Good morning. My name is Carole and I will be your conference operator today. At this time, I would like to welcome everyone to the Eagle Point Credit Company Q2 Update Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] I would now like to turn the call over to Tom Majewski, Chief Executive Officer..

Good morning and welcome everyone to the Eagle Point Credit Company’s second quarter earnings call. This is Thomas Majewski and I’m the Chief Executive Officer of Eagle Point Credit Company. I’m 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 before we begin..

Thank you, Tom. This is Ken Onorio speaking. 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 Semi-Annual Report, which includes our second quarter financial statements with the Securities and Exchange Commission.

The Semi-Annual Report and our second quarter investor presentation are available on the company’s website. The Semi-Annual Report can be found by following the Financial Statements & Reports quick link. The investor presentation can be found by following the Investor Presentation and Portfolio Information quick link.

I would now like to hand the call back over to Tom..

Thank you, Ken. Ken and I plan to address a handful of topics with call participants today, including first, the company’s second quarter financial results and investment activity during the second quarter.

The second topic we’re going to cover is the third quarter 2016 portfolio activity through August 19, and management’s preliminary estimate of the July 2016 NAV per share of common stock.

The third item we plan to cover is a recap of the company’s two recent follow-on unsecured note offerings and the follow-on common stock offering during the second quarter. The fourth item will be an update on broad CLO and loan market developments.

And then finally, fifth, we’re going to provide some additional details around the impact on moves in LIBOR and the impact of LIBOR floors on the CLO equity.

Ken, would you begin by walking us through the second quarter results, please?.

Sure, Tom. We will begin with the company’s second quarter 2016 results. During the period from April 1 to June 30, 2016, the company reported net investment income and realized capital gains of approximately $8.2 million in the aggregate or $0.57 per common share.

This was comprised of $7.9 million of net investment income and $0.3 million of realized capital gains. This compares to net investment income and realized capital gains of $0.61 per common share in the first quarter of 2016 and $0.47 per common share in the second quarter of 2015.

When unrealized portfolio appreciation is included, the company reported net income of approximately $26.2 million or $1.81 per common share for the second quarter of 2016. This compares to a net loss of $0.10 per common share in the first quarter of 2016 and net income of $0.46 per common share in the second quarter of 2015.

The company’s second quarter net income was comprised of total investment income of $13.3 million, net unrealized appreciation or mark-to-market gain of $18 million, and realized capital gains on investments of $0.3 million, offset by total expenses of $5.4 million.

The quarter-on-quarter decrease in net investment income in realized capital gains per share is attributable in large part to capital raised during the second quarter that was not deployed by quarter end. As of June 30, 2016, the company’s net asset value was approximately $218.7 million or $14.46 per common share.

As of June 30, the closing trading price of our common stock was $16.10 per share, reflecting 11.3% premium to NAV on such date. As of August 19, the company’s closing common stock was $17.78 per share. The total return to our common stockholders for the six months ended June 30, 2016 was 5.23%.

This assumes that distributions received during the period were reinvested at prices obtained by the company’s dividend reinvestment plan. During the first six months of 2016, the company deployed a total of $99 million in new investments, inclusive of amounts reinvested.

This consisted of 14 new CLO equity investments, more loan accumulation facility add-on investments, and one investment in CLO debt. Three of our new CLO equity investments were the result of the company pricing new CLOs using the loans from loan accumulation facilities held by the company.

In conjunction with the closing of these CLOs, the loan accumulation facilities were repaid in full, including accrued interest. The weighted average effective yield of CLO equity investments made by the company in the first six months of 2016 was 18.31% as measured at the time of investment.

The weighted average effective yield of these new investments was approximately 163 basis points higher than the weighted average effective yield of the portfolio as of year-end and reflects the company’s efforts to capitalize on market conditions during the second quarter.

As of June 30, 2016, the weighted average effective yield on the company’s CLO equity portfolio, inclusive of CLO equity investments made in the second quarter, was 17.03%. This compares to a weighted average effective yield of 16.47% as of June 30, 2015, and 16.77% as of March 31, 2016.

We highlight that effective yields of the company’s CLO equity investments include a provision for future credit losses. The company’s asset coverage ratios as of June 30 for our preferred stock and debt has calculated pursuant to an Investment Company Act requirements were 325% and 620% respectively.

These measures are well in excess of statutory minimum coverage requirements of 200% and 300% respectively. On prior calls, we discussed management’s expectations under current market conditions of generally operating the company with the leverage in the form of debt and/or preferred stock within a range of 25% to 35% of total assets.

As of June 30, the company had debt and preferred securities outstanding, which totaled approximately 31% of the company’s total assets less current liabilities. Overall, we remain pleased with the company’s portfolio and believe the portfolio’s cash generating capacity remain strong.

As noted in our prior communications, our portfolio continued to generate meaningful cash flow, despite the unrealized mark-to-market challenges experienced in senior secured loans and CLO securities during the second half of 2015 and the early part of 2016.

More recently, we have seen the value of our portfolio increase, reflecting among other things the markets better understanding of the cash flow generating capacity of our investments.

Additional information regarding the company’s portfolio and underlying loan obligors can be found in the company’s regular quarterly investor presentation available on our website. This presentation includes portfolio level information, which we believe is helpful for stockholders and their continued evaluation of the company.

We encourage everyone to download and read this presentation. Your attention is drawn to pages four and five. On these pages, we provide position-by-position details of GAAP earnings, cash flows, and other investment level metrics.

Among other information, this page compares the cash flows received in the second quarter versus GAAP earnings accrued using the effective yield method in the prior quarter. You will see the ratio of cash received in the second quarter to income accrued during the first quarter is 165%.

All cash flow in excess of accrued income is treated as a return of capital for GAAP purposes. In addition, the company provides via its website certain look through information regarding the senior secured loans underlying the company’s CLO equity and loan accumulation facility investments on a monthly basis.

There is one small enhancement this quarter in the investor presentation that I wanted to highlight. In prior quarters, we have shown investors that distribution of ratings of the underlying loans in our CLO investments. This showed how many loans were CCC and in other rating categories across all of our portfolio investments.

We will keep that format of reporting, but we’ll now also include a total percentage of loans rated CCC plus or below on a position-by-position basis. You can see this level of detail on pages four and five of the presentation. We hope the information is helpful for investors. I’ll now hand the call back over to Tom..

Great. Thanks, Ken. Before moving on to the second agenda item, I’d like to add some broader thoughts about the company’s financial performance and our approach to managing the company during the second quarter.

At the beginning of the year, after several months of NAV decline, we commented that we thought the market valuations and the cash generating capabilities of our portfolio were inconsistent with each other.

We formed this view not based on headlines and sound bites, but rather based on our deep understanding of the behavior of our investment portfolio. While we would not assert that all volatility is behind us, we are pleased that our investments have performed similar to the way many other CLOs have behaved in prior periods of downward price movement.

Frankly, it is during periods of pricing pressure on loans that we’re of the view that CLOs can often take advantage of their locked-in structures without margin style triggers to capitalize on reinvesting in low-priced loans.

Sometimes during periods of prolonged downward price movement, we think CLO market participants sometimes lose sight of the long-term track record of senior secured loans and the resilience of CLO structures. As long-term investors, we focus our attention on evaluating the securities fundamental of value.

I’m also proud of the thoughtful approach with, which our management has taken to managing the company. Inclusive of our most recent note offering, since our IPO, the company has access to capital markets five times.

We have sought to and I believe we have appropriately sized each capital raise be it of common stock, preferred stock, or unsecured notes to allow us to continue to pursue our strategy of vintage period diversification in our investment portfolio.

Our common stock offering in the second quarter increased NAV by approximately $0.19 per share and our recent note offerings have allowed us to lower our all-in cost of capital. We believe the recent notes offerings will be very accretive to our long-term earnings potential.

While it is sometimes too easy just to focus on the short-term of quarter-to-quarter earnings wherever possible, our management seeks to maximize the long-term value for shareholders. Moving on to the second agenda item, I’ll provide an update on the company following the June 30 quarter end.

On July 29, 2016, we did a distribution of $0.60 per common share for the quarter ended June 30, 2016. As with prior quarters, the June 30 net asset value reflects an accrued liability for this distribution.

Looking at cash flows, what we see is investments that have reached their first payment date and are generating cash flows in line with our expectations. During the third quarter of 2016, as of August 19, the company has received cash flows on its CLO equity portfolio totaling $20.8 million, or $1.37 per common share.

This compares to $24.3 million of cash flow received during all of the second quarter of 2016, which was primarily comprised of $17.1 million from our CLO equity positions. You will note that the third quarter cash flow generated from all CLO equity positions through August is higher than that in all of the second quarter.

You may also recall that in the last quarter, we talked about a quarter-over-quarter decrease in cash, driven by the impact of the Fed’s rate hike in December 2015. And you may now be surprised to see an increase. One of the drivers of the increase in cash flow so far this quarter was the market volatility during the first quarter.

When loan prices were lower earlier this year, many of our CLOs were able to reposition their portfolios, building par, and increasing spread. CLO portfolios are actively managed and their portfolio composition typically changes regularly.

We believe periods of volatility can be beneficial to the long-term value of CLO equity, as reflected in the increased cash flow that we’re now seeing on these investments. During the third quarter, through August 19, the company has made new investments totaling $12.4 million consisting of three new and two add-on CLO equity investments.

These investments were all made in the secondary market, where we have continued to see attractive values.

In addition to making certain portfolio level information available on our website on a monthly basis, we also published an unaudited management estimate of the company’s monthly NAV and quarterly net investment income and realized capital gains or losses.

Recently, we published a management estimate NAV of $16.33 per share of common stock as of July month end. This reflects a 12.9% gain over the June 30 NAV. We believe this increase was due principally to unrealized mark-to-market gains in the company’s portfolio. Ken will now cover the next agenda items..

Thanks, Tom. Our third agenda item is to provide a recap of the company’s recent follow-on issuance of unsecured notes and common stock. On June 1, 2016, the company priced a follow-on underwritten public offering of approximately $25 million aggregate principal amount of its 7% unsecured notes due December 31, 2020.

This transaction generated net proceeds of approximately $24 million after payment of underwriting discounts and commissions and estimated offering expenses. On August 8, 2016, the company priced an additional follow-on offering of $10 million aggregate principal amount of its Series 2020 Notes.

This resulted in net proceeds of $9.9 million after payment of estimated offering expenses. Both the June and August unsecured note offerings were institutionally placed with no impact to market price.

The company plans to use the net proceeds from these offerings to acquire investments in accordance with its investment objectives and strategies and for general working capital purposes. An important part of our advisors investment strategy is to continue to enhance the vintage period diversification of the company’s CLO portfolio.

While the company generates cash flow in excess of investor distributions and expenses and this cash flow is available to be invested, the newly raised capital allows us to execute a diversification strategy of keeping the company within the range of leverage it generally expect us to operate within.

As a result of these two insurances, the company currently has $60 million of aggregate principal amount of its Series 2020 Notes outstanding. The Series 2020 Notes trade on the New York Stock Exchange under the symbol ECCZ. As of August 19, the market price of the Series 2020 Notes was $26.16, representing a 4.6% premium to its $25 principal amount.

As noted on the first quarter earnings call, on May 13, the company priced the public offering of 1,250,000 shares of its common stock at $17.65 per share. This resulted in net proceeds to the company of approximately $20.8 million after payment of underwriting discounts and commissions and estimated offering expenses.

The offering price of $17.65 reflected a 23.2% premium to management’s estimate of April 30, NAV. This resulted in an increase in NAV of $0.19 per share, or 1.33%. Moving to the fourth agenda item, Tom will provide an update on his loan and CLO markets..

Great. Thank you, Ken. Since the February lows, CLOs have continued to rally through July month end. The global hunt for yield has benefited the company as NAV increased by 21.5% in Q2 and continued to rally further in July. The Brexit vote in late June provided a two-day blimp without prolonged price volatility in CLOs.

Due to meaningful amounts of new capital pools that were formed to invest in the CLO opportunity, demand for CLO equity and CLO debt has remained strong, as investors continue to view CLOs as having strong relative value characteristics compared to many other asset classes.

Along with most other risk assets, loans have rallied significantly since the February lows. Technicals have brought the JPMorgan leverage loan index up 5.7% through July, despite net outflows of over $6 billion from retail funds during the same period.

At the end of July, 41.2% of the JPMorgan leverage loan index was trading above par, spurring some opportunistic refinancing activity in the loan market, though perhaps less active than prior periods. Actual loan default rates have remained low.

Many are surprised to learn that the last 12-month loan default rate currently stands at 2.27%, that number is only 89 basis points if energy-related names are excluded. Moving to the CLO market, issuance picked up significantly in Q2 versus Q1.

Based on market data from Wells Fargo and Barclays, even in July marks some of the highest or the highest and third highest months of CLO issuance this year with $12.4 billion of new issued volume. Through July, 2016 issuance stood at approximately $32 billion, which is roughly half of the 2015 volume as of the same date.

Several major underwriters have increased their 2016 CLO issuance forecasts, in some cases after lowering those forecasts back in April, due to strong demand throughout the capital stack. The latest forecast typically predict approximately $60 billion of U.S. CLO issuance in 2016.

Market data also shows that AAA and BB debt spreads among other debt classes have tightened from the February wides of 175 basis points and 1000 basis points over LIBOR through more recent levels of 145 basis points and 750 basis points over LIBOR, respectively. In our opinion, that’s a meaningful tightening in the market.

CLO fundamentals also improved across several metrics in July, as the loan market continued to rally. Market data shows that close to two-thirds of CLOs reported an increase in the minimum over collateralization cushions during the past month.

CLOs have also generally shed exposure to second lien assets since the beginning of the year with the median exposure now approximately 2.1%. This is about 50 basis points lower than it was six months ago. Despite an increase in the CCC bucket over the last six months, the median CLO still has 3% to 4% cushion on its CCC bucket tests.

The median default exposure rose by about 10 basis points across CLOs in July. But as we noted earlier, we still remain in an overall benign default environment away from commodities-related loans. We note that LIBOR has increased recently somewhat due to the upcoming money market reform effective date.

[ph] Three-month LIBOR has increased by approximately 20 basis points over the last two months and is currently at multi-year highs of approximately 83 basis points. However, 78% of the JPMorgan leverage loan index has a LIBOR floor of 1% or greater.

The CLO equity will continue to benefit from these LIBOR of these floors as long as LIBOR remains below 1%. The company evaluates its investments using the LIBOR forward curve, which we’ll talk more about later. So we have long accounted for the benefit of these LIBOR floors going away over the life of our investments.

Earlier this week, CLO issuance in August has also remained strong, despite the typical summer slowdown of roughly $4 billion of new CLOs has priced and CLO debt spreads continue to move tighter as demand outweighs supply. We see this tightening CLO debt environment is favorable for CLO equity to lock-in long-term financing.

For our fifth agenda item, we’d like to share some more thoughts on the impact of LIBOR floors. If you follow CLO news in the broader media, you’ve probably read something about these LIBOR floors. We’ve seen an increase in coverage of this topic over the past few months.

Some of these articles may have even suggested dire consequences for CLO equity as a result of LIBOR moving up. But we read these articles too. One of the things we have yet to read in an article is the full story really as we experienced as market participants.

What is missing from what we have read is that, based on our experience, the vast majority of CLO equity investors consider the LIBOR forward curve when evaluating CLO equity investments.

The forward curve reflects the market’s view of where rates are expected to be in the future, and over the past few years the curve has priced an increases in rates over time. In fact, from our perspective, using the forward curve could very well be called an industry convention among CLO industry – CLO equity investors.

This is important and we’ll explain why. Many of our CLO investments reset the coupon on their debt tranches during the first month of each calendar quarter based on spot three-month LIBOR. There typically aren’t floors on CLO tranches, so when LIBOR is low, the CLOs funding cost stays low.

Nearly all senior secured loans are also floating rate and that rate typically floats based on LIBOR. However, today many loans have what are known as LIBOR floors as we established earlier, a floor that limits the low-end of a variable rate.

In CLOs case, when LIBOR is very low, the floors are valuable, because CLOs collect interest on its loans at a floored rate, while borrowing itself at an unfloored rate. The left side of a CLOs balance sheet is floored and the right side is not. All as equal, this is good.

As of the second quarter, our look through loan portfolio – through our look through loan portfolio, this – the left side of the CLOs balance sheet had a weighted average LIBOR floor of 96 basis points, and again, three-month LIBOR is roughly 83 bps.

Holding all else constant as the LIBOR increases towards 96 basis points, equity cash flows in the average CLO would drop. This potential decrease for cash flows is what is being reported in the media articles.

Should LIBOR increase above 96 basis points, however, holding all those constant equity cash flows in our average CLOs would then begin to be increasing from those lower levels. This is not covered in media articles. When the company determines its effective yield for each investment, we factor in the forward curve for LIBOR.

As a result, all of our effective yields contemplate rates rising to and eventually above 96 basis points. What this means is the purportedly dire consequences foreshadowed in some media articles has long been factored into what we believe to be a large part of CLO equity investor landscape.

To put some more real-life data around this point, today the forward curve predicts that in August 2017, three-month LIBOR will be approximately 98 basis points. If we were to make a new investment today, this would be the curve that we use suggesting that nearly all the benefits of LIBOR floors go away quickly.

Looking back to the data of our IPO in 2014 to share some history, the LIBOR forward curve then predicted that three-month LIBOR would be at 1.6% today in August 2016. Again, three-month LIBOR is 83 basis points today far – so far lower than what the forward curve would have predicted 22 months ago.

As a result, we actually have ended up receiving more benefit from LIBOR floors than we anticipated. Over the coming weeks, we plan to post an illustration on our website showing the impact of different LIBOR trajectories on our representative CLO equity IRR.

We hope you’ll find this information helpful and we’d be happy to address any questions that you may have once we publish the information. To offer some brief concluding remarks, I’d like to thank everyone for their continued interest in Eagle Point Credit Company.

We believe the company has continued to build upon its strong first quarter and are pleased with our positioning going into the fall.

Some of the company’s accomplishments include earning GAAP net investment income and realized capital gains of $1.18 for the first-half of the year, issuing additional common stock at a significant premium, increasing NAV by approximately 1.33% for common stockholders, and completing two follow-on offerings of our 2020 unsecured notes in purely institutional placements, management’s estimate of NAV for July 30 is up another 12.9% from the June 30 NAV, the company has been able to be on the offense during these periods of price volatility.

The new CLO equity investments the company made in the first-half of the year had a weighted average effective yield at the time of investment, which was approximately 163 basis points greater than the company’s year-end weighted average.

And finally, the company has available cash on its balance sheet and our advisor continues to evaluate new investment opportunities. The company is well-positioned to continue to selectively take advantage of market opportunities as they arise. This concludes management’s presentation of Eagle Point Credit Company’s second quarter update.

At this point, we’ll open the call to questions, and Ken and I would be happy to address any questions that our call participants have..

[Operator Instructions]. Your first question today comes from Ryan Lynch from KBW. Please go ahead..

Hey, good morning, Ryan..

Good morning, Tom and Ken. Just the first question, you guys had about $58 million of originations in the quarter and only about $1 million of net growth.

Was that all just due to your three loan accumulation facilities just converting from those facilities into CLO equity? And then second part to that would be though, basically the $1 million of net portfolio growth in the quarter considering the amount of capital you guys currently hold in your balance sheet, why wasn’t there more portfolio growth in the quarter and what’s kind of your outlook for future net portfolio growth going into the second-half of 2016?.

So, yes, the first-half regarding the net investments for – the new investments for the quarter, we can confirm that a good portion of that was the conversions of loan accumulation facilities into CLO equity..

And then as we look prospectively, we had a healthy amount of cash on the balance sheet as of June 30. We’ve continued to be active both – I guess, let me kind of expand upon why that was there. If you look at prior quarters, we’ve typically been, I think, the prior end of Q1, we were quite tight on cash in keeping the company fully invested.

The reason for the buildup in cash towards the end of Q2 was principally the two raises of both common stock and the unsecured bond offering. We have not been super heavily deployed by the end of the quarter. We shared data.

We probably made 14 or so line items, maybe more than that somewhere in the mid-teens in terms of counts of investments during the second quarter, and we’ve continued to be active into the third quarter.

Looking at the market landscape, we did not -- kind of the mid-June period going into the Brexit vote, there was some uncertainty around what was going to happen in the world at that point and having a little extra cash, people felt like the right decision.

But broadly, when we – when – in each of the prospective supplements for the various capital raises. You’ll see, we typically target around two to six months for pace of deployment for any of the raises, and we don’t see any reason why that won’t be achievable..

Okay, great. And then just moving to some of the credit metrics that you guys have stated in your presentation. So cash received as a percentage of prior quarters income accrual was about 165% and that was down from 194% in the prior quarter, and the weighted average junior OC cushion was about 4.08%, and that’s down from 4.38% in the prior quarter.

So how do you guys view these current metrics today? And what – at what levels do you consider these metrics to be healthy? And are you concerned with the general trend of these metrics going lower as we see in this quarter and I believe the last quarter as well?.

Good question, Ryan. Let me answer those in two part. The cash-on-cash, we talked about that briefly in the prepared remarks.

But what we saw in the second quarter and the excess cash above accrued income in the second quarter fell versus that same metric in the first quarter, and that was principally due to the LIBOR in – the base rate increase in December, which reset CLO liability rates in January, which manifested itself in the April payments.

So that was kind of the manifestation of LIBOR floors, actually ticking out is what we see is the difference between the Q1 and the Q2 cash versus accrual metrics.

What we shared in the prepared remarks is cash flows from the portfolio so far through mid-August are actually – the CLO equity component is actually greater than we received through – from all of Q1 and some investments haven’t yet made their payments in this quarter.

And what we’re seeing is the underlying CLOs in many cases, we’re able to increase spread or build par or both during the periods of – when loans were at their cheapest, which is now actually generally increasing cash on many CLO investments. So some of the cash flow trend has already changed.

But importantly, and this kind of goes to that LIBOR floor discussion, and we’ll add some more detail when we put out the full presentation.

The reduction that we saw from Q1 to Q2 was anticipated by virtue of using the forward curve for projecting cash flows, and now some of this increase is coming from benefit of being able to – for the portfolios to be actively managed in picking up spread in choppy markets.

To the second part of your question around the deterioration in the OC cushion, we’re still in the very low 4s is my recollection, and that’s down about 25 basis points from where we were at quarter end. Some of that is due to portfolio migration on our part and continued portfolio activity.

One of the challenges, when we make an investment in the secondary market, we have to take someone else’s cooking, and when we create our own or involved in the creation of CLOs at time zero, we typically will focus on building an extra OC cushion. When you buy something in the secondary market, that much is set.

So if you look at some of the newest line items in the portfolio, you’ll see some of those have lower cushions than the average.

Although overall, I think some CLOs did deteriorate somewhat on their OC cushion just based on realizing losses, selling something, selling in energy name, we think is going to go down further, things like that we’re certainly happy to see within the CLOs.

Overall to your question, what sort of cushion are we comfortable with? I think if you were to ask nearly any collateral manager in the market, they would tell you, boy, if you had four points of cushion, that’s great. And in general, I would take the view that our portfolio has more OC cushion than the broader market average..

Okay, great. That’s actually a great color around both of those metrics. My next question just has to do with the risk retention rules, I was just reading an article last week, it was talking about three new issuers or managers have entered the market since April.

I would assume that conversely, there’s going to be some managers they may have to pullback or maybe exit the market due to the risk retention rules going forward.

So are you seeing those dynamics of the – a lot of new managers coming in and potentially some new managers stepping away? And is there a risk that any managers that you have worked with historically that you consider top tier may have to eventually exit the market because of the implementation of the risk retention rules at the end of the year?.

To answer that last question, no. So that much is easy. We’re not worried about any of the collateral managers in our portfolio either having going concern issues or substantively exiting the market.

Everyone and you can see line item byline item on page five of the Semi-Annual Report that the collateral managers and the CLOs or the CLOs and by that you can tell the collateral managers.

The risk retention rules were originally published in August of 2013, and the company went public in late 2014, and we consistently managed this in our other strategies. I’m very mindful that there would be some degree of shakeout from the risk retention rules if ultimately enacted.

Compared to last year in 2015, they were roughly 87 give or take one or two, CLO collateral managers that issued CLOs. So far this year, I would believe, there has been over 60 different firms that have issued CLOs. And we think and to roll the clock back to 2014, that number was actually over 100.

So we’ve gone from over 100 to the 80s, now to the 60s. And what that says in our opinion is substantially any firm that wasn’t going to be able to issue CLOs prospectively has already been shaken out by the market.

So they are not issuing today and the investment landscape that we’re working in reflects that smaller universe of CLO collateral managers. There are some new entrants coming in, which you picked up on, a lot of people are surprised to hear that.

But we do see more and more folks and people who call us and say, we’re interested in getting into the issuance business. We would like to get your thoughts. I’m always happy to have constructive conversations with folks.

But certainly everyone in the portfolio, there is no going concern risk in our opinion with any of the collateral managers, and we expect all of them to continue to be able to issue CLOs in the market and most of them have quite recently.

If you read in the letter kind of buried in the prose somewhere, we also talked about that a number of our CLOs are already risk retention compliant using vertical risk retention, where the collateral manager purchased 5% of each class of securities.

While these rules are not – the rules don’t take effect the President until December 24, 2016, and there’s not a requirement to bring CLOs prior to that date into compliance with rules as a show of strength, the number of the collateral managers that we’ve worked with have already undertaken to make their CLOs risk retention complaint and several of those are in the company’s portfolio..

If I can just ask one more follow-up to that, since none of your managers are really exiting the market as you stated and there are some new managers coming on as we’ve read and you’ve indicated.

Is that something – are you guys willing to work with potentially new managers that haven’t been really in a market, at least, in the last couple of years? Are you potentially willing to work with them, or do you guys want to stick with managers that have been in the market for several years, because if you would work with these new managers that could potentially open up a new pipeline and good – some different – I guess, just more deal flow potential with work when as you manage, however, the track record may not be as robust or complete some of the existing guy.

So how do you balancing potentially work with these new managers versus sticking with the old ones that you’ve continued to work with for a long period of time?.

Yes, a very good question and you fit on the balance really, really on point there.

Some of the – we weigh each of the factors, when you talk about how is someone going to manage a CLO, a question or how is the firm, how is the platform going to manage a CLO? One of the things we look at is the actual people involved in doing this on a day-to-day basis.

There are some folks who are highly experienced in the loan market, but for whatever reason have never been involved in CLO collateral management.

And managing a portfolio within a CLO, we believe is different than just managing a total return loan portfolio, because in addition to picking good credits and making relative value decisions, we have a 200 page indenture you have to deal with, which seems to have a rule on every page.

So on the surface you’ll see most of the collateral managers we’ve worked with are highly experienced, as a firm and as a team. That said, there are a small number of positions in our portfolio.

I feel what you see, I’m just looking at the schedule, you see, we have CLO 20s or CLO 20, someone CLO 14, CLO 27, those are obviously – those people have done it a few times. There is also a CLO 3, and someone else’s second or third CLO in here.

And in each of the cases of those lowered numbered CLOs the trade-off there as in many cases, it’s a highly experienced team that had a firm that’s new to CLOs, but that the firm is not going away. They are typically larger in a multi-pronged money managers and the team itself has long-standing experience in the market.

And that’s really what we look for as a team. That’s really good at credit and really good at in our opinion at managing CLOs at a firm of platform that has the staying power prospectively. And I think every name in our portfolio you’d be able to check those boxes..

Great color, Tom. That’s all for me. Thanks..

Great. Thank you, Ryan..

Your next question comes from Christopher Testa from National Securities. Please go ahead..

Good morning, Chris..

Hi, good morning, guys. Good, good, how are you, Tom? So just wondering, given you guys have done a substantial amount of secondary purchases with the volatility in the markets now that we’ve had such a sharp snapback in loan prices and CLOs.

Just wondering quarter to-date and your expectations for the fourth quarter this year on your secondary purchases versus your actual structured originations in CLO equity?.

Sure. And I think Ken shared some highlights or I did in the remarks that we’ve made a handful of investments and when we go back to the exact text, I think we’ve made $12 million and the composition – we made $12.4 million of new investments so far this quarter consisting of three new and two add-on investments.

So let me kind of explain a little further what that means..

Sure..

But certainly new things that we bought minority pieces of or maybe majority pieces depending on the opportunity, but we bought those in the secondary market.

And then two add-on CLO equity investments, those were cases where Eagle Point as a family already had an interest in the CLO, and I think in both cases, we’re involved in the formation of the CLO, where we are able to buy back CLO equity or what we thought to be very attractive levels with the added benefit of it being our own cooking and not having to buy someone else’s cooking.

So that much we like. But indeed, as you pointed out, the price of many of the securities have rallied.

We had, I believe, two – we had – we have two accumulation facilities opened at quarter end?.

Yes..

Sorry, so here’s going to turn over the page, we had two loan accumulation facilities opened at quarter end. And frankly, with the tightening in debt spreads, I’m a bit of what we are foreshadowing was that may start being a better time to be an issuer of new CLOs than a buyer of secondary CLOs, so it wouldn’t….

Right..

…[Multiple Speakers] to be more active on the primary side in the coming months based on where the market is today..

Got it, yes.

And that kind of leads into my next question, which is what opportunities do you have in the existing portfolio if any where you were able to potentially refi the AAA and AA portion of the debt, given spreads have narrowed pretty significantly?.

What we don’t – very good question.

While we don’t list this out, I’m looking through there as a firm here there are several refinancings that that we’ve been involved in, where we’ve repriced some more – the – some or all of the senior tranches within CLOs and a number of the CLOs in our portfolio have been flagged in some broader media articles as leading refinancing candidates shall we say.

So we’re very proactive on all of the investments in our portfolio in terms of looking at what and when our prime to be refinanced.

We’re fortunate there’s a resuming growing market of investors who are interested in shorter dated CLO tranches something that might be a little further along in the lifecycle and not a brand new transaction and they’re willing to buy those classes in many cases right to the prevailing new issue market whenever possible, we’re keen to capitalize on that.

And we’re I’d say as a firm very proactive in working with the collateral managers to implement those strategies..

Got it.

And also just touching on the CLO debt, just curious what you’ve seen, if any, if there has been any changes with regards to foreign investor appetite for the AAAs and AAs?.

Specifically, I think about that. We continue to hear increased activity from a broader set of investors in Japan, whereas at the beginning of the year, it might have been just one or two investors that were opened.

But we’re not directly out just trying to sell the securities ourselves and more and more interest from Japanese investors in CLO, AAA seems pretty visible.

We were out in the Pacific Rim in the first – in the second quarter and met with a number of AAA investors just as market catch up and a number of them were talking about increasing their investment capacity.

We’ve also heard of some regulations changing in, particularly, in China, where there we understand some regulated institutions may now be able to invest in rated CLO debt tranches, which have not historically invested in the market. I can’t point any specific transactions, but I’m certainly aware of a broad regulatory change, which is favorable.

More onshore to the extent you want to look through other kind of mutual fund filings at some of the very, very large fixed income oriented money managers in the U.S. We’re continuing to see more and more investors kind of come into the market folks who might be managing money that’s indexed off the Barclays agg.

Some of them may now be willing to add shorter dated CLO paper into that bucket. CLOs are not in the agg because of their floating rate. But if you were to take a shorter duration, I think, we’re seeing some investors go a little off indexed include those into their portfolios..

Got it, great. And just with the – if I look at your schedule of investments, so the – both the KVK CLOs as well as the Staniford Street CLO have affected the yields north of 35%.

So I guess the question is, what’s the catch there? Are – those have higher cyclical industries in them, just any color there is much appreciated?.

A very good question. And these were as you could tell by the prices and yields – our cost and yields were secondary market transactions. The yields are quite high. You can see that the cost if you understand kind of two KVKs. I guess, both thankfully and sadly are less than $1 million, maybe we could have gotten more of that.

The – each of these were both their KVKs and the Stanis were from what I’ll call probably that some of the lower NAV type CLO such that the marks on the portfolio in some case the underlying loans was lower than other CLOs in the market. We were able to get these positions at very, very lower prices as you can see.

Against that, a lot of our analysis is both looking at the credits and particularly the Fulcrum credits, those that are in the middle not the ones that are at 100 and not the ones that are at $0.10 on the $1. But the ones in the middle that could either go to 100 or go to 10, getting our heads around you there.

And then equally importantly looking at the structure of the CLOs and how much OC cushion those transactions have. And then finally, the overall status and standing of the collateral manager and what their approach is to managing – to managing each of the portfolios.

We’ve met in person a number of times with the team from KVK and a number of time from the team at Staniford. Staniford is actually NewStar now. It was the former Feingold O’Keeffe platform and NewStar for that Feingold something over the past few months. So we know the management at both of the shops in person.

We haven’t – you see there’s no prime or original new issue positions with either of those platforms. But looking at them, we think that cash flow potential certainly very, very high on those investments and the relative downside relatively small to the small size organization [ph]..

Got it, that’s great color. Thank you.

And just last one for me, just should we expect the junior OC cushion to trend down a little more? Are you anticipating making more relative value trades, where you’re kind of lowering cyclicality of the CLOs, or is that somewhat at a level where you’re comfortable at now in terms of energy and also mining, et cetera?.

Yes, certainly where we are now at the level, we’re very comfortable at. But the trends in that level and it’s certainly come down a non-trivial amount over the last 6 to 12 months that cushion even despite the reduction in cushion, we’re still that – we believe well north of industry market wide average is.

If you were to look at just kind of take with us 4% OC cushion even mean frankly. What that would suggest is holding all as equal, you could have 8% of the loans default and 50% recovery and still not reach your test. So when you think about it that way, we’re at a trailing two to one-year default rate in the very low 2%.

You need a significant increase if it were defaults that were to drive it in defaults at low recovery lower than historic recoveries actually trip that test.

One of the other things that you could do as a collateral manager, if you buy a loan typically at 80 or 85 or above, there is the opportunity – those loans typically would be counted as 100 in the OC test numerator.

So even if you were to have that drastic move of 8% of the portfolio defaulted instantly in the average CLO, you could also build back some par by using recovery proceeds to buy loans at a discount to par.

So while there’s a active and living breathing test and I just shared one little subset of what could happen to kind of quantify how big is that and that’s a question people ask a lot, there’s a big number or a little number, frankly the – just thinking about it at a 50% recovery, that support 8% defaults, which is certainly far greater than I think most market participants would forecast for the near-term for defaults..

Great. That’s all for me. Thank you for taking my questions..

All right. Thanks, Chris..

Your next question comes from Jim Young from West Family Investments. Please go ahead..

Good morning, Jim.

How are you?.

Yes, hi, good morning. Could you please quantify your credit loss provision for the quarter and how does that compare with the first quarter provision? And just in general, how are you thinking about the magnitude of the credit loss provision going forward? Thank you..

So the credit loss on provision, it’s a little – it’s over the life of the investment, it’s similar to kind of loan loss accounting that a bank uses, but different than the way a bank might report we don’t take a provision on a quarter-by-quarter basis. So the way to think about the reserves that are baked in.

If you were to look at the financial statements, this is on page 19 of the June 30, unaudited financial statements. We lay out the defaults and recovery assumptions related to the credits. And this is what we use in calculating our effective yields, which then by definition has the loan loss reserve.

Broadly, we haven’t changed it quarter versus quarter, maybe the market was a little too dour in terms of pricing things in the first quarter, and currently the market has changed from a tone perspective today. We haven’t changed our default assumptions based on those shorter-term market moves.

On page 19 of the portfolio – of the financials, which you can see is, these are constant default rate of between zero and 2%. Obviously, zero isn’t that meaningful or reserve. And what we do is have a relatively short period of time as the portfolio seasoned, the defaults ramp up to 2% per annum for the life of the CLO.

And then importantly, we use recovery rates depending on the type of portfolio, loans and bonds and second liens and whatnot of recovery rates between 64.9% and 70%. So that suggest kind of a loss, given default of 30% to 35% roughly based on that that credit experience.

But we haven’t made any changes to these assumptions since – with the exception of the discount rates may have moved. The range of discount rates may have move around, but I don’t think there’s any other substance to change the assumptions related to credit losses quarter-over-quarter. So that’s the long answer.

The short answer, once this ramped about 2% defaults per annual at a little less than 70 recovered..

[Operator Instructions] Your next question comes from ‘Troy Ward from Ares Management. Please go ahead..

Hi, Troy, good morning..

Hey, thanks. Thanks for taking my question, Tom. Just to touch back on some of the refinance that you brought up during Chris’s questions. As we look at the portfolio, there’s a significant amount of your portfolios out of the non-call period, and some more still comes by the end of the year.

Can you just kind of talk about what that means? First of all, what’s the potential to actually get a refinance there? And what does that mean to the cash flows to your equity? And then second part of that would be, is there any positive or negative catalyst as we approach the implementation of the retention rules to do those refinance before the end of the year, if they’re going to happen?.

Sure, a very good question, and indeed some of the CLOs are contradict through their reinvestment period, and a handful even have less than – a small number have less than a year to go in terms of the end of their reinvestment period. There’s a very new and they still have a long way to go.

Wherever Eagle Point has a family as majority investor, we would typically be able to direct the call, and that’s a very important piece of the puzzle. There are some CLOs, where Eagle Point as a family does not have a majority of the equity in that case.

In some of the cases, other majority investors might do it, maybe in one or two cases, there might be a blocking position, where it requires a supermajority of the call. So it varies a little bit, but broadly, it’s the majority you can direct these things.

Then when you look at kind of the feasibility of this, the feasibility of refinancings, activity certainly has picked up in the past few weeks. A recent, this is just kind of from public communicated information.

We’re aware of [indiscernible] 19 having a repricing, ING, Voya, I think 14 – one of their 14 vintage deals, and maybe it’s a 12 vintage deal, I apologize, I think it’s 12 is doing what called reset where they’re actually changing the coupon and also lengthening up the reinvestment period, that’s 2012-4, we’re not involved in the transaction, but certainly great to see those kind of things happening.

And what we’re seeing broadly and I think Crescent completed a refinancing in the last month as well, just lowering that debt spreads on their CLOs. And like any kind of more mature fixed income market, there is a on – there should be a time curve.

If you have a one-year bond, it should trade tied to a five-year bond if it’s the same underlying credit that’s kind of finance 101.

The CLO market, we’ve been a little slower to maybe catch up on that, and it’s only kind of more recently where we’re receiving investors really differentiate okay a AAA that’s at the end of its reinvestment period of similar quality should trade at a tighter spread to CLO that has three years more of reinvestment period and perhaps more uncertainty as to the path.

So if you were to look around, I would wager, there’s been north of $1 billion of tranches refinanced. I’m doing that from memory and don’t sight me on that, over the last month frankly alone, and that’s not a giant number, that’s directionally quite positive and I think we’re seeing more and more of that transpire of the market.

That said, as I look through our portfolio, obviously a key driver of refinancing is what that spreads are you starting with, and what other factors are out there and just to look at a few pieces in the puzzle, I’ll take an example of Sheridan Square CLO, which is a relatively small holding for the company.

We were the original majority investor many years ago, but we have sold out mainly. That one has AAA as well as LIBOR plus 105. So that’s still very much in the money and you wouldn’t be able to replicate that. So that is – that one is probably a lower probability of being refinanced, although we’re not the ones you can direct it there.

Other CLOs in the portfolio and this is kind of a broader trend from 2013, spreads were quite low, particularly in the first-half.

So a lot of those CLOs, which might be kind of more natural later in life call candidates, are refinanced or refinancing candidates might have already locked in a very, very attractive levels, which still can’t be replicated today.

But that Voya transaction I mentioned earlier is 2012-4 that have wider debt levels than many of the Voya’s 13 deals, so that one makes sense to do.

And then kind of looking more recently into some of the 14 vintage CLOs, if you look at I think Credit Flex published a list of call candidates or refinancing candidates, some of the later 2014 vintage CLOs also become attractive candidates as they come against their reinvestment period – non-call periods ending later this year.

They had some of the wider liability levels that the market kind of forced upon us as the energy kind of stored began to unfold. So every CLOs has a different story.

There’s one or two that that make sense for our portfolio is maybe to act on quickly, wherever we see opportunities, we’ll work on, but we continue to kind of flag this and monitor it across every position in our portfolio and we hope to see more activity in that space.

We are seeing more and more investors kind of going off index in agg index funds coming into the space. We think it makes a lot of sense for them. If a little dream of mine would be to have this product somehow in the agg, but obviously the floating rate is a very, very important – very important part of that proposition.

But we’re happy to see investors willing to go off index.

In terms of how risk retention in the spring requirements in December of 2016 come into this, there is probably the most notable piece, I think it was earlier this year might have been late last year, the SEC issued a no action letter, called the Crescent letter, I mean it was in response to request Crescent Capital Management, which that letter obviously lays that a whole series of conditions.

But broadly what it says is CLOs issued prior to the end of 2014 and refinance after the effective date of the retention goes in December 2016 without a springing retention requirements, and my understanding was some of the logic conveyed in that report was investors got into those transactions, thinking they have the ability to refinance them, shouldn’t – that the people weren’t looking to necessarily takeaway rights of existing investors and others a series of important conditions that have to be followed.

The market many people view that as an important letter on to follow, which should allow for some CLOs to be refinanced after the retention date without a springing retention requirement.

Equally, importantly, I mentioned a number of the CLOs in the company’s portfolio are already risk retention compliant and while indeed, there’s no requirement for them to be compliant today and not a springing requirement in the future, if we were to try and refinance them that issuance of new securities would likely trigger a retention requirement.

So having the CLOs compliant right out of the gates obviously is the best approach..

Great, color. Thanks, Tom..

No worries..

There are no further questions in queue at this time..

Great. We’ll thank you very much for joining us on the call we have this afternoon. We had some great Q&A and I appreciate that the questions people were posing. Ken and I are in line today if anyone has any follow-up questions, happy to speak and we appreciate everyone’s continued interest in Eagle Point Credit Company. Thank you very much..

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