ECC - NYSE

Greetings, and welcome to Eagle Point Credit Company Inc. Fourth Quarter 2022 Financial Results Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you. You may begin.

Thank you, 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. Further information on factors that could impact the company and 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 N-CSR, our full year 2022 audited financial statements and our fourth quarter investor presentation with the Securities and Exchange Commission. Financial statements in our fourth quarter investor presentation are also available within the Investor Relations section of the company's website. The financial statements can be found by following the Financial Statements and Reports link, and the investor presentation can be found by following the Presentation and Events link. I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.

Thank you, Garrett, and welcome, everyone, to Eagle Point Credit Company's fourth quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. The company's portfolio had a good end to the year despite the continued challenging macroeconomic environment. We are pleased with our overall performance for the year as we generated strong cash flows that enabled us to increase our common distributions during the year as well as declare $0.75 per common share in special distributions during 2022. Our portfolio of CLO equity continues to demonstrate resilience compared to many other risk assets. We believe our diverse CLO equity portfolio with 3 years as a weighted average remaining reinvestment period remains well positioned to thrive in the current market environment. For the fourth quarter, our net income totaled $0.40 per common share before nonrecurring expenses. This is just a hair below our regular common stock distributions for the quarter. We actively managed our portfolio, deploying $27.8 million of net new capital in portfolio investments during the quarter. We had recurring cash flows on our portfolio in the fourth quarter of $32.9 million or $0.65 per common share. As we noted on our previous call, the reduced October amount was largely attributable to our CLO equity portfolio and the rapid changes in the benchmark interest rates resulting in a disparity between 1-month and 3-month rates and a difference between LIBOR and SOFR. Currently, many loan obligors are paying off of a 1-month reference rate, be it LIBOR or SOFR, while CLO liabilities typically have a 3-month reference rate at present, most of which still LIBOR-based. Cash flows in the first quarter of 2023 have rebounded nicely, and we expect cash flows to trend further upward in April, driven by a tighter spread between 1-month and 3-month reference rates and more and more paper both on the asset and liability side converting to SOFR. We previously declared a $0.50 special common distribution, which was paid in January of 2023. NAV per share ended the fourth quarter at $9.07. NAV was lower than it would have otherwise been in part due to the special distributions paid. Since the end of the quarter, we estimate our NAV at January month end increased to between $9.62 and $9.72 per common share. This is up roughly 7% from where it stood on December 31. We also continue to raise capital prudently through our at the market program and issued about 6.7 million common shares at a premium to NAV that helped NAV increase by $0.12 per common share simply from the stock issuance. These sales generated net proceeds of about $71 million during the fourth quarter. All of our financing is fixed rate and unsecured. You've heard us say that many calls in the past, and I expect will continue to giving us -- gives us a real measure of protection in a rising environment. Nothing is secured, and we have no financing maturities until April of 2028. So we have a very long-term stable runway for the company's financing. Earlier today, we declared regular monthly common distributions for the second quarter of $0.14 per common share. We were also pleased to announce an additional variable supplemental distribution of $0.02 per common share per month for the second quarter. This is related to 2022 taxable spillover income, reflecting again our 2022 strong performance. Management currently expects to continue monthly variable supplemental distributions for the balance of the year, although the exact timing and amounts of distributions may vary. We're pleased to get more cash into the hands of our shareholders. CLO equity is a highly cash generative asset, and that's one of the reasons why we believe people invest with us. If you invested in our IPO back in 2014, you've now received over 90% of our IPO price back in the form of cash distributions, and we're looking to crossing the 100% threshold very soon. As of December 31, the weighted average effective yield of our CLO equity portfolio was 16.23%, -- this was down just modestly from 16.29% at the end of the third quarter. Our portfolio's weighted average effective yield was aided by a few borrowers defaulting and essentially no loan repricings. In fact, as borrowers tackle 2023 and 2024 maturities, some are even refinancing at wider spreads, which is great news for CLOs. As I mentioned, during the quarter, we deployed $27.8 million of net capital into CLO and other investments. Notably, during the quarter, we deployed a bit of capital into SRT or significant risk transfer investments. These are bank balance sheet securitizations where banks seek to obtain capital relief on diversified pools of core lending assets. They're sometimes called balance sheet CLOs, and we believe they do present an attractive investment opportunity. We continue to find attractive opportunities also in the secondary and primary CLO markets, but we remain disciplined and maintain significant dry powder. So far in the first quarter, we've deployed an additional $43.1 million of net capital into CLO equity and other investments. As of year-end, our CLO equity portfolio's weighted average remaining reinvestment period stood at 3 years, and this is down just modestly from 3.2 years as of the end of the third quarter, and it's actually in line with where the portfolio stood at the beginning of 2022. So despite the passage of 12 months through our proactive portfolio management, the weighted average remaining reinvestment period on our CLO equity portfolio remains substantially unchanged, which we believe continues to drive the portfolio's outperformance relative to the broader CLO equity market. We remain focused on finding opportunities to invest in CLO equity with generally longer reinvestment periods to enable us to further navigate through the current market volatility. I would also like to take a moment to highlight Eagle Point Income Company, which trades under the ticker symbol EIC. EIC invests principally in CLO junior debt for the fourth quarter, EIC generated net investment income of $0.52 per common share prior to nonrecurring expenses, and this was comfortably above its regular common distributions. Since the first quarter of '21, EIC has doubled its monthly common distribution. And with the rising interest rate environment, EIC remains very well positioned to increase NII over time, given the performance of CLO junior debt, which pays a floating rate coupon, and that's heavily directly correlated to rising interest rates. We invite you to join EIC's investor call at 11:30 a.m. today and also to visit the company's website at eaglepointincome.com. Overall, we remain very active in managing our portfolio and mindful of the broader economy. After Ken's remarks, I'll take you through our view of the current loan, the corporate loan and CLO markets and share a bit more of our outlook for 2023. I'll turn the call over to Ken now.

Thanks, Tom. For the fourth quarter of 2022, the company recorded net investment income and realized losses of approximately $15 million or $0.29 per share. This compares to NII and realized gains of $0.47 per share in the third quarter of 2022 and NII and realized losses of $0.37 per share for the fourth quarter of 2021. NII and realized losses for the fourth quarter were net of a realized loss of $0.07 per share related to the write-off of a small number of CLO equity holdings where further cash flows were determined to be improbable as well as an estimated excise tax liability of $0.04 per share related to 2022 spillover income. Excluding these nonrecurring items, NII would have been $0.40 per share. When unrealized portfolio depreciation is included, the company recorded GAAP net income of approximately $8.8 million or $0.17 per share for the fourth quarter. This compares to GAAP net income of $0.21 per share in the third quarter of 2022 and GAAP net income of $0.20 per share in the fourth quarter of 2021. The company's fourth quarter GAAP net income was comprised of total investment income of $32.5 million and net unrealized appreciation on certain liabilities held at fair value of $20.7 million, offset by total net unrealized appreciation on investments of $26.8 million, realized capital losses of $3.6 million, expenses of $13.5 million and distributions on the Series C preferred stock of $0.5 million. The company also incurred other comprehensive loss of $15.2 million during the fourth quarter. The company's asset coverage ratios at December 31 for preferred stock and debt calculated pursuant to Investment Company Act requirements were 286% and 423%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 35% of the company's total assets less current liabilities. This is at the upper end of our target range of generally operating the company with leverage between 25% to 35% of total assets under normal market conditions. Leverage decreased to approximately 32% in January, reflecting higher valuations and ATM issuance. Moving on to our portfolio activity in the first quarter through February 15. The company received recurring cash flows on its investment portfolio of $41 million. This is significantly above the $33 million received during the full fourth quarter of 2022. Note that some of our investments are expected to make payments later in the quarter. As of February 15, we had approximately $55 million of cash available for investment. Management's estimated range of company's NAV per share as of January 31 was $9.62 to $9.72, reflecting a 7% increase at the midpoint from year-end. During the fourth quarter, we paid 3 monthly common distributions of $0.14 per share. Earlier today, we declared monthly regular distributions of $0.14 per share and a monthly variable supplemental distribution of $0.02 per share on our common stock for an aggregate common monthly distribution of $0.16 per share for the second quarter of 2023. The supplemental distribution relates to the excess of the company's estimated taxable income for the tax year ending November 30, 2022, over the aggregate amount distributed to common stockholders for the same time period. In addition, the company paid a special distribution of $0.50 per share in January to shareholders of record as of December 23, 2022. The I will now hand the call back over to Tom.

Great. Thank you, Ken. Let me take the call participants through some thoughts on the loan and CLO markets. The Credit Suisse Leveraged Loan Index generated a total return of 2.33% in the fourth quarter of 2022, and this is well in excess of what investment-grade bonds or high-yield bonds returned. The index was actually down 1.06% for 2022, which is only the third year and its 31-year existence that had finished the year with a negative total return. There have never been 2 consecutive years with annual declines, a testament to the robust nature of the loan asset class. Indeed, in the 2 prior times when loans were down, the following years proved quite robust for the loan market. While who knows what for sure what will happen in 2023, the year is certainly off to a strong start, and loans are up about 3.38% through the middle of February. In addition, on a relative basis, the loan asset class continues to exhibit greater resilience and outperformance versus other risk assets, most of which or many of which certainly saw double-digit declines in returns for 2022. These loans are the raw materials that underpin the strong cash flows to our CLO portfolio. Leverage loan defaults did begin to rise during the year, coming up from near 0 default rates. But notably, despite many negative headlines about credit, there's so many of them. There were actually no corporate loans that defaulted in the fourth quarter. As a result, at year-end, the trailing 12-month default rate actually fell back down to 72 basis points, well below the historic average. There are not a lot of headlines about no companies defaulting. That doesn't seem to get a lot of clicks, but it's, in fact, what happened. Research debts are expecting a pickup in defaults this year, in many cases around the historical average or even slightly above for 2023, but indeed defaults were quite low and obviously in 0 for last quarter. During the fourth quarter, equally importantly or perhaps more so, 3.5% of leverage loans repaid at par. This provides our our CLO's par dollars to reinvest in a discounted loan market. This is a very important part of the long-term success of CLOs. Given the market conditions that are still choppy, the percentage of loans trading over par remains quite low and approximately 20% of the loan market was still trading below 90% at year-end. As a result, repricing the repricing activity in the loan market is also essentially zero. -- indeed, borrowers with maturities in the next 2 years have actually been focused on refinancing just to push out the maturity wall, even if it comes at the cost of paying a higher spread, and we've seen a number of loans refinanced at wider spreads. That's obviously very, very good news for CLOs, and we're happy to see those. With a significant share of high-quality issuers trading at discounted prices, CLO collateral managers were well positioned to improve the underlying loan portfolios during the year through relative value credit selection in the secondary market as well as take advantage of a high-quality primary market, often with nicely discounted prices at original issue. On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios remained steady at year-end compared to the end of September. This measure of our portfolio has now increased or remained constant for the last 5 quarters. CCC C concentrations within our CLO stood at 5.4% at year-end and the percentage of loans trading below 80 within CLOs is around 7.4%. Our weighted average junior OC cushion was 4.12% as of December 31, a slight reduction compared to 4.24% at the end of September. That OC cushion is a very important measure, and that's the principal driver that could cause interruption to equity distributions, we believe our portfolio has a very strong and healthy cushion. In the CLO market, we saw $23 billion of new CLO issuance in the fourth quarter as issuance edged to over $129 billion for the full year. This was the second largest year of CLO issuance on record. At the same time, CLO reset and refinancing activity was essentially 0 because most current CLO financing is in the money. The spreads in many CLOs are lower than where you could issue today. So frankly, it doesn't make sense to do. While the market gives the in-the-money nature of our CLOs financing some credit, in our opinion, we don't believe the market gives it full credit, and that represents some hidden value embedded in our portfolio. As we have noted, it is an environment of loan price volatility where we believe CLO structures and CLO equity, in particular, are set up well to buy loans at discounts to par with a very stable financing structure and using par paydowns and other relative value trading to outperform the broader debt market over the medium term as they've done consistently in the past. To sum up, we generated NII excluding nonrecurring expenses for the quarter of $0.40 per common share. We paid another $0.50 in special common distributions in January 2023, thanks to our high taxable income from 2022. We continue to use our -- continue our regular monthly distributions for the second quarter, and we're pleased to introduce the new supplemental -- variable supplemental distribution. I'll get the hang of that word here, that phrase shortly for the second quarter as well, that was $0.02 per common share per month. We also further strengthened our liquidity position during the fourth quarter, generating an accretion of $0.12 per share through the -- our NAV increased through our ATM program. We continue to source and deploy capital into very attractive investments and nicely attractive yields. And we continue to maintain a 100% fixed rate financing on our balance sheet. -- with no financing maturities prior to 2028. And this gives us a measure from any further increases in interest rates, and we believe locks in a very attractive cost of capital to us for many years to come. We believe the company navigated through a challenging 2022 very well, and the portfolio is positioned, we think, well for continued success in 2023. We remain pleased to return cash to our investors in the form of special and supplemental distributions and will remain opportunistic and proactive as we manage our investment portfolio with a long-term mindset. We thank you for your time and interest in Eagle Point Credit Company. Ken and I will now open the call to your questions.

[Operator Instructions]. One moment, please, while we poll for questions -- our first question is from the line of Mickey Schleien with Ladenburg.

Can you hear me all right? Tom, obviously, the markets remain really concerned about the potential of a hard landing as the Fed tightens. But as you also mentioned in your prepared remarks, it doesn't seem like there's a lot of data that supports that view. But I'm curious to understand to what extent are you seeing any deterioration in the trends in your underlying obligors, which would support that concern?

Sure. Well, indeed, no company is defaulted in the fourth quarter. That's obviously optimal default, right. The -- and if anything, with the company's refinancing and pushing out the maturity walls, there was par building opportunities in the quarter. To your question though, the answer may be still a little bit hidden in the data. And how do we say, a big issue facing quite a few companies in the loan market is higher interest rates. And one of the things we love is, well, we own all these floating rate investments and everything is up up in a way and LIBOR was 20 basis points or something when we started the year last year, and now it's 4 and change percent almost 5%. That's great news for those who receive that higher interest rate, someone's got to pay it in that company. While I've read research maybe 30% to 40% of companies or 30% to 40% of interest expense is hedged to some degree at leverage borrowers. There's imperfect data on that, and this is anecdotal things from dealer research. Interest rates go up, we have to pay higher interest. And the way a lot of companies and a lot of press report interest coverage, it's like on a trailing 12-month basis. And so that includes the first quarter and second quarter of 2022, which is certainly not consistent with the third and definitely not the fourth quarter of interest coverage. So when we talk about -- I mentioned in my prepared remarks, a lot of banks kind of expect defaults to return to kind of more typical levels, more long-term average type levels. Deutsche Bank, even above the long-term average for loans. A lot of that is really driven by the interest rate expense that these companies are facing. If you were had a LIBOR floor of 1%, you were paying L plus 350, you're paying 4.5% interest at the beginning of the year. Last year, euro LIBOR today is 4.9%. You're paying $3.50 over on that, you're looking at 8.5% interest roughly. That's a big difference for companies. So while the trailing interest coverage looks not too bad, the trailing 12 months interest cover looks not to bad[indiscernible] trailing 3-month interest coverage might be the more accurate picture. And I do think we will see some companies start to struggle with EBITDA not fully covering their interest. Now the flip side, though, ever since the depths of the Q2 in 2020, companies do run with more balance, cash on their balance sheet, even if interest expense dips below EBITDA for a quarter or 2, it's not as companies are going to simply default or go out of business. In many cases, these are fine businesses, and they have extra cash on their balance sheets. And frankly, it wouldn't surprise me to see sponsors step up and help out some of these companies or them go and borrow more money in the market. The market is largely open. So a long answer, but to the question, I think the biggest risk facing the loan market, frankly, is interest coverage, not so much a decline in EBITDA. Some companies will do better or some worse, but we're not looking at a wholesale decline in EBITDA across the market. But the interest part of EBITDA, which comes before is creeping up. And if we're going to see problems this year, I suspect that's where we're going to see it. But we don't expect it to be widespread simply because we think companies have better liquidity than average.

Tom, given what you just said and when we think about loan collateral prices actually up in the fourth calendar quarter and spreads were relatively stable. Is this the issue you think that's driving the decline in CLO equity values, at least what we saw in the fourth quarter? Or is there something else the market is also worried about?

It's a couple of things. It's -- if anything, probably the decline in cash flows, if I had to say one thing, moved prices lower in the fourth quarter, those October payments were not good. And this goes back to the difference. I mentioned. We like in the old days, everything was just 3-month LIBOR on the assets and liabilities, and I just always worked beautifully, right? With the rapid increase in rates, the -- at one point, the spread between 1-month LIBOR and 3-month LIBOR was, I want to say, over 50 basis points. I'm looking at the screen right now, 1-month LIBOR was 4.59%, 3-month 4.90%. So we're still at a 30 basis point spread between those 2 rates. -- it was much greater. So if you're a CFO of one of these companies, it thinks that lever your cost is going up to begin with. If you're going to say 5 basis points a year, it's not worth doing the certifications every month. But if you're going to say 50 basis points, you're done well going to switch to 1-month LIBOR. So we had a difference in that. We're always paying 3 months on our CLOs, but a lot of the loans went to 1 month. And then you had a LIBOR SOFR delta 3 months, which is actually closing now quite nicely, but at one point, that was also significant. So you had some companies trying to move over to SOFR or new loans getting issued off of SOFR, which was different than LIBOR. So CLO equity was down, I think the market maybe got a little bit spooked by the October payments, but that was kind of a low point in the -- or the bad point, in my opinion, of the mismatch between the multitude of rates in a CLO ecosystem. -- by this summer, I believe, essentially everything will convert over to SOFR. So we won't have the LIBOR SOFR dynamic anymore. And as I mentioned earlier, the 1-month and 3-month LIBOR differential is closing pretty significantly. We still got more wood to chop there, but the 1-month, 3-month curve is getting tighter. I mean we can see this in our cash flows. Our January cash flows were about $40 million. I gave the exact number here. It was -- let me find -- what did we collect -- was it 40 --lets see -- cash flows are up a bunch. We were...

We were in January.

Yes. So $32.9 million for the fourth quarter and January cash flows were up over -- up about 10% from all of the fourth quarter. And as we forecast out cash flows for future periods based on where rate the rate curve is -- and this is really just the 1-month, 3-month curve, we don't care about the 5-year curve, 10-year curve doesn't impact us, has moved up, has tightened significantly. So I think people are looking at all the economic uncertainty, what the payments are way down on these CLOs, there must be some big problem. I think that was a lot -- a big driver of the price movement. And certainly, you can see as the as the payments came in, in January and will what I know our NAV is up about 7% in January. So perhaps the drawdown was attributable a lot to that cash, and I think we'll see even better cash flows in the second quarter.

That's helpful. A couple of more questions, Tom. Did you have any meaningful CLO positions failing their tests? And what is the portfolio's average CCC bucket?

Yes. Let's see. The average CCC -- let me go pull that up. I know I said that, and then we are at -- let's see 5.4%. And then if you look at our investor presentation, let's see, this is going to be -- we've given on a deal-by-deal basis on pages, let's see 25 and 26 of our CCC concentration there such tiny numbers -- that's 6.11%, and that's as of the -- let's say, that's the most recent reports we have. So it will be later than the year-end numbers. So...

Yes, I'm sorry, I should have seen that. I'm sorry, I didn't realize that...

So that's... Our CCC cushion and then our junior OC cushion that is a 4.12 number. And if you look, you can see deal by deal, there's a handful that are negative. These are typically older or smaller physicians that are out of their reinvestment period. But it's -- I'm just looking -- I'm scrolling through the portfolio. I see 3 negatives at this point. One, just a hair negative, but 2 very slightly negative, one more significantly. But you can see quite a few of the bigger positions, the kind of the bigger dollar positions looking at junior OC cushion, plenty of them still have 5% which is good. You can never have -- and you can never have too much OC cushion. That's no CLO manager has ever said they have too much OC cushion. There's always a trade-off. And when we're involved in the structuring of CLOs, we like more versus less, the trade-off is, at some point, if you have too much cushion, then you start getting a less optimal capital structure. So it's always -- it's a give and get. We typically structure 10% more cushion than the market, if I had to say judgmentally, -- and I think that's money well spent. In theory, we can put in double the OC cushion in the market. I think that would be money, not well spent. But overall, one of the things we look at when we monitor and evaluate collateral managers and bring new ones on to kind of our approved universe or those we seek to eliminate. I guess, at the same time, their ability to manage OC tests and CCC buckets, but particularly OC test is something very, very important. The last thing I'll say about OC test is they -- I used to say they matter 4 days a year. They really only matter 4 minutes of the year at 5 p.m. on the determination date each quarter. It was interesting all year long, but the only time it really impacts us is the proverbial 5:00 p.m. on the quarterly determination dates. And the nice thing about that is you know when those are coming. So if you're a CLO collateral manager and now you're getting a little tight on the OC test, there's techniques you can do to keep things on site and quite a few of the CLO managers we work with kept all or substantially all their deals in the reinvestment period on site during the financial crisis during COVID. So folks know how to do it, I think, pretty darn well.

Yes. I think the market may not understand that this cycle is very different than the COVID cycle, and it gives managers an opportunity to do their job more effectively. Tom, just one last question. What drove the realized losses or the net realized losses on investments this quarter?

Sure. Something we've done and we have done this at the fourth quarter and 1 or 2 prior years. Basically, it's a reclassification from unrealized to realized. -- maybe Ken you want to expand on that?

Sure. That's a good [indiscernible] from the previous comment. So we analyze our positions on a periodic basis to see if there's any permanent impairments. -- permanent impairment being we walked the position down at fair value, but the amortized cost is still where it is. And what we effectively do is move the unrealized loss to a realized loss and recorded above the line. And of the 3 positions that Tom mentioned that have negative OC cushion, 2 of them were the 2 that we wrote down this quarter, Marathon 6 and Marathon 10. In addition to the negative OC cushion, both of those physicians are outside the reinvestment period greater than 1 year and they obviously have negative effective yield. So those 3 factors allowed us to determine that future recovery was improbable, and we just recognize that loss in income moving it from an unrealized to realized.

But that was already full factors have, so not a NAV event, just a...

Yes, it's not a NAV event. And if I'm understanding you correctly, you actually didn't exit those positions. This is more of an accounting treatment. Is that correct?

Correct. Yes. So let me get into a permanent impairment situation. We recognize that above the line.

Right. And Tom, I just thought -- I wanted to circle back, and I apologize for all my questions, but the markets are obviously so volatile. So folks have a lot of questions on their minds. You talked about cash interest coverage ratios, and that's certainly come up in a lot of earnings calls. And -- if I were to sort of paraphrase what I generally would hear was that perhaps in the middle market prior to the Fed tightening, those cash interest coverage ratios were north of 3% and maybe in the upper middle market and the syndicated loan market, it was better, perhaps 4 or 5. And those numbers would roughly drop in half based on the forward curves. But apart from tail risks, the consensus was that balance sheets could absorb that higher interest expense. And let's not forget that the forward actually shows rates going down in the not-too-distant future as the economy slows. So is this phenomenon you're describing more of a tail risk perhaps concentrated in borrowers that have more highly levered balance sheets and maybe less recurring revenues? Or is this something a theme that you're seeing more broadly?

Let's see, every company is facing higher -- [indiscernible]with flow any company with floating rate debt is facing higher interest expense. So that's market-wide. In our deck, the same deck I had referred to earlier, if you go out to Page 32, and let me actually go to 33, and then I'll come back to 32. 33 is something that really -- and this shows the annual year-over-year change for revenue and EBITDA for below investment-grade companies that are public issuers within the S&P/LSTA leveraged loan index. So it's not -- this is not the full market by any stretch, but at some set of data. And again, this doesn't get a lot of headlines, but revenue and EBITDA are growing at double-digit percentages. So that's good. Let's start with that. So we're not -- now this is an average. Some companies are up, some companies are down. But overall, you don't usually think of Financial doom when revenue is up 15% and EBITDA is up 14%. So those are -- that's a good starting point. But then flip back a page to Page 32, and this -- if you look at the top right chart, this is the average interest coverage multiple for outstanding loans. And if you look at it, it actually shows 6x -- that's kind of the highest ever on that chart. But that's not factoring in, and that's for outstanding. You can see newly issued down below, was lower. What that is, though, is that's -- I believe that's trailing 12 months.

As of the third quarter...

So if I share that, [indiscernible] is great. Mickey, there's no problems in the world. The reality, what we know is that includes not bad data, but not applicable data and it includes LIBOR at less than 1%. -- for a while. So the key takeaway that I think people look at the newly issued loans. You can see that's down to what is at 3.3x, down in the bottom right-hand corner, the interest coverage. And that's trending downward in aggregate.

But it's not historically particularly low. I mean... That's my big[indiscernible]

It's headed in the wrong direction. If you think about that 6x for the overall market. And again -- or that's just a subset of publicly reported companies, which is not the full market by any stretch. It's about $200 billion or $190 billion of loans. So it's a bunch, but not -- nowhere near all. but mindful that includes a year ago data in there. It's not great, in my opinion. This is where companies are going to trip, Mindful of these numbers are averages as well, some above the media some below or mean. But it's not the armageddon that folks are talking about. And certainly, when you couple it with the increase in revenue and EBITDA, that's the #1 mitigant all problems is increasing EBITDA, obviously. So there will be some problem, but it's not going to be as bad as I think the doomsday sayers, are saying. And if the... Right, the price of loans should fall significantly. And having 3 years on our remaining reinvestment period will -- while our marks will nearly certainly be down on that day, then the reinvestment option within our CLO gets far more attractive.

Right. And this is why in terms of lack of -- you don't think we're in a doomsday scenario. That's why you're actually expecting your cash flows to at least this year remain robust. Would you agree with that?

Yes. No question about it. And... Defaults really impact the terminal value loan defaults, even without par building from other reinvestments really just impact your terminal payment, your terminal value of a CLO. It doesn't have that big of an impact on the ongoing cash flows. So in January are up quarter-over-quarter. So that we can always have as our cash flows are up. So...

Thank you. Our next question is from the line of Paul Johnson with KBW.

Most of my questions have been touched on, but kind of just I guess, adding into the discussion, the points you hit on with Mickey's questions and everything you sort of described. I was just wondering maybe your kind of overall thoughts on the current vintage of CLO creation just given the obviously strong surgeons in that market and what seems to be more attractive terms in the loan markets as well. So just any kind of thoughts there would be interesting to hear.

Sure. New CLOs think, let's just put it right out there. The with very limited exception. It's -- the new issue dynamic isn't great today. I think ECC has been involved in 2 new CLOs in the past 6 months, plus or minus in each of those, there were some supplemental economic drivers that with further inducements to participate in new CLOs. -- frankly, substantially all of our portfolio activity and CLO equity. This is across all of Eagle Point has been in the secondary market where we're able to pick things up, weighted average yield of new things we put in the ground, high teens, low 20s over the last 6 months in the CLO equity market on a loss-adjusted basis -- so that's where we're putting most of our investment dollars to work today. There's not enough good opportunities in the secondary market. There never will be, I guess, we'd always like more, but that's, by and large, where we're finding the most attractive parts. Why is that? So AAAs rolled the clock back a few months ago or $2.25 to $2.40 over and the rest of the stack even commensurately wider. That's certainly come in a bunch, kind of, I don't know, 175 area type context, which is in radically, if you talking of AAA or in 50 bps, that'd be say that's great news. The bad news is loans are up a bunch. And it's a little bit out of whack right now, the arbitrage for new versus used. But it doesn't really matter. I mean, we obviously love a robust new issue market. We have no problem finding opportunities in the secondary market when we'd like. I shared the stats earlier, we put in the ground already this year -- about $41 million into -- so far in the first quarter, we have deployed an additional $43.1 million net capital into CLO equity and other investments. So the opportunity set does ebb and flow a little bit, but right now, substantially all of our focus is on the secondary market. And absent extraordinary unusual circumstances, we don't think the new issue market is attractive today. That said, it can turn on a dime. We did a whole bunch of stuff in May of 2022, and those CLOs did great. They made big first flush payments in January. So that's great. We love it. And that the tide will turn again, and we're able to pivot very nimbly between the primary and secondary market. To that end, we have a handful of loan accumulation facilities kind of in early formation stages at this point, a little bit of capital in them, not a lot, but it's frankly getting us slots in collateral manager pipelines. In many cases, we're able to command even more preferential fees today, see pre-breaks than we normally do simply because we're willing to set things up, and it's basically just kind of buying a reservation at this point. But the market will turn at some point, and we're positioned to capitalize on that just as we are focused on secondary right now.

It's very interesting. And I guess one of the things you mentioned, I was curious if you could talk a little bit more about on the call with the SRT Bank balance sheet CLO transactions that you did this quarter. I'm just curious if you could just explain that a little bit further in what you find, I guess, attractive with it if it offers better economics, better deployment opportunity. I'm just curious to hear what you have to say there.

It's a market we've studied for quite some time. We might have had 1 or 2 little positions in the -- around over the years in the space within broader Eagle Point. What makes these interesting is these are -- the things you look for is that these are sort of a core lending operations of the bank. These aren't like discontinued operations where the bank wants to shed their risk. It's kind of a situation where they say, this is something -- this is an important business. We're probably growing it, which typically means they're making a lot of money on it, but they might not -- they might need more capital. And it's basically a way for banks to get stealth capital into their balance sheet without having to go do an equity raise in the common stock market. So for them, it's taking good stuff, taking and selling a pro rata piece, keeping a lot of risk themselves, but kind of just getting more capital in their system. That's their motivation. And a key thing we look at when we're making investments in this space is making sure these are core operations for the bank, not some legacy stuff or something they took over via merger. What we saw in the fourth quarter was demand from other investors, other funds that typically invest in securities like these. They had dried up and all of a sudden, kind of the, hey, what would it take to get a ticket done with you guys kind of picked up. One of the other nice -- so that was good, all of a sudden, when you're getting that second call, that's a proverbial second call. That's always a very good sign. And then one of the other nice things about these is there's no concept of a AAA market and that the banks are already funding these themselves. And the way this paper is quoted, it's a Coupa stated coupon to the residual tranche, which we're owning and we're not having to go deal with a bank or insurance company to place AAAs. So it's a very a very elegant solution for the issuers they're getting some degree of capital relief for us as an investor, we're investing alongside the bank, subject to strict NDAs. They provide us with their track record and typically 20 years of plus of loss experience. So to the extent they've been in the business is that long. And these are typically their crown jewel assets, in my opinion, and then overlay the attractiveness of not needing to deal with the AAA market very good. And then frankly, these are assets that I think are a little more stable from a valuation perspective compared to CLO equity and CLO debt, which trades more rapidly, frankly, than the SRT transactions. So of course, we'll fairly mark everything. But what we see is having been involved with the assets for a number of years, they displayed less price volatility. -- than broader CLOs. So it's an interesting mix. I don't anticipate it being a very large part of our portfolio, but it presented some interesting opportunities when few others were buying. And frankly, we had cash available. Just another form of CLO typically with higher quality underlying assets, if anything.

Yes, very interesting. Thanks for that, Tom. That's very interesting. My last question, you guys had around $0.04 or so of excise tax this quarter. I may have missed a spill over a number of you -- you gave it on the call. But I guess with the large distributions that you guys paid out in the fourth quarter and then as well as the supplemental that you guys declared for this year. I mean, do you expect that to be, I guess, enough to kind of clear out the spillover income for any sort of additional excise tax expense like you took this quarter? Or do you, I guess, expect to be carrying over some levels to later here, you'd be taking a similar charge again this year.

Well, so a couple of things around that. One sentence I did say in the call, management expects to continue monthly variable supplemental distributions for the balance of the year, though actual timing and amounts of distributions may vary. So we -- that certainly remains the case. Cash versus GAAP versus tax and CLO equity is the great mystery that will never be resolved. We have a presentation on our website from, I think, 2015, which lays out a representative transaction. And over the life of an investment, cash profit, GAAP profit and tax profit substantially all equal. There may be a small bit of nondeductible stuff for tax. By and large, it all equals, but in my experience, it never equals in any given year. If you look back in our history, we've had years with almost no taxable income where our common distributions, the vast majority of which were return-of-capital because there was no taxable income, even though we had GAAP earnings perhaps and other years where we have losses on GAAP but gobs of taxable income that when -- and it's very difficult to predict because even if everything is going swimmingly, tax outlook can change and a bunch of losses could be realized in the last month of the tax year. So even if you're predicting accurately along the way, kaboom, the last month, things change. So when we do this, we take the reserve or the charge the expense, and it was $0.04 for ECC took that you only really take that once a year kind of when you're at the end of your taxable year and you make your best estimate of what your taxable income will be. So it's not something I would struggle to see us having any -- we might have a $0.01 or $0.02 of adjustment to that as we get the final numbers in but I would struggle to see another excise tax of any note prior to this time next year. Would that be fair, Ken?

Yes.

Okay. Just Ken is looking at me and smiling, and it's been much higher in some periods, much lower than others. And honestly, some of the reason we went to kind of the little a couple of extra pennies a month was trying to reward long-term shareholders. Obviously, everyone loves a $0.50 special. That's a nice way to start the year. I'm a shareholder. It's nice to get as well. But we certainly -- we're long-term investors, and we like to reward long-term investors, and we thought what might be a better way to kind of handle the variability of the spillover income, which is still our best estimate, not definitive to keep -- is to kind of pay it out on a monthly basis like that. We will revisit that number each quarter, so it could go up or down. But our plan is, at this point, we'd expect things for the rest of the year.

[Operator Instructions] Our next question is from the line of Matthew Howlett with B. Riley.

I just want to look -- the capital deployment, it looked like it was a sort of lag you raised money through the ATM in the fourth Q, fourth quarter. It looked like a lot of it got deployed in January, obviously. So was there a drag, if you will, on the $0.40 adjusted NII, we look at NII going forward and look at what could be run rate? I'm assuming that it's a bit higher given the lag in capital deployment.

Yes. Usually have very long answers, but it's just yes. It's a dilemma, you raise capital, you raise capital at a premium the day when there's the best opportunities, it's the hardest time to raise capital. So it's a -- it's an art, not a science, the relationship between the 2. And there was probably -- there were fewer opportunities than we'd like in the very end of the year. You never know. Sometimes there's year-end specials this year, there weren't. Turned out January proved to be the most ripe time for deployment. We try to be measured on the ATM. If you think about $0.12 of NAV accretion, that's almost 1 month of distribution kind of covered through that, which is obviously nice. But there -- we had over 5% cash. If I had to judgmentally say it. So yes, there was some drag in that 40% for sure.

And then when I look at -- when I look at the -- what you've done post year-end, the 2.6 million shares of common, and now you -- looks like you're tapping into the Series D. I think that's trading around a little bit over an 8% yield. When I look at that going forward, I mean, how -- I mean, can you -- where purchase yields are today in the secondary market or that new sort of synthetic incidence, I mean how -- I mean, how accretive is this -- the sort of -- you can now issue a little bit of preferred now that your leverage is down to continue to issue TAM above NAV. I mean this is -- is this all accretive to NII? I mean we look going forward in our model is can we just say this continues, they're going to put things on it high teens and your cost of capital is somewhere at low double digits or something? I mean how should we think about the accretion to NII through the capital markets at this point?

Yes. So we look at our cost of capital on a blended basis. There's debt. I mean, we have those 5 3/8 Vs, and I wish we had more of those. And basically, treasury is flat at this point or nearly all the way through perpetual preferreds, and I wish we had more of those and obviously common. Then we look at the weighted average stack, and we kind of said we -- I use the midpoint of the range kind of the 30% is kind of where our bogey is. And if we're raising new equity capital, I know what the distribution is and I factor all that in and we look is are we going to be able to be both NAV accretive, that's easy math with raising. And can we deploy the capital within a reasonable time frame on an income neutral to accretive basis. And those are kind of the governors that we look at around each of these. So our -- including all the expenses of the company, it's a mid-teen -- a little bit of mid- to mid-upper teens kind of blended cost of capital right now. And many of the investments we're able to find, not every single one, but quite a few of them are in line with or above that, which would suggest NII accretion. That said, it's a portfolio approach. Some investments are going to be higher-yield, some are going to be lower-yield. We can't just buy investments that are above the average because eventually, you find your way into too high of a risk portfolio risky portfolio there. But we look at it carefully between the -- between at some point, the premium is so great, you just issue. At the same time, if you don't think you can service that distribution that you're due when you issue it, then you got to be very careful. So it's an art around this, but it's something we're very conscious about. And being long-term investors, while we always want the maximum earnings per share and NII in any given quarter, I said this earlier, the day that stuff is being sold and given away is probably not the best day for us to be issuing new common stock. So sometimes there's a little -- there is going to be a little bit of mismatch in that the day you can raise capital is probably not the day -- not necessarily the best stage to deploy it, but the day that is the best day to deploy is probably very tough to raise. So it's a collage of all of these factors.

Got you. And without asking NII, asking you for NII guidance, I mean, I'm assuming when you look at setting the dividend, the board -- you look at being learned out on a GAAP basis going forward and look at sort of what your run rate is and thinking that when the dust settles that you're probably above -- you're probably in your sort of the mid-40s where you were ex these sort of onetime expenses going forward when things sort of shake out.

Yes. I mean, obviously, we have to be very careful on NAV guidance or NII guidance. Obviously, you can see the yield of things we have in the ground today.

And also another dynamic to consider is cash flows that the portfolio, recurring cash flows from our CLO equity portfolio, if they're down in one quarter the subsequent quarter, the weighted average effective yield of the portfolio would also be down because of the amortization of cost that recalibrates the effective yield on a prospective basis. So something to Tom's point is not only capital issuance, but the stuff we already have in the ground also needs to be considered for NII.

Got you. That makes sense is on accounting in Great. Got you. And I guess the second question is, you gave some sort of some sensitivity. I was reading your letter about sort of the every 0.5% improvement in the junior OC could -- I think it was 20 bps improvement can withstand 50 bps of extra defaults. Is that -- could you just remind -- I mean that would assume that you could -- CLOs could easily withstand a 3% default rate. I mean what was that sense -- can you just remind us of the sensitivity?

Yes, sure, sure. Yes. And just to frame it, again, just looking at our average CLO, and this is on Page 26 of the investor deck. Our average OC cushion is 4.12%. So let's just say all CLOs were 100% average. We could have 4% default and 0 recovery on our average CLO, assuming the collateral managers should no other corrective actions and to our average CLO, wouldn't cut off the equity distributions. Now the sensitivity we use, it kind of depends on what recovery rate you want to assume. Let's assume 60% recovery for loans just as for a point of illustration here. So again, holding all else constant in a portfolio, if we had 1% default at 60 recoveries, you lose 40 basis points of par. So that would suggest at that math, on our average CLO, we could have 10% default at 60% recovery and still only decay 400 bps at par so we'd still have some OC cushion left. Now in the day where 10% of corporate America is defaulting, CCCs are probably up, which could go over the 7.5% threshold that could start to hurt the numerator even further. Against that, hard to see a scenario where loans are at par on the day where 10% of corporate America's defaulting such that the other little secret in CLOs is pretty much anything you buy over 80 is going to count as 100 in the OC test. So you can buy discounted paper, which again, in the picture of the world in March and April of 2020, loans -- many good loans were in the low to mid-80s, these are the kind of things that you can buy and build a ton of par very, very quickly. And again, these OC tests only matter 4 minutes of the year. You know when the test is coming, there's no surprise test. So you've got the ability when you're managing a CLO to prepare and pounce when and position your portfolio such that you're passing the test even if it's potentially a close call.

And I guess that's why it's so important that the managers -- I mean, there's tiering, right? Obviously, there's some managers that do this better than others, correct? And that is somewhat priced in when you buy the equity. Is that -- is there still, I guess, tiering among the managers?

Yes. Absolutely. And tiering is probably greater than it's ever been. The flip side, the tiering is principally driven based on the AAA investors' perception of the riskiness of what a collateral manager does, not necessarily their prowess in delivering equity returns. So there are some collateral matters I probably don't want to, on a recorded call, get into naming them, but in our portfolio that the market might consider a Tier 2 collateral manager. But from a "knows how to deliver IRR to the equity", we unambiguously call them Tier 1. So there's -- and so what that comes to is a challenge like when issuing a CLO, if you're a Tier 3 collateral manager, it's very expensive to find a AAA bid if you're issuing a new CLO today. At the same time, the secondary equity might be very cheap, and they might have gotten the AAAs done in 2021 when the market was on fire and open and you could get stuff done. So we're -- with very few exceptions, there's no bad bonds, just bad prices, but -- and there's a few bad bonds perhaps in the market. But by and large, we're going to focus on collateral managers who have a proven track record of generating returns to the equity, which, in some cases, does line up a Tier 1, what the market would commonly call Tier 1, but by no means dollar-for-dollar.

Well, great. I think you do a great job orchestrating and explaining what very highly complex assets, certainly for equity investors. So I think I certainly agree that there's a lot of value in the CLO equity that I think is just misunderstood by the market.

Thanks Paul -- thank you, Matt. Well, I mean what I think you out, what I can tell you when you look at our portfolio over 8 years, it's been up, it's been down, markets are left and right, trouble here, trouble there in China, COVID, the portfolio just keeps generating cash flow. And I mentioned that in the call, if you invested at the IPO, you've got over 90% of your money back in distributions, and you still own the company. And we expect to cross 100% soon. And that's the name of the game. And to the questions of if you look at the cash generation of our portfolio, that's the that's the real thing that keeps going -- there's going to be up, down. There's going to be higher defaults, sometimes lower defaults, but the cash has at least historically had a pretty good habit of continuing coming, and we expect that to continue.

Our next question is from the line of Stephen Bavaria, with The Income Factory.

Congrats for your great work on both your funds. Quick question. I see that you've managed to keep your reinvestment average -- reinvestment period out to 3 years, which is great. And we've talked so many times about how CLOs really make out great when they can continue to collect at par and then reinvest at market discounts in the secondary market on new loans, which, I guess, has certainly continued during the past year. And I guess, rate discounts have shrunk a little bit, but you're probably still got good prices in the secondary market. So my question then is what happens like on an individual CLO when its reinvestment period runs out and now it has to start taking those repayments and paying off its cheapest debt first. At a certain point, its margin, obviously, shrinks and shrinks and could even disappear as it's only funding itself on its most expensive debt. So at that point, I assume that CLO has to sort of start selling off its assets into what may be a declining market. So the advantage you have when you're reinvesting now turns into a disadvantage if a CLO is disinvesting, so to speak, at the end of its life. And so if that's -- if I'm assuming that correctly, so a -- an individual CLO sort of turns into an annuity at a certain point. But are you confident that you can continue to sort of asset-manage the entire fund in such a way that you'll always have a positive reinvestment period so that the fund itself never turns into an annuity as opposed to the individual CLOs that are in it? Does that makes sense?

Yes. No, it's a very good question, Steve. We certainly value reinvestment period, probably more than the average investor in the market. I think we're right, obviously, or we wouldn't do it. But there's no one in -- who manages a CLO who said, "I have too much reinvestment period." I don't think that's ever been said. And mindful you can always call a CLO if after the non-call period, if it makes sense to call the CLO if your debt costs are too high. In general, we're going to continue seeking and even in -- while most of the new things in the ground have been from the secondary market, we focus on CLOs with longer remaining reinvestment periods even in the secondary market. And so every quarter, we face a quarter of decay, if we just sat on our hands that 3-year measure would be 2.75 at the end of the next quarter. We will do everything in our power to make sure that doesn't happen. I can't assure you what will happen, but we will try our best to find long paper to keep putting it into ECC such that it keeps its life going -- its weighted average remaining reinvestment period longer. It got down to the low 2s at one point. I don't know if we have a chart of it in here. I know I've seen one somewhere. We might not have it in the deck, but we certainly publish it every single quarter. And you can see it even probably on our monthly tearsheets, of what that reinvestment period is at any given time. It did get down to the 2s, at some point in the last few years, but we were able to get it up significantly. And that's a key part of our portfolio management approach for ECC. To your second -- the other part of your question, how does it work within a given CLO? So let's say, a CLO ends its reinvestment period. What happens then, the end of the reinvestment period is a name. It's not a hard rule. There are many CLOs, the ability for the collateral manager to keep reinvesting certain --oh, there it is, I apologize. We've got it right here, Ken has it. It's page sorry, it's -- I have an internal chart of it. It did get the reinvestment weighted average remaining reinvestment period got down to 2.3% in Q1 of 2020. That's the lowest it's been since Q1 of '17, which is as far back as this chart goes. We do include the stat every month in the monthly tearsheets for the fund. So you can go back and see the data. Again, we're at 3 years right now. Within the CLOs, when it gets to the end of the reinvestment period, there actually are provisions that allow the collateral managers to reinvest certain amounts, certain unscheduled proceeds, even after the reinvestment period, there's additional criteria. It has to be the same or better rating and maturity has to be same or shorter of the loan that paid off, but there's some ability to keep reinvesting after the reinvestment period, but it does get more limited. To the extent there are -- there are more paydowns than reinvestment opportunities, then indeed, you're using principal dollars to repay your AAA, your lowest cost of funding. So now you're delevering and your cost of capital is going up. So that's bad. And then the question comes about, but you're never forced to sell, and that's important. So the nice thing is every CLO will -- will either be -- or we would expect to either be reset or called. If we can't -- don't think we can do either of them, we might just sell the darn thing. But what we would expect is we control when we get to the call or reset option. Obviously, there's a non-call period and a typical CLO, 2-year non-call, 5-year reinvestment period, 12-year legal final. And the increase in cost of debt and the delevering kind of really becomes a little more painful maybe 1 year after the end of the reinvestment period, so kind of in year 6 of a CLO. So what that means is we have a window of 4 years when the non-call period ends the kind of reinvestment period plus 1, where we get to make the decision, do we call this? Do we reset it, if we call it, you sell the collateral into the market, you get the best price you can pay off the debt, you reset it, lower your -- hopefully, lower your cost of funding, lengthen the weighted average -- get a new 5-year reinvestment period. We did that in spades in 2021. But the nice thing is we've got kind of a 4-year window for nearly every investment in which to make that decision. And I don't know what the future is going to bring tomorrow. I'm reasonably confident at some point in the next 4 years, there's going to be an attractive time to do these things. And just like in 2021, it was refi, reset mania here at Eagle Point. I mean we did dozens of them -- the refi, reset departments pretty much had the year off last year, certainly once the Ukraine stuff started. But it will turn back on again. I don't know exactly when, I'm but highly confident it will. And we're able to pivot our actions, be it new issue, be it buying secondary, being refi or reset, wherever the market opportunity is. But what's so important is we've got -- it's not like we're betting on one specific day like we got a low -- if we had like a fixed maturity and there was no ability to do it early, we had a bullet maturity, that would frighten me. We've got this 4-year window. We're going to find the right time for every one of those. And even if we don't, it just gets a little more expensive to hold and cash flows would go down a little, but not in a situation where -- we're never a forced seller, and that's such an important part of our CLO investment program.

That's very important to a lot of your retail investment base. I appreciate that reassurance.

Gladly. Perfect. Thank you, Steve. Okay.

As there are no further questions at this time, I would like to turn the floor back over to Thomas Majewski, for closing comments. Over to you.

Great. Thank you very much, everyone, for your time, interest and questions. Ken and I appreciate everyone's continued interest in Eagle Point Credit Company. We're going to do it again and Lena and I are going to do it again with a new participant in 13 minutes for Eagle Point Income Company. If anyone would like to join, we welcome speaking with you then. Thank you.