you're in next year. How should we think about what those could be? And then how do investors look at special dividends in general from a company? I know you want to earn the core dividends being earned or the monthly dividends being earned. How do we look at special dividends? Do we look at these as just part of the recurring business model or is this sort of exceptional times that maybe may not always be there?
spk00: Yeah. Um, so, uh, it's, uh, a tricky one. Um, there's three things in CLOs. There's cashflow, which in my opinion is the most important. There's gap income, which everyone likes to talk about EPS and NII and all that good stuff. And then there's the tax man and taxable income. Right. And over the life of every investment, those will, you know, those will all equal. They are, in my experience, have never equaled in any given year. Um, So when we look back to last year, if you were a shareholder in 2020, you would have gotten a K-1 from Ken in the beginning of the year, and 20% of it was taxable income. The balance was return of capital. So last year's dividends were a little greener in that you didn't get a tax bill associated with it. It did lower your basis, obviously. And what drove that was within CLOs, both as some companies defaulted, and in a typical CLO structure, which is a PFIC, you can take capital losses as an offset against ordinary income. So some CLOs generated a ton of cash and flashed no ordinary income, no income to us at all. Obviously, all else equal, that's good. Cash now, pay tax later. Now, the flip side, a lot of loans that were bought at discounts last year when loans were 70, 80, 90 cents on the dollar, unfortunately, a lot of those loans, or fortunately, perhaps, have paid off at par this year. And what that's done is then created a ton of gains that flashed through as income to us. So what it's probably the most indicative of is the inconsistency of tax versus cash. So last year, we paid out five times our taxable income, roughly in line with our NII, give or take a little bit, where we look this year, the 50 cents as a preliminary estimate, and when we said we expect one or more additional specials to be declared, that's based on preliminary estimates and the tax year is not yet over, so things can still change. We last did a special in August of 2017, and What we, as a team here, we want to ultimately reward long-term shareholders. And that's something that's, you know, the person who owned the stock this morning obviously had good news, great, here's a special, the stock is up nicely on the news. We do seek to reward long-term shareholders. So we wanted to get some out today. There's also an excise tax if you go into spillover income of 4% that we have to pay. We kind of view that as a financing cost basically. Once we wanted to get some more money out to shareholders, as kind of some good news now, and then once we get our tax returns final, which will be certainly before the next earnings call, we'll have greater visibility into what other excess or spillover income we have, and Ken and I will add our strategy on the next call for what we'll do with the balance. In general, everything we wanna do is rewarding long-term shareholders. While we're certainly happy for anyone who bought the stock last night at 350, PM, we'd rather reward people over an extended period of time. So a little bit of a dilemma. We wish we didn't have it. Life would be a lot simpler without the taxable income distribution requirement, but those are the rules we work within, and we will try our best to defer taxable income as long as possible, but it's time to pay the piper a little bit after getting a coaster-free ride last year. Right. And look, shareholders certainly benefit.
spk06: But what you're saying is the gap, at some point, they're all going to converge. One can't be well above the other and vice versa forever. At some point, it all equals out.
spk00: We have a presentation on our website from, I think, 2015, which might be the most clicked-on thing in our website. If you look way back in the presentation section where we lay out a representative investment gap, cash, and tax, you'll see the totals are all the same, but no given year is the same. Right.
spk06: Great. I'll take a look at that and congrats, John. Thank you.
spk00: Thank you.
spk04: And again, as a quick reminder, if you have any questions, you may press star 1 on your telephone keypad in order to join the question and answer queue. And our next question comes from the line of Paul Johnson with KBW. Please proceed with your question.
spk03: Good morning. Thanks for taking my questions. So you guys were fairly active this quarter as you have been for this year. It looks like nine resets, two refis. I'm just wondering if you could talk about what made those opportunities so favorable during the quarter and do you see continued opportunity for continuing to reset and refi CLOs actively in the quarters ahead or if there's been anything to significantly change that?
spk00: So during the quarter, we had nine resets, two refis done, significant cost of savings across the board on all of them. In a number of cases, we were even able to take out special cash distributions to the equity class as part of the reset, lengthen the deal, lower the cost, and take money off the table. If we could do that on every deal, we'd be thrilled. What gave rise to that, a variety of things, and one of the advantages of our portfolio and being part of the broader Eagle Point family, we believe we're the largest holder of CLO equity in the world, probably was somewhere between 85 and 95 majority positions across our complex. The good news with that is there's always some deal that can have something done to it in some market condition, or at least so far that's been the case. And the types of transactions that got reset this quarter were some of the CLOs we issued in the summer of 2020, back when AAAs were 165, 175 over. You know, boy, the second those things hit, back then, last year, deals had a one-year non-call, three-year reinvestment period. Boom. The second those things hit the non-call date, we had them reset, lowering, you know, AAAs. I think in one deal, maybe it was even 45 basis points or something. So a little bit of capturing the market, tightening from things we issued last year. And then some of the 2019 CLOs, which back had two-year non-call periods, were also running off of non-call throughout the summer. And what we've seen is because most CLOs today are kind of going into the third-party equity hands, there's not a lot of risk retention or captive funds active in the market. We've been able to kind of find a good balance of keeping the, not pushing out the AAA level. kind of keeping a nice balance. AAAs might widen or tighten a couple of basis points, but today they're generally much tighter than they were during most of the 2020 issuance and most of the 2019 issuance. That said, while we talk about, let me go back and check my notes here, that we've done, I don't know how many dozens of refis and resets. It's about, let me, let's say we did about, We've done 11, 18 resets and 11 refis. Our schedule of investments has a lot more CLOs than that. And indeed, you know, we've continued to complete resets even after quarter end. One CLO in our portfolio, let me just look and make sure I hit this properly. Octagon Investment Partners 50, which is a position within ECC, that had a reset after quarter end. And we'll continue, as I believe others have, we'll continue to focus on doing that wherever it makes sense. One thing I'll say, we are probably going to slow down a little bit going into the end of the year, just with the LIBOR SOFR transition, and we're kind of arm wrestling over the credit spread adjustment with potential AAA buyers. So we may, we probably won't see too much more activity for the balance of the year, maybe a little bit in our portfolio. but then expect to resume in earnest with a combination of refis and resets, whatever makes the most sense. While we love to save money, the best part of the reset, though, is lengthening the reinvestment period. I think we said we saved 29 basis points on the resets. That's great. We love it. We love the special distributions. But what we love most of all is kicking the reinvestment period out another five years. We don't know when the next bout of volatility will come, but what we do know is we want our CLOs to have as much reinvestment period as possible on that day. So when we talk about, and maybe two calls ago, it might have even been Ryan who asked, will the weighted average remaining reinvestment period ever go back up? Because it had been going down for a while as we weren't doing many resets last year in a wider market. Indeed, it's reversed course and has gone up nicely this year despite the passage of nine months. And that's the number one defense, in our opinion, if Armageddon hits tomorrow, which is certainly not our prediction. But if it were, we'd want as much runway as possible within the CLOs, and this gets us that.
spk03: Great. Thanks, Tom. That's very good and very helpful commentary. My next question was just, I'm wondering if you could speak to your NAV performance. Obviously, we're up, I believe, a little bit more than 25% for the year, and we're up 2% so far into the fourth quarter. I think you mentioned 35% basically since COVID began. I'm wondering what you see to, if you could, I guess, speak to the strength of the loan market and how, you know, I guess any thoughts around additional upside to NAV from here, or if you think that we've kind of realized most of the, you know, appreciation and recovery from, you know, the COVID downturn.
spk00: Yeah, we're, I mean, we're, The NAV is up roughly 35%. From where we started, if pre-COVID NAV is up 35%, obviously plus distributions along the way, that's obviously the right answer. We're not aware of many other fixed income funds. Certainly, I can't think of a BDC, maybe other than a venture lending BDC or something like that that's had anywhere near that sort of NAV appreciation on a pre-COVID basis. Things that drive the or our NAV is based obviously on the fair value of our securities, the fair value of the securities we hold may be above or below the liquidation value of the underlying CLOs. If a CLO is at the end of its reinvestment period, it's typically gonna be marked in today's market a little bit, a touch below NAV or maybe a touch above, right around, our fair value would be right around the liquidation value, give or take a little bit. But a shiny new CLO is worth more than its liquidation value, simply because it's got a kind of a nice juicy IO stream coming is the way the market thinks of it. To the extent we do resets, one of the things that does is typically increase the value of the security. I mean, think about it. Just think about our representative reset this quarter. We saved 29 basis points. So the future cash flows holding all else constant just got better. they just got longer and to the extent the company participates and in many cases shares in rebates or revenue shares in the underlying collateral manager fees, those also got longer. So it's not so much that the positions we owned just holding them straight up went up. Some of them did. It's quite a bit of our proactive management And I can't break out the exact amount of NAV increase due to our management versus underlying performance of the CLOs, but a non-trivial portion of our NAV increase this year has been due to our refine reset activity where we're able to both take value out, in many cases take cash out, but have a security that's worth more the day after we did this versus the day before we did it. So to the extent we're able to continue resets and refis, that has potential to increase the value of our portfolio further, even if the loan market doesn't move up from here.
spk03: Got it. Thanks again. It's a very helpful commentary. My last question is just on the advisor. We've seen that you've been active in the fundraising market. I'm curious if any of the new funds and capital that's been raised, if any of this will be set to potentially invest alongside Eagle Point Credit Company, and if those funds would participate together in any way.
spk00: Sure, yes. So back in Q1 of 2015, if memory serves, we did get exemptive relief from the SEC, which allows ECC funds to invest jointly in negotiated transactions with other private clients of the advisor. Going way back to ancient history, ECC was actually spun out of a private vehicle that we manage, and we took a pro-rata slice of every investment in that portfolio back in the summer of 2014. So in general, or absent an exceptional or extraordinary circumstance, When Eagle Point Advisor makes an investment, it would be allocated to all of our clients that participate in the majority strategy. There have been other vehicles. There's not been a new vehicle formed specifically for investing in the majority strategy in some time, but several of those other vehicles do experience capital inflows and as well as cash flow on the portfolio. In general, every new investment gets allocated ratably across each of the investments. Our independent board, anytime there's a negotiated transaction where we're negotiating any term beyond price, approves the allocation of the investment, but it's typically just pro-rata. The principal exception would be if one client was out of cash from time to time. But ECC, when we raise money as a firm, Something we're very focused on is making sure we have the investments coming in so that we're not sitting on cash. Invariably, when you have a CLO portfolio the size of ours, there's always going to be a little bit of cash in there, but we try and keep it as measured as possible.
spk03: Got it. Appreciate taking my questions today, and that's all for me.
spk00: Thanks so much, Paul.
spk04: And it looks like we have reached the end of the question and answer session. I'll now turn the call back over to Thomas Majewski for closing remarks.
spk00: Great. Thank you very much, everyone, for joining the call. Indeed, it's been a great quarter and great year for ECC. Hopefully, we've got a few more weeks to go for the year here, but the market continues to be trending in our direction. We appreciate everyone's interest in the company. and I look forward to those of you who can join us at 1130 for the call regarding EIC. Thank you.
spk04: And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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