ECC - NYSE

Greetings, and welcome to the Eagle Point Credit Company's Fourth Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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, Garrett. 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. As a reminder, before we begin our formal remarks, the matters discussed on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. For further information on factors that could impact the company 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 2023 audited financial statements and our fourth quarter investor presentation with the Securities and Exchange Commission. The financial statements and our fourth quarter investor presentation are also available within the Investor Relations section of the company's website. The financial statements can be found by following the Financial Statements and Reports link, and the investor presentation can be found by following the Presentations and Events link. I would now turn it over to 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. I'll start off by saying that the company had both a strong fourth quarter and a great 2023. For the year we generated a GAAP return of equity of 20.79% and a total return on our common stock, assuming reinvestment of distributions of 18.92%. We believe our portfolio remains well positioned for 2024 and also that our portfolio has room for continued upside. The right side of the company's balance sheet is also positioned very well. Some highlights from the fourth quarter include that our net income and realized capital gains totaled $0.33 per common share. We received recurring cash flows on our portfolio in the fourth quarter of $60.7 million, or $0.82 per common share. This exceeded our aggregate common distributions and expenses for the quarter by $0.14 per share. NAV per share as of December 31 was $9.21. And this is a modest decrease from September 30, but up 2% for the full year. During the quarter, we paid $0.48 per share of cash distributions to our common shareholders, taking the distributions with record dates during the year to $1.86 per share. During the quarter, we continued to actively manage our portfolio opportunistically deploying $34 million in net capital into new investments that we believe will increase the earning power of our portfolio over time. Along with our overall portfolio performance, we continue to prudently raise capital through our at-the-market program, and issued approximately 4.5 million common shares at a premium, generating NAV accretion of $0.03 per share during the quarter. As of December 31, the weighted average effective yield of our CLO equity portfolio was 16.7% based on amortized cost, and this is an increase from 16.29% at the end of September. The new CLO equity that we purchased during the fourth quarter had a weighted average effective yield of 22.9%, which should help bolster the portfolio's weighted average effective yield prospectively. The company also had a number of meaningful subsequent events that I would like to highlight. We estimated our NAV at January month end to be between $9.22 and $9.32 per share, and that's an increase from yearend. Along with our regular monthly common distributions of $0.14 per share, we also declared additional variable supplemental distributions of $0.02 per share for aggregate monthly common distributions of $0.16 per share through the end of June 2024. I also want to highlight that inclusive of the January 31 distributions, we've now crossed an important milestone and the cash distributions paid to our shareholders have now totaled $20.15 per share since our IPO in 2014. This means a shareholder who invested in our IPO less than a decade ago has now received over 100%, a full return of invested capital of our IPO price in the form of cash distributions while still owning their shares in Eagle Point. We are immensely proud of this milestone and the value that we have created for shareholders. During the first quarter, we were also pleased to be able to further strengthen our balance sheet, raising an additional $47 million of net proceeds through the issuance of a new Series F term preferred stock due in 2029. Consistent with our longtime strategy for operating the company, all of our financing remains fixed rate, and we have no financing maturities prior to April 2028. In fact, some of our preferred stock financing is even perpetual, with no set maturity date. We continue to focus most of our investment efforts in the secondary market during the fourth quarter, as the yields and convexity available in the secondary market offered, in our view, better risk adjusted returns than the primary market. We remain focused on finding opportunities to invest in CLO equity with a generally longer reinvestment periods remaining. As a result of our consistently proactive portfolio management, as of December 31, our CLO equity portfolios weighted average remaining reinvestment period, or WARRP stood at 2.4 years well above the market average of 1.6 years. As we have consistently stated, we believe keeping our weighted average remaining reinvestment period as extended as possible is our best defense against future market volatility. With a notable increase in demand for CLO triple A bonds, we're starting to see a pickup and reset in refinancing activity within the CLO market. We expect to be active in completing resets and refinancing where attractive in order to further increase our portfolio's weighted average remaining reinvestment period and potentially lower our CLOs cost of debt. For the first time in a while, we're also seeing an increase in attractive new issues, CLO equity opportunities, several of which we're pursuing. Before turning the call over to Ken, I'd like to take a moment to highlight Eagle Point Income Company which trades on the New York Stock Exchange under symbol EIC. EIC primarily invests in CLO Junior debt. For the fourth quarter EIC generated net investment income of $0.56 per share, excluding non--recurring expenses, once again exceeding its common distributions for the quarter. Given our continued confidence in EICs portfolio, we recently raised its monthly common distribution by 11% to $0.20 per share. This is the highest distribution in the company's history. EIC has performed very well over the last few years and we believe remains well positioned to continue generating strong net investment income. We invite you to join EIC's investor call at 11:30 am today, after this call, and to visit the company's website, eaglepointincome.com to learn more. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets. I'll now turn the call over to Ken.

Thanks, Tom, and thanks to everyone for joining our call. I'll start off by reporting for the fourth quarter of 2023, the company recorded net investment income and realized gains of approximately $25 million or $0.33 per share. This compares to NII and realized gains of $0.35 cents per share in the third quarter of 2023, and NII less realized losses of $0.29 per share in the fourth quarter of 2022. When unrealized portfolio appreciation is included for the fourth quarter, the company recorded GAAP net income of approximately $27 million or $0.37 per share. This compares to GAAP net income of $0.93 per share in the third quarter of 2023 and GAAP net income of $0.17 per share in the fourth quarter of 2022. The company's fourth quarter GAAP net income was comprised of total investment income of $39.4 million, net unrealized appreciation on investments of $10.1 million and realized capital gains of $0.2 million partially offset by expenses of $14.1 million net unrealized appreciation on certain liabilities held at fair value of $8 million and distributions on the Series D preferred stock of $0.5 million. Additionally, for the quarter ending December 31, 2023, the company recorded another comprehensive loss of $1.2 million. The company's asset coverage ratios at December 31 for preferred stock and debt, calculated pursuant to Investment Company Act requirements were 371% and 551% respectively. These measures are comfortably above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 27% of the company's total assets, less current liabilities. This is towards the low end 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 distributions for the second quarter in line with our recent distributions. We will continue to review our variable supplemental distribution on a quarterly basis. Moving on to our portfolio activity this year through February 15, the company received recurring cash flows on its investment portfolio of $50.4 million. This is below our fourth quarter recurring cash flows, as there were higher loan prepayments in the fourth quarter of 2023, which caused a short term buildup of cash on some of our CLOs. In addition, some semi-annual paying loans and bonds and our CLOs underlying portfolios will not make payments again until the second quarter of 2024, which also contributed to the decline in cash flow. As these items are generally timing related we expect portfolio cash flows to be higher in the second quarter, all else equal. I will now hand the call back over to Tom.

Thanks, Ken. I'll now update everyone on the loan and CLO markets. In 2023, the Credit Suisse Leveraged Loan Index generated its best performance in nearly 15 years. It was actually a second best performance on record, with a total return of 13.04% for the full year. The index has continued its positive performance into 2024, and as of February 15, loans were up about 1.14%. During the fourth quarter, we saw only four leveraged loan defaults and that's down from six in the prior quarter. As of yearend, the trailing 12 month default rates stood at 1.53%, remaining well below the long term historic average of 2.7%. While some research desks believe the default rate will rise modestly in 2024, nearly all were completely wrong in 2023. And we believe that typical loan borrower has far more tools in its toolkit to manage their balance sheet than the average researcher gives credit to. While defaults may actually increase in 2024, we don't expect a spike and believe many forecasters will again miss the mark. During the fourth quarter, approximately 5% of all leveraged loans, or about 21% annualized repaid at par. This represents a modest quarter-over-quarter increase, and importantly provides our CLOs with valuable par dollars to reinvest in today's discounted loan market. With a large number of high quality issuers continuing to trade at discounted prices, CLO collateral managers remain very well positioned to improve underlying loan portfolios through relative value trading in the secondary market. Loan repayments make this even easier. Additionally, most loan issuers remain very proactive in tackling their near term maturities in an effort to further extend the term of their debt. Some borrowers even offer lenders a higher spread and new OID in order to lengthen out their maturities on their newly refinanced loans. As a result, our portfolio continues to have numerous opportunities to build par and increase our weighted average spread, which in turn increases the excess spread we receive on our CLO equity portfolio. On a look through basis, the weighted average spread of our CLOs underlying loan portfolios was 3.79% at the end of the year. This is comparable to September, but is a healthy 21 basis point increase over the last 21 months. Meanwhile spreads on debt tranches issued by our CLOs that were locked in 21 months ago, remain unchanged and actually have the potential to tighten if we're able to refinance or reset our CLO debt. Triple C concentrations within our portfolios stood at around 7.4% as of December 31, and the percentage of loans trading below 80 stood at around 4.5%. Our portfolios weighted average Junior over collateralization cushion was 4.28% as of December 31. This gives us ample room to withstand any potential downgrades or losses. Our portfolio's OC cushion remains much higher than the market average, which stood at 3.31% at the end of the year. In terms of new CLO issuance, we saw $32 billion of issuance in the fourth quarter and $116 billion for the full year, once again eclipsing the $100 billion mark. We believe that over 80% of the volume in 2023, however, was backed by captive CLO funds, which are generally less return sensitive than investors like us. 2024 has started off strong, with a very active January for CLO issuance as triple A's tightened significantly. While secondary CLO equity can vary, CLO equity arbitrage has improved enough that the company has invested in a number of attractive new issues CLOs during the first quarter. We haven't done much of that in some time. As we've consistently noted, its 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 very stable financing structure, using par pay-downs from other loans to outperform the broader corporate debt markets over the medium term as they have in the past. I'll conclude the call with the following highlights. We generated net investment income and realized capital gains for the quarter of $0.33 per weighted average common share. We continue to receive robust cash flows on our portfolio in the fourth quarter that exceeded our common distributions and expenses. We sourced a number of new investments with very attractive yields, investing $34 million of net capital during the quarter. Our portfolio continues to maintain a weighted average remaining reinvestment period that's significantly longer than the market average. Our existing regular monthly common distributions and our variable supplemental distributions were declared and continued through June of 2024. We further strengthened our liquidity position, generating NAV accretion of $0.03 per share through our ATM program. And in the first quarter, we generated $47 million of net new capital from the issuance of the Series F term preferred stock. As of February 15 we had about $52 million of cash available to deploy into new investments. And we've been very active in sourcing investments which should provide dry powder. Importantly, we continue to maintain 100% fixed rate financing, with no financing maturities before 2028. And this gives us protection from any further increase in interest rates, and locks us into an attractive cost of capital for many years to come. We have a strong pipeline of primary and secondary CLO equity investments that we're evaluating. In addition, we're carefully looking at many CLOs in our portfolio in evaluating the possibility to refinance or reset them, which if successful, would lock additional upside in our portfolio in 2024. We believe the company's investment portfolio continues to be very well-positioned given our proactive management, the portfolio's weighted average remaining reinvestment period, its strong OC cushions and its high recurring cash flows. We remain opportunistic and proactive as we manage our investment portfolio, always with a long term mindset. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions. Operator?

Thank you. We will now be conducting a question-and answer-session. [Operator Instructions] One moment please while we poll for questions. Thank you. Our first question is from Mickey Schleien with Ladenburg. Please proceed with your question.

Yes, good morning, Tom and Ken. Tom, I wanted to ask you, how do you see the potential to call deals that are beyond their reinvestment period, and now rotate that capital into the primary market, since you're seeing the economics there starting to make more sense?

Good morning. Very good question. Kind of two pronged to that, certainly later in life CLOs get a healthy review from us. The range of outcomes that we can do either CLOs at past the reinvestment period or even with a year or less to go, our menu of options are pulled, sell, call, reset, or refinance. Selling obviously takes care of it, calling it you get what's left over. Refi just lowers your cost. Reset gives you the potential to lengthen -- reset with a whole new reinvestment period. With the triple A market having come in significantly over the last three to six months, and the price of loans while still trading at discount, up a bunch that optionality has come more into play. Whereas we conducted very few calls and resets last year, it wouldn't surprise me to see that activity pickup. And we're certainly actively looking at it across a number of investments right now. One or two, maybe just lowering the triple A spread and just doing a refi frankly. A couple of resets are being considered. What we do at the proceeds is it might be going into the new issue market. We have done a small number of new issues this year. But there's still plenty of attractive secondary opportunities as well. So the good news is the optionality embedded in CLO equity is more in the money today be it through a call or reset or refi than it was the last time we spoke. And while the secondary market has certainly moved up, since the end of the third quarter, we had a good, very nice fourth quarter and there's still attractive opportunities there. And now we have the added opportunity to invest in the primary market. The primary market is typically bigger tickets. You can buy secondary pieces. It's sometimes hard to deploy $10 million in proceeds in the secondary market. It's possible but it's limited versus new issue majority investing, obviously, you can get more capital in the ground. There's a bit of an inverse yield curve in the CLO market. If you think about like what a typical treasury curve looks like when you are I might have been students at school, the low rates are -- the short rates are low. The 30 year was high and there was some sort of slope around that. CLO equity yields are almost inverse to the remaining reinvestment period and that's something that's brand new, with five year reinvestment periods or something like that might have mid to mid upper teens yield versus something with one year left might have a 25% yield than it generically loss adjusted. So it's kind of inverse, the more time you have on your reinvestment period, the less yield you're going to get in general, but the more optionality you have. So as we look we continue to consider what to do with every single investment, roll the clock back a year or two ago. We kind of thought of things as refi, reset mania here. And we did dozens of them. Last year, again, very few, but this year, it looks like that option is more in the money, and I suspect we'll get -- continue to get things done in that space.

Thank Thanks, Tom. That's very helpful. And if I could just follow up with one question, what do you believe is dry [technical difficulty] were very much out of whack last year. Is it new entrants or old entrants coming back into the market or a reassessment of risk or combination of all the above what's -- how would you characterize all of that?

It's a couple of things, not so much reassessment of risk. But we're seeing some older buyers who might have been off coming back online, both U.S. banks and Asian banks, in particular. We are seeing some new entrants into the market, and then a stat that's often overlooked, a significant portion of the CLO market, the last number I saw was around 40%. But it might be a tiny bit dated, is actually outside the reinvestment period. And depending on how proactive the collateral managers are, assuming they're not very proactive, then indeed what's happening is people hold this triple As are getting paid down and factored down. And to the extent there's resets, refis and calls, they're getting their triple A money back. Some are actually -- some of the triple A buyers are seeking to increase their exposure. Some are frankly, just seeking to maintain it. And if they're getting called, or paid off, and a refi, or reset, they need to redeploy. So one banker described to one of our partners, that there's very, very strong demand for triple As. This was a couple of weeks ago, but we're definitely seeing it across the market with a number of prints in the 150 area, levels that three to six months ago, we would have loved to have gotten to.

Right, great, that's really helpful. Those are all my questions. Thank you for your time.

Great, thanks, Mickey.

Thank you. Our next question is from Matthew Howlett with B. Riley Securities. Please proceed with your question.

Oh, Hi, Tom. Thanks for taking my question.

Good morning, Matt.

Good morning. When we look at the forward curve, when we look at the potential for the Fed to cut at least two times, I think the market is projecting even a little bit higher than that. And then look out in '25, walk us through how we should think about GAAP NII, and more importantly, cash flows. I mean, obviously, in one hand, you get the reset downward. But on the other hand, you could do these resets, your net debt [ph] opportunity, could increase, you obviously could issue debt cheaper. How should we think about a declining -- now it just looks like it's a matter of time -- declining rate environment for ECC, and would you take up leverage? Just walk me through, like, how you guys are thinking about it, how we should think about it from a modeling standpoint?

Yeah. The short answer is, it's much ado about nothing in my opinion. While all we do is yeah, we're a borrower and a lender, all with interest rates. In the old days, LIBOR now SOFR, largely cancels each other out in a CLO. So we -- loans, here we went from zero. We have basically zero or near zero rates a couple years ago, are at around 5% rates today. We can see the equity, cash flow, if you look at it over time in our portfolio, didn't adjust it by share accounting or whatever other stuff like that, it doesn't even move that much in that the bulk of our income distributions that come to us, the CLO equity holders is simply the difference in the spread on the loans versus the spread on the liabilities. Increases in rates have the potential to increase defaults for companies to pay these higher rates. Although, as you heard, four companies that have 1,400 or something like that in the portfolio, defaulted, is not a not a default situation, down from six over the prior quarter or whatever it may be. So there's a little bit of drag there. Probably the best thing going on is the ability for us to start refining and resetting. That's the thing that's going to drive increases in cash flows on the existing portfolio, where we can rip out costs on the right side of the CLOs balance sheet. The flip side, one or two loans have repriced as well, but that's really the exception. If we think back to like 2017, we saw a loan repricing wave. That was bad news for us and loans were getting repriced faster than we could reset and refinance our CLOs play, that there's a very small amount of loan activity on repricing, more activity and optionality for us on the right side of our balance sheet. So those are things we like. Would we take up leverage? Not particularly, I mean, we seek to operate the company within the 25 to 35% band. We've been consistent with that message probably since 2015, when we added the first ECCAs, which we paid off a long time ago. I remember those. We were a little below the target. We got the apps off earlier, might have even been, you or one of your colleagues who suggested we do something like that, although it might have been in the works on the last call. But we got the apps off. And that's a good piece of paper for us. And if you read in the financials, it's not that deep of a market. We do continue to issue a little bit of the Series D perpetual preferred via the ATM as well. Those are kind of trading just looking at the screen right now around right, low to mid 8, type yield. So that's obviously very attractive and we can kind of drift that in as we need it. So we're fixed income investors but the biggest thing that's going to drive is getting our effective yield up and the things that get our effective yield up are getting our CLO debt costs as low as possible for our existing portfolio and continuing to put in very attractive new investments on the balance sheet as capital comes in, and cash flow on our portfolio comes in.

And you have a ten-year now on call. Right, no look, it makes me -- look at one thing where it certainly can matter. You look at Eagle Point, ECC is 18% plus yield, rates are going lower. That's got to be more apparent to a lot of people earning, -- that were 125% on their money market isn't really might take some cash off the sidelines and buy your stock. And that's where I want to go with the next question on, you have this. It's just, we always sort of thought that the excess cash flow over the dividend, think it was -- what was it $0.14 over dividend expenses, this quarter. I mean, at some point it was going to come down, but it's sort of like a high -- it's just the gift that keeps on giving. It's a high class problem. You just have this every quarter, almost like clockwork, and maybe you don't expect it forever. But my question is, how -- at some point, did you have -- you're going to have to pay a special -- do you want to pay a special dividend? You just rather pay an excess tax? Do you have to pay it? Just walk me through how -- you had the supplemental, which is great, but at some point did you have to true everything up because of this just bonanza that's happening with your cash flow or longer -- higher for longer?

Yeah. And again, we're probably the higher for longer type here. But again, that's not going to be the big driver for us. The way we've looked at this, we've evolved our thinking as we learn how to work 10 years, this is our 10th year anniversary, I guess in October. It will be a decade. We've kind of gotten our sea legs, Ken and I, I remember back in probably 2017, we declared a special distribution for the first time. And maybe it was $0.50 distribution, I don't remember exactly what it was, but it was in that context. And the stock went up $0.50 cents the next day. And for the person who bought that stock at 3:59 pm, had no idea, it was a bit of a windfall. And we're just -- I mean, that gives just distributing cash back to the shareholders. But so we kind of came to the view, we did specials a couple of times. It became very predictable what would happen, but it didn't in our opinion, reward long term shareholders. Obviously it got money to long term shareholders, but there was some benefit of invariably, someone got a lucky break, and some guy sold the stock at 3:59 pm, the day before as well. So what we've gotten to is more of this kind of dripping the supplementals out when we need to. We think a $0.14 as the base distribution right now. We've been doing the attitude to deal with spillover income, but to kind of reward people over a longer period of time. We reevaluate this based on taxable income every single quarter. Obviously, when the Board met last week, we extended it through the end of June. But even without that, even at $.14, we think the stock is still a very attractive high earning high cash flowing stock to own in a portfolio. But I think we're going to broadly get away from big chunky specials. And when we have taxable income, we do have to pay out substantially all of our taxable income. We'll try to trickle it out, more of how we've been doing lately, then do those big blocks.

Great. Appreciate that. And look at the high end, no one's complaining, it's a high enough yield.

Yeah. No one's ever complained. The number of happy messages I get when we do a special is great. But we were a long term player. We want to reward long term shareholders and the best way to do that we think is a drip, not a splash.

Great, thanks. And the last one, the new issue market, you made some just comments on them. And what did they help? I know you're primarily looking at the secondary market? But what are your expectations '24 for M&A and new issue? And what's the new kind of -- what's in vogue now with CLO deals? Anything interesting about them structurally wise? Something that that might be interesting? It's new, just give us an update on some of your expectations?

Yeah, so most of the market last year, I think we said this in the prepared remarks, our estimate is about 80% of the market was taken by captive investors, where the collateral manager was the person who turned up at the table with the majority of the equity. It might be their own money, it might be client money, who knows where, but the person who leaves with management fees was the person who turned up with the equity. We did a very small number of CLOs last year on a new issue basis and very close to zero or no refunds or reset. That said it's -- that universe has changed significantly. And even so far this year, we have done a number of new CLOs at Eagle Point where we've been as a firm, the majority equity investor. And some of that is attributable to -- we have a handful of loans accumulation facilities on our books. I'm looking at the portfolio, we've got about 1.4% of the portfolio based on the January Tear Sheet in loan accumulation facilities. Those are basically tickets. So whenever it's good time to do a CLO, everyone wants to do a CLO. And when it's a bad time no one wants to do one, it seems. What we do is, with the collateral managers that we know we're going to want to be working with when the markets right, we'll keep a small amount of loans. We'll have all the papers set, all the economic terms agreed. And if loans dip, they can buy some, if loans go up, they can sell some, but we've kind of got the tickets punched, so that when it makes sense to do new CLOs we got everything. We're -- people are -- oh my goodness, it's a great idea. Let's try and figure it out. We've got all the groundwork laid out. So I think we're going to see an increase in third party new issue CLO activity this year, which suggests that the returns are pretty good. M&A activity probably picks up. But even without that, there's still the loan market $1.31 trillion, $1.4 trillion depending on whose numbers you look at. And while CLOs make up a significant part of that process, usually the majority of that, whether we're buying new loans or secondary loans, there's usually always enough loans to buy to get into CLOs. But I would expect to see us doing more on the new side and more on the refi and reset side which is just unlocking value in our existing portfolios.

Great, well, congrats on the 10 year anniversary. That growth is tremendous, should be over a $1 billion market cap in no time. And congratulations, look forward to another great year.

Thanks very much. And we got -- we shared -- shareholders got their full IPO price back as of January 31. We're one penny short, as of December, but that's the way it's supposed to be. And we hope to get another $20 back to people, no assurances, obviously. But we'll try as soon as we can. So…

You made a lot of people happy. It's a tremendous accomplishment.

Thank you.

Our next question is from Steven Bavaria with inside the income factor. Please proceed with your question.

Hi, Tom.

Hey, Steve. Good morning.

Good morning. Just a quick one. Happy to see how well you're doing. Congratulations. I see that your GAAP net income covers about three quarters of your distribution. But then you've got your recurring cash distributions that really cover -- will cover the rest of it, and then some. And the question, I guess, that I get all the time is what's in that recurring cash distribution number that's over and above your GAAP income, your net, your NII and your realized capital gains and since the average loan includes an amortization feature, and then a smaller balloon at the end, how much of the routine amortization that's in loan payments throughout their life, and that flows down through the waterfall to you as equity owners. How much of that amortization of principle is included in the recurring cash distribution? And then what else is in it?

So the short answer is none.

Oh, good.

With one upside, I'll come back to but we haven't had it in a while. So when we talk about recurring distributions that's proceeds that would be interest waterfall from a CLO. So your point, your description is absolutely correct, that loans have some amortization payments, and then a balloon payment, whatever is leftover at the end, for a CLO during the reinvestment period, with one exception, which I'll get to, all of that principle stays in the system and goes to buy new loans. And what gets distributed to us, and in that recurring cash flow number is just money that comes to us from the interest waterfall. So let's say we call a CLO, a topic we've talked about earlier, if we were to call one, then we'd also get a principal payment. We would not include that principal payment from a call in our recurring cash flow number that we described. We would just say what the total cash is, but we always have that recurring number, which is just from the water -- the interest waterfall. I did say there's one exception. We haven't had this in a while. I mean, just in interest of full disclosure. Early in the life of a CLO, sometimes on the first or second payment date, if there are gains, realized gains in the portfolio above, let's say we start with a $500 million CLO and the collateral manager is able to create some gains in excess of $500 million, sometimes for the first or second period in a CLO, they can move those gains from the principal account to the interest account and pay it out to us as the equity holders. But having not been involved in many new CLOs there, sadly we haven't gotten -- I don't remember the last time we got one of those payments. So that might be the one exception, but the essentially all of the cash flow, all of the cash flows from the interest waterfall and substantially all of that is interest. So to be very clear. So then your question, what's the difference? What's the difference? Why are you getting all this interest, but you're saying your GAAP income is lower? It's not exactly what we do. But you'll remember this from your banking days, loan loss reserve accounting. And it's not exactly what we do. We have this effective yield concept. And what you'll see -- I mean, we publish on a position by position basis, the amount of cash we received on each investment, try and apply -- provide a tremendous amount of transparency. For the vast vast majority of our investments if you look at the effective yield, multiply it times the par amount of what we have, divided by four, you'll see that would be, you think what we're getting in cash, we're actually getting more cash than that. And the difference is that effective yield has a reserve for losses analogous to a loan loss reserve. What's happening is we model and all the assumptions are in there. But basically, once a CLO is ramped up about 2% defaults per year, we're not seeing that. The default rate remains well below the long term average. So it might catch up with us. Maybe we'll have a spike and those defaults will catch up. But right now, what we're seeing is many CLOs are performing better than our credit assumptions. In our expectation, we're not anticipating a default spike. So what we're using are these recurring cash flows, which is -- which touch wood continue quite robustly.

So the recurring cash flow does not include your sort of anticipated loan loss. Although your experience has been that you don't usually achieve that as much of a loan losses you might kind of mentally or financially reserve for it. And again, I could pack -- and loan loss anticipation, a reserve that you would create that that's not part of your -- that's not a taxable loss, until you actually have the -- experience the loss. So you're required to pay out a certain portion of your pretax income, obviously. So I guess that gets complicated trying to reserve for a loss that you're not allowed to include in your tax return.

Exactly. So GAAP, we have to use the effective yield method, which includes a reserve for losses. Maybe there's been a year where there's been an exactly an average number of losses. But in my experience, it's usually above or below the average. And over time, you get to the average. And what you've seen is that translates -- so that's the GAAP is basically accrual model. Tax is a realized model. So I mean, there's been years where the vast majority of our distribution has been treated as a return of capital for tax. Because CLOs even if it's -- if you bought a loan, at par, you sold it at 90, you bought another loan at 88, you get to take the $0.10 loss on the first one, and you don't have to pick up the gain on the next one until you sell it. So there's been years where we've had very low taxable income. And then there's been years where we've had these -- the next year invariably, when all those 88 loans pay off at par, which stays in the system because it doesn't get paid out to us because it's in the principal account. We've had situations where we've had -- and we talked about with the prior question, needs to pay big specials. So the crux of the matter is GAAP is accrual, taxes as incurred.

So it can work on both for you and against you. Hey, thanks. It's complicated.

You got it.

Appreciate your explanation.

Cash in the bank is the simple part. That's the -- yeah, we can debate all the referring of it. Money in the bank is the easiest part to analyze in our opinion. So thank you.

Thanks. Thank you. Keep it up.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Thomas Majewski for closing comments.