Tom Majewski - Chief Executive Officer Ken Onorio - Chief Financial Officer.

Christopher Testa - National Securities Ryan Lynch - KBW.

Welcome to the Eagle Point Credit Company's Third 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 third 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 discussion regarding forward-looking statements before we begin..

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. Each forward-looking statement 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 Web site, eaglepointcreditcompany.com. This morning we filed our third quarter financial statements with the Securities and Exchange Commission.

Additionally, we made the financial statements and our third quarter investor presentation available on the company's Web site. The financial statements can be found by following the financial statements and reports quick link on our Web site.

The investor presentation can be found by following the investor presentations and portfolio information quick link on our Web site. I would now like to hand the call back over to Tom..

Thank you, Ken. Ken and I plan to address five topics with our call participants today. The first is the company's third quarter financial results and investment activity during the third quarter.

The second is an update on cash flows received on investments so far in the fourth quarter, management's preliminary estimate range of October NAV and other portfolio highlights. The third item will be an update on broad CLO and loan market developments.

The fourth item will be an update regarding our pending draft shelf registration statement which we recently filed with the SEC. And the fifth is an update on projected taxable income for our current tax year and outlook on the company's plans for special distributions.

Ken, would you mind beginning by walking through the third quarter results, please?.

Sure, Tom. This is Ken speaking again. We will begin with the company's third quarter 2015 results. During the period from July 1, 2015 to September 30, 2015, the company had a net loss of approximately $30.4 million or a loss of $2.20 per common share. This compares to net income of $6.4 million or $0.46 per common share in the second quarter.

The company's third quarter net loss was comprised of total investment income of $11.7 million and a net realized gain on investments of $0.1 million, offset by total expenses of $4.7 million and net unrealized depreciation of mark-to-market loss of $37.5 million.

Net investment income for the third quarter, which excludes unrealized mark-to-market changes in the portfolio, was $7 million or $0.51 per common share. This represents an increase of 11.7% or $0.05 per common share compared to the second quarter. As we look at drivers for the quarter-over-quarter improvement in net investment income.

Total investment income was aided as we deployed the proceeds from the series A term preferred stock offering. In addition to the growth of the portfolio, the weighted average expected yield on the portfolio also increased during the period.

As of September 30, 2015, the company's net asset value was approximately $218.6 million or $15.82 per share of common stock. As of September 30, the company's closing common stock price was $19.04 per share, reflecting a 20.4% premium to NAV on such date. As of November 16, 2015, the company's closing common stock price was $16.99 per share.

During the first nine months of the year, total return to common stockholders for the full period was approximately 3.08%. This assumes that distributions received during the period or reinvested at prices obtained by the company's dividend reinvestment plan.

According to CLO market trading commentary released on October 15, 2015 by Morgan Stanley, Morgan Stanley estimated CLO 2.0 equity total returns as of September 30 year-to-date was down between 8% and 15%.

Even in the current credit market in which there has been relatively little realized credit expense, we have observed a wide dispersion of performance amongst CLO equity securities.

We believe our advisors investment process which seeks to source CLO equity investments which it believes are likely to outperform the broader market for similar vintages contributed to the company's relative outperformance net of expenses versus the Morgan Stanley estimate.

During the third quarter, the company made one new CLO equity investment, three new loan accumulation facility investments and additional follow-on loan accumulation facility investments. The total amount of net capital invested during the third quarter was $38.1 million and for the first nine months of 2015 was $107.4 million.

As of September 30, 2015, the weighted average effective yield on the company's CLO equity portfolio inclusive of newly added investments was 16.65%. This compares [indiscernible] we plan to continue providing this information on a quarterly basis going forward. Your attention is drawn to page 4 of the quarterly investor presentation.

On this page, we provide position by position details of GAAP earnings, cash flows and other investment level metrics. You will note that we included both quarter three GAAP earnings and quarter two GAAP earnings for each investment. We also included cash received in quarter three for each investment.

The reason we included quarter two GAAP earnings is so that you can compare the quarter three cash flows to the quarter two GAAP earnings. You will see the ratio of cash received in the third quarter to income accrued during the second quarter is 201%. In general, our CLOs make distributions in the first few weeks of each quarter.

These distributions are largely related to the performance of the investment in the prior calendar quarter. When evaluating the components of our portfolio cash flow, we highlight that several of the CLOs in our portfolio have not yet reached their first payment date as of September 30, 2015.

It's also worth noting that we received a small number of first equity payments during the third quarter. In many cases, the CLOs first equity distribution is larger than its expected run rate equity distributions, among others, total portfolio cash flow was lower in the third quarter than the second quarter.

You will also note that the cash flows from CLO equity making payments other than their first payments in the third quarter, was meaningfully higher than non-first paying investments in the second quarter.

On page 3 of our quarterly investor presentation, we break our cash flows from those CLOs making their first equity payment versus those making their second or latter payments, as well as cash flows from other sources.

In addition, beginning on May 2015, the company started providing certain book through information regarding the senior secured loans underlying the company's CLO equity and loan accumulation facility on a monthly basis. The latest information as of the end of September is now available on the company's Web site.

Moving to the second agenda item, I will provide an update on the company following September 30 quarter end. On October 30, 2015, we paid a distribution of $0.60 per common share for the quarter ended September 30, 2015, which was declared on September 1, 2015.

As with prior quarters, the September 30 net asset value reflects an accrued liability for this distribution. Those investments that have reached their first payment date are generating meaningful cash flows.

In the fourth quarter, as of November 11, the company received cash flows on its investment portfolio totaling $20.3 million or $1.47 per share of common stock. This compares to $16.3 million of total cash flow received during the third quarter.

This increase was primarily driven by more investments making their generally outsized initial distributions in the fourth quarter compared to the third quarter. Other loan accumulation facilities in our portfolio as of quarter end, the collateral managers are accumulating loans in a normal course towards conversions into CLOs.

Over the past few weeks, we have seen attractive buying opportunities into the accumulation facilities as there have been a number of new issue loans in the market which have to get done. We believe that it has been a good period to have capital available to deploy in newly issued senior secured loans.

In addition to making certain portfolio level information available on our Web site on a monthly basis, we also publish a monthly unaudited management estimate of the company's NAV. Last week we published a preliminary management estimate of the range of our NAV per share of common stock as of October month end.

This range was $15.45 to $15.55 per common share. This change in NAV per share from September 30 was primarily due to further unrealized mark-to-market changes in the company's portfolio.

As of October 30, 2015, the company's closing common stock price on such date was $17.64, reflecting a 13.4% premium to the top end of our estimated October NAV range. Tom will now provide us with an update on the CLO and bank loan markets..

Thanks, Ken. This is Tom speaking again. Our third agenda item is to share an update on the CLO and bank loan markets. According to data published by S&P Capital IQ through November 11, 2015, there have been 166 U.S. CLOs issued this year.

This represents $87 billion in total issuance volumes which compares to $110 billion of volume through the same date in 2014. Origination volume in the U.S. senior secured loan market has also been lower this year than last year.

Based on information published by S&P Capital IQ, there were approximately $209 billion of institutional term loans issued during the first nine months of 2015. This compares to the $333 billion of loans issued during the first nine months of 2014.

When evaluated in conjunction with the over $844 billion of existing senior secured loans outstanding as of October 30, according to reports from S&P Capital IQ, our CLOs continue to have a large market in which to invest and reinvest. A number of factors have impacted the loan market this year.

These factors include a lower new issue supply, retail loan mutual fund outflows, as well as macro factors globally and some loans specific factors. According to data from Credit Suisse, the average dollar price of the Credit Suisse leverage loan index on January 1, 2015 was 96.28. As of June 30, that index was up to 96.72.

However, as of December 10, the index has fallen to 93.62. With the price of loans down, it has become much more of a lender's market. According to data from S&P Capital IQ, new issue yields [gapped] [ph] out with the average yield to maturity from new loans that allocated in October, widening to 6.22% from 5.37% in the month prior September 2015.

In our opinion this is a significant change in a short period of time. Consistent with this widening, in recent weeks we have observed a number of the have to get done type loans coming to the market with over 5 points of original issue discount or OID.

While each loan needs to be carefully analyzed, in general we welcome seeing new loans coming in to the market with large amounts of OID. These sorts of offerings allow for CLOs to build par which should provide a buffer against potential future credit expenses.

During the third quarter we observed mark-to-market volatility in CLO securities which in our opinion is unrivalled since the downgrade of the sovereign credit rating of the United States on August 2011. Throughout the third quarter, investors have required wider and wider yields to invest in CLO securities.

Specifically, we believe that the CLO equity demand from hedge funds has waned over concerns related to mark-to-market volatility as we approach year-end.

In addition, we have observed decreased demand for CLO equity from many business development companies as many have been unable to raise additional capital and in certain cases shareholders have penalized several BDCs with significant CLO equity exposure.

These wider yield requirements from investors translate into our lower prices for our existing CLO securities therefore driving our meaningful unrealized mark-to-market loss in the quarter. While we cannot call and are not calling a bottom in CLO security prices, in our view the sell off is overdone.

Part of the reason why we believe this has to do with the structure of cash flow CLOs themselves. While we do focus on the marks of the loans and the CLO securities that we hold, it is important to remember that CLO structures are typically considered to be non-mark-to-market structures.

What this means is the price of performing loans is not a factor in the continuation of our structure. Our advisor generally views periods of loan price volatility to be beneficial to the long-term value of CLO equity securities. Given the recent vintages of CLOs in the company's portfolio, all of our CLOs are currently in their reinvestment period.

When talking about the ability of CLO collateral managers to deploy cash in their reinvestment periods in order to seek opportunities to build par and increase spread and potentially mitigate future losses during these periods of loan price volatility, a common question we hear from CLO market participants is, where does the money come from to invest in these or reinvest in these new wider yielding loans.

While CLOs generate cash available for investment from a number of sources, we believe and often overlook source of cash, pay downs of existing loans is perhaps the most important source of cash for reinvestment within a CLO. During the third quarter of 2015, according to data provided by S&P, the annualized pre-payment rate in the U.S.

loan market was approximately 26%. This money comes back into each CLOs closed system at par and can be redeployed by the collateral manager during choppy periods like these into loans typically at lower prices and with wider spreads.

Of course, all new loans are subject to the various prescribed portfolio restrictions of a CLO and must be in strict compliance with the CLOs indenture. Our advisors seeks to invest in CLOs whose collateral managers the advisor believes can benefit most from reinvestment opportunities in dislocated markets.

Looking further back into history, during 2008 and 2009, annual prepayment rates on loans were approximately 9% and 15% respectively.

For 2006 and 2007 vintage CLOs, most of which were still in their reinvestment period in 2008 and 2009, these prepayments were able to be redeployed into new or secondary senior secured loans at meaningfully wider yields than the loans that were acquired during 2006 and 2007.

As noted earlier, we generally view periods of loan price volatility as providing meaningful opportunity for CLOs as in our advisors view these periods can be beneficial to the long-term value of CLO equity securities.

Whereas many market indices rallied in October with the S&P 500 up over 8% in one month, loans and CLO securities were generally softer in October. This was evident in our estimate of our October NAV range.

However, preliminary indications since month end indicate some strengthening in demand for CLO securities but it is too early to tell if this trend will be sustained..

Thanks. This is Ken speaking again. For our fourth agenda item. We wanted to acknowledge our recent filings with the SEC. on November 5, we amended a registration statement on Form N2 that we got previously filed with the SEC regarding a potential bond offering.

This enables the company to offer a variety of securities including debt securities, preferred stock, common stock at subscription rights via a shelf registration statement. Because we are still in the registration process, we will not be commenting further on the filing during this call. Moving on to our final agenda item.

We would like to discuss the company's analysis of special distributions. As we indicated in our first quarter earnings call back in May, we plan to provide an update this quarter as it relates to special distributions.

In order to maintain our RIC status and minimize excise taxes, the company is required to pay distributions equal to nearly all of its taxable income.

As you may recall, the company elected in November 30 tax year end, this has a number of advantages including facilitating timely and accurate reporting of the year-end tax information to our stockholders.

Although the company has received significant cash flow this past calendar year, our actual taxable income in any tax year is driven by the tax statements received from our CLO investments during a given tax year.

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

As a result of our November tax year-end, company's management expects the recognition of a meaningful amount of our taxable income related to cash received this year will be delayed until our December 2015 to November 2016 tax year.

Preliminary management estimates indicate that our taxable income for the year ended November 30, 2015 will be meaningfully less than common distributions paid during the year. As a result, we do not expect to have a requirement to pay a special distribution associated with our current tax year ending November 30, 2015.

We may have such a requirement with respect to future tax years, depending on circumstances. Please note, the final determination of the source of all distributions paid in 2015 will be made after year-end.

The company will provide a Form 1099-DIV for the calendar year, informing you of the characteristics of the company's distributions for federal income tax purposes. We will continue to track taxable income and expect to provide a further update on our plans regarding special distributions on our call discussing the first quarter 2016 results..

Right. Thanks for that update, Ken. This is Tom again, and to just offer some brief concluding remarks, I would like to thank everyone for their continued interest in Eagle Point Credit Company.

While we have generated consistent quarter-over-quarter growth in our net investment income, we are mindful that that measure is not yet generating $0.60 per common share.

Our near-term goal for the company is to continue to grow the company's net investment income and we expect that net investment income will grow in the fourth quarter compared to the third quarter.

Our advisor has a number of investment opportunities in various stages of analysis and negotiation and we will continue to selectively take advantage of the opportunities that markets such as this provide. That concludes managements presentation of Eagle Point Credit Company's third quarter update.

At this point we are happy to open the call to questions and Ken and I can address any questions that you may have..

[Operator Instructions] Your first question comes from the line of Christopher Testa with National Securities. Your line is open..

Tom, just want to know if you are still seeing kind of the bifurcation you spoke of last quarter with regards to energy and metals and mining or whether now we are seeing everything in the loan markets back up all together..

Hey, Chris, good morning. How are you? So certainly we are seeing a bifurcated market. We are seeing it both in the loan market and in the CLO market. Certainly a meaningful portion of the move in the Credit Suisse leverage loan index is attributable to energy names and in general in the third quarter I would say they certainly led the index lower.

However, what I will say is in the past few weeks and really since labor day, we have seen additional softness in the non-energy loans. And that’s something we welcome quite a bit. I shared some examples of a handful of new issue loans that have come with more than 5 points of OID.

And these were loans that were underwritten and needed to get done and they had to find the true clearing level for a significant amount of a given loan. To the extent some of our CLOs may have been able to participate in these that we consider really really good, in that it’s much more of a lender's market.

So to your question, it does remain bifurcated but which may be is less good but what we are seeing which we think is particularly strong, is that we are seeing non-energy loans have some non-trivial softness in price which helps with, at our reinvestment opportunities..

Okay. Great. And just given the update about receiving a $1.47 per share in cash through November 11, that’s ahead of your previous guidance by a decently significant amount for the whole quarter. Just what drove the higher cash coming in over your expectations from last quarter..

Sure. I am not sure if we offered a formal cash forecast. The components, and if you have the investor presentation handy, right now I will just direct you to look at page 3. This includes through the third quarter of actual cash flow. And you can see the components.

The one that moves around the most is the first line of CLO equity making the first distribution. And so far in the fourth quarter we have had a number of CLOs that have made first distributions more than we had in the third quarter.

But we do expect to get additional payments on certain of our investment later in the quarter, what we have received is a big bulk of it. But there will be a bigger -- expect there will be a bigger number in the first payment received bucket for the fourth quarter when we publish this statistics.

When you are looking at forecasting income, one thing we would highlight is in general the GAAP income or net investment income is really driven by the expected yield on the portfolio.

And obviously we are earning, we are receiving cash in the prior quarter well in excess of the GAAP income but that’s somewhat driven sometimes on first payments can be bigger or smaller.

The important metrics we think about is what is the expected yield on the portfolio which is the GAAP measure which includes the reserve for losses and then obviously a very good check that that cash flows are well in excess of the income accrued..

Okay. And just given the really high CPR, I think you have mentioned 26%, spreads are still very wide.

How long do you see this persisting before there is somewhat of a burnout in ability of people to refinance?.

Believe it or not, 26% is below the long-term average. Now depending on whose data you look at, most kind of 3, 5 10 year prepayment rates are typically have a three handle on them. So somewhere in the 30s. So 26% is actually a little bit of a slowdown, odd as it maybe.

Many of the prepayments, and different companies pay off their loan in full and that includes partial prepayments as well, that metric. The reasons people pay it down vary widely. It could be a short tranche. Maybe a company has 2016 tranche and a 2020 tranche. Maybe they are refinancing for '16 just because it's coming due.

It might be a small part of their overall capital structure. Or if company is getting sold, private equity sponsor sells company A to company B, that’s going to be a pay to sponsor B. That typically would require a pay down. There is probably not a lot of rate in term refinance or rate based refinance or spread based refinancing right now.

So the repayment rates we are seeing are due to factors other than, oh gee I can lock in lower cost of debt..

Okay. And just more of a general question. I mean I know the NAV per share has gone down, obviously that’s from the unrealized marks. Do you think that, I guess in general, the market is kind of missing the story when you look at the cash yields that your company is able to throw off and the growth from the NII.

And that these are coming from unrealized marks that are actually making the opportunities just that more attractive for you when you are reinvesting. I would just like to hear your thoughts on that..

Yes. That one is actually the easiest answer of all. We did say in the prepared remarks, we think the sell off is overdone. There has been a non-trivial shift in the supply demand balance in the CLO market, both for junior CLO debt securities and CLO equity. A number of sectors who had been active buyers have backed away for a variety of reasons.

Frankly, the continued noise around the energy space has we believed moved some investors away. And we are very mindful that there will be credit events in the energy space, no doubt about it. And all of our expected yields include a meaningful reserve for losses.

That said, we think there have been some participants in the market who got pretty used to not having any credit problems. Then you wake up and, my goodness, there is a sector or two that’s under review that causes folks to move away. So we think the sell off is overdone. We are doing our best to keep the portfolio fully invested.

If you see in the September financials, I mean we had less than $1 million of cash.

We get a lot of payments in October which allows us to comfortably service the dividend but we are trying to keep from a capital point of view, the portfolio fully invested during these choppy times because it's a great time to be buying, frankly when the supply demand is much more in our favor..

Your next question comes from the line of Ryan Lynch with KBW. Your line is open..

I know you talked about expecting the $0.51 NII to grow in the fourth quarter but as I look at your balance sheet, looks like you guys are fully invested with the current capital available to you guys.

So just what actions can be taken to increase the earnings about the dividend and is converting some of the $40 million of loan accumulation facility is part of that thought process..

Yes. Very good question, Ryan. So a couple of things we think move in the favor of seeing NII move up quarter-over-quarter. The first is, that in the third quarter there was some drag from the preferred stock offering in that we deployed that. I think we announced in mid-August we had fully deployed that capital.

But assuming it was sprinkled between July 1 and mid-August, there was a period of time when that was earning cash or sitting in cash but of course accruing interest expense. So that was one of the things holding back earnings. It was certainly greater than maybe about 2 pennies a share, roughly, in the last quarter. So that was one of the factors.

And then, indeed while we converted two of the loan accumulation facilities into CLOs and you see on page five of the investor presentation, facilities six and seven have gone away. We do have five facilities on the books and the income accrued on those facilities, frankly, is below the expected yields on the actual CLO equity in the ground.

The CLO market is open and active. Some data I saw this morning through the Q4 to date has been over $14 billion of new CLOs issued. Frankly, we have been holding the reigns in a little bit just because the liability costs on the CLO just as CLO equity yields have widened. Double Ds have widened by 100s of basis points.

And we have kind of slow [claimed] [ph] these a little bit, I think would be fair way to put it, but entirely at our discretion.

You will see the earnings or the income accrued during Q3, this is on page 5 of the investor presentation, versus the amount of capital we have in the ground, is certainly well less than the 16% plus rate, net of losses that we are accruing on the CLO equity portfolio. So I do expect those to convert over time into CLOs.

The nice part is, these are all multiyear, non-mark-to-market facilities so the discretion is really ours, within reason when they get converted into a CLO. Against that, we are mindful the optionality is not free because they earn less until they are converted but we are also trying to make long-term decisions not period by period decisions.

So those two factors taken together would add a bunch of cents to the portfolio, the expected yield. And then even during the third quarter you saw the expected yield resulting from the new investments than went up, the yield went up by virtue of some new more yieldy investments coming on line during the quarter.

So if you look at the growth rate in the net investment income per quarter, it's a very steady growth rate. And as we continue to reposition the portfolio, just moving $40 million all into CLO equity, which I don’t predict will do this quarter, you could see the impact of that, I think you could calculate, would be pretty significant..

Okay. Thanks for that. So sticking with the loan accumulation facilities. Would you say that the kind of disruption in the leverage loan market. Does that help or hurt your ability to eventually convert those loan accumulation facilities into CLOs..

Held in that. I mean, again, we have been using these facilities to opportunistically buy -- or the collateral managers have been using these to opportunistically buy new issue loans which are underwritten under today's, certainly much tighter credit standards on today's much wider yields.

We shared that example of October versus September yields for new issue syndicated loans, meaningfully wider.

So we are able to capitalize on those and frankly we use the similar strategy, if you look at our financials from last -- certainly Q4 of last year -- loans got really cheap in December and we were able to frankly have our facilities pick up a bunch of loans very very cheap in December.

And then as the CLO market tightened in January and February, we were able to convert those into new CLOs. The exact timing, you never know exactly what market conditions will do broadly. It feels like CLO debt is tightening right now. I don’t know if that continues through the rest of the year.

Typically, in the first quarter of the year we see rallies in CLO debt and that’s some of the stuff that factors into our timing decisions.

The timing option is not completely free because we are earning less than if they were converted but, again, we are trying to make the right long-term decisions but we love having these open to be able to buy loans cheap when stuff needs to get done..

Okay. And then just I was looking at your balance sheet. I mean you guys are -- your cash is fully invested and you guys have your preferred stock now fully invested, including the preferred stock as a leverage or about leverage. 0.2 times debt to equity.

So what are your thoughts about portfolio growth expectations going forward as well as how you guys are thinking about the addition of additional balance sheet or additional leverage to your balance sheet?.

Sure. So we are a little bit limited as to what we can say because we are in registration right now on the amended bonds now shelf filing. What I would expect is over time assuming the filing is declared effective, that we would look to have a measured growth at all points in the company's capital structure.

The terms of the preferred stock we think are highly accretive that we think it's a fine investment onto itself, but highly accretive to the common and the original genesis of that N2 filing which has now been amended, you will recall was to issue an unsecured corporate bond.

We announced earlier in the summer that the company was given, I guess, a conditional or provisional A minus rating from a nationally recognized statistical rating organization, NRSRO, which we think will help -- if that security is issued, help get some very attractive pricing on it.

So it wouldn’t surprise me to see some additional, some new debt or some additional preferred at some point, but then equally importantly, the company always considers if it makes sense to issue common. Of course, we are very sensitive that we have been very fortunate that the stock is traded at a healthy premium to NAV.

Obviously, any common issuance would need to be accretive to issue additional common..

Great. And then just one last one.

Can you guys provide a split of the amounts of directly originated CLO equity in your portfolio versus secondary CLO equity?.

Let me think about that. We haven't done that to date. At the end of the day, every security we have has gone through our rigorous underwriting process. Some things we have purchased, we have purchased in the secondary market and I guess two reasons for that.

Certainly before our exemptive relief was granted in the first quarter of this year, we did need to buy some smaller pieces. And they might have been primary minority or secondary minority pieces.

But even in those cases we still give very very strict review to the transaction documents and in many cases hold those investments to a higher standard because if they don’t have all of the documentation and protective rights that we look to add.

I am not sure if it would make -- how we can flag that or not because in some cases we step in late in the process in the CLO. So let us think about that. I am not sure what we will be able to come back with.

What you will see though is even in some situations and if you look at page 2 of our filing, there is a number of collateral managers that appear there multiple times. Safe to say some of those are investments that we were involved in the formation of and others that we bought in the secondary market.

So there may be a little bit of both there but even if we are not involved in the formation, certainly our collateral manager review process gets done as well as the whole documentation process..

Your next question comes from the line of [Philip Johanes with Cambro Capital] [ph]. Your line is open..

Thanks as usual for the great additional color on the quarter and the market. Two quick questions. You had mentioned a number of metrics to indicate the health of the underlying portfolio notwithstanding the large negative pricing mark experienced in the market. One of the measures, at least in my view would be diverted cash flow in the quarter.

Do you guys have that handy? Did you get more or less all the expected payments coming out of your CLO managers or did you see any diversion in cash flow?.

That was easy, zero, a zero diversion. And if you look at page 4 of the third quarter investor presentation, here we list out each of the CLO equity holdings and the fourth column from the right is the junior most OC test cushion. And that’s a very good metric to look at to see.

Obviously if that were to get to zero or below zero, than there is the very likely outcome where cash flows that would have otherwise gone to our securities would rather be diverted to buy new loans or in certain cases to repay senior debt. But right now as you can see, I think our min looks like maybe CLO 25 at 366.

I think this is looking at the size of the earnings as the secondary position we would have purchased. The weighted average of the portfolio is over 5 points. If you look at our research report that Dave Preston at Wells published a month or two ago, it looks like the average 2.0 junior OC cushion is in the mid fours.

So our CLOs in general, whenever possible, we seek to have more OC cushion than less. And then you can see that overall manifested itself in the weighted average on page 4. The final bit to highlight, and this is something we always like to remind folks of.

The OC test matter four days a year, they don’t matte the other 361 days substantially, in that they really only come into play on the quarterly determination date and even if an OC test were to be failing, let's say on all days other than the determination date, the collateral manager would generally be able to reinvest any pay downs including par paydowns from prepayments into new loans.

It's only that cash in the accounts on the date of determination that at OC test failure comes into play.

So it's not something that we feel is a near-term risk to the portfolio and even if it was, even if it were to become a risk and indeed some CLOs missed payments in the 2008-9 cycle, we don’t think it's a significant -- frankly, many of those reinvestments were some of the best that CLO has made..

Terrific. Thank you for that. The second question is just related to the market structure. I picked up a piece regarding Guggenheim pricing a CLO in Europe with a step up feature on the senior. At prior call it had a step up in coupon after I think an 18-month non-call period.

And presumably this was a way to attract people to the triple As in today's market. Can you just comment on whether you are seeing that structure more widely and how you think about that sitting in the equity seat..

Sure. So at a high level, we saw that step-up triple A be pretty common in 2014. There were one or two investors who really really liked that. And what they were focused on was they wanted to get new issue deals but they wanted to have a reasonable degree of confidence that they would have a two-year piece of paper or 1.5 year piece of paper.

So a number of CLOs got on with that. I know we have purchased one or two over the years that have that as our advisor, I should say, has purchased. I am not sure if those are in this portfolio at present. If they were, they were typically those deals that had it were very very small portions of the triple A.

If it's a $300 million class, maybe $25 million or $50 million might have been done with that format. And certainly when we underwrote those investments, one of the things we don’t include in any of our underwriting quantitatively is benefit of refinancing..

Understood.

So said differently, you are assuming the step up?.

If we have any in here, it’s not significant. And then b, we are assuming the full step up..

Okay. So put against the backdrop of let's say LIBOR floors and the prospect of increasing interest rates, this is de minimis with regard to potentially yield compression.

Is that a fair assessment?.

Absolutely. And just like LIBOR floors, it's baked into our assumptions. So when we make a new investment, we assume the forward curve which, although the forward curve has been wrong more consistently than it's been right, that would have, as of last I looked, LIBOR going above 1% a little more than a year from now.

Although maybe it's moved a little closer in the last week or so. So again....

Your next question comes from the line of [Steven Bavaria] [ph] a private investor. Your line is open..

I appreciated the question four questioners ago or so on the challenge of getting retail investors, especially I guess to focus on the growth in your distributable cash flow and not to fixate as much on the changes in the NAV.

And along that line I just wanted to ask you with in theory, would an investor be correct in assuming that say for every 1% drop in the market price of the loans in a CLO, assuming your CLOs leverage 10 times, that would mean that if the loans were available in the market again, which they presumably are not in most cases, but you would sort of theoretically replicate that CLO with 10% less equity than you could have before the 1% drop in the market price of the loans in the CLO.

Right. So that your NAVs would sort of, in theory, you would expect them to drop by 10% for every 1% drop in the overall market price in the market. Even if at a 10% leverage rate, typically, even though that would have no impact whatsoever on those CLOs cash generating capacity.

Is that sort of the right model for an investor to think about this NAV drop?.

You are correct in all regards..

Okay. Just wanted to....

And then the piece that we think about, CLO equity trades at value which may or may not be equal to its liquidation value. This is in general a CLO that’s past its reinvestment period in amortizing. Might trade slightly above or slightly below its liquidation value.

A lightly seasoned CLO with 3.5 years still to reinvest, in many cases trades at a premium to its liquidation value, recognizing that it has multiple years of runway of potentially cheap financing.

So the price of loans of late has been a big driver in the value of CLO securities, particularly CLO equity securities and the math that you laid out holding on our sequel is exactly spot on.

A couple of -- the piece that we think the market doesn’t give enough credit to in the marks on the security -- on the CLO equity securities is let's take your example a step further. Loans are down a point and let's assume all loans are down a point equally, we just saw a 26% of the underlying portfolio on an annualized basis repay.

That’s a hair less than or it's a little over 6.5% roughly. That’s money that can look out the right side of the balance sheet locked in that we can now go buy those new loans at new cheaper prices.

And the market does not give any credit or we think many participants in the market do not give any credit to that and I made a statement during our prepared remarks that we think the sell-off is overdone. It's exactly that reason. People talk about what's the NAV plus type analysis and the math is absolutely correct.

I would say, what's the reinvestment opportunity that the CLOs are looking at today. And unambiguously that’s better than it's been in a long time, in terms of it being a lenders market. So the marks are the marks, we fairly marked the portfolio. Hopefully we do a very good job of that.

What we look at is the cash flows on the portfolio which you see obviously doing well, the OC cushion and then building the net investment income, our things we are most focused in the day to day management of the company..

Thanks. That’s reassuring. And I think your retail investor base especially needs to hear that every so often. So I appreciate it..

We will do our best to keep that message coming and hopefully all the transparency on the portfolio and the cash that’s generating is helpful for investors to get their heads around this.

Are there any other questions from anyone?.

There are no further questions at this time. I will turn the call back over to Mr. Majewski..

Great. Thank you, very much everyone for joining the call this morning. We appreciate all the questions and that concludes the call today. Thank you very much for your interest in Eagle Point..

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