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Operator
Ladies and gentlemen thank you for your patience. We will begin in one minute. Again we do thank you for your patience. We will begin in under one minute. Thank you.
Ken
Greetings. Welcome to the Eagle Point Credit Company Inc.
Operator
Second Quarter 2024 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.
Ken
I will now turn the conference over to your host, Garrett Edson of ICR. You may begin. Thank you and good morning.
Garrett Edson
By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call, which may also be found on our website at eaglepointcreditcompany.com. As a reminder, before we begin our formal remarks, the matters discussed on this call include forward-looking statements or projected financial information that involves risk 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 form NCSR half-year 2024 financial statements in our second quarter investor presentation with the Securities and Exchange Commission. The financial statements and our second quarter investor presentation are also available within the investor relations section of the company's website. Financial statements can be found by following the financial statements and reports link, and the investor presentation can be found by following the presentations and events link. I will now turn it over to Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.
Tom Majewski
Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's second quarter earnings call. We'd like to invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. Recurring cash flows from our portfolio increased on both an absolute and per share basis in the quarter to $71.4 million, or 79 cents per share. This is up from $56.2 million, or 70 cents per share, in the first quarter to and exceeded our quarterly aggregate common distributions and total expenses by $0.13 per share. The higher recurring cash flows were in part due to the growth of our portfolio, as well as the results of semi-annual interest payments received from certain of our assets in our CLOs during the second quarter. It's worth noting that roughly 3% of our CLOs' underlying portfolios are now invested in bonds, which typically pay interest on a semi-annual basis. and we do expect some fluctuations in cash flows from quarter to quarter. The company generated net investment income, less realized capital losses of 16 cents per share, which comprised of 28 cents of net investment income and 12 cents of realized losses. The realized losses included 15 cents per share related to the write-down of amortized costs to fair value associated with two legacy CLO equity positions, which had already been reflected in NAV as unrealized losses. This was basically a reclassification on our balance sheet from unrealized to realized. Excluding this, we realized $0.03 per share of gains, principally from selling appreciated CLO debt positions during the quarter. Excluding the reclassifications, net investment income and realized gains would have been $0.31 per common share. NAV per share as of June 30th was $8.00 And we'll walk you through more of our financial results shortly, but first I'd like to take you through some additional highlights from the second quarter. We deployed over $135 million in net capital into new investments. The new CLO equity purchases that we made during the quarter had a weighted average effective yield of 19.4%. During the quarter, we completed four resets and two refinancings. Also, we launched our new Series AA and Series AB non-traded convertible preferred perpetual stock offering. The offering so far has generated proceeds for the company of approximately $9 million. The total program size is expected to be $100 million. We believe the non-traded perpetual program will be significantly accretive to ECC over time, and we're very excited about it. We were able to issue approximately 12 million common shares through our at-the-market program, or ATM. These shares were issued at a premium to NAV, and it generated NAV accretion of 11 cents per share. We also issued a smaller amount of preferred stock under the ATM. Over the previous quarters, we had opportunistically purchased CLO BBs at discounts, which we started selling this quarter, harvesting gains, and beginning to rotate the proceeds from those sales back into CLO equity. We expect to continue this rotation over the coming months and expect to invest the proceeds of those CLO BB sales into higher yielding CLO equity. During the second quarter, along with our regular monthly common distribution of 14 cents per share, we paid an additional variable supplemental monthly distribution of 2 cents per share, for an aggregate monthly distribution of $0.16 per share. Consistent with our long-term financing strategy for operating the company, all of our financing is fixed rate and we have no financing maturities prior to April 2028. In addition, some of our preferred stock financing is perpetual with no set maturity date. As we've stated consistently in the past, We actively manage our portfolio towards having a long remaining reinvestment period, and this drives performance, we believe, and guards against future market volatility. Similarly, rotating CLO BBs back into CLO equity, we believe, remains highly attractive in today's market. In this prolonged environment of tightening CLO debt spreads, the refinancing and reset market has also returned. We completed four resets and two refinancings in our portfolio during the quarter. These actions have extended the reinvestment period of the reset CLOs to five years and lowered the debt cost of the refinance CLOs by approximately 20 basis points. We have a robust pipeline of additional reset and refinancing opportunities under negotiation. As of June 30th, Our CLO equity portfolio's weighted average remaining reinvestment period, or WARP, stood at 2.7 years, which is 0.2 years longer than where it stood on March 31st. And this is despite the passage of three months' time. Our portfolio's WARP is 59% above the market average of 1.7 years. We continue to believe keeping our WARP as long as possible is our best defense against future market volatility. I would also like to take a moment to highlight Eagle Point Income Company, which trades on the New York Stock Exchange under the ticker symbol EIC. EIC invests principally in CLO debt. For the second quarter, EIC generated net investment income and realized gains, excluding non-recurring expenses of $0.54 per share. EIC continues to perform well and we believe remains well-positioned to continue generating strong NII. We invite you to join EIC's investor call today at 11.30 a.m. after this call and to visit the company's website, Eagle Point Income, to learn more. After Ken's remarks, I'll take you through the current state of the loan and CLO markets. I'll now turn the call over to Ken.
Ken
Thank you, Tom, and thanks, everyone, for joining our call. For the second quarter, the company recorded net investment income less net realized capital losses of approximately $15 million or $0.16 per share. This compares to NII and realized gains of $0.29 per share in the first quarter of 2024 and NII less realized losses of $0.05 per share in the second quarter of 2023. Second quarter results include the effect of $0.15 per share of realized losses due to the write-down of amortized costs to fair value for two legacy CLO equity investments. The two investments are no longer generating cash flow, have a zero effective yield, and were at least one year past their reinvestment period end date. Since the fair value of these investments had already been previously reflected in the company's NAV, the realized loss was a reclassification from an unrealized loss. There was no impact to NAV as a result of the write-down. Excluding the write-down, our second quarter NII and realized gains would have been $0.31 per share. When unrealized portfolio depreciation is included for the second quarter, the company recorded a GAAP net loss of approximately $4 million or $0.04 per share. This compares to GAAP net income of $0.43 per share in the first quarter of 2024 and GAAP net income of $0.11 per share in and the second quarter of 2023. The company's second quarter gap net loss was comprised of total investment income of $42.3 million and net unrealized appreciation on certain liabilities held at fair value of $1.1 million, offset by net unrealized appreciation on investments of $19.4 million, realized capital losses of $10.8 million, expenses of $16.1 million, distributions on the Series D preferred stock of $0.6 million, and distributions on the convertible preferred stock of $0.1 million. Additionally, the company recorded an other comprehensive loss of $2.8 million for the quarter. The company's asset coverage ratios at June 30th for preferred stock and debt calculated pursuant to Investment Company Act requirements with 352% and 682% 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. below the midpoint of our target range of generally operating the company with leverage between 25% to 35% of total assets under normal market conditions. Last week, we declared monthly common distributions for the fourth quarter in line with our recent distributions. The $0.16 per share monthly aggregate distribution is comprised of $0.14 per share regular distribution and a $0.02 per share supplemental distribution. We will continue to review our variable supplemental distribution on a quarterly basis. Moving on to our portfolio activity, so far in the current quarter through July 31st, the company received recurring cash flows on its investment portfolio of $60.4 million. The lower recurring third quarter cash flow figure compared to the second quarter is driven by approximately $80 million in new CLL equity investments which have not yet made their first payment, some spread compression, and off-cycle semi-annual paying loans and bonds in the underlying portfolios. We do expect our portfolio cash flows to move higher in the fourth quarter. I will now hand the call back over to Tom for his market insights and updates.
Tom Majewski
Thanks, Ken. I'll now update everyone on the trends we're seeing in the loan and CLO markets. Starting off with loan performance, The Credit Suisse Leveraged Loan Index continued to perform well in the second quarter, generating a total return of 1.87% for the quarter and 4.44% for the first half of 2024. The index continued its trajectory in July with loans up 5.21% through July 31st. We continue to believe dealer research desks are significantly overstating overall corporate default risk, as the underlying loan borrowers that we see have continued to see revenue and EBITDA growth on average, despite the current elevated rate environment. Dealer Research Desk default forecasts for 2024 are now typically between 4% and 6%. However, during the second quarter, we saw only six loans actually default, which was the same number as the prior quarter. 92 basis points, remaining well below the historic average of 2.65% and even farther below dealer forecasts. As of June 30th, ECC's portfolio's exposure to defaulted loans stood at 53 basis points. Also, during the second quarter, approximately 9% of all leveraged loans, or roughly 35% annualized, were repaid at par. While there has been some opportunistic repricing activity within the nearly 45% of loans trading at or above par, many loan issuers remain very proactive in tackling their near-term maturities through these repayments and refinancings in an effort to further push out their debt maturities. We view this as another sign of the loan market's resiliency. On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios was 3.63% at the end of the quarter, and that's down from 3.74% at the end of the prior quarter. Meanwhile, spreads on debt tranches issued by our CLOs that were locked in two years ago remain unchanged and have the potential to tighten significantly as they roll off their non-call periods later this year and early next. Over the past few days, there has been some softness in the loan market in line with the broader market volatility. the price movement we've seen in the loan market has been relatively modest to date. In terms of new CLO issuance, we saw $53 billion in the second quarter of 2024 and $102 billion for the first half of 2024. This is the fastest pace on record and approximately 82% higher than the new issue CLO volume for all of the first half of 2023. As CLO debt spreads have tightened, third-party CLO equity investors, including us, have returned to the new issue market. During the second quarter, we invested significant amounts of capital into both primary and secondary CLO equity, as well as other attractive investments. Market-wide, CCC concentrations within CLOs stood at 6.6% as of June 30th, and the percentage of loans trading below 80 within CLOs in the market was about 5.5%. Our portfolio's weighted average junior OC cushion was 4.2% as of June 30th, which gives us ample room to withstand potential future downgrades or losses. To compare this, our portfolio's OC cushion remains well higher than the market average of 3.2%. We continue to believe CLO structures, and CLO equity in particular, are set up well to buy loans at discounts during periods of volatility and ultimately outperform the corporate debt markets over the medium term, as they have done in the past. To sum up the quarter for ECC, we generated net investment income and realized capital gains, excluding the write-down reclassification for the quarter, totaling $0.31 per weighted average common share. Recurring cash flows were solid in the second quarter, both up on a quarter-over-quarter basis and comfortably exceeding our regular common distributions and expenses. We sourced a significant number of attractive new investments, investing $135 million of net capital during the second quarter. Our portfolio's warp of 2.7 years increased during the second quarter and remained significantly longer than the market average. We expect our warp to increase further as our new issue investing and reset activity continues. Our existing regular monthly common distributions and variable supplemental distributions were declared through the end of 2024. We've also significantly strengthened our balance sheet through the launch of our non-traded 7% perpetual convertible preferred stock, as well as NAV accretive issuances through our ATM program. We continue to maintain 100% fixed rate financing with no financing maturities before 2028, providing protection from any future rise in rates and locking us into an attractive cost of capital for years to come. Further, an increasing amount of our preferred financing is now perpetual with no repayment date obligated. Importantly, we still see an abundance of primary and secondary CLO equity opportunities and have a robust pipeline of refinancing and reset opportunities under consideration to further enhance the value of our portfolio. In closing, we're encouraged by the performance in the first half of the year. Our proactive investment approach has resulted in the portfolio's significantly greater than market average warp, strong OC cushions, and high recurring cash flows. We believe our portfolio is well positioned for continued strong performance through the second half of the year. We appreciate your time and interest in Eagle Point. Ken and I will now open the call to your questions.
Ken
Operator? Thank you. At this time, we will be conducting a question and answer session.
Operator
If you would 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Ken
One moment, please, while we pull for questions. Our first question comes from the line of Mickey Schlien with Lattenberg Taubman.
Operator
Please proceed with your question.
Mickey
Yes, good morning, everyone. Tom, there's been a leveraged loan repricing wave, which we're all aware of, that's been driving down loan spreads. I see that your portfolio's weighted average AAA spread is near the market average. How much of an opportunity do you have left to refinance or reset the liabilities in your CLO equity portfolio to help defend your yields against that spread compression?
Tom Majewski
Hey, Mickey. Good morning. Excellent question. A couple of things in there. Definitely loan spreads tightening. I forget the exact number. Tighter about 10 basis points, plus or minus quarter over quarter. Flip side of that, of course, defaults. very few in a spread-tightening world. But to your specific question of how do we manage the right side of our CLO balance sheets, while the average is about the market average, we give you line-by-line detail in the investor presentation, there's a tremendous dispersion. And I don't know the exact number, but about half of them are probably above the average. And some of the highest cost CLOs start running off of non-call later this year. So we have been very proactive in, I think we had four resets and two refis in the second quarter. And we continue to be active with those here in the third quarter. And we have an active pipeline. Obviously, market conditions can change at any time. But what I would less focus on the average and more focus on sorting by the highest AAA ones and looking at the non-call dates on those, and those are the ones we're most focused on, particularly as they run off of non-call.
Mickey
I appreciate that. Thanks for that clarification. You mentioned that default forecasts seem fairly pessimistic, and the ratings agencies have also remained pretty conservative and haven't seemed to accept what I would probably say are decent odds of a soft landing, and They also don't seem to recognize the amount of capital available to lower quality borrowers. So the downgrade to upgrade ratio is still a problem. That situation can obviously pressure triple C buckets. So how are your portfolio managers dealing with that trend?
Tom Majewski
I mean, there's always too many triple C's. As long as there's one triple C, I guess there's too many. Against that, our CLOs in general have tons of cushion. We provide the average in our deck for both our triple C bucket. Let me just pull up the number here. Bear with me. Weighted triple Cs. This is on the right deck here, page 28 of the master presentation. 6.37% is the weighted average triple Cs. which is, I think, slightly better than the overall market, which is good across our CLOs. Again, there's an average and a dispersion. You'll see some of them have higher numbers, others lower. The higher ones are typically later in life and in many cases are amortizing. Against that, we also have 4.2% junior OC cushion on a weighted average basis. And that is very, very powerful in that you'd need to have triple Cs on the typical CLO go over 7.5%. And then you start taking a haircut above 7.5%, the lower of your market or a stated number in a given CLO. But in general, you could probably cuff it that we could have 15% triple Cs on average, give or take, before we actually faced interruption on CLO equity payments. Now, if we got to a market where there was 15% triple Cs, the current markets in the sixes, there's clearly something going on in the world and a continued downdraft. And what that would suggest is While a non-trivial amount of loans right now are priced at pretty heavy prices, they're relatively high prices, although coming down a little bit lately, you'd imagine you'd see a drawdown in all loan prices, which would then help discounted reinvesting non-CCC loans to help build back par. Quite a few of the CLO managers in our portfolio, frankly, have never missed a payment to the equity through COVID, through the financial crisis. These OC tests are very important, I hope there's no AAA investors on the call right now, but they only matter four minutes a year. They matter at the close of business on the quarterly determination dates. So it's a known target, and good CLO managers, they have a schedule. They know when they need to be passing that OC test, and the folks we work with have a pretty good knack of doing that. Obviously, who knows what the future brings, but having been involved in CLO management here over the years at Eagle Point as well, Those are relatively manageable tests, but we've got a better than average portfolio, and I think the collateral managers we partner with have a real good knack of beating these tests, and they really just matter four minutes a year.
Mickey
Tom, in terms of the folks you work with, Eagle Point has grown significantly over the years, so I'm curious whether you can still focus on just top-tier managers or have you grown to a point where you need to consider tapping into maybe second and third tier managers, assuming the pricing is right, to be able to deploy capital?
Tom Majewski
Yeah, so I would say over an extended period of time, we've had collateral managers that the market would rank in varying tiers. What we're focused on at ECC is are CLO collateral managers that have the DNA to deliver superior equity returns. On the surface, you'd think all CLO collateral managers want to deliver superior equity returns. The equity investors are the owners, the residual holders. All companies work for the owners. In our opinion, some purportedly tier one CLO collateral managers think of the equity as nice, but not really important. So one of the things our investment process is focused on is honing in on CLO collateral managers who have the DNA to outperform for the equity class while respecting their creditors. A, then B, while ECC has certainly grown and Eagle Point, our overall CLO equity holdings, which are far greater than just what's in ECC, have grown, we still remain what we believe to be a single-digit percentage of the market. The CLO market itself is about a trillion dollars outstanding, give or take, in just the U.S. And the nice thing is when you look through our portfolio, I'm just looking at that same page 28, like Octagon, which is a CLO manager we've worked with a bunch. You can see we've got 26, 27, 29, 37, 44, 45, so on and so on and so on, you know, all the way up to Octagon 58. And Old Octagon 14, our original investment, back when they used Roman numerals. So the good news is the chefs we like, so to speak, are always in the kitchen, and there's always another one coming. So sometimes we buy new, sometimes we buy used, depending on what's better in the market condition. But we've not struggled to find access to the collateral managers that we've wanted to And frankly, our continued size and scale has net helped us in that we're, in many cases, their most relevant equity investor.
Mickey
That's very helpful, Tom. Thanks for your time this morning.
Ken
Great. Thanks so much, Mickey. Thank you. Our next question comes from the line of Mitchell Penn with Oppenheimer & Company.
Operator
Please proceed with your question.
spk11
Thanks so much. A quick question just to follow up on Mickey's question. The impact of spread compression during the quarter you said was around 10 basis points. Is that, are you taking, is that just the loans that were repriced or is that taking the amount that was repriced and spreading it over the total portfolio?
Tom Majewski
And I had used the number 10 earlier. I said approximately the exact number is 11 basis points, just to be clear. And good morning. Good morning. That's just the weighted average spread of the loans in our portfolio. It doesn't matter if it was a repricing, if a loan was sold, a loan was bought, whatever. The weighted average spread as of the prior quarter, weighted average spread of this quarter, taking into account all changes in the portfolio.
Operator
Got it. Got it.
Tom Majewski
New CLOs, changes in the CLOs. and different CLOs that we bought and sold during the quarter as well.
spk11
Got it. Because we had heard a higher number mentioned, and I assume that's just on the few deals or whatever deals repriced. It was a higher number.
Tom Majewski
Oh, I'm sure some loans repriced 50, 100 basis points tighter. Got it. Others may have repriced wider if they were kicking out their maturity. But that's just overall what our portfolio did in aggregate.
spk11
And you said the research guys are like their streets like 4% to 6% default forecast. And you guys thought it was lower. I think, and tell me if I'm wrong, if you're looking at just defaults, you're not including distressed exchanges. Is that correct? Because distressed exchanges are running over 4% right now.
Tom Majewski
Correct. So the number we cite and what triggers a D rating, some distressed exchanges do trigger a D rating. Others don't. Facts and circumstances vary. Our number is anything I believe that's rated D or fails to pay would be immediately rated D. Sometimes distressed exchanges happen below us. Sometimes they do happen at the loan level as well.
spk11
Got it. But that would probably be why the street's estimating a higher number, probably, because they're including those distressed exchanges?
Tom Majewski
Different dealers include different things in their measures. As long as your PAR is not impaired, I don't know. That, to me, seems like the most important thing. And some distressed exchanges, you do take less PAR back, but in many, you don't.
Ken
Guy, that's all for me. Thank you. Great. Thanks, Mitchell. Thank you. Again, as you mind, if anyone has any questions, you may press star one on your telephone keypad.
Operator
Our next question comes from the line of Matt Howlett with BYD Security.
Ken
Please proceed with your question.
Ken
Good morning. Hi, Tom.
Ken
How are you?
Ken
Good, thanks. Thanks for taking my question. Congratulations again. I'll just first start on a follow-up. I mean, how much do you look at these analysts' forecasts or default rates? I mean, they've been dead wrong for a number of years. I'm just curious, like, when you look at that stuff, what do you think your portfolio is, 50 bps of long-term default?
Tom Majewski
Yeah, we don't really care about it. I mean, it's just interesting to see. I mean, in 2022, one leading investment bank predicted 11% defaults for 2024.
Ken
I mean, it's fascinating, but it doesn't really make a difference one way or the other for us.
Tom Majewski
As long as our loans keep paying, that's the relevant measure.
Ken
Yeah, I mean, and that's why I want to kind of dovetail into my question here. I mean, you have this incredible phenomenon that you have reoccurring cash flows that are way above the dividend, way above what you report for, you know, GAAP NII. And this has been going on ever since I've been covering the company, I mean, really for several years now. I know at some point, you know, gap and cash flow and tax all kind of converge. Just what can you, I mean, tell us about, you know, what you really believe is the economic earnings power? Like what metric, you know, what should we look at? Should we just, you know, I'm assuming that we're not going to get this huge reoccurring cash flows above dividends forever. And otherwise, you'd have to raise the dividend a lot over time. Just walk me through how to think about it. I mean, it's been great. Ever since I've covered the company, we've seen this phenomenon.
Ken
Yeah. How do I put it?
Tom Majewski
CLOs generate gobs of cash as a general rule. And even when loans are defaulting, something that's really powerful and important to remember is the defaults let's say you have a 50 basis point position in a CLO and it defaults. And let's just say it's a total wipeout, a zero recovery. Let's take the most conservative position here. If that all happens, you get a little bit less interest on an ongoing basis, but your principal loss is five to seven years from now when you ultimately redeem the CLO. And so interest income is far more important in the CLO equity IRR than principal income. Frankly, in many of our investments, we would have a positive IRR, even if we never got a dollar of principal at the end of the CLO. Because in many cases, the cash flows, not all cases, but in many cases, the cash flows on an ongoing basis from the CLO, frankly, outweigh the... are greater than the principal we invested at the beginning. So now along the way, if we have a bunch of those defaults where the zero recoveries are very bad recoveries, again, we're not predicting zero recoveries, the price of loans is going to be down nearly certainly on that day if you're having a bunch of those. And that's what gives us, as long as you're in the reinvestment period, gives the COO collateral managers the opportunity to reinvest. So if you look at like the performance of ECC from January 1, 2020 through the end of December 2021, so a 24-month period, our NAV grew somewhere between 25% and 35% during that timeframe. NAV grew, and obviously we continued paying distributions throughout that period, never failed the ACR or anything like that on a measurement date. CLO's equity is very nice in that it generates cash flow on an ongoing basis pretty robustly. When things go haywire, COVID, financial crisis, what you want to have is a long RP so you can continue reinvesting. In April of 2020, approximately 2% of the loan market paid off at par. No CFO like Ken walked in and said, hey, why don't we optionally pay down our debt today? But, you know, they're previously announced M&A. I remember the thing with the T-Mobile loan paid off that month. You know, just stuff keeps happening. If you're a CLO manager, you're just opening the mail, getting money at 100 cents when loans are for sale on 80. If you're in the RP, you're able to take advantage of that. So that's the formula that makes this work. The drawback of CLO equity, the prices move around far greater than the fair value, in my opinion. But the very nice thing of it is the cash flow just keeps coming. And, you know, we've seen that, you know, we're It will be 10 years public in October of this year. A lot of things have happened. And what hasn't changed is the cash flows continue being very robust.
Ken
Yeah, look, in my opinion, it's better. In my opinion, that number is more important than the GAAP number. I don't know. I mean, I know you give everything.
Tom Majewski
Cash pays the bills. We don't send out GAAP dividends. We send out cash dividends. Look, I've covered it.
Ken
I've covered REITs and closed-end funds that only give a CAD or a FAD number, and that's all we really focus on in a given quarter and almost ignore the gap. But certainly, that's the number that's just remarkable and really, I think, speaks to the value inside ECC. So congrats on that, and hopefully you keep it up. The next question, I mean, your capital structure is evolving as you really mature here and grow. Just with more perpetual and preferred and this non-traded exchange or convertible note. How do you feel about targeted leverage? Do you think about that differently as the capital structure evolves?
Tom Majewski
Obviously, the best financing is financing you don't have to pay back. So those are, you know, from a common equity perspective, that's great. We have issued a little bit of the preferred D, which is the traded perpetual via the ATM from time to time. There's activity there. The Series AA and AB, which we're issuing through a non-traded channel. Really, really nice. We don't have any maturities, I think, until April of 2028 at this point. Our target leverage is unchanged between 25% and 35%. And I've always roughly thought of that roughly half debt, half equity. It's moved around a little bit, but that's always kind of been the benchmark in the back of my mind. I don't think we... Let me see, with perpetuals, in theory, you have a little more wiggle room. In general, I've tried to avoid something I'm very proud of. Let's put it this way. We didn't fail the ACR during COVID. And that's something, on any measurement date, we passed. And there's no scientific rule for this other than 30 years of experience in this market and in the securitization markets to say, You know, I've never been through a pandemic before. No one had. But kind of gut feel when things get really ugly really fast, this is kind of what's going to happen. And that's honestly how we sized it, purely based on judgment. Obviously, we know the statutory limits. We have to be within those. But when we've sized it, so while I certainly have more flexibility without ever worrying about repaying this, the perpetuals, it's still, we always want to be able to, you know, our goal is never to fail the ACR. So that's an equal governor on how much leverage we would add to the company. So I don't see us going above 25, above that 35 band in normal market conditions. But I certainly love pushing out, you know, taking away the maturity wall. How about that?
Ken
Yeah, no, in theory, someone should use a lower discount rate on the cash on the dividend because of it. On that note, you can do up to $100 million on that new exchangeable convert series. What are the terms? Can you force conversion or call it when the stock trades over a certain price for a period of time?
Tom Majewski
The exact details, I'm going to start here and then maybe Ken will finish. He's been a little closer to this one. It's perpetual in length, so that's always nice. If And the owner of the security has the conversion option. Anytime after four years, they can call us up and say, I'd like to get rid of my security. And we have two choices as a company. We can either pay them cash or give them stock equal to the ECC common stock, a market value of that equal to the par amount of their preferred, their $25. So if the stock is $10 a share, we'd have to give them two and a half shares in exchange for that, new shares in exchange for that $25 of preferred. We can also call it after a certain date. I don't recall what that call date is, Ken.
Ken
Five years.
Tom Majewski
And we can mandatorily repay it if we want after five years. But at 7% perpetual, obviously we would happily have that option. I would struggle to see a scenario where we, you know, in current conditions where we'd exercise that. But it's nice to have. And obviously, if we got offsides on the ACR, things like that. And if investors wanted to redeem or convert prior to four years, there's a penalty 8654 or something like that over the first four years. So, you know, it's a great piece of paper for, you know, it's investment grade rated for investors who might want to hold it. It's because it's non-traded. You know, it sits in people's accounts that typically people just carry it at par. You get a monthly coupon of seven, investment grade rated, a ton of capital beneath you, really good assets underlying. It's a nice piece of paper unto itself, frankly, but it's a great tool for the company to keep a very stable balance sheet. And I think one of the things... I'm sorry? It's perpetual, did you say? Yeah, it's perpetual, but you have a path out after four years if you want.
Ken
Right.
Tom Majewski
And we can either give you cash or stock at our option. But, you know, not a lot of things paying 7% on a monthly pay basis that don't move around, that don't have really any NAV volatility. So it's an interesting, or very interesting, people usually carry it at par. So it's one of those kind of, really feels like if someone can invest their cash for four plus years, it feels like win-win, win for the person who invests in that security. and win for the company because it's a great and stable piece of financing.
Ken
And I've been a lot of, you know, elect the conversion feature, the dividends that much higher, you know, dividends 15% or something, but they're welcome.
Tom Majewski
We're always, you know, we're welcome to do that. People are welcome to do that. I think if you're buying the 7%, you're probably seeking just that, you know, you're focused more on the stable price on your statement, if I had to guess, but, you know, We'll see in 3.75 years what people do.
Ken
Just to clarify, the call option, it's actually two years.
Tom Majewski
Oh, sorry. Oh, even better. Oh, great. I apologize. Yeah, because there are other properties. These are five years. Yeah.
Ken
You can call that a par in two years. I mean, you could be reissuing this stuff at 6% or something in two years.
Ken
Okay, great. We can only hope.
Ken
Yeah, exactly. Look, the same here. Yeah. Well, look, congrats on that. And the last question, what is the opportunity, the BB opportunity to sell those at premiums? It's been obviously a great trade. Just any way to quantify what's left and what could be sold?
Tom Majewski
Yeah, we still have everything in the BB portfolio is certainly available for sale, shall we say, to use an accounting term. We bought most of that when BBs were in the 80s and 90s. Just looking at the portfolio here. We are at about 15% still. That was as of June month end. We'll continue. The markets off this last couple days has probably brought things down a little bit, but through July. We bought this stuff at discounts, thinking it would get back to par, close to par. Our theory has been correct. I think we mentioned we had $0.03 of realized gains from sales in the quarter, last quarter. And we've certainly, you know, our goal is to continue reducing that. We increased it when there was some nice convexity, and now that the convexity is largely gone, we're continuing to reduce it. Hopefully, you know, hopefully, I don't think we'll get rid of everything, but I want to ask the team, please get rid of everything.
Ken
Well, certainly a creation to make into our model. Really appreciate it. Congrats.
Ken
Thanks, Ken and Tom. Thanks so much, Matt. Thank you. Our next question comes from the line of Paul Johnson with KVW. Please proceed with your question. Good morning. Thank you for taking my questions.
Paul Johnson
I'm just wondering to get your thoughts on how you think broadly on new investments. Obviously, there's some interplay here between the effect of yield and cash yield on on what's realized over investments, but the cost of equity for ECC has, you know, been increasing. That's hard to deny. I mean, the cost of equity is getting close to 20%. Yield on the effective yield on new investments this quarter was around 19%. How does that math work?
Tom Majewski
No, very good question, Paul. When we look at our, the, the, The bogeys we're trying to meet, we look at it on a blended basis. And if you just say the distribution rate, I'm just putting a number, is 20%, and we're investing at 19%, that's not a formula for success. Overlay, there's costs and expenses as well. But just looking at just the raw equity cost, obviously, is not the full picture. We look at the blended cost of capital on the right side of our balance sheet, which includes stuff that has coupons in the sixes. Even those, the old perpetuals, the Ds are 6.75 if memory serves. We have other coupons, probably the highest is eight across the stack. But so we've got roughly a little less than a third of the portfolio financed in the eighth. So the actual cost is an average of the distribution rate on the common. in our opinion, and the attractive debt cost that we have at the top of the stack. Without the attractive debt, our distribution yield would need to be lower, frankly, the debt end preferred.
Ken
Got it. Thanks for that.
Paul Johnson
And then lastly, just out of curiosity, I mean, just with the development of some liability management exercises in the leverage loan market, lender-on-lender violence, in some of those workout situations. I'm just curious, how is that dealt with, I guess, at a CLO manager level? I mean, obviously, you would assume you're in a minority position, you know, within CLO. How is that dealt with? Or is that just a situation where it just basically never comes to fruition because it's, you know, an investment that would probably be exited, you know, due to downgrades or whatever?
Tom Majewski
Yeah, a very good question. So the good news, lender-on-lender violence is certainly, proverbial lender-on-lender violence is certainly down versus where it was one to three years ago. The market's kind of calmed a little bit in terms of that. It's not zero, but it feels judgmentally to me like it's less than it's been in the past, A. And B, while any given CLO, if you think of a CLO as a $500 million CLO, typical position size is 60 basis points or something, a big one, so that's $3 million. Against that, these collateral managers manage tens of billions of dollars, so some of them might own $100 million, $200 million, $300 million of a loan. So there's good and bad of that. The bad part is if they wanted to exit the loan, that would take them a little while. The good part is CLOs own... roughly two-thirds of the loan market. That percentage moves up and down a little bit, but directionally, I think that number is accurate. And many of the collateral managers that we work with are some of the largest investors in loans. So while any one CLO might be a little pipsqueak of a holder, when you aggregate many of the collateral managers we work with, you're going to see they're really quite relevant in here. And one of the things that happens in the loan market, though, And this is something, this is a bad part. It's all worked out over the last 10 years, but if a new loan is issued at 99.5, CLOs buy it there, let's say it trades down to 60, other distressed funds, purported bad guys come in and buy it at 60. For them, getting out at 80 is a nice win. For us, a recovery at 80 kind of stinks. We just lost 20, roughly 20%. So one of the things that does cause a problem sometimes you get these people with divergent starting points, the same outcome can be a win or a loss for different people. That said, I think the loan market is getting better at not being intimidated and bullied by distressed funds as much as perhaps used to be. So while there will continue to be some degree of lender-on-lender violence in some situations where the CLO community does get The CLO collateral manager community gets a little outsmarted by these distressed guys. It feels like the tide has been turning in the CLO market's favor for a while now.
Ken
Very interesting, Tom. Thanks for taking my question. It's all for me. Great. Thanks so much, Paul. Thank you. Our next question comes from the line of Stephen Bavaria with Inside the Income Factory. Please proceed with your question. Hi, Tom. Hey, Steve. Good morning.
Stephen Bavaria
Say, since typical syndicated loans, you know, partially amortized principal over the term of the loan, at least they did when I was doing them, you know, then with a balloon payment of the unamortized principal at the end, at the loan maturity, what is your estimate of within your recurring cash distributions of What's your estimate of the percentage of that that consists of principal payments? And then sort of follow up to the extent that that would cause any erosion over time of the ultimate principle of that particular CLO. How much is that then offset through building par, you know, resets, portfolio trading, buying new loans at 70 cents, you know, when old ones mature at 100 cents, that kind of thing.
Tom Majewski
It's an easy estimate. Zero. Zero? With one asterisk, zero, yes. So within a CLO, I will explain the asterisk. When money comes in to the CLO, there's a trustee, you know, Wells Fargo Bank or Citibank, you know, serves as trustee for the CLOs. When the money comes in, they put it in two accounts. There's an interest account and a principal account. And the interest is what gets paid out to us as the equity after the AAAs and all the debt holders get paid. The money that comes to us is purely from the interest account. All the principal that comes in, whatever amortization a loan makes or sale proceeds or recoveries on defaults or anything, goes in the principal account, which is during the reinvestment period, entirely used for reinvesting into new loans. So even if a loan makes a 1% quarterly amortization payment, that's going to be trapped in the principal account and not used to pay out current income distributions to the equity. There is one exception I did mention in ASTRIC, and this is something called the principal flush. And on one hand, that sounds bad, but if you're the receiver of it, it's actually pretty good. In many CLOs on the first and second payment date, if the collateral manager was able to buy the loans cheaper than the targeted price, that savings, let's say they modeled buying them at 99 and three quarters, they bought them at 99 and a half, that quarter point, which is left over in the principal account, can be reclassified into interest and paid out as a one-time or two-time special distribution to the equity. That would be the only situation when that occurs, but like randomly on the seventh payment date of a CLO, if some of the loans are amortizing, all that money's trapped in the system and we don't get any of it. So it's... All the latter parts of your question kind of go away, frankly, other than that one special distribution at the beginning or one or two to the extent we can buy loans cheaper or have some trading gains early. The balance of the principal stays within the system.
Stephen Bavaria
So is there a simple answer to the question then of what accounts for the big difference between your NII plus your capital gains balance? and then the much larger recurring cash distributions.
Tom Majewski
Yeah. So you were a banker back when bankers made loans in the old-fashioned days. Yep. Basically, loan loss reserves. So when we calculate an effective yield on a CLO, there's a provision for losses baked into there. Whether or not those losses actually happen... So we might be getting cash far greater. If we're accruing, I think that was 19.4% was the new purchases this quarter. So those investments on average, Ken's going to book 19.4%. Divided by four is going to be the income in the third quarter on those. We expect to get more cash than that, but we're taking a reserve for losses along the way. To the extent those losses don't occur, we might get a little more at the end. To the extent the losses are greater, we'll get a little less at the end.
Stephen Bavaria
And your reserve, as you take that reserve, I assume that's not part of your pre-tax income from which you're supposed to pay whatever, 90%. So in other words, the losses don't actually get taken for tax purposes until later on when you... Until they're incurred. Yeah.
spk00
Yeah.
Tom Majewski
So it's basically accrual accounting for GAAP and cash accounting for tax, I guess, would be a pretty basic, simple way to put it.
Stephen Bavaria
Perfect. Thank you so much. That's a question that a lot of people have and I think now maybe won't have. I don't.
Tom Majewski
I mean, that really doesn't work. There's cash, gap, and tax. They've never equaled in any given period, but over the life of a CLO, absent a handful of non-deductible items, cash profit, tax profit, and gap profit will equal in aggregate, but sadly not in any given quarter.
Stephen Bavaria
You put out an explanation of that about five years ago or so.
Tom Majewski
I think it was nine years ago. I think it was August 2015 or 16.
Stephen Bavaria
Exactly, yeah.
Tom Majewski
It's the most downloaded thing on our website.
Stephen Bavaria
I'll go take a look. One other quick question or point is, I don't know how many of your investors realize that even a 4% default rate, which you would probably never achieve, even though that's being accepted in a, in a real recession after 60% or so recoveries, you're talking about a loss rate. That's only one and a half percent or so big difference in that direction.
Tom Majewski
And, and I would also then say, well, Steve, if 4% of the corporate loan markets defaulting every year, what's the price of loans on that day? It's probably not par.
Stephen Bavaria
Yeah.
Tom Majewski
Anyway, every loan that doesn't default pays off at par.
Ken
Binary outcome. Thanks a lot. Appreciate it. Thanks for your time, Steve. Pleasure. Thank you. Again, as a reminder, if anyone has any questions, you may press star 1 on your cell phone. And it looks like we have reached the end of the question and answer session. I will now turn the call back over to Tom Majewski for a closing remark.
Tom Majewski
Great. Thank you very much for joining, Ken, and I appreciate your time and interest in Eagle Point Credit Company. For those interested in Eagle Point Income Company, we invite you to join me, Lena, and Dan at 1130 this morning. Thank you very much. And this concludes today's conference, and you may disconnect your lines at this time.
Ken
Thank you for your participation.
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