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spk01: Greetings, and welcome to the Eagle Plank Credit Company third quarter 2023 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. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Garrett Edson, with ICR. Please go ahead.
spk02: Thank you, Melissa, 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 projected in 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 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 2023 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.
spk03: 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. The company continues to perform solidly despite concerns about macro volatility in the market. Our NAV grew by 7% during the quarter. We paid $32.5 million in cash distributions to shareholders, and we deployed $119 million of net capital into new attractive investments. Recurring cash flows remain robust as we receive $51.9 million, or $0.70 per common share of cash flow, which is well in excess of our common distribution and expenses. CLO equity investments purchased during the quarter had a weighted average effective yield of 20.3%. As of quarter end, our CLO equity portfolio had a weighted average remaining reinvestment period of 2.7 years, which is steady from the last quarter despite the passage of three months. As we have stated in the past, we believe keeping our weighted average remaining reinvestment period as long as possible is our best defense against future market volatility. For the third quarter, our net investment income and realized gains totaled $0.35 per common share. NAV per share as of September 30th was $9.33, which again is a 7% increase from June 30th. Since the end of the quarter, we estimate our NAB at October month end to be between 898 and 908 per share. We continue to actively manage our portfolio, deploying $119 million in net new capital into new portfolio investments during the quarter. We receive recurring cash flows on our portfolio of $51.9 million, or 77 cents per common share, exceeding our aggregate common distributions and total expenses by roughly 10 cents per share. We have already received cash flows from our portfolio in October, which were greater than all of our third quarter collections, as we benefit from rising rates, strong investment performance, and continued growth of our portfolio. Along with our regular monthly common distribution of 14 cents per share, we declared an additional variable supplemental distribution of 2 cents per share, for an aggregate monthly distribution of 16 cents per share for each month during the first quarter of 2024. Inclusive of the October 31st distributions, we've now distributed cash to our investors equal to $19.67 per share since our IPO. We also continued to prudently raise capital through our at-the-market program and issued approximately 8.8 million common shares at a premium generating a NAV accretion of 14 cents per share. These sales generated proceeds of approximately $90 million during the quarter. At the end of October, we had $59.3 million of cash on our balance sheet, thanks in part to the strong October cash flows, providing us with ample dry powder to deploy into new investments. All of our financing remains fixed rate, which gives us continued protection in a rising rate environment. Importantly, we have no financing maturities prior to April 2028. As of September 30th, the weighted average effective yield on our CLO equity portfolio was 16.29%, and that's a meaningful increase from the 15.23% at the end of June. New CLO equity that we purchased during the third quarter had a weighted average effective yield of 20.3%, which should help bolster the portfolio's weighted average effective yield prospectively. Additionally, the weighted average expected yield of our CLO equity portfolio based on market value held relatively steady, just over 27% as of September 30th. As I mentioned previously, during the quarter, we deployed $119 million of net new capital into primary and secondary CLO equity, CLO junior debt, loan accumulation facilities, and certain other related investments. While there are select primary CLO equity opportunities that represented attractive value, by and large, we focused most of our investment effort on the secondary market and for other investments that we believe offer appealing returns. As of September 30th, our CLO equity portfolio's weighted average remaining reinvestment period stood at 2.7 years, unchanged from the prior quarter. And we remain focused on finding opportunities to invest in CLO equity in with generally longer reinvestment periods to enable us to navigate through periods of volatility. I would also like to take a moment to highlight Eagle Point Income Company, our sister company, which trades under the symbol EIC. EIC invests primarily in CLO junior debt. For the third quarter, EIC generated net investment income of 51 cents per share, excluding certain non-recurring items, once again exceeding its common distribution for the quarter. Additionally, EIC just increased its common distribution by 11% to 20 cents per share beginning in January. EIC has performed very well through the rising rate environment and remains well-positioned to generate strong NII. And we invite you to join EIC's investor call at 11.30 a.m. to hear more. Overall, after we remain active in managing our portfolio and continue to keep a close eye on the broader economy, After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets. I'll now turn the call over to Ken.
spk07: Thanks, Tom. For the third quarter of 2023, the company recorded net investment income and realized gains of approximately $23 million, or $0.35 per common share, which is inclusive of a non-recurring excise tax refund of $0.01 per share. This compares to NII and realized losses of $0.05 per share in the second quarter of 2023 and NII and realized gains of $0.47 per share for the quarter ending September 30, 2022. When unrealized portfolio appreciation is included, the company recorded gap net income of approximately $63.2 million or $0.93 per share for the third quarter. This compares to GAAP net income of 11 cents per share in the second quarter of 2023 and GAAP net income of 21 cents per share in the third quarter of 2022. The company's third quarter GAAP net income was comprised of total investment income of $36 million, net unrealized appreciation on investments of $34.8 million, Net unrealized appreciation on certain liabilities held at fair value of $4.9 million and realized capital gains of $0.6 million, partially offset by expenses of $12.6 million and distributions on the Series D preferred stock of $0.5 million. Additionally, for the quarter, the company recorded other comprehensive income of $0.6 million. The company's asset coverage ratios at September 30th for preferred stock and debt calculated pursuant to Investment Company Act requirements were 354% and 524%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 28% of the company's total assets, less current liabilities. This is within our target 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 fourth quarter through October 31st, the company received recurring cash flows on its investment portfolio of 55.3 million. Note that some of our investments are expected to make payments later in the quarter. As of October 31st, we had 59.3 million of cash available for investment. Management's estimated range of the company's NAV as of October 31st was $8.98 to $9.08 per share reflecting a 3.2% decrease at the midpoint from September 30th as spreads widened. During the quarter, we paid three monthly common distributions of 14 cents per share and three monthly variable supplemental common distributions of 2 cents per share for aggregate common monthly distributions of 16 cents per share. We have also declared aggregate common monthly distributions of 16 cents per share through the end of March 2024. I will now hand the call back over to Tom.
spk03: Thanks, Ken. Let me provide a quick update on the loan and CLO markets. The Credit Suisse Leverage Loan Index generated a total return of 3.37% in the quarter and is at 9.91% year-to-date through September 30th, as loans continue to perform strongly. It's far better than many other fixed income indices. The index had another solid month in October and remains on pace to have its best full-year return in nearly 15 years. During the quarter, we actually saw only five leveraged loan defaults, down from 15 in the second quarter. In fact, there was not a single corporate loan default in the month of September, again, evidence of the resilience of senior secured loans, and as a result, CLOs, despite the various macro concerns that people write about in headlines. While some recent market reports have expressed concern over loans facing rising interest rates, the actual data, the default rate, and the number of defaults paints a very different picture than the headlines in our view. As a result, at quarter end, the trailing 12-month default rate declined to 1.3%, remaining well below historical averages. Barring a shock in the next few weeks, we expect 2023 to be a far better than average year for defaults. The company's exposure to defaulted loans as of September 30th stood at only 40 basis points, further proof of the strength of our active portfolio management and construction. Approximately 5% of all leveraged loans, or roughly 19% annualized, repaid at par during the quarter. This represents a quarter-over-quarter increase and provides our CLOs with valuable par dollars to reinvest in today's discounted loan market, and to offset losses from the few defaults that are occurring. With a large number of high-quality issuers continuing to trade at discounted prices, CLO collateral managers remain well-positioned to improve underlying loan portfolios through relative value credit selection in the secondary market. Most loan issuers have become proactive in tackling their near-term maturities in an effort to further extend the maturity of their debt. and they continue to offer lenders higher spreads and OID on their newly refinanced loans. As a result, our portfolios continue to have numerous opportunities to build par and increase their weighted average spread, which in turn increases the excess spread we receive on our CLO equity portfolio. On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios was 3.78% at the end of September. Notably, that's an 11 basis point increase compared to the end of June. This measure has actually increased by 20 basis points in the last 18 months. Meanwhile, spreads on the debt tranches issued by our CLOs that were locked in 18 months ago remain unchanged. Triple C concentrations within our CLOs stood at 6.7% as of September 30th, and the percentage of loans trading below 80 within CLOs is at about 4.4%. Our portfolio's weighted average junior OC cushion was 4.41% as of September 30th, which gives us ample room, in our opinion, to withstand potential downgrades or future losses. Our portfolio's OC cushion remains much higher than the market average, which stands at 3.44%. One of the trends that we are seeing increasingly in the loan market is having private credit funds and BDCs refinance triple C rated loans out of the syndicated loan market. A recent example of this would be Mises, which is a large software company. For our CLOs, this represents a par repayment and a reduction in triple C exposure. This is great. We hope more of this happens. We wish Mises, frankly, and their new lenders well in the future. As private credit funds and BDCs continue to expand, We expect this favorable trend to continue. In the CLO market, we saw $28 billion of new CLO issuance in the third quarter of 2023 and $84 billion year-to-date through September 30th, remaining on pace to eclipse $100 billion once again, while tracking a little below 2022's pace. We continue to believe that a fair bit of this volume was backed by captive CLO equity funds, which in our view are far less return-sensitive than we are. Reset and refinancing activity related to CLOs issued during the second half of 2022, which was a small period of CLOs where quite a few were issued with one-year non-call periods, have picked up, but otherwise there's essentially no refi reset activity in the market. Indeed, the AAA weighted average level on our CLO equity portfolio is well tight to where CLOs could be issued today. While the market does give the in-the-money nature of our CLOs financing some credit, we believe the market doesn't give it full credit and that this represents hidden value embedded in our portfolio. Our weighted average AAA spread is about 144 basis points and this is roughly 39 basis points in the money today. As we have consistently noted, it's an environment of loan price volatility where we believe CLO equity or CLO structures and CLO equity in particular are set up well to buy loans at discounts to par with a very stable financing structure using par paydowns from other loans, and outperformed the broader corporate debt markets over the medium term, as they have done in the past. We're seeing that happen right now and expect that to continue. To sum up, we grew our NAV by 7% during the quarter. We generated net investment income and realized capital gains for the quarter of $0.35 per weighted average common share. We continued to receive robust cash flows during the third quarter, and have already collected more cash flow from our portfolio in the fourth quarter than we did in the third quarter. We remain very active in terms of sourcing and deploying investments at attractive yields, investing about $119 million of net new capital, and we continue our existing regular monthly distribution and variable supplemental distributions through March of 2024. We further strengthened our liquidity position, generating NAV accretion of 14 cents per share through our ATM program, And at the end of October, we have about $59 million of cash to deploy into new investments. We continue to maintain 100% fixed-rate financing, entirely unsecured, and we have no maturities prior to 2028. This gives us protection from any further increase in interest rates and locks in a very attractive cost of funding for many years to come. We believe the company's investment portfolio continues to be well-positioned, giving our proactive management opportunities the portfolio's long-weighted average remaining reinvestment period, its strong OC cushion, and consistent recurring cash flows. We also remain pleased to return extra cash to our investors in the form of special or variable distributions and remain opportunistic and proactive as we manage the investment portfolio with a long-term mindset. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions.
spk01: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Mickey Schlein with Lundberg Salmon. Please proceed with your question.
spk06: Yes, good morning, Tom and Ken. Tom, I wanted to follow up on your comments about the primary market. You noted that it's been spotty and, you know, with captive funds holding the majority of the new issue volume that we're seeing. And that's clearly a function of the high or I should say wide AAA spreads, that process or that lack of primary market puts pressure on your financial performance in that it makes it more difficult for existing CLOs to refinance or reset, as you noted. So what's it going to take for that primary market to finally start to operate on a more normal basis, which is something you would expect given that the overall market fundamentals, as you mentioned in the data, are pretty good.
spk03: Yeah. Good morning, Mickey. Good question. AAA is ebb and flow, I guess, over the years. If you think back to our performance, we've been public for nine years now. There are periods of time where the market's ripe and we're resetting and refinancing absolutely everything. The bad news during those times is if you look at our weighted average loan spread, it's typically going down. And if you look at 2017 and 2018, you'll see we had, I think of it as reset mania here. At the same time, if you look at the portfolio decks, and these are all on our website going back ages ago, you'll see in many quarters, the loan spread is trickling downward. So the bad news today, we didn't do any refis or resets. The good news today is We picked up 11 basis points in spread in the quarter as loans keep getting reset and loans themselves get refinanced wider. So it's a little bit of, you know, while I wish we were resetting stuff as well, I'm also very happy that our weighted average loan spread went up 11 bips. Multiplied by the leverage of CLOs, that's obviously very impactful to our portfolio and certainly one of the drivers of NAB going up 7% during the quarter. Some of the things going on in the world broadly of AAA investing, obviously there's always currency fluctuation. Certain of the regulators in Japan continue to ask questions, although we do note that there are quite a number of Japanese banks that are active. Some of the new Basel rules, as proposed, we believe will make holding CLO AAAs more attractive for banks all around the world. Also, some of the NAIC considerations underway last we've heard also suggest AAAs will become even more attractive to hold. So there's some good news there. Probably the one segment of the market that's missing that might be the most impactful are some of the large U.S. money center banks. And indeed, if you look in their filings, you can see many of the largest banks in the country have, in some cases, 1%, perhaps even more, of their portfolio and CLO securities. That's the one market participant. frankly, that would be nice to see more of. But while we're obviously disappointed we're not resetting and refinancing, at the end of the day, what we care about is the difference between the spread on our assets and the spread of our liabilities. And this quarter, we made it through the spread of our assets going up. So we like to win both ways, but we typically have a good habit of having one of them go in our direction, which we're seeing on loan spreads right now.
spk06: That's very helpful, Tom. That's it for me this morning. Thank you for your time. Great. Thanks, Mickey.
spk01: Thank you. Our next question comes from the line of Ryan Lynch with KBW. Please proceed with your question.
spk00: Hey, good morning. My first question just has to do with some combination of you guys raised quite a bit of equity this quarter in combination with You're talking about kind of most of that was deployed in the secondary market. And so can you just talk about what sort of secondary opportunities you guys are seeing that drove the decision to raise quite a bit of equity this quarter? And do you see those trends continuing thus far into the fourth quarter?
spk03: Yes, is the answer to the last question in terms of attractive secondary opportunities. The pickup in the difference in the spread that I was just talking about with Mickey of loan spreads versus CLO debt spreads in general is moving in our favor. Typically, when someone models a CLO, they model spread tightening over time. We're actually getting spread widening, which is great. They're a pretty robust supply of secondary CLO equity opportunities, both majority positions and, in some cases, minority positions or minority where we see a path to build to majority, where, frankly, the yield opportunities there, loss-adjusted applying punitive portfolio stresses for the tails and portfolios, typically pencil out, frankly, to stuff well into the 20s on a loss-adjusted basis. There was one investment that came in at a new investment that came in at a lower yield where there's other strategic reasons for the company to be participating. But if you look by and large at the secondary new ads into the portfolio, you're going to see those in the mid-20s. The types of sellers of those investments, and those are all privately negotiated transactions. Some are done via a BWIC process or bids wanted in comp. Quite a few are done off-sheet where it's just over the phone and negotiating a price. Some of our edge there is our ability, our knowledge of nearly all CLOs, our ability to analyze any transaction and be current on it very quickly using our own proprietary technology and our knowledge of the transaction documents and CLO collateral managers. The types of sellers varied widely from, in some cases, maybe even one or two funds winding down, maybe other investors who didn't always appreciate what they were signing up for, maybe people who bought new issue and got their model wrong and just want to punch out. The stuff we buy, we typically focus on less seasoned, so newer CLOs, but not brand new, with as much reinvestment period as possible. We probably pay up for that a little bit, but I will give up some degree of yield on our portfolio to keep the weighted average remaining reinvestment period as long as possible. We value that greatly. We saw through COVID, we saw through the 2008-2009 cycle ages ago that the number one defense to have is reinvestment period. And while it's very, very expensive to get that in the new issue market, we can get it pretty nicely in the secondary market, picking up a lot of 21 vintage CLOs, maybe some early 22s.
spk00: Okay, that's helpful color on the market dynamics going on there and what you're seeing. The other question I had was, Kind of a high-level question about some trends that are occurring in the CLO market and the private credit market. You mentioned the one loan that was re-fied from the broadly syndicated loan market to the private credit market. That's certainly a trend that is likely going to continue, if not accelerate, going forward. I'm just curious. I've seen some recent projections from different banks on the level of CLO formation that they expect in 2024. And again, these are just estimates that can subject to change very much so. But a couple of trends from those was that they expect CLO issuance to be down for the third consecutive year in 2024. Additionally, This is Bank of America who recently put out a report who's talking about there's going to be a big increase in middle market CLO formation in 2024. And there's already been a big increase in 2023 as those trends of loans, more and more loans going to private credit providers. They're either holding them on their balance sheet or actually then funding them through middle market CLOs. So I'm just curious about, from where you sit, if these trends continue, both lower CLO formation or an increase in middle market CLO formation, what does that mean for your business?
spk03: Sure. We're working in a plus or minus trillion dollar market. Is it going to get, you know, Bigger, the new issue, the newly formed component is one part of it. The called component is another part. You've got to look at the two of those combined. Certainly to date, we have not seen a situation where we've had a, even in years where issuance is way down, where we've had a shortage of investment opportunities. Typically when issuance is down, the secondary opportunities are more robust, frankly. At the same time, when folks are talking about down, it might be going from $100 billion. I don't remember B of A's specific numbers, but it could be going from $105 billion to $90 billion or something like that while it's still down. All we need to deploy is a couple hundred million in a given year and be more than fine. So our ability to source investments in the short to medium term is not something, frankly, I... I lose a lot of sleep over. Importantly, ECC actually also has a strategic interest in one CLO collateral manager. You can see in our portfolio, and it's disclosed in the footnotes, but where the ECC actually owns or has a revenue interest in a piece of the collateral manager that is independent of further beyond meeting a certain investment requirement that continues one way or the other. It's sort of like, I guess, it's a permanent revenue share. So one of the things we've done in that case is it's an opportunity to continue to get access to CLOs if we want, while we certainly expect that platform to raise capital elsewhere. It's something that we obviously have a very deep tie with and will have continued access. And then finally, when you look across our portfolio, there's two things you'll see. We have, you know, it's we have deep relationships with a small number of select issuers. And these are issuers that, by and large for us, have performed very, very well and where we have a special place with them. And as long as they keep performing, they have a special place with us. So our access to the market, I think, is different and more durable than a transient coming into the market. Across all of our providers, different investment vehicles, including ECC, we believe we're the largest holder of CLO equity in the world, which gives us a meaningful advantage. That said, we do have to keep investing to keep the portfolios fully deployed. And then to the point you've raised of the increase in private credit CLOs, formerly called middle market CLOs, just put a different label on it. It's like junior debt or senior equity, kind of the same thing. By and large, What we saw during the financial crisis going back to 08 and 09 is that middle market CLOs, as they were called back then, while they had better credit experience in terms of fewer defaults and better recoveries than syndicated loans in general, the CLO equity frequently underperformed broadly syndicated CLOs. And that was frankly because many of the collateral managers didn't have the DNA to reinvest cheap Rather, they make a new loan 200 basis points wider. So we have a small amount of middle market or private credit exposure in our portfolio right now. It's very small, but it's greater than zero. But some of that, intentionally, that's with folks who we believe can pivot to the extent new secondary syndicated loans are at $0.80 on the dollar. Go buy the really good ones at $0.85 and just be done with it and capture value that way. So we have firsthand personal relationships with all or many at a minimum of the middle market slash private credit CLO issuers. As we look at the market, we believe it's an even smaller set of folks who will know how to deliver superior returns when things get choppy. Frankly, if they're taking out triple C loans from us, we're very, very happy about that. And I suspect we'll see an increase in private credit CLOs in our portfolio over the coming year or two. No assurance, but that would be my best estimate. And with that, it's going to be focused on an even smaller number of issuers who actually have experience in managing CLOs through cycles, not just folks that might have run a BDC for a long time but are just dipping their toe in the CLO world. Running a BDC is very different than running a CLO, for better or worse.
spk00: That's very helpful. My next question was going to be, what is your middle market CLO exposure? Just because looking at some of these statistics, 10% to 12% has been kind of the historical market share of middle market CLOs historically, and it's up to 22% in 2023, and it's projected. And again, let me know if the projection is going to be right or not, but it's expected to be 32% of the CLO market.
spk03: Yeah, the 32 strikes me as a big nut. Stranger things have happened. I suspect it will be the day where we – I mean, well, I know what would happen. The day where we have cash where we can't invest, we'll stop raising capital and we raise capital. I think few in the CLO – we raise capital when we see opportunities. and when it's accretive to shareholders, both on what we can put the money in the ground at and can we raise capital at an accretive to NAV type price. There's few in the market who would say the summer was not a good time to be deploying capital. And you can see that our NAV was up 7%, while a little bit of that was from the premium issuance. The vast majority of it was from other than premium issuance. and what we saw was paper was cheap, so we pushed the pedal to the metal a little bit. There's times when offers are scarcer, and frankly, we're less active on the ATM program, but it's a very effective tool for the company in that while it never is quite as simple as the traders see something attractive in the morning, we call the bank, we issue the capital, and we can do it on a same-day basis, but I wish it was that easy, but it's something that works really well on a just-in-time basis when we're seeing, when the phone's lighting up more than often, we push the gas a little harder. The one challenge in managing a portfolio like ECC, make this our worst problem, we get a ton of cash four times a year. Again, I will never actually complain about that, but all the CLOs kind of pay on a January 15th, April 15th cycle. So that's why we have a little more cash than average as of October 30th. It's simply, you know, it's Christmas here, you know, proverbially four times a year. And we're getting that money in the ground, you know, very, very quickly.
spk00: Okay. I appreciate your thoughts and comments on that. That's all for me.
spk03: Thank you.
spk01: Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Matthew Hallett with B Riley Securities. Please proceed with your question.
spk05: Oh, hi, Tom. Hi, Ken. Thanks for taking my question. Good morning. Good morning. You know, look, I think the question, look, I think it's the elephant in the room. Your balance sheet just keeps on improving and deleveraging, you know, with the growth and net worth. My question, and I think I asked the last time, is, I mean, you've got to be looking at putting where your ratios are, putting... you know, some either preferred or, you know, term preferred or term dead on the balance sheet? I mean, given with the moving rates the last few weeks, given where you're talking, where yields are, by the time, should we be thinking about, you know, getting leverage back up to that 35% and taking advantage of these great spreads before, you know, they don't last?
spk03: Good question. We certainly, you know, are very proactive in managing the right side of the balance sheet and, The, you know, we're blessed. I love our balance sheet. I'm looking at my Bloomberg screen. The nearest maturity is April of 28 on the Xs. Everything's unsecured. Everything's fixed rate. We have some perpetuals out there even. So that's all good. And that's by design. We've intentionally run the company with a 25 to 35% target band of leverage, including both preferred and unsecured debt. That served us well. In COVID, for example, where we were on sides on our ACR at all times, which, you know, that's an art as much of a science kind of judging these things. As we look at, you know, capital raising opportunities, ideally we'd raise some common, some preferred, and some debt every single day. The OID rules on preferreds and debt sometimes make that not so easy to do. But I can assure you we're continually looking at our balance sheet and looking at creative ways to prudently stay within that band. But we're comfortably, I think we're around 28% as of the last numbers? Yes. Yeah, around 28% right now. And we try and keep it within there. Sometimes we've gone a little above, maybe we've gone a little below once in a while. But ideally, we're close to the midpoint of that band. But I can assure you we're always thinking of trying to come up with creative things that that may be accretive to the company over time. The flip side, when the stock is at a handsome premium, at a double-digit premium, sometimes it makes sense to capture a little more common equity at that point, but it's a balance of both, and we'll continue to look at opportunities on the right side of our balance sheet.
spk05: No, look, it's a high-class problem, debt or equity, but I tell you, do you think you could issue I mean, are the markets open today? I mean, could you issue – we've seen deals in the 8%, you know, five years, seven years.
spk03: The thing I don't like right now, just to be really candid, I hope your banker colleagues are listening. You can get a five-year done. One or two other, you know, 40-act RICs have been out, CLO-oriented, have done some stuff in that space. But so five years from today puts us like right in 2028, right in 2029. I got a 28 maturity and a 29 maturity. Um, so, um, I say, what about us? We used to do 10 years or perpetuals. Um, I said, what about a 10 year click? Um, I'm joking when I say that, but, um, well, heat in the middle. I, I, you know, we, we'd be open to stuff like that. Um, the, the, I haven't seen much get done in the $25 format. Um, uh, I can't point to anything, and we have an active business that invests in these securities from other vehicles, and obviously, sadly, not our own. I don't think I've seen any public deals come across in $25 market north of five years. Perhaps with the recent, you know, some of the, you know, maybe people, more stability in rates going forward, perhaps there's some paths there. We probably, we always have things in the laboratory here as well, and, you know, maybe we'll come up with some other ideas later. to be able to get closer to the midpoint of our range. But I am sensitive to not crowding up our maturity wall into 28, 29, which if I had to do a five-year today, that's where I'd have to put it.
spk05: Look, I mean, you have a terrific balance sheet, the lowest leverage in the space. Obviously, it's worth pointing out. I mean, obviously, we can do the math on how creative that would be, leveraging back up modestly in it. It just looks very attractive to us, particularly if the yields keep on coming down here. And I want to jump into the question. You talked about defaults going down next year. I know it's a big picture thing, but I mean, what are you seeing differently that the credit, the leverage loan market may actually see defaults have retraced?
spk03: Just to clarify, I don't believe I predicted defaults going down next year. I did say that trailing 12-month default rate declined a little bit versus the last quarter versus some other recent data measure, but that was sadly not a prediction for all of 2024. Okay. So what the market's missing, though, to the specific way, like most banks predicted around 3% defaults. I think one bank predicted 5% or plus defaults for loans. Wow. That might have been for 2024, if memory serves. Okay. And we get questions from investors, you know, so every, you know, like CLO double B index last I saw is up, you know, I think 16% year to date. During the EIC call, their return on equity is even higher than 16% this year. But compare that to the ag, you know, give or take, as of the last time I looked at it, it's roughly flat for the year. all this floating rate is great. All the rate problems are just not ours. Companies and defaults remain well below historic averages. The flip side, all these companies have to pay this higher interest to pay our higher cash flows. And what a lot of people have said is, my goodness, debt service coverage ratios of companies are going to get really constrained. And it's True, that company's debt service is getting tighter. If your interest rate went from 1% base rate plus a spread to now 5% base rate plus a spread, you got to pay more. Against that, what I think research analysts didn't give enough kind of consideration to, CFOs are pretty smart. Private equity sponsors are pretty smart. I don't remember the time where a company was $1 short on its debt service and the equity handed the keys over to the lenders. I can't say it's never happened, but it kind of sounds silly to even think about. So people have run reports that said, well, if rates move to this, my goodness, X percent of the loan market won't be able to pay its interest anymore. That's holding everything constant. If things are a little tight, you slow pay your payables for a few weeks. You sell the overseas division regularly. You know, you call some sort of, you know, aggressive lender for a 15% mezzanine loan. As long as your revenue and EBITDA are growing, and according to the market data that we see, the average below investment grade company, and you can see this in our investor deck. It's way in the back, but it's in there. This is, I think it's LCD pitch book data. So it's all third-party data that shows revenue and EBITDA for the average below investment grade company is going up. So if you own a business and the top line is growing and the bottom line is growing, are you going to hand over the keys because things get a little tight on payments for a couple of months? And for two-leggeds, you borrow from Uncle Charlie to pay your bill that month. Companies find ways. So I think too much of the analysis was keeping things in a steady state level without realizing there's two-leggeds behind the scenes doing this stuff. And frankly, Covenant Lights. If you had a debt service covenant, you might be failing it. Right. And then you're going to have some mercenary lenders who got in there, and they're going to be pushing for a default. CLO guys probably got in a little early. We don't want it to default. Covenant lights our friend. Against that, only 4%, give or take, of the loan market is below 80. Right.
spk05: That's surprising.
spk03: I mean, that's a good indication of things below 80. That's certainly the market saying there's some hair on the name. or more, a lot of hair in some of the names, but that means 96% of the market is not trading at distressed levels. So the research is one thing, but the reality I think is different.
spk05: Well, I tell you, you guys know this market extremely well, and you're doing such a great job with it, and you've called it. So my last question is, the cash flow is We always go to this, you know, between the recurring cash flows, the gap, and I get the disconnect. Cash flows are back up big in October. I mean, what's driving it? And then when we, you know, we still have this, I didn't expect it to last this long, this huge recurring cash flow, still way above, you know, the gap reported in NII. And how long do you see it? Why were the cash flows way up in October? This is the gift that keeps on giving. I mean, you know, assuming there's probably going to have to be special dividends going forward just to manage that taxable basis. I mean, all this good stuff. I get another high-class problem.
spk03: You've got Ken and I smiling here. The number of emails I get from my friends when we announce specials and supplementals, they're always very happy. It's a happy day, a special dividend day. Yeah. We're so close to getting to $20 in distribution since the IPO, which we're within shooting distance to get that done, which will be great. Just a ringing the bell type event for us.
spk05: Absolutely.
spk03: Big milestone. So what happens? So loan spreads are up a bunch. If we're up 11 bps on our spread, CLOs are 10 plus times levered. So that just generates more cash right there because our CLO debt spreads are fixed. There was a period of time when there was a big basis between one month and three month LIBOR or one month and three month SOFR. And it was kind of memory serves, you know, 40, 50 basis points, which, you know, every time you make a payment on one of these loans, you got to send in a certificate and all kinds of, you know, the CFO has got to sign some papers. You got to call it legal. If you're saving 50 basis points, you're going to do it. If you're saving five basis points stuff, it just paid the three month rate. Unfortunately, essentially all CLOs pay only off of three months. So that differential has closed. We were probably, If you look back, and it was one second, one July, not this year, maybe last year, where it was really out of whack. And maybe it was two years ago. We were like, oh, we're saying one month, three month LIBOR was out of whack. That's now largely behind us. So that's also helped. The three month rates have been pretty stable over the last couple of months, which then helps the ARB just work even better in CLOs. And as you saw, third quarter cash flow or fourth quarter cash flow is collected. better than all of the third quarter, and we still have a few more payments that we're expecting. Combination of the portfolio growing and the spreads on the loans underlying the CLOs continuing to go up. So we obviously hope that continues as much as possible. Stuff can happen that moves it around to some degree. Sadly, it's not a trend you can predict forever. But some of the things that kind of put us off sides a little bit, I think, are behind us at this point.
spk05: Unbelievable. We'll enjoy it and keep up the good work, and thanks for answering all those questions. Thanks, everyone.
spk03: Thanks very much, Matt. Thank you.
spk01: Thank you. Our next question comes from the line of Stephen Bavaria with Inside the Income Factory. Please proceed with your question.
spk04: Hi, Tom.
spk03: Hey, Steve. Good morning.
spk04: Good morning. I loved your conversation just now. As an old credit guy, those are all themes I love. But my specific question, most closed-end funds focus a lot on NII coverage for distribution coverage. You folks focus primarily on recurring cash distributions, which, of course, is much higher. Could you just outline for us? What's the primary difference between what additional items are in recurring cash distribution that are not part of standard net investment income? You know, and specifically, does it include recurring principal amortization that's made on, you know, your typical loans, not just a bullet loan. It's got recurring principal amortization. Is that recurring amortization? flow down as part of recurring cash distribution?
spk03: Sure. Very good question, Steve. The recurring cash flows are equity distributions from CLOs, and if we have CLO debt and other things that pay interest, but excludes distributions from called CLOs, period. So it's basically the NII getting generated out paid in cash from our underlying CLOs. If a CLO, unless all the CLO debt has been paid off, which we might have one or two of those, but that's not really our portfolio, any principal that comes in on a loan, if the CLO is in the reinvestment period, is going to be reinvested into new loans or secondary loans. So that doesn't come to us. And if it's after the reinvestment period, it's going to be used to pay down the AAAs and the AAs and so on and so forth. So all of the recurring cash flows, with one exception I'll come to, is really just all NII or coupon income coming out of our investments. The one slight exception, we don't really have much of it now. Sometimes it's called a flush payment on a CLO when it's newly created on the first payment date. Sometimes you get a little extra from that, which can actually be like a special principal dividend. But we don't really, because we don't really have any new CLOs right now, that's not a big part of our cash flow. So the short answer to the first part of your question, what is principal included in recurring cash flows? By and large, the answer is no, because the principal payments on loans are generally trapped in a CLO. Then B, let me think through this. You had the what's the difference between cash and NII, gap NII? At the end of the day, cash is what pays the bills. Cash is what we distribute to shareholders. That's the most important, you know, tax gap, all this other stuff. Cash money in the bank is always the most, statement of cash flows is the most important of the three financials on a company, in my opinion. The difference, the principal difference between cash and gap is a reserve for credit losses. A handful of other smaller things, but When we predict NII, one of the things we say when we talk about these effective yields, or we often say, these include a reserve for future credit expense. In old bank speak, if you worked at, say, Bank of New York a few years ago, you'd call that a loan loss reserve. Right. For variable interest entity accounting, VIE accounting, we take a reserve for losses. We disclose a lot of this in our financial statements, but you can see we typically get default rates up to 2, 2 plus percent. Right now we have 40 basis points of default exposure. So we are taking reserves for future losses, and very rarely do defaults happen exactly as modeled. Sometimes they're higher, sometimes they're lower. Right now we're seeing lower defaults than we'd expect. If we did have a default on a loan in a CLO, it doesn't come dollar for dollar out of the cash flow of a CLO in that scenario. It reduces our interest income a little bit, but the recovery on that loan is invested in a new loan, which generates new cash flow. A default principally reduces the terminal value of a CLO, but that could be five, seven years from now, and we're mainly interested in money today. So the big difference is a reserve for credit losses, and by and large, credit losses are lower than the models today. But they could go back up tomorrow, but that's the big driver.
spk04: So the NII... actually is net of a loan loss reserve.
spk03: That's a fair way to think of it, yes.
spk04: Oh, okay. That answers a big question, and it also answers the question, I believe, that your recurring cash distributions, to the extent you use those to pay dividends, distributions, does not include an eroding factor as it would if it included principal payments.
spk03: We're not taking loan principal payments and distributing those.
spk04: Perfect. Okay, that's really good news. You know, it answers a question a lot of retail investors, you know, have been asking me, frankly. And I'm glad I have the forum now.
spk03: Thanks. The number one thing we look at recurring, I mean, if any business you underwrite, what's the recurring cash flow? If you could have only one measure, would you have gap tax or cash? In my opinion, I would go with cash over the other two all day long and maybe keep tax as low as possible. But that's, you know, at the end of the day, the cash flow is what we want to pay out to shareholders every single quarter, and we do everything we can to keep that as high as possible.
spk04: Great.
spk03: And hopefully Matt's bankers will call us back about a 10-year deal.
spk04: Yeah, that's great. Okay, thanks, Tom.
spk03: Appreciate it, Steve. Thanks so much.
spk01: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Raduski for any final comments.
spk03: Great. Thank you very much, everyone, for joining. Both Ken and I appreciate your interest in Eagle Point Credit Company. I'm obviously very pleased with our third quarter results, and we shared cash flows in the fourth quarter trending very favorably. Ken and I will be available if anyone has any follow-up questions later today, and we appreciate your time and attention. Thank you.
spk01: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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