Tom Majewski - CEO Ken Onorio - CFO.

Merrill Ross - Wunderlich Securities Greg Mason - KBW Jim Young - West Family Investments Steven Bavaria - Private Investor.

Ladies and gentlemen, thank you for standing by. Welcome to the Eagle Point Credit Company First Quarter 2015 Earnings Release Conference Call and Webcast. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session; instructions will be provided at that time.

[Operator Instructions] Please note that this call is being recorded. I would now like to turn the meeting over to your host for today’s call, Tom Majewski, Chief Executive Officer of Eagle Point Credit Company. Please go ahead Mr. Majewski..

Good morning, and welcome everyone to the Eagle Point Credit Company first quarter earnings call. This is Thomas Majewski and I am the Chief Executive Officer of Eagle Point Credit Company. I am joined this morning by Ken Onorio who is the Company's Chief Financial Officer.

I would like to ask Ken to provide a brief discussion regarding forward-looking statements..

Thank you, Tom. This is Ken Onorio speaking. The matters discussed in this call include forward-looking statements that involve risks and uncertainties that may cause the Company’s actual results to differ materially from those projected in such forward-looking statements.

For further information on factors that could impact the company and the statements contained herein, please refer to the company’s filings with the Securities and Exchange Commission. 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, the company filed a Form N-Q with the Securities and Exchange Commission, providing the company's scheduled investment as of March 31, 2015.

In addition, the company published an investor presentation which is available on our website in the Portfolio Overview section. I would now like to hand the call back over to Tom..

Thank you, Ken. Ken and I plan to address seven topics with our call participants today. First is the company’s first quarter results and investment activity during the quarter. The second item will be cash flows received on investments so far in the second quarter as well as management's estimate of April NAV and other portfolio highlights.

The third will be a recap of our recent preferred stock offering. The fourth will be a summary of our Annual Meeting, which was held last week. The fifth item will be an update on the broad CLO and loan market and developments therein. The sixth will be an update on the company's distribution plans.

And then seventh, a discussion of an accounting example which was provided in the investor presentation. To begin with the company’s first quarter 2015 results, during the period from January 1, 2015 through March 31, 2015, the company had net income of approximately $3.8 million or $0.27 per common share.

The company's net income of $3.8 million was comprised of total investment income of $8.3 million, a realized net gain of $0.1 million, offset by total expenses of $2.9 million and an unrealized net mark-to-market loss of $1.7 million. As of March 31, 2015, the company’s net asset value was approximately $259.1 million or $18.76 per common share.

As of March 31, the company's stock price was $21 per share, reflecting an 11.9% premium to NAV. The March 31 net asset value reflected an accrued liability for our common distribution of $0.60 per share, which was paid on April 30, 2015 and an unrealized mark-to-market loss of approximately $0.40 per common share.

CLO equity broadly faced mark-to-market pressure during the early part of the first quarter. As evidenced by the increase in our estimate of NAV from February through March, and our estimated April 30 NAV of $19.16 per common share, we are observing an increase in demand for CLO securities and note the price of many CLO securities have moved up.

We do not believe that downward price movement that we saw earlier in the quarter or the subsequent upper price movement over the past few months were indicative of material changes in the fundamental long-term value of the company's portfolio.

As we previously announced, the company completed the ramp up of the IPO proceeds during the first quarter in line with the three to six months target cited in the prospectus for our IPO.

Because we still held meaningful amounts of cash in January and February, we do not believe the net investment income recorded in the first quarter reflects the full earnings power of the company.

During the first quarter, the company made one CLO equity investment, two new loan accumulation facility investments and one follow-on loan accumulation facility investment. The total amount of capital invested during the period was approximately $44.2 million.

As of March 31, 2015, the weighted average expected yield on the company's CLO equity portfolio, inclusive of newly added investments was 15.21%. The company's weighted average effective yield includes a provision for credit losses. As of December 31, 2014, we held a small amount of CLO debt securities.

Each of these positions has been sold as of March 31, 2015 and proceeds from these sales have been invested in CLO equity and loan accumulation facilities that are expected to produce higher yields. The underlying obligors of the Company’s portfolio remain highly diverse.

As of March 31, 2015, on a look-through basis, the Company had exposure to approximately 1,043 distinct corporate obligors. The largest look-through obligor, Albertsons, represented 0.9% of the Company’s total assets and the top ten largest look-through obligors represented only 6.4% of the Company’s total assets.

Overall, we remain very pleased with the Company’s portfolio. Additional information regarding the Company’s portfolio and underlying loan obligors can be found in the Company’s investor presentation, which is available on our website.

The presentation includes meaningful portfolio level information, which we believe will be helpful for stockholders in their continued evaluation of the Company. We encourage everyone to download and read through the presentation.

Except for one special item added as an illustration, we plan to provide this information on a quarterly basis going forward. In addition, certain look-through information regarding senior secured loans will be updated monthly beginning with the May 2015 estimated results. Your attention is drawn to page four of the investor presentation.

On this page, we provide position by position details of GAAP earnings, cash flows and other important investment level metrics. You will note that we include both the Q1 GAAP earnings and the Q4 2014 GAAP earnings for each investment. We also included the cash received in Q1 2015 related to each investment.

The reason we included the Q4 GAAP earnings is so that you can compare the Q1 cash flows to the Q4 GAAP earnings. You’ll see the ratio of cash received to income accrued is approximately 193%. In general, our CLOs make distributions in the first few weeks of each calendar quarter.

These distributions are largely related to the performance of the investment in the prior calendar quarter. Going forward, we plan to include current GAAP earnings, prior quarter GAAP earnings and current quarter cash flow, which will generally relate to the prior quarter, so that you can evaluate differences between cash flow and GAAP earnings.

On March 18, 2015, we announced that Eagle Point was granted exemptive relief by the SEC, allowing for negotiated co-investments between the Company and other clients of our advisor. We believe this order is beneficial to the Company and will give us access to a broader set of investment opportunities.

Indeed, since the order was granted, the Company has participated in three negotiated transactions, which the Company was previously restricted from doing. Moving to the second agenda item, I would now like to provide an update on the portfolio following to quarter end.

Earlier this month, we published a $19.16 per common share NAV as an estimate of the April 30 NAV. This is approximately a 2.1% increase from our March 31 NAV and reflects continued favorable performance in our portfolio and positive trends in the prices of CLO securities generally.

As of the close of business last night, the Company’s common stock price was $20.56 a share, reflecting 7.3% premium to our estimated April 30 NAV. Those investments that have reached their first payment period are generating strong cash flows.

Indeed, in the second quarter through May 22, the Company has received cash flows on its investment portfolio, totaling $17.1 million or $1.24 per common share. This compares to $9 million of total cash flow during the first quarter.

This significant increase was driven by several investments making their initial distributions in April and May and was partially offset by more normalized payments in April and May from CLOs that made their initial distribution in the first quarter.

During the second quarter, prior to the closing of the preferred stock offering, which Ken will describe more fully, the Company has been substantially fully invested in CLO equity and loan accumulation facilities. We believe these remain the most attractive investment opportunities for the company.

Of the loan accumulation facilities in our portfolio as of quarter end, the largest has priced into a CLO and is expected to close next week. The two other accumulating facilities are accumulating in the normal course towards ultimate conversion into CLOs.

So far in the second quarter, the company has also invested or committed to invest in two new loan accumulation facilities. I will now hand the call over to Ken to cover the next agenda items. .

Thanks, Tom. This is Ken speaking again. As we announced on May 13, the company priced our preferred stock offering of 1.6 million shares at a price $25 per share.

The offer resulted in an aggregate gross proceeds of $40 million prior to detecting underwriting discounts and commissions of $1.6 million and estimated offering expenses payable by the company of $285,000 dollars. The Series A preferred stock will pay a monthly distribution at an annual rate of 7.75% beginning on June 30, 2015.

The preferred stock is mandatorily redeemable on June 30, 2022 and maybe optionally redeemed on or after June 29, 2018 at the company’s discretion. We were pleased with the execution on the Series A preferred stock offering.

The underwriter group was able to price the shares at a level comparable to what we initially contemplated and achieved a modest increase in the size of the offering. The preferred stock was amended for listing on the New York Stock Exchange on Friday, May 22. It trades under the symbol ECCA.

As of the end of trading last night, ECCA was quoted at $25.24 per share, a slight premium to its $25.00 per share liquidation preference. The company’s IPO perspectives contemplated the potential issuance of preferred shares at some point within the first year following the IPO.

The preferred offering process began in earnest only after we completed the ramp up of the original IPO proceeds.

As Tom will mention later on the call, we believe it remains an attractive time to continue to deploy capital in new investments and the preferred offering will enable the company to continue to participate in additional investment opportunities.

Considering the company’s portfolio of CLO equity at a loss adjusted expected deal of 15.21% as of March 31, we believe adding attractive long-term preferred capital at a rate well below the expected yields will be accretive to net asset value.

Due to strong asset coverage, over 700% as of the time of issuance, we also believe that the preferred stock represents an attractive risk adjusted investment for those stockholders onto itself. We expect to deploy the proceeds from preferred stock offering within the next two to six months.

And segueing on to our fourth agenda item, this relates to our annual meeting. The company held its first Annual Stockholder Meeting on May 20. Over 80% of the common shares eligible to vote were represented by proxy at the meeting. Our two Class I directors Scott Appleby and Jeff Weiss were re-elected to new three-year terms.

We are very pleased with the high voting participation rate. Tom will now provide us an update on the CLO and bank loan markets. .

Thank you, Ken. The fifth agenda item is to share an update on the CLO and bank loan markets. According to data published by S&P Capital IQ through May 22, there have been 87 US CLOs issued this year. This represents $46.6 billion of issuance volume, which compares to $44.6 billion of volume through the same day in 2015 [ph].

While many in the market talked about a potential slowdown of CLO issuance this year, so far, the data paints a different picture. We believe the issuance volume is underpinned by strong demand by institutional investors for CLO debt securities. Indeed, despite this increase in volume, we are seeing CLO debt spreads tighten.

Looking at the yield on the JPMorgan CLOIE 2.0 AAA and BB indices, those have tightened from 165 basis points and 688 basis points as of January 1 respectively to 149 basis points and 622 basis points as of May 22.

While there is demand from other investors for CLO equity, we believe our long-term approach to the market and our advisors investment process has allowed the Company to continue to source some of what we consider to be the most attractive investment opportunities in the market. The senior secured loan market however has been less active.

Based on data published by LCD, there were approximately $56.2 billion of new institutional term loans issued during the first quarter, this compares to $128.5 billion issued during the first quarter of 2014.

That said, when evaluated in conjunction with the over $832 billion of existing loans outstanding as of May 15, 2015 according to S&P Capital IQ, our CLOs continue to have a large market in which to invest and reinvest. The slowdown in supply of new senior secured loans has brought upward pricing pressure to the loan market.

According to data from Credit Suisse, the average price of senior secured loans on January 1 was $96.28. As of May 21, that same average is up to $97.50 with many loans trading at a premium to par. In fact, S&P Capital IQ reported that as of May 15, 55% of all senior secured loans where trading at or above par.

Typically, when loans trade meaningfully above par, they are often refinanced by their issuers at tighter pricing levels. This can be adverse to CLO equity as it may cause spread compression, with our loans yielding less over LIBOR when compared to our fixed spread liabilities.

Whereas the annual prepayment rate on loans was 35.9% in Q1 2014, during Q1 2015, the annualized prepayment rate was only 13.4%. We believe the slow rate of prepayments is favorable for CLO equity as it generally augments for less spread compression than might normally occur when loan prices are above par.

We believe a meaningful portion of the slowdown in refinancing activity is due to heightened review by banking regulators of senior secured lending practices. While rules and guidelines regarding leverage lending have existed for some time, there appears to be an increased focus on this area from banking regulators in recent months.

To the extent these reviews can slow prepayments and keep aggregate leverage levels in check, we consider this to be a positive development for both the market and the Company. Moving onto our sixth agenda item, we would like to discuss distribution plans for the balance of the year.

The first monthly distribution on the Company's preferred stock will be paid on June 30, 2015 to holders of record on June 15, 2015. Thereafter, we expect to declare three months of distributions on our preferred stock at the beginning of each calendar quarter with payments to be made on the last business day of each month.

The Company expects to continue making quarterly base distributions on the Company's common stock in line with prior quarters which has been $0.60 per share per full calendar quarter, although the actual distribution payments are subject to variation from time to time and may include a return of capital.

We previously said that we would update you this quarter as it relates to our plans for special distributions. You will recall that to maintain our RIC status, the Company is required to pay distributions equal to nearly all of our taxable income.

In periods of low defaults like we are in now, cash distributions on CLO equity are a common proxy for taxable income related to CLO equity holdings. Indeed, our cash received in the second quarter to-date is $1.24 a share, well in excess of our expected distribution of $0.60 per share. The Company has elected a November 30 tax year end.

This has a number of advantages, including facilitating timely and active reporting of year-end tax information to our shareholders. While cash serves as a common proxy for income on CLO equity investments, our actual taxable income in any tax year is driven by the tax statements received by the company for our CLO investments in any given year.

Many CLOs have a December year-end and have already provided us with the only tax statements we will receive related to investments.

[Technical Difficulty] As a result, while we may be required to pay special distributions in the future, we do not currently expect that there will be a requirement to pay special distribution prior to the end of our tax year in November 2015.

If our GAAP income is greater than $2.40 per share this year, which we cannot assure, we will be able to further build the company' NAV. We believe that is a very positive development.

We have previously said that the company plans to evaluate the need for special distributions on a semi-annual basis and we plan to have the next update on this topic during our November 2015 earnings call. Moving on to our seventh agenda item, we've prepared an example regarding accounting for the yields on one of our CLO equity investments.

I will kick this off briefly and then Ken has the -- I think it's the honor to walk us through the example which we provided to you in the investor presentation. This is on page nine of the investor presentation. There has been continued discussion in the market regarding how to account for holdings of CLO equity.

This is indeed an asset class which is complex in many regards and one in which we believe specialists and investors like our advisor have an advantage. The company accounts for its CLO equity holdings using what is sometimes referred to as the expected yield method or constant yield method.

When we make a new CLO equity investment, we make a series of assumptions related to defaults, recoveries, reinvestment spreads, prepayments fees and other factors. These inputs create a stream of base case cash flows that serve as part of our advisors' investment decision. Right now as you can see from page four of our investor presentation.

All CLO equity positions in our portfolio which have made their first distribution are paying distributions well in excess of our US GAAP income. This excess of cash over US GAAP earnings is treated as a return of capital within our financial statements and reduces the carrying value of each investment.

You could think of these excess amounts similar to principal repayments on a loan. In many cases, at the end of a CLO's life, we do not expect to get back the original amount we invested in the CLO equity.

Our accounting reflects this and treats excess payments received during the life of a CLO above the expected yields as a return of capital such that if our models were exactly correct, which they are unlikely to be, there would be no US GAAP gain or loss when a CLO is unwound.

In other words, the aggregate of all excess payments received from a CLO during our investment would equal the shortfall on the investment received upon winding up of such a CLO, again creating no gain or loss. Let me draw your attention to page nine of the deck.

It's important to highlight we do not expect to provide this level of detail for each investment going forward. However, in light of the broader discussions in the market, we thought it would be helpful to illustrate the accounting the company followed for one investment which has been fully realized.

This example is intended only to illustrate accounting methods used and is not representative of the investments in our portfolio. The effective yields and IRRs realized on our investments may be substantially higher or lower than those shown in this example. In general, we are long term investors and usually do not sell positions.

This example of an investments was a minority CLO equity purchase that we made in December 2014 when the markets were risk off. We sold the position in April with the plan to rotate into other new majority CLO equity investments and loan accumulation facilities.

With that introduction, Ken, would you mind walking us through page nine of the investor presentation?.

Sure Tom, this is Ken speaking again. This example was an investment that the Company made on December 23, 2014. We bought a minority interest in a CLO for $3.5 million. Based on our forecast at the time, we booked an expected yield of 14.61%.

You'll see on line two, on December 31, we booked $10,599 of periodic accrued interest for the short period we held the position until year end. The fair value of the position as of year-end included accrued interest as approved by our Board of Directors was cost.

This created a $10,599 unrealized mark-to-market loss, which is included in our unrealized mark-to-market loss at year end. On line three, on January 15, we received a cash payment of $242,913. The cash was first supplied to relive the accrued interest at December 31 of $10,599.

Secondly, $19,959 was applied to interest income representing the period of January 1 through January 15, 2015. The remaining amount of cash $212,355 was accounted for as a return of capital.

You'll see the amortized cost drop by $212,355 on the payment date; this is a result of the return of capital treatment of the cash in excess of our accrued income. On line four, we continued to accrued income in the amount of $19,961 for the second half of January.

The position was markdown to $3.284 million as of January 31; this reflects our advisors estimate of fair value. We continue to accrue income of our current amortized cost for each of February and March for $35,221 and $39,427 respectively.

You'll note that while the fair value plus accrued interest moved up between January and February by $12,000, the increase was less the income accrued at February of $35,221, which further added to our unrealized mark-to-market loss on this position as of February month end.

Come March, however, the value of position moved up in excess of the income accrued in March, partially reversing the unrealized mark-to-market loss from prior months. We highlighted this general upward price trend in our earnings call back in February. Finally in early April, we found an interested buyer and sold this position for $3.48 million.

This reprise reflected a further pick up from our March 31 carrying value and a premium to our amortized cost generating a realized gain. Our accrued but unpaid interest balance on this position was $104,869 as of April 8. This is the sum of the periodic interest accrual beginning on January 16.

Of the sale proceeds of $3.48 million, $3.327 million was a return on capital, $109,869 was a receipt of interest accrued since January 16 and $47,486 was a realized gain. Overall, our realized IRR on this investment was 20.08%. We share all this detail to serve as a specific illustration of how the Company accounts for its CLO equity.

In general, we are long-term investors in CLO equity and it is unusual for us to sell an investment so quickly. This particular situation afforded us an opportunity to realize a gain in excess of our expected yield and to redeploy the sale proceeds in new majority investments.

We hope this is helpful -- we hope this is a helpful illustration for investors..

Thanks for that detailed walkthrough Ken, it was very helpful. To offer some brief concluding remarks, I'd like to thank everyone for their continued interest in Eagle Point Credit Company. Our near-term objective for the Company is to deploy the proceeds from the recent preferred share offering prudently.

We have a number of investment and attractive investments opportunities in various stages of diligence and negotiation at present. We are very pleased that our shareholders have been rewarded by common and preferred stock prices above their initial offering prices and we remain comfortable with the Company’s portfolio and its earnings power.

That concludes management’s presentation of Eagle Point Credit Company’s first quarter update. At this point, we’d like to open the call to questions. Ken and I would be happy to address any questions that you may have..

[Operator Instructions] Your first question is from Merrill Ross with Wunderlich Securities..

Good morning. Looks like a nice quarter. And guess, I’m wanting to drill down a little bit on the activity in the second quarter. I know you mentioned two loan accumulation facilities that would be opening and then there is the Cutwater CLO that priced and I’m wondering how much of the equity you purchased in that.

Was that a controlled position, was it more than 51%? Any color on that would be useful..

Sure. Good morning, Merrill. Thank you, thank you for calling in. I guess it was the Cutwater CLO, which was the CLO that priced, that was a $40 million accumulation facility that we had as of month -- quarter end the CLO priced and is scheduled to close next week and Eagle Point did purchase a majority position in that CLO of the equity tranche..

And did you buy more than 51% or was it just barely majority?.

In excess of 51%..

Okay.

And so, will that be the only piece of CLO equity you buy this quarter or did you have plans to or already accomplished any other purchases?.

Sure. We were substantially fully invested prior to the preferred offering. You can see in the investor slide deck our net cash as of quarter end was about 1.7%.

So, the natural rolling of Cutwater into a term CLO is as we expected and now we’re continuing to evaluate opportunities and we’ve said we expect to get the preferred capital deployed prudently within the next two to six months..

Okay. I think that makes sense. Thank you. That’s all I have for now..

Thank you very much, Merrill..

The next question is from Greg Mason with KBW..

Great. Good morning, guys. First on this kind of tax GAAP difference. First up, I appreciate your November 30 tax year end.

So, we may not have to address some of these questions until the next tax year, but several of your peers that have owned CLO equity have talked about the losses that might occur over the life of the CLO, when they realize those, they will count as capital losses instead of ordinary losses.

So, at the end of the day, their taxable income won’t be reduced by the losses. And so, I just wanted to get your view on how your business model will work and your view of the GAAP tax differences over time and how you’re thinking about that tax GAAP difference when it comes to paying special dividends down the road..

Thanks. Very good question and certainly an area that gets a lot of continued focus from investors. Broadly, as we -- we think about both the GAAP – first, the economic consequences, but in addition the GAAP and tax consequences certainly of every acquisition and equally as much of any potential sale or liquidation of an investment.

Broadly again, we highlight we’re a long-term holders and the example we shared of that one transaction was not representative of our normal investment approach.

We said in the prepared remarks that many in the market think of cash on CLO equity as a reasonable proxy for taxable income and that’s not materially incorrect, but one thing we do like to highlight is that in many CLOs, there is also an amortization of upfront issuance costs and OID on the debt such that there is in many CLOs a non-cash deduction even away in a scenario where there is no losses.

So, it’s not if in a zero loss scenario, there in many cases would still be a partial additional tax deduction on a non-cash basis. That said, if someone buys or sells a piece of CLO equity, the statement that we take a big tax loss at the end is still one we scratch our heads at.

I can see how it could happen, and a way that could be driven is a CLO is generated, we’ve good cash flows and not had any underlying losses in the portfolio. But as it gets closer and closer to its non-call date kind of the in the money nature of the financing moves away from it and would potentially create some degree of tax capital loss on a sale.

In general, we’re trying to minimize those situations.

The tax basis to the extent you’re amortizing issuance costs and OID, will reduce over time, so that’s something that -- I am not sure how many people pick up when they are going through things that something we look for and all of our – we focus very carefully on our investments, but such that we seek to avoid that situation and while we can see how it can happen of a big tax loss at the end, we think a prudent plan actually can avoid that in many cases.

.

Got it.

In addition with the preferred equity that you just issued, what is your kind of target leverage for your company and how do you think about issuing more preferreds over the longer term?.

Sure, a very good question. I mean, we are – the things we like about CLOs or we love about CLOs that we have long-term non-mark-to-market financing that’s longer than the assets within the CLOs, that we think is a great fact.

The ability to issue preferred and bank debt off of a company like ECC is also good, but it’s not as good frankly as CLO and that as a preferred just do within seven years although is reasonably flexible in terms of covenants and what not.

We haven’t put a hard leverage limit on the company other than obviously the statutory limits; the prospectus for the IPO lays out an example of where the company could get to which is certainly higher than where we are today.

I wouldn’t see us using preferreds anywhere near the limit shall we say, but we do think it’s an attractive investment unto itself, but in a moderate amount comfortably accretive to the common equity. So I don’t have a hard number to put, but to share with you the mind-set that we think about this. .

And just correct me if I am wrong, but I believe ECC could lever from a statutory perspective to 0.5 debt-to-equity and 1 to 1 preferred equity to equity, is your thought to use solely preferred equity or is there any ability or desire to use actual senior debt down the road in the vehicle?.

Sure. So there are the two limits, I mean, you hit the ratios spot on, the code describes it as 300% asset coverage for debt and 200% asset coverage for preferred and debt. So there is a sub-limit within there for debt. We will continue to evaluate all different opportunities for the company and the capital markets.

Right now, our number one objective is to get the preferred capital – the current preferred capital deployed in a prudent manner, but we’ll continue to evaluate all the different sources and frankly would expect the company with the passage of time to access the markets in a number of different manners. .

Great. Thanks, guys. .

Thank you..

Next question is from Jim Young with West Family..

Hey, Jim. .

Hi, you mentioned your attractive yield is 15.21% and that includes the provision for credit losses.

So how much in credit losses did you increase in the March quarter and what are your total credit losses on the balance sheet at this point in time?.

The effective yield calculation, and probably the best part to look is in the Q, we lay out – the assumptions in the Q or do we have to go back to the annual report?.

No, assumption is not in the Q..

Okay, so you have to go back to the annual report. I mean, I can walk you through –.

There on the Q, – sorry, there is both [ph] the Q and the annual report. .

Oh, let’s stick with the Q. And it’s in the footnotes, within Note I of the schedule of investments that was filed.

There's not a – compared to like the way a bank would account for loans, there is not a loan loss reserve for something ascribed against any individual credit against that what you will see in the Q is that we use a constant default rate starting at zero percent initially and then ramping up to 2% per annum.

And the broad theory there is there is very, very few instances our first period defaults in senior secured loans. These are large corporate well-underwritten loans. And then we assume a 25% annual prepayment rate and a 70% recovery rate.

So once fully ramped, that is if 2% defaults and 70 recoveries ascribes about a 60 basis point net loss per annum model once the CLOs have reached the ramp up. To-date defaults experienced in the senior secured loan market, I don't have a number handy, but in general I think most would say it's really quite low.

There's not been a meaningful factor in any of our investments to-date. .

Okay. And then are you using the same assumptions for defaults in the 70% recoveries for the most recent CLO equity investment in the Cutwater CLO. .

The defaults and recovery assumptions are consistent across all of the CLOs. The reinvestments spread is something that varies across our different investments and you can see those are meaningful range there based on the style of the CLO and the underlying collateral manager..

Great. Thank you. .

Thank you. .

Next question is from Steven Bavaria, private investor..

Hi, Tom. .

Good morning, Steve. .

You may have answered this with your page nine illustration, but I’m going to have to go through it a few more times to fully understand it.

But typically when we see that you and your neighbor OXLC also report that your distributable earnings are greater than the GAAP earnings for a period, do those distributable earnings actually include what to a bank would be a return of principal? And is that one of the components of the difference whereas the GAAP earnings would only include interest..

That's correct. So GAAP earnings would only -- this is Ken speaking -- would only include interest income. When we apply the excess as an amortization of cost, if were to look at it, it’s referred to it as return of principal in a normal loan.

We will say that as we amortize down cost, right, that will have, all else equal on fair value, that would result in an unrealized gain, all else equal. So now we have a cash flow, right, we were not going to create any income from that cash flow, we are just bucketing into interest income and amortization, i.e. unrealized gain..

And then to convert it to the kind of the tax question, in many cases right now the distributable income, ignoring some of the tax year nuances that we've introduced, some of that or nearly all of that cash flow is coming from the interest waterfall of a CLO and right now in these benign markets where there's few defaults in the underlying portfolio, a portion of that money that's treated as GAAP as a return of capital would be -- some of it would likely be considered income for tax, which is what could give rise to the distributable income that we see in a couple of reports greater than the GAAP income.

Against that there also needs to be reserves for this amortization of issuance costs and other non-cash tax deductions within many CLOs. So it's not a perfect proxy out of it. .

Well, in a normal CLO equity world, you would expect to see a sort of gradual drop of NAV from period-to-period?.

Absent mark-to-market move, yes. Now, if our models were absolutely perfect, not [indiscernible]. What's happening right now is our models are assuming varying degrees of defaults depending on how seasoned the loans are and there's very few if any defaults occurring in the underlying portfolios. And that's what's giving rise to this potential mismatch.

We tried to defer this in a number of reasons with the November tax year end and one of the benefits is deferring a lot of the taxable income at least we have one more year to keep building NAV. So that's an important thing that we're very mindful of, we want to see the NAV as high as possible.

So that's a very important factor, but if the model was absolutely perfect at time zero, with a little bit of losses occurring each quarter, it wouldn't be a meaningful difference..

Thank you.

Could you comment quickly on the LIBOR floor issue and what happens if we get a 50 to 100 basis point rate increase over the next year or so?.

Sure. So all of the -- all of our investments that we value, we use the LIBOR forward curve and that is a rate -- that's a published rate on Bloomberg, it's changes all the time, it’s a liquid and actionable rate, although in my experience, it's often incorrect, predicting what LIBOR would be in the future.

That said, that's the curve we use and it's the convention in the market and what that entails is right now, LIBOR goes, as of the last time I looked at the screens, over 1% some point in 2016 according to that forward curve. So our base case assumptions have the impact of the LIBOR floors getting muted within that roughly one-year time frame..

During that time, while it’s rising and your liabilities are going up but your assets are not because you're getting a benefit now of LIBOR floor, you would be hit during that period?.

The cash flows would go down over -- let's say the LIBOR forward curve was perfect, cash flows would go down each of the next few quarters to the extent that would be closing that gap and that three month LIBOR is around 28 basis points and our loans have a weighted average LIBOR floor of 97 basis points.

So that gap is modeled to close in our expected yield across the roughly the next year. To the extent it happens sooner that would be adverse, to the extent it happens later, that would be beneficial.

The other fact, but most important is that we factor that in to all of our base case assumptions to the extent LIBOR doesn't get to 1% anytime in the next year that would be a good fact compared to our base case assumptions at present.

At the flip side, to the extent rate start rising above 1% that is also holding all else constant good for CLO equity and now our assets and liabilities are both floating and CLO equity is getting the pickup of the base rates over 1.

So the key takeaways we factored into our base case roughly goes away, the benefit of the floor goes away in a year and then once we get over 1%, the cash flows start going up..

If you look at the cash coverage on page 4 of just the cash received versus the accrued income and mindful that a number of the investments, this is on the slide deck, that a number of the investments hadn't even made payments yet, we have 193% cash to GAAP earnings coverage right now.

All of that excess as Ken explained is treated as a return of capital but if LIBOR were to rise towards 1, you could expect the cash flows to go down but we still have a significant amount of cushion against our GAAP earnings and it's all factored into the earnings..

Thank you..

Great, thanks Steve..

Your next question is from Greg Mason with KBW..

Hi, Greg..

Hi, couple of follow-up questions.

Just on that last one, just to clarify when you say it's baked in, you're talking about the GAAP earnings you have already assumed before LIBOR curve, it's the cash flow that would be negatively impacted, is that just partially [indiscernible]?.

Yes, correct..

So the GAAP earnings already include that impact?.

Yes..

And then one last thing, with this new co-investment provision, what is the size of average investment that you can do now; previously you kind of had to speak for the whole 40, maybe 50 million of it, what do you speak for now in terms of net investment size to a control deal?.

The facts and circumstances around each investment will vary, the good part with the exemptive order is between the ECC and our other clients who also have a similar investment objective, we have meaningful amount of – the other vehicle, I don’t know the last time we put a number out Ken, it must have been in the ADV, around $400 million plus or minus.

So between the ECC and the private vehicle, which has the same strategy in aggregate we have plus or minus $700 million of buying power, $300 million here, $400 there as of the last publication.

So we can make investments -- $70 million investment across that complex is only a 10% position recognizing that there is in many cases well over 100 underlying obligors is something we are very comfortable with. I don’t think we have any $70 million positions in the family at present.

But we are able to go as big as we need and can also be small and nimble if $20 million check is the thing that drives the needle in a given investment. .

Okay, great.

And then one last question in BDC line where we focus on a lot of our time, there has been ton of conversation about the GE impact there, do you think there is any impact to the liquid bank loan markets from GE exiting?.

It’s a very good question. Not a meaningful amount of impact. GE certainly had participated as a loan syndicator, those were typically at the extreme, you could call them smaller syndicated and you could also call them middle market depending on what conversation you’re in.

In general, there is very little of paper that would have typically been of GE flavor, very good quality, but just many CLOs, syndicated CLOs actually have limitations on companies with say at less than $200 million of total indebtedness, so not a meaningful factor in the origination here for us.

The good news that we like and we talked about in the prepared remarks were the focus from the bank regulators on HL or highly leveraged transactions and many – or at least some transactions getting criticized that’s been a very positive development and it’s interesting that broadly the BDC community, which is not regulated by that same set of lenders in some cases we have seen leverage on the underlying companies move up there whereas in general in the liquid syndicated loan market we are seeing because of this regulatory change a limitation.

.

Great. Thanks guys, appreciate it. .

Thank you very much.

Mike, are there any other questions?.

[Operator Instructions] There are no additional questions at this time. I will turn the call back over to the presenters. .

Great, thank you very much, Mike, and thank you everyone for joining the call. We appreciate everyone’s interest in the company and the active dialog we are able to have during these calls. As we said earlier, our near-term objective for the company is to deploy the proceeds from the recent preferred share offering prudently.

We have a number of investment opportunities in various stages of diligence and negotiation. Having the exempt of order frankly keeps the universe of investments that the company can participate frankly even wider than it had been previously. We appreciate your time today, and look forward to speaking with everyone in the next quarter.

Thank you very much. .

This concludes today’s conference call. You may now disconnect..