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spk05: Greetings and welcome to Eagle Point Credit Company's fourth quarter and year-end 2021 financial results 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 keypad. Please note this conference is being recorded. I would now like to turn the conference over to your host, Garrett Edson. Thank you. You may begin.
spk06: Thank you, Rob, and good morning. By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call and which may also be found on our website at eaglepointcreditcompany.com. Before we begin our formal remarks, we need to remind everyone that the matters discussed in 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 projected financial information. For further information on factors that could impact the company in the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement of 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, our full year 2021 audited financial statements, and our fourth quarter investor presentation with Securities and Exchange Commission. The financial statements and our fourth 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: Great. Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's fourth quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. The company closed out 2021 with an active and productive fourth quarter. This was particularly true with respect to capital markets activity. And that momentum from the fourth quarter has carried into 2022, enabling us to generate significant new deployable capital for investments, and also considerably lowering our overall cost of capital. In addition, during the fourth quarter, we declared a special distribution of 50 cents per common share, which was paid in January. And recently, we also announced another increase in our common distributions, which will begin in the second quarter. Our portfolio continues to do quite well, generating very strong recurring cash flows. Our net investment income, or NII, Excluding non-recurring expenses rose in the fourth quarter compared to the third. We also remained very active in managing the portfolio, both buying and selling securities, as well as resetting and refinancing CLOs in our portfolio. During the quarter, we deployed $24.7 million of net capital into CLO equity and debt investments, and we priced five resets and refinancings. In all, the fourth quarter was a great close to an outstanding 2021 for Eagle Point and provides us with plenty of momentum as we head into 2022. For the fourth quarter, our net investment income and realized losses before non-recurring items totaled 44 cents per common share, which exceeded our common distributions paid during the quarter by 22%. Recurring cash flows on our portfolio in the fourth quarter were $47.8 million and which was 59 cents per share above our total expenses and common distributions paid. I will note that cash flows in the fourth quarter benefited from first-time payments on a number of CLO equity positions that were made in the third quarter, when we deployed nearly $70 million of capital into CLO equity and debt. January's collections have totaled $39.1 million as we continue to maintain strong cash flows. And January's total collections this year were 27% more than our January collections last year. During the fourth quarter, NAV per share ended at $13.39 per share. It fell a little bit during the quarter due to the $0.50 per share special distribution that was accrued in December. Since the end of the year, we estimate our NAV at January month end to have moved up slightly to between $13.42 and $13.52 per share. reflecting a gain of approximately 1% based on the midpoint of that range. Obviously, in addition, we paid a common distribution during that period as well, as had previously been declared. For 2021, our NAV per share grew by 20%. And when we look back from the beginning of 2019, our NAV is now up 26% from before the onset of COVID-19. We believe there are a few other income-oriented listed funds that increased NAV so materially over the COVID period, and that's something we're very proud of as a company. As I mentioned earlier, we significantly strengthened our balance sheet and liquidity position during the quarter. We completed an offering of the 6.75% Series D preferred stock, our first perpetual offering, and used the proceeds of that perpetual to redeem half of our higher-cost 7.75% ECCB preferred stock, which originally was scheduled to mature in 2026. Management has long wanted to have a perpetual preferred in our capital structure, and we were pleased to be able to act when the window was open. We've kept at it this year, completing an offering of our 5 3⁄8 ECCV notes. This was both our largest $25 denominated issuance ever, and also our lowest cost of capital to date and by a healthy margin. We are using the proceeds of the new Vs to retire the other half of the ECCBs, retire our ECCYs, and half of our ECCX notes. All of this activity provides us with several meaningful benefits. We've achieved significant savings on interest expense moving forward. We've protected ourselves in a rising rate environment. All of our financing is fixed rate and unsecured. So if rates go up, our cost of financing does not go up. We've extended the weighted average maturity of our debt. Upon the redemption of the Series B preferred stock at the end of this month, we'll have no financing maturities prior to April 2028. And of course, regular participants on this call will know we've never had any repo-style financing or unfunded revolver commitments at the company. We also continue to raise capital through our at-the-market program and issued approximately 2.2 million common shares at a premium to NAV. We also tapped the ATM to issue approximately 211,000 Series C preferred shares. Together, these sales generated additional net proceeds of $36 million for the company during the fourth quarter. Last week, given the continued strength of the company's performance and our confidence in our outlook for our investment portfolio, We were pleased to raise our monthly common distribution again, this time by 17%, going to 14 cents per common share beginning in the second quarter. This is the third common distribution increase we've announced in less than a year, and since July of 2021, our monthly common distribution per share has increased by 75%. That does not include the benefit of the special distribution as well. As of December 31, 2021, the weighted average effective yield of our overall portfolio was 17.04%, which is up from 16.35% at the end of September. This increase was aided by strong cash flows in our portfolio, our proactive reset and refinancing program, our ability to put new investments in the ground at attractive levels, few underlying loan borrowers defaulting, and pleasantly a muted level of loan repricing. As I mentioned, during the quarter, we deployed $24.7 million of net capital into CLO debt and equity investments. We continue to find attractive CLO opportunities in the primary and secondary markets. And indeed, across the nine CLO equity purchases we made during the fourth quarter, the weighted average effective yield on those investments was about 17%. On the monetization side, we opportunistically sold CLO securities and other investments Collectively, these sales allowed us to realize a modest amount of gains per common share, about one penny. While we typically underwrite investments with a long-term hold mindset, we do sell investments where we see strong bids or we see attractive rotation opportunities. In addition to the deployment of capital, we remained very active with our reset and refinancing program, taking advantage of the strong demand for CLO debt to further lower the cost of funding in our CLOs and enhance future equity cash flows. For our two refinancings in the fourth quarter, we lowered the cost of debt on the refinance tranches by an average of 37 basis points. And for our three resets, we saved an average of 26 basis points on the debt and, importantly, also lengthened the remaining reinvestment period of each of those CLOs out to five years. For the full year 2021, we completed 21 resets and 13 refis. This totals 34 corporate actions taken during the year, not including calls. That's a pace of roughly three a month, and it shows just how active we are in managing our portfolio. We continue to have a robust pipeline of resets and refinancings under evaluation, and with CLO debt spreads continuing to be on the tighter side, we expect we'll be actively working on the pipeline throughout much of 2022. As we've consistently noted, resets and refinancing are a key part of our advisors' value proposition for our CLO majority equity strategy. proactive involvement with each investment both at the time of purchase and, importantly, throughout its lifecycle. Our advisor is always seeking ways to create value for our shareholders. Thanks to our ability to capitalize on the attractive reset and refinancing market, at the end of 2021, our CLO equity portfolio's weighted average remaining reinvestment period stood at three years. This is an increase from 2.9 years at the end of September 30th and an increase from 2.4 years at the beginning of 2021. So when you think about it, despite the passage of a year through our proactive portfolio management, the reinvestment period on our CLO equity positions actually increased meaningfully despite passage of time. These actions allow the company to increase prospect of cash flow while also being better positioned to take advantage of the future loan price volatility whenever it eventually occurs. As we manage the company's portfolio, we seek to keep the weighted average remaining reinvestment period as long as possible. Looking ahead, when combining our increased weighted average effective yield of our CLO equity portfolio, the favorable cash flows and default trends, our reset and refinancing activity, and the earnings potential of our portfolio, we believe the company remains well positioned to continue increasing NII throughout 2022. I'd also like to take a quick moment to highlight Eagle Point Income Company. sort of our sister company, which trades under the symbol EIC on the New York Stock Exchange. For the fourth quarter, EIC generated net investment income and gains in line with its quarterly distributions and raised nearly $45 million of new capital in the fourth quarter to continue deploying principally into CLO junior debt and some CLO equity investments. We invite you to join our call at 1130 a.m. to learn more about the company, or you can visit the website at eaglepointincome.com. Overall, we continue to be bullish on our portfolio and the broader economy. After Ken's remarks, I'll take you through our view of the current state of the loan and CLO markets, share our outlook for 2022, and, of course, take your questions. I'll now turn the call over to Ken.
spk02: Thanks, Tom. For the fourth quarter of 2021, the company recorded net investment income, net of realized losses of approximately $13.5 million, or $0.37 per share. This compares to net investment income and realized gains of $0.39 per share in the third quarter of 2021, and NII, less realized losses resulting in a net loss of $0.80 per share for the fourth quarter of 2020. NII and realized losses for the fourth quarter of 2021 were net of a realized loss of $0.02 per share related to the acceleration of unamortized issuance costs associated with a partial redemption of our Series B term preferred stock, as well as an estimated excise tax liability of $0.05 per share. Excluding these non-recurring items, NII and realized losses would have been $0.44 per share. When unrealized portfolio depreciation is included, the company recorded GAAP net income of approximately $7.3 million, or $0.20 per share, for the fourth quarter. This compares the GAAP net income of $1.35 per share in the third quarter of 2021 and GAAP net income of $2.98 per share in the fourth quarter of 2020. The company's fourth quarter GAAP net income was comprised of total investment income of $27.1 million, partially offset by net unrealized depreciation of $6.2 million, realized capital losses of $0.2 million, and net expenses of $13.4 million. The company's asset coverage ratios at December 31st for preferred stock and debt calculated pursuant to Investment Company Act requirements were 313% and 535%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%. Are debt and preferred securities outstanding at quarter end approximately 32% of the company's total assets. 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 first quarter through January 31st, the company received recurring cash flows on its investment portfolio of $39.1 million, or $1 per share. This compares to $47.8 million, or $1.32 per share, received during the full fourth quarter of 2021. It's important to highlight that some of our investments are expected to make payments later in the quarter. As of February 11th, we had $31 million of cash on hand net of pending settlements. Management's estimated range of the company's NAV per common share as of January 31st was $13.42 to $13.52. The midpoint of the range is a slight increase of approximately 1% from December 31st. During the fourth quarter, we paid three monthly distributions of 12 cents per share. Last week, we were pleased to announce a 17% increase in common distributions to 14 cents per month commencing in April. Just a quick reminder, in order for the company to maintain its RIC status, it is required to distribute effectively all of its taxable income within one year of its tax year end. For our tax year ending November 30th, 2021, we estimate taxable income will exceed the aggregate amount distributed to common stockholders for the same time period. As a result, the company paid a special distribution of 50 cents per common share on January 24th to stockholders of record as of December 23rd, 2021. The company's final taxable income and the actual amount required to be distributed in respect of the tax year ended November 30th, 2021 will be finally determined when a company files its final tax returns. And we expect based on current estimates that our final taxable income will exceed amounts already distributed in respect to the 2021 tax year. The company has incurred a 4% excise tax on the estimated amount of remaining undistributed taxable income pertaining to the 2021 tax year, which is estimated to be $0.05 per share and is recorded as a liability in the company's December 31st financial results. I will now hand the call back over to Tom.
spk00: Great. Thank you, Ken. Let us take everyone through some thoughts on the loan and CLO markets for a minute. The Credit Suisse Leverage Loan Index had a solid fourth quarter, generating a total return of 70 basis points, and for the full year 2021, generated a 5.4% total return. 2021 marked the loan index's 28th year of positive total returns in the 30 years that it's been in existence. We are aware of no other risk asset class that has generated such consistent positive returns over three decades. These loans, of course, are the raw material that drive the returns to CLO investors like us. We believe that the loan market remains very well positioned for CLOs right now. Corporate defaults remain very, very low, with only five loan issuers defaulting during all of 2021, compared to 68 in 2020. At year-end, the trailing 12-month default rate stood at 0.29%, 29 basis points, remaining among historic lows, and many investment bank research desks expect default rates to be between 65 basis points and less than 2% in 2022. While the percentage of loans trading over par has moved up to 15%, and that's primarily in our view due to retail loan inflows, loan fund inflows, this is still quite low, and repricing activity in the loan market has remained relatively limited. On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios increased by two basis points in the fourth quarter from the end of September. The weighted average spread on our overall CLO portfolios decreased about six basis points from where it started in 2021. This is basically no movement. This is a little bit of static, which we consider to be great. Our portfolio's weighted average junior over collateralization cushion was 3.89% as of December 31st, a meaningful increase from the 3.41% at the end of September. In the CLO market, we saw $56 billion of new issuance in the fourth quarter of 2021 and $187 billion for all of 2021, far more than the prior full-year record of $129 billion, which was set in 2018. As expected, volumes of $138 billion for resets and $113 billion of refinancings in 2021 also eclipsed previous record levels for those set back in 2018 and 2017, respectively. For 2022, while we don't expect new records to be surpassed, we do believe it will be another robust year for CLO issuances, resets, and refinancings. Demand for floating rate assets, what we own, remains strong as more investors shift out of fixed rate products, especially given the rising rate environment that we're now seeing. With that backdrop and the strong economy, limited loan defaults and muted loan repricings, we believe our portfolio has room for further price appreciation while it continues to generate strong cash flows. To sum up, NII and realized gains, excluding non-recurring items, once again exceeded our common distribution. Our excellent performance throughout 2021 enabled us to declare and pay a 50-cent special common distribution with a likelihood for at least one more special distribution later this year. We'll announce that after our taxable income for 2021 is finalized. Our strong performance in 2021 and our confidence in the outlook for our portfolio has led us to once again increase our monthly common distribution this time by 17% to 14 cents per common share beginning in the second quarter. Our portfolio's net asset value finished 2021 up 20% per share, and as I mentioned earlier, has actually risen 26% per share since before the onset of COVID, which we think is very, very strong performance. Cash flows on our portfolio remain strong. We talked about our January number being well above last year's January number. And new CLO equity investments that went into the ground during the fourth quarter had a weighted average effective yield of about 17% as we continue to source and deploy capital into investments with attractive yields. We're actively managing our portfolio and plan to continue our CLO reset and refi program, which we believe will help us drive additional net investment income over time. And we made major strides in the past few months to strengthen our balance sheet and our liquidity position through both a significant reduction in our cost of capital and an extension of our weighted average debt maturity, including issuing our first perpetual preferred. 2021 was a banner year for the company and has clearly been evident for the last few months. We have numerous levers to pull, both within our CLOs and within the company structure, all to seek to strengthen our balance sheet and increase net investment income. We'll continue to look to pull on all of them. We believe this will help us continue distributing as much cash out to shareholders as possible and on a monthly basis. So with that, we thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions.
spk05: Thanks. 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 to 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.
spk04: One moment, please, while we poll for questions. Our first question comes from the line of Mickey Schleim with Ladenburg-Zalman. Please proceed with your question.
spk01: Tom, I see that cash flow yields look like they've come down a little bit in the first quarter relative to the fourth quarter. Can you help us understand how CLO equity cash flows have historically behaved in periods of rising interest rates, you know, just considering that the liabilities reprice more quickly than the assets?
spk00: Sure, sure. Well, the... The principal driver in the change from the fourth quarter of 21 to the first quarter of 22, which is just the January numbers, was actually that we had a lot of first period distributions in the fourth quarter related to CLOs we put in the ground in the summer. And oftentimes the first payment on a CLO will be larger than the regular payment. So the number one driver of the change quarter over quarter was relates to, simply relates to that we had a bunch of first payments in the fourth quarter, less to do with interest rates. January's total, January 22 total collection was 27% more than our collections in January 2021. So if you look on a year-over-year basis, cash flow is going up quite a bit. We provide detailed analysis in the online presentation. You can see the cash per investment And you'll see a number of investments have pretty outsized investments, and you'll see them largely being 2021 vintage investments that paid in the fourth quarter. So it was first payments that were particularly large. To your question on rising interest rates, with the slight exception of LIBOR, I mean, right now everything in the portfolio, or nearly everything, both in the CLO loans and the CLO debt, Our LIBOR denominator, there's a handful of SOFR things popping up on both sides, and that percentage will increase over time. But they're all referenced off similar short-term rates, and pretty much everything resets every three months or less. So while there might be some slight timing nuances, sometimes you win, sometimes you lose on those, but in general, they're going to move pretty much in lockstep up in the right direction. Holding all else constant, once you see short-term rates kind of at 2% or 3% if we were to get to that high, we're earning on all the loans that higher base rate, and the CLO debt is typically only 90% of the capital structure. Although the coupon on that CLO debt is going up, kind of the excess income as we get higher and higher, kind of past 1.5%, 2%, you'd expect it to start being meaningfully beneficial to the equity. Okay.
spk01: Thanks for that explanation, Tom. That's really helpful. And talking about initial distributions, I see that your warehouse lines increased quarter to quarter with more steamboat loan accumulation facilities. How do you envision the timing of those warehouses converting to CLOs this year?
spk00: Sure. We like to sprinkle them throughout the year as our broad strategy. And if you look at the sizes of those investments, you'll see some are discernibly larger than others. Some are very early stage. Some are late stage and may even be CLOs that could be converted into CLOs in the coming weeks and months. Obviously, there's no assurance of any transaction occurring. But part of our strategy is vintage diversification. And that's always served us very, very well. So we might do One this month, one next month, maybe two in a month, you never know for sure. But we don't try and crowd anything in any given month. And frankly, what we've seen over time is even quarterly vintage diversification matters. If we look back to the 2014 vintage, if you did a CLO in the first quarter or fourth quarter, you ended up being very happy. If you did one in the second or third quarter, you ended up being, you kind of got your money back and not much else. So that vintage diversification, and even within a year, quarterly vintage diversification remains very important, and that's part of our strategy with the different accumulation facilities.
spk01: Thanks for that, Tom. Going back to interest rates, obviously the short-term interest rate yield curve is steepening given the Fed's comments. How do you expect that to impact, if at all, your estimated yields and cash flows going forward?
spk00: All else equal, if you were to shift the forward curve, because one of the inputs to our effective yield is the forward curve for loans indexed off of LIBOR. We use LIBOR. There's actually some SOFR curve we're able to use as well. That's not a big factor just yet, but it will become more and more. If that were to be higher and higher, all else equal, as you kind of move past 1%, get past any of the floors and loans, that starts benefiting CLO equity and our yield. So if you were to just, say, shift the whole curve up 300 basis points, holding all else constant, that would be a very good fact for us.
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 in the line of Paul Johnson with KBW.
spk05: Please proceed with your question.
spk03: Hey, Paul. Good morning. Good morning. Good morning. Thanks for taking my questions. Just touching a little bit on the rising rate talk and the LIBOR curve. I guess as rates continue to move higher this year after the expected Fed hikes, would you expect the CLO refi or the reset activity to decline by any means as this is going on?
spk00: The principal driver of refi and reset activity, a number of drivers, but a big driver certainly on refis is the spread over the base rate, not the base rate itself. If you convert, you're You're keeping the same short-term rates. So whether a short-term rate is half a percent, 1 percent, or 3 percent, you got that same one either way. The bigger driver is spreads. So that would be the principal question. To the extent spreads stay where they are, if you look at – we published some of the debt costs. I think we published the AAA spreads on all of our CLOs on a deal-by-deal basis, even Probably start with the highest ones and look at the non-call date and start to form a view of which would be the most likely candidates. Not every one of them works for different reasons. But just as we like to create some vintage diversification in our new issuance, hence the number of different accumulation facilities with different balances, we also seek to be diverse in our vintages of doing refis and resets. and continue to sprinkle them when the market cooperates throughout each quarter and throughout each year. So to a short answer, to the extent rates move up a bunch, all else equal, that really won't affect re-fire or reset activity, in our opinion, one way or the other. The bigger driver will be where do CLO debt spreads go. To the extent they go tighter, it's certainly something we would look to capitalize on regardless of where rates are.
spk03: Thanks for that. That's very helpful. And then just on the effective yield that continues to inch higher, I know this is a complicated question. There's several things that you recalibrate almost every quarter. But would you say that this is mainly being driven by just the lower expected losses in the leveraged loan market in the near future? Or is there anything else in particular that's sort of driving the effective yields higher?
spk00: It's a little of everything. In prior periods, prior earnings calls, I might have even used the word golden period once or twice. Mindful, we know those things don't last forever. We're happy to be in them when we are, though, and we try and position ourselves for when they go away. But so if you think of the things that can go wrong for CLO investors, in theory, defaults could be a problem, although we can talk about that in a minute, and loan repricing tighter can be a problem, faster than we can refinance the debt. So that's kind of what happened in 2018. That latter one, 2020, is when we saw, obviously, you know, an increased amount of defaults compared to 2021. We're not seeing any of that happen right now. You know, the loans portfolio largely, you know, modestly down a couple of basis points during the year last year. And that may be just due to us buying and selling different CLOs. Many of the CLOs didn't really move at all. And at the same time, you know, out of the 1,000-plus borrowers we have exposure to, five of them defaulted last year. I'm not even sure we're in every one of those five. We probably are. But loans aren't repricing. Companies aren't defaulting. So when we set our assumptions, we assume companies default and loans reprice. Every quarter that goes by where that doesn't happen, if all the metrics outperform our assumptions, then the yield moves higher because we're basically treating cash as return of capital, a portion of it, but we can continue to get more cash than we would have otherwise expected, which then lowers our amortized cost, which then increases our yield all else equal for the next period. So the things to do in these periods is basically buy as much runway as possible in that things are great, relatively good today with essentially no defaults and very muted repricings. One of those will change at some point. I don't know which and when. But what I do know is I want to have as much reinvestment period as possible on that day. And that's why we focus so hard on getting the weighted average reinvestment period up pretty significantly last year. A couple of calls ago, it might have been you or Ryan who asked. It might have been someone else. I'm not sure. But we saw the weighted average remaining reinvestment period go down for some time because we weren't really doing much in the way of refis and resets. during 2020, and someone asked the question, can this ever go back up? Obviously, the answer is yes, and the proof is in the numbers. I want to keep pushing that number as high as possible because when that next thing out of left field comes, the number one thing that's a defense for CLO equity investors is reinvestment period. So our broad strategy is to keep maximizing that. Changes in rates and the curve, less of a factor. but we're in a great situation where few companies are defaulting, yet few companies are repricing their loans. May that continue for as long as possible.
spk03: Appreciate that. Thank you very much, and appreciate all the color there. My last question is just on a more of a modeling question, but I think you talked about it a little bit for the tax expense that you accrued for the, you know, in the fourth quarter for the year of 2021. But do you expect any as part of that tax expense for this year, or sorry, for this quarter, in the fourth quarter? um you know running around like 2.2 million do you expect any of that to be uh recurring in in 2022 just given that you guys have you know pretty meaningfully over earned the dividend at least on on a net income basis pretty considerable considerably um or there's more of a fourth quarter one time non-recurring item yeah um
spk00: So we fancy ourselves as being pretty good at CLOs. The one thing that's very difficult to calculate is CLO or forecast the CLO taxable income. And we did a bunch of analysis and had the outside tax preparers do some numbers, probably at the end of August, Ken, right? Yeah, as of August. And even from there, the things changed so much because underlying activity in the CLOs, mindful CLOs are living, breathing portfolios unto themselves. and impacts the taxable income. So even some of those forecasts that we did in August proved to be too low, frankly. So, and then I'll compare back to 2020 when, you know, the best distributions, I mean, in one perspective, most of our common distribution, the majority of it was treated as a return of capital for tax purposes, even though we had, you know, a great ROE for the year from a gap perspective. That was because of losses realized in the CLOs, was able to... You know, you bought a loan at par before COVID, you sold it at 80 during COVID, you took a 20-point loss. You bought a different loan at 80, and what do you know, in 2021, that loan probably paid off at par, and now you took a 20-point gain. So it's unfortunate, and this is the great thing that will never be fully grasped in the CLO market. While cash profits, gap profits, and tax profits will ultimately equal over the life of a CLO, in no period will they, I can't foresee a period where they would ever be the same in any one period. So 2020, we had a great ROE, NAV was up, lots of distributions, very little taxable income. This year, taxable income far exceeded the distributions. But a lot of that, you can kind of think of it as catch up from 2020. So our base case hope is Our distributions are basically roughly equal to taxable income on a run rate basis and hopefully also in excess of below NII each period. But it's a long answer to that. I wouldn't see the strength of 2021 continuing into 2022 when it comes to taxable income broadly because a lot of the 2021 stuff was recouping kind of the kind of free ride we got in 2020.
spk03: Sure, understood. Appreciate that. Yeah, makes sense.
spk00: Thanks again. The short answer is, I don't know. But it probably doesn't recur anywhere near, I'd be thrilled if it did, but probably doesn't recur as much as it did, you know, 20 versus 21.
spk03: Got it, got it. We'll just hope that it does. Again, thanks again for the color. Appreciate it. Congratulations on a
spk01: another uh closing out another good year for eagle point great thanks so much paul we appreciate it our next question comes from the line of mickey fein with ladenberg salmon please proceed with your question uh tom my welcome back mickey you dropped off yeah yeah yeah blame verizon we thought we upset you no no verizon doing its thing I actually wanted to follow up on the excise tax question. Maybe I can ask it a different way. Post the special distribution, maybe Ken can tell us where undistributed taxable income stands, and do you intend to accrue excise tax every quarter for whatever that number is, or do you just intend to true it up at the end of this year?
spk02: Yeah. The 50-cent distribution, since we declared it in December and paid it in January, that does not incur excise tax. So the $2.2 million, or the 5 cents per share, that we currently have accrued at year-end is based on our current estimate of undistributed taxable income that still needs to be distributed. The one thing I want to point out, and this is how the tax rule works, so this isn't anything that's non-disclosed anywhere, is that when there is spillover, in this case, let's say spillover from 2021, undistributed income, the first distributions that occur in 2022 get applied to that 2021 spillover. So there we have an excise tax at the end of 2021 in an undistributed amount, effectively, the common distribution that's going out on a regular basis is being applied towards that spillover. That's just a technical matter for clarification. So, the excise tax, you know, is 4% of the amount that's undistributed. So, what we need to balance going forward is, How much is being satisfied via our current distributions in 2022 that pertain to 2021? What our 2022 taxable income is going to look like? And we have no idea at this point in time. And then what special distribution do we need to make considering all of those factors? And the only reason I'm noting this is there wouldn't be a special distribution for that full amount of the under-distribution because we have to balance all of these factors. We are confident that there would be a special distribution at some point in the future to be determined, but I just don't want to give the impression based on your question, Mickey, that would be the full amount that the excise tax is currently being applied to. As far as excise tax... I'm sorry, go ahead. Yeah, as far as accruing excise tax going forward, Obviously, we want to make sure we have something that's estimated and probable. We're going to take a snapshot or an estimate of our 2022 taxable income at mid-year. Certainly, if we're looking at a situation as though we're looking at today, we would begin accruing that excise, but that's still very much to be determined. To Tom's point earlier, 2021 was definitely an anomaly that was reversing 2020's anomaly. We think, obviously, we'd be somewhere in the middle on a normalized basis.
spk01: Thanks for that, Ken. I appreciate how complicated it is with the PFIX coming in late in the year and all of that. Tom, just to follow up on some big picture questions, is the introduction of SOFR or how is the introduction of SOFR impacting the primary market and the funds investment opportunity?
spk00: Sure. Not meaningfully would be the way I'd put it. We had a little bit of price discovery in CLO land in January, which we've kind of quickly figured out what should AAAs price at on a SOFR plus basis versus a LIBOR basis. Mindful that right now SOFR, three-month SOFR is a lower rate than three-month LIBOR by a certain number of basis points. So that's all sorted out. Many loans are getting referenced off of SOFR already and some were even last year. At the end of the day, there's far more micro basis risk in CLOs than most people really give credit to. But over the last 20 years, in my experience, it doesn't really matter. It might be brief blips where it does. At the end of the day, you know, In the old days when everything was LIBOR, you know, CLOs set their LIBOR off of three-month LIBOR four times a year. Loans randomly set their LIBOR on any day of the year and could have chose one-month LIBOR, two-month LIBOR, three-month LIBOR, six-month LIBOR, or even the prime rate if they wanted to. It's one of the odd instruments where the borrower can change their frequency and their base rate. So we've always had things that are never, you know, the models for these things just kind of assume the same LIBOR on both the assets and liabilities. Sometimes it works in our favor. Sometimes it doesn't. but it never stays out of whack for a long period of time in my experience. So now we have a new input of some of the CLOs will start being, all the new CLOs will be off of SOFR, but we'll actually have a lot of LIBOR-based loans in them for a while because most loans outstanding are still LIBOR-based. Over time, that will change. And kind of the mechanic for old CLOs, pre-2022 CLOs, the general rule is once the half the loan portfolio is is referenced off of SOFR, then the CLO debt swaps from LIBOR-based to SOFR basis, plus a little adjustment. And in our view, that adjustment's a few basis points too high, and that may cause an acceleration of refinancings or resets at some point in the future. Who knows for sure? But we'll see what shakes out there. But at the end of the day, what really drives CLO equity returns is the difference in the spread on the assets versus the spread of the liabilities. We lend money out to these companies at a high spread, somewhere 350, 360 over. We borrow AAAs at 125 over, something like that, 130 over today, obviously with higher other classes of debt a little bit higher. But the main thing that drives the return here is 100 plus basis points, well in excess of 100 basis points of excess spread just on a spread over spread basis, if one base rate is three or seven basis points higher or lower than the other, while obviously we like it to be in our favor as much as possible, the difference in base rates is very rarely a meaningful driver for CLO equity other than in very brief isolated instances.
spk01: I appreciate that, Tom. And you mentioned this sort of hodgepodge of rates and LIBOR is intended to sunset next year. So this year and a couple of quarters next year, we'll have this sort of hodgepodge. And over time, SOFR will sort of take over. And as you mentioned, the debt will get repriced to SOFR. Not repriced, but it'll be indexed to SOFR. So apart from repricing, do CLO managers try to hedge in the futures market or swaps or in any other manner? that basis risk, or do they take just a more passive approach until they decide to refinance the debt?
spk00: In the case of our CLOs, we're the one who gets to decide when to refinance the debt, not them. Again, the difference in these base rates is, in many cases, you're talking single digits of basis points versus, again, 100-plus basis points of spread benefit between the assets and liabilities. Sometimes it works in our favor, sometimes it works against us, but it's truly, in our view, at the margin, not a material factor. As an equity investor, as an owner of the CLOs, if you make widgets, what does it cost your raw material versus what can you sell it for? worrying about the base rates is kind of like how much does copy paper cost in the scheme of things. It's such a small input by and large that it's not an area of focus really for anyone in the CLO market.
spk01: I appreciate that. That's it for me this morning. Thanks for your time.
spk00: Thank you.
spk05: We've reached the end of the question and answer session. I will now turn the call over to Thomas Majewski for closing comments.
spk00: Great. Thanks so much, Rob. We appreciate everyone's time and interest in Eagle Point Credit Company this morning. Obviously, we're really thrilled with performance from last year. And frankly, if you look at the performance over the last two years, I'm even more thrilled. As we look forward, the company is positioned well. The things we've been putting in the ground, we got the perpetual done. We've lowered our cost of debt significantly and lengthened our maturities, both on our CLOs, frankly, and on the company's balance sheet. So we believe we're doing what we should be doing in these strong markets, and we will keep at it. Ken and I are around today if anyone else wants to follow up with questions, and we appreciate everyone's time and interest in the company. Thank you.
spk05: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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