Garrett Edson - ICR Tom Majewski - CEO Ken Onorio - CFO.

Ryan Lynch - KBW Mickey Schleien - Ladenburg Christopher Testa - National Securities Merrill Ross - Wunderlich.

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Eagle Point Credit Company Q4 Update. 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 Mr. Garrett Edson from ICR. Please go ahead..

Thank you Michelle, and good morning. By now everyone should have access to our earnings announcement and investor presentation which was released prior to this call and which may also be found on our website at eaglepointcreditcompany.com.

Before we begin our formal remarks, I need to remind everyone that the matters discussed on this call include forward-looking statements 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.

And further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission.

Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law.

A replay of this call can be accessed for 30 days via the company's website eaglepointcreditcompany.com. Earlier today, we filed our form NCSR fourth quarter and full-year 2016 financial statements with Securities and Exchange Commission. Financial statements in our fourth quarter investor presentation are also available on the company's website.

Financial statements can be found by following the financial statements and reports quick link on our website. The investor presentation can be found by following the investor presentation and portfolio information quick link on our website. Also our discussion today may include references to certain non-GAAP measures.

A reconciliation of these measures to most comparable GAAP measure can be found within our earnings announcement, investor presentation posted on our company website. I’d like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company..

Thank you Garrett, and welcome everyone to Eagle Point Credit Company's fourth quarter earnings call. If you haven't done so already we invite you to download our supplemental investor presentation from our website which provides additional information regarding our portfolio and underlying loan obligors.

We're going to tweak our usual call format a little bit this quarter, I'll provide some high level commentary on the fourth quarter and then turn the call over to Ken who will take us through the fourth quarter financials as well as recent activity.

I'll then return to talk about the macro environment, our strategy and provide updates on 2017 activity, and of course we'll open up the call at the end to questions from call participants. 2016 was a great year for Eagle Point Credit as we saw our NAV per share increase 27% from the prior year.

During the year, we more than doubled our CLO equity assets from the prior quarter to 386 million - from the prior year rather to $386 million. We invested over $193 million in new CLO debt and equity securities. We received cash distributions of $92 million or $6.25 per weighted average common share from our portfolio.

We grew our CLO equity portfolio weighted average effective yield to 17.48%, up from 16.68% at the start of the year.

And we successfully refinanced or reset three CLOs within our portfolio last year, lowering the ongoing costs within the CLO or extending the life of the CLO, I mean setting the company up to generate additional value from those investments. Our performance last year is a testament to the hard work and dedication of our entire team.

They utilized their knowledge and skills with the goal of creating long-term shareholder value. Our fourth quarter kept up our active momentum in several areas.

We generated net investment income and realized gains of $0.58 per common share excluding an estimated $0.04 per common share excise tax that we recorded in the fourth quarter in connection with spillover income. Including the tax charge, net investment income and realized gains were $0.54 per common share.

Aided by the cash proceeds that we raised during the year and the ongoing strength of the credit markets, we were able to deploy $125 million in the fourth quarter across four primary CLO investments, three secondary CLO equity investments and several loan accumulation facilities.

Of the loan accumulation facilities, three of them were eventually converted into CLOs and the other was sold for approximately $500,000 gain versus cost. The new CLO equity investments in the quarter had a weighted average effective yield of 16.51% reflecting attractive yields we believe in a strong credit market.

On the monetization side, the strong market demand also helped us opportunistically sell $5.5 million of CLO equity securities allowing us to realize a 400,000 net gain versus amortized cost for those sales.

As we've noted previously, while selling securities may come at the short-term cost of reducing our net investment income by realizing meaningful gains and rotating into higher yielding investments, we believe the benefits gained from the sales are clearly in the long-term best interest of our shareholders.

In addition, we completed several successful refinancings and resets in the quarter which are further testament to our proactive investment strategy and our focus on retaining optionality through the ownership of CLO equity tranches.

As of December 31, 2016, the weighted average effective yield on our CLO equity portfolio was 17.48%, an increase from 17.27% the last quarter and from 16.68% at the end of 2015.

Of course as we've noted previously, these effective yields include an allowance for future credit losses and they also include an allowance for future spread compression on loans.

In terms of our fund raising activity, we successfully completed two preferred stock offerings and one common stock offering in the quarter generating approximately 63 million in net proceeds for the company which has allowed us to continue to pursue our investment program and expand our portfolio.

We continue to increase our recurring CLO equity cash flow quarter over quarter and have over $386 million in CLO equity assets in our portfolio at the end of the year, more than twice the size of our CLO equity portfolio at the end of 2015.

We were very pleased with our portfolio and its performance during 2016 and after Ken's remarks I'll take you through the current state of the institutional loan and CLO markets and give you an update on what a busy first quarter we've had so far in 2017. I’ll now turn the call over to Ken..

Thanks Tom. Let's go through the fourth quarter in a bit more detail. For the fourth quarter of 2016, the company recorded net investment income and realized capital gains of approximately 8.5 million in the aggregate or $0.54 per common share. This was comprised of 7.4 million of net investment income and 1.1 million of net realized capital gains.

Excluding the $0.04 per share excise tax charge we incurred in the quarter with respect to the undistributed income from our just concluded tax year, net investment income and realized capital gains was $0.58 per common share.

This compares to net investment income and net realized capital gains of $0.54 per common share in the third quarter of 2016 and $0.53 per common share in the fourth quarter of 2015.

When unrealized portfolio appreciation is included, the company recorded net income of approximately 23.4 million or $1.51 per common share for the fourth quarter of 2016. This compares to net income of $2.80 per common share in the third quarter of 2016 and a net loss of $1.50 per common share in the fourth quarter of 2015.

The Company's fourth quarter net income was comprised of total investment income of 15.1 million, net unrealized appreciation or mark-to-market gain of 14.9 million and realized capital gains on investments of 1.1 million offset by total expenses of 7.7 million.

While our quarterly total investment income and realized gains once again increased, they were impacted on a per common share basis by the aforementioned excise tax recording as well as our common stock capital raised in December which provided the company with $19 million in additional deployable net proceeds while raising our share count by just over 1 million.

Capital deployment from common raise and Series B raise remain obvious with expectations. The company helped 26.1 million of cash, net of pending investment transit transactions at year end.

As a result of our deployment of 67 million in net capital during the fourth quarter, we note there is a significant amount of capital that will begin generating income for the company in the first quarter of 2017.

As of December 31, the company's net asset value was approximately 288 million or $17.48 per common share and we estimate that NAV has further increased by approximately 1.7% as of the end of January 2017. Net GAAP return on common equity in fourth quarter was 9.18%.

The company's asset coverage ratios at December 31 were preferred stock and debt, as calculated pursuit to Investment Company Act requirements, were 286% and 722% respectively. These measures are above the statutory minimum coverage requirements of 200 and 300 respectively as of quarter end.

On prior calls we discussed management’s expectations under current market conditions of generally operating the company with leverage in the form of debt and/or preferred stock within a range of 25% to 35% of total assets As of December 31, the company had debt and preferred securities outstanding of approximately 35% of the company's total assets less current liabilities.

This is an increase from the prior quarter due to the Series B preferred share issuance. In terms of our weighted average effective yield, we want to communicate and update on how we will evaluate this metric going forward.

We conducted a full recast of our CLO equity portfolio during the fourth quarter and have determined going forward to recalibrate in investments effective yield at least once a year.

In addition to recalibrated investments effective yield on a deal events such as a portal sale, add-on purchase or refinancing we will also recast investments effective yield on the anniversary date of the formation of each CLO investment in our portfolio.

We believe this is an appropriate and prudent way to determine our portfolio’s effective yield going forward. A summary of the investment by investment changes in expected yield are included in our quarterly investor presentation. We plan to include summaries of future changes and subsequent quarterly presentations.

Moving on to our portfolio activities so for in 2017, investments have reached their first payment date of generating cash flow in line with our expectations. In the first quarter of 2017, as of February 15, the company received total cash flows on its investment portfolio totaling 24.6 million or $1.49 per common share.

This compares to 25.5 million of total cash flow received during the entire fourth quarter of 2016. As always we want to stress that some of our investments make payments later in the quarter and as of February 15 those other investments have not yet reached their payment date.

As a normal course of business, we published an unaudited management estimate of the company's monthly NAV and quarterly net investment income and realized capital gains or losses.

Management’s unaudited estimate of the company's NAV as of January 31 was $17.78 per share of common stock reflecting a continued increase in the market value of our estimates. On January 31, we paid a distribution of $0.60 per share of common stock for the quarter ended December 31, 2016.

As with prior quarters, December 31 net asset value reflects an accrued liability for this distribution. We are also very pleased to announce that we will begin paying our common distributions on a monthly basis going forward.

Our portfolio continues to generate very strong cash flow and as our portfolio expands we are receiving cash distributions more spread out across the quarter. As a result, stockholders will be able to receive their distribution sooner than they otherwise would have.

Earlier today, we declared our first four monthly $0.20 per share common distributions. Finally, we want to update you on the special distribution that we will be required to pay later this year.

As we noted on our prior call, the taxable income for the tax year ending November 30, 2016 will exceed the aggregate quarterly distributions paid to common stockholders requiring a special distribution to meet tax requirement.

Management's current estimate of the company's special distribution requirement is between $0.60 and $0.80 per share of common stock. We note that this estimate remains preliminary and is based solely on the final returns and formal estimates for approximately 90% of our portfolio.

Please note the actual distribution requirement will not be known until the company files it tax returns later this year and it may deviate from our range. We still expect to pay the special distribution in one or more installments in the second half of 2017. We will provide additional updates on a special distribution plan on our next quarterly call.

I would now like to hand the call back over to Tom to discuss the current status of our portfolio and overall market..

Great, thank you Ken. Let me first take our call participants through some of our macro loan and CLO market observations and we can talk about how they may impact the company. I will then also touch on our activity so far in 2017.

For 2016 boosted by a strong second half of the year, the overall loan market saw its highest annual return since 2010 as the Credit Suisse leverage loan index generated a total return of 9.88%. At the end of the year roughly two thirds of the loan market was trading at a premium to par.

With the Fed expected to raise rates further following the election, loan mutual fund inflows continue to increase which has led to additional loan refinancing and repricing activity. Specifically according to S&P Capital IQ over 70% of the new loan volume in January of this year was attributed exclusively to re-pricings and re-financings.

What that means is in many cases the spreads on the loans are lowered and the maturity dates often are extended. Total issuance - institutional loans outstanding were 887 billion at the end of the year, which provides a large market for our CLOs to continue investing in.

In terms of defaults, absent unforeseen events, we expect that default should remain below historic averages over the near to medium term due to minimal impending maturities, GDP growth buoyed by a more pro-business administration in Washington and the majority of the bank loan market consisting of covenant light loans.

That said low defaults do not necessarily correlate to low loan price volatility. And as such we continue to position ECC and our portfolio to be able to take advantage of price dislocations. In the CLO market, 2016 completed with 72.3 billion of CLO issuance including over 26 billion alone in the fourth quarter.

In January, CLO issuance was only 1 billion due to the limited supply of new loans and the natural ramp up of the market at the start of the year. We've since seen CLO increase in February and are currently expecting a range of 80 to 100 billion of CLO issuance in 2017 based on stabilized markets and the potential for tax and regulatory reforms.

For the fourth quarter, demand for all parts of the capital structure and CLOs remain strong with AAA’s pricing as low as the low 140s. Recently, in the first quarter we have observed new issue CLO AAAs being issued in the 120s.

Importantly, more and more CLOs now have five-year reinvestment periods, a 25% increase from the four-year standard of not long ago. We believe the reinvestment option is one of the most valuable aspects of CLO equity and we very much welcome this trend of reinvestment periods increasing.

We also saw an increase in CLO debt and refinancing activity of seasoned CLOs as liabilities spreads tighten and more mature yield curve has developed in the CLO market.

While the group of active CLO collateral managers has shrunk over the past few years we believe the reduction has helped cull the herd and provided for a stronger pool of issuers going forward. Under current market conditions we believe each of the CLO collateral managers that issued CLOs in 2016 can issue in the future if they desire.

Further we expect to see several new entrants in the market this year. With all of that in mind it's been a very busy first couple of months in 2017 for us at Eagle Point especially on the refinancing front where we can really put our management teams investing experience to use in generating additional value for our portfolio and our stockholders.

So far in 2017, we've priced one primary CLO equity investment from a loan accumulation facility, we've aggregated to a majority position in the secondary market buying up equity in a number of trades and another CLO. Additionally we have called two of our CLOs this year to take advantage of the strong loan prices in the CLOs.

Each of them have exited their reinvestment periods already. The IRRs on our investments in these called CLOs were both over 20%. On the refinancing side, we've priced five CLO refinancing so far in 2017. And we believe these have the potential to increase the combined expected yield of the impacted investments by over 200 basis points.

We are also far from finished with our refinancing activity and our refinancing and reset pipeline remains robust with many potential additional candidates in our portfolio. We know that should spread continue to tighten we would expect lower credit expense than our base case as favorable market conditions can help mitigate default risk.

So to sum up, the company strong momentum from 2016 has carried over so far in 2017.

The significant deployment of capital into CLO equity investments in the fourth quarter should begin generating additional interest income for us in the first quarter as we grow closer to achieving again having net investment income and realized gains that are equal to or in excess of our common distributions.

Our NAV per common share also continues to rise now at $17.78 per share based on management’s unaudited January 31 estimate. As noted, we've already successfully refinanced five investments alone this year and this will help us reduce ongoing expenses within those CLOs and increase the expected yield on those investments.

Our refinancing pipeline remains robust and finally we have deployable cash and we are in strong position with our advisor to continue to evaluate new investment opportunities both in the primary and secondary market. We thank you for your time and continued interest in Eagle Point Credit Company. Ken and I will now open the call to questions.

Operator?.

[Operator Instructions] The first question comes from Ryan Lynch from KBW. Your line is open..

First one is just a little bit of an educational question. On Slide 6, if you guys use slide deck, you showed each individual CLOs effective yield change, number one, that’s a very helpful slide, it's very granular and helps a lot of details I appreciate that.

But one question I did have is, several CLOs in this quarter had meaningful swings in their effective yield, some positive, some negative, there are obviously a lot of factors that go into that effect of yield calculation, default rates, changes in loan pricing, repricing liabilities et cetera.

But is there any primary driver that really can swing the effective yield around that you guys see regularly.

You move these effective yields around so much?.

Sure. It’s a number of factors. Maybe they’ll talk about the outliers of some of the reasons why things may move down a lot or move up a lot, we kind of talk about those. [indiscernible] some you can see move around a little bit, not too much.

In aggregate, the weighted average actually increased quarter over quarter but just modestly, but thinking about it on a portfolio wide level what it shows is even with a full re-underwriting and recasting, the portfolio is substantially were we expected it to be. But with a large portfolio there are outliers.

Looking at the negative side first, handful of investments we're going to move forward and carry them at 0% expected yield. Importantly, each of those investments are still generating very, very strong cash flow.

However in a number of cases while they haven't necessarily had particularly high defaults, in some cases spreads have compressed harder than or more than other CLOs or more than the broader market.

In one or two cases and again these are pretty much all small investments, the other one or two had a greater than average of energy exposure which hurt it when we did kind of the full re-underwriting on the investment.

So typically it's a combination of spread compression or greater than expected losses and it's not necessarily defaults, it could just be selling loans into the market or similarly loans that are not defaulted but sitting there at $0.60 or $0.70 on the dollar for some of the CLOs.

On the flip side, why they have done better, which I think is on a, I don’t even know, on account basis, it looks about even. We’ve had quite a few CLOs which have outperformed both our default and spread compression expectations.

If you look in our financial statements we described the default assumptions and the spread reinvestment assumptions within the portfolios for each of the underlying CLOs. We believe in general those assumptions can be conservative and many of the top CLOs have outperformed on both sides of the ledger.

So if they've lost less spread and/or built more par or have fewer losses they're going to outperform. Some of the biggest swings on the upside just looking through a handful of items in the portfolio.

Some of those are things that we bought in the depths of the market last year as well, so some of the biggest swings up have been some of the strongest performers from first quarter or first half last year activity. The flip side some of the bigger negative ones you could probably trace those to mid-2014 vintage in general..

Okay yeah that's great color and very healthful and….

Overall, they’re all - the portfolio in aggregate were you know the weighted average was up modestly, but substantively not a big change from a full re-underwrite. And every investment continues to generate very strong cash flows..

Moving to the special dividend, you mentioned about a $0.60 to $0.80 special dividend later in this year potentially, while that's nothing good, you guys have are creating a lot of income that you guys need to distribute to shareholders. That's positive on one hand.

On the other hand that's still going to be at the midpoint around $11 million of capital that you're going to need to pay out and that's capital that's not going to be being able to be deployed into CLO equity and other interest earning assets. So, I look at that capital, that capital and I kind of put that on models.

My dividend paid out which was going to be great for shareholders but it could also potentially provide some headwinds to earnings because that gap was going to be paid out.

So how are you guys looking to offset some of the potential headwinds for EPS for paying out that special dividend?.

Sure. You hit the nail on the head, I’ll use your number as the given obviously it can move higher or lower, but we're going to have to pay out kind of 11, 12 million bucks potentially, of course based on management estimates subject to revision at some point in the second half of the year and for a GAAP purpose is a reduction of our capital.

Mindful we’ve said and we seek to earn $0.60 or greater per quarter, one of the things to look at is obviously we had a non-trivial amount of cash at the end of the quarter, $26 million that was from principally from some of the B and common raises in the fourth quarter and we typically say in respect to supplements we deploy, anticipate through six months, Ken mentioned we're on pace for deployment on all of the raises.

But certainly that cash was not earning income. And then finally a number of the investments not unlike in the third quarter ended up being made close to the end of the quarter in the fourth quarter. So it didn't necessarily generate a full quarter's worth of income.

We're very focused on maintaining the $0.60 aggregate - maintaining the $0.60 aggregate distribution per quarter and importantly earning NII and realized gains over $0.60 or greater per quarter.

So what we would encourage you to do is you're looking at the model is maybe just to challenge and make sure the last quarter had drag from both the third and fourth quarters had some drag from issuance both from cash and some of the capital being deployed so late in the period that holding all else equal if those investments are held over a full quarter they would generate more income would be helpful in your analysis..

And then with the new administration and Congress coming in and the new Congress coming in, are there any regulatory or legislative change they're watching closely, I know one in particular that we watch at KBW is just the Financial Choice Act that's kind of a major financial overhaul to some of the Dodd Frank rules.

So I don’t know if you're looking at anything out there specifically that could affect leveraged loan market or CLO markets or if you know something like that Financial Choice Act has any impact on CLOs, I know Dodd Frank part of the rule in was the risk retention rule and I'm not sure if the Financial Choice Act could potentially lessen that or pare back those rules at all?.

Yeah. Our current read and mindful these regulatory things, we’re by no means experts in the winds of Washington. A number of versions of the bill that I have seen, I won't even purport that they're the current version of the Financial Choice Act, does have a repeal of the risk retention requirements for the CLO market.

What ultimately passes is simply anyone's guess. We can’t even wager one, but versions we've seen do contemplate a complete repeal of the retention requirements. Against that, we shared some metrics during the script and there's more detail in the annual letter.

Most notably that all of the collateral managers that issued CLOs last year we believe can issue new CLOs this year. Some of them have published retention approaches, others might not have publicly published it, but we don't believe there's a firm that issued last year that doesn't have the financial wherewithal to issue prospectively.

The market has done a pretty good job of weaning those - the weaker hands out of the market.

And then interestingly, you would be surprised to know, I think five or six firms issued last year that hasn’t issued in the two prior years, actually new entrants to the market and we’re aware of other firms that are getting ready to issue their inaugural CLOs this year. Well capitalized firms from, well regarded institutions.

So if anything, it's conceivable, we're in a growth market again, even absent a regulatory repeal in the account of CLOs getting issued or as account of CLO issuers. But if those rights did pass, that would certainly, in the form that we've seen, certainly would reduce the regulatory burden in the market..

Okay.

And then just one more if I can, this is more educational question, but can you just describe, obviously LIBOR moves kind of foot around that at least three month LIBOR on that 1%, which is the critical level for a lot of loans, loans with that 1% for, so could you maybe just talk to us and tell investors what are some of the impacts as the LIBOR starts to move up above this 1% level, what kind of effect does that have on your guys CLO equity investments?.

Sure. And first, I’ll direct your attention and I'll call participants, we have a slide deck on our website I think from September of last year, which laid out as LIBOR hit the - three month LIBOR hit the nine handle ninety’s, LIBOR up, LIBOR down, LIBOR stays the same, everything probably about our curlicue in terms of forward curves.

Where LIBOR is broadly right now, three months LIBOR is typically the relevant measure, is right around 1%. Holding all else constant, which is highly simplifying assumption, we like LIBOR as far away from 1% as possible.

If it goes down, that makes the floors on loans more powerful and if it goes up, the excess LIBOR of the amount of the loans over the CLO debt would flow through to the equity. Our effective yield assumptions factor in a number of things.

We factor in corporate defaults, we factor in spread compression on the loans, and importantly, we also factor in the LIBOR forward curve.

So while the LIBOR, the forward curve doesn't usually get it right, but it's the market's best view of things and our projections even a year ago would have forecast LIBOR going to 1% and above 1% over time and our assumptions today would continue to do that using current LIBOR.

On our website, you can see the presentation, we ran out five or six scenarios kind of up 100, down 100, a big shock up in the future that lays out, then you can see the potency of the impact, we held all other assumptions constant, to kind of get a sense of how big the impact would be to be equity IRRs.

It's not zero, but it's not a game changer either in our opinion for most investments. Of course if LIBOR were to move 300 or 400 basis points, that could be indicative of other things going on in the world, which could call into question the holding all else equal assumption, but just trying to isolate it, we think we did a good job.

Hopefully, you'll agree with the slide on the website..

Next question comes from Mickey Schleien from Ladenburg. Your line is open..

Good morning Tom. Listen, I wanted to ask sort of a 30,000 foot level question. There were a lot of moving pieces in 2016.

But certainly at least for the last three quarters and even going into this quarter, one of the themes that we've seen is just amazing spread compression due probably to a wide bid ask spread in the M&A market making it hard for private equity guys to do their thing.

So in essence, that leads to a very borrower friendly market and can make it more difficult to put together CLOs with interesting economics.

So I'm interested in your outlook for when and if I guess do you think the leverage loan market might come into equilibrium? And what are the factors that will allow that to happen?.

Sure. There was a lot more fun buying loans at the beginning of last year, that much is correct and it was much more a lender's market. Obviously, the tide has turned quite strongly over the past 12 months. And what you're talking about is very clear is the syndicated loan market is a borrower's market today unfortunately.

We’re a lender in that market indirectly. To kind of look at, and we talked in the prepared remarks about 70% of the new issue activity in the loan market, I think in January was refinancing activity, which is basically lowering the spread and kicking out the maturity.

The kicking out the maturity may actually be a good thing for us and as a CLO investor, as an equity investor in that it gives the company more runway and pushes out the maturity wall, but unambiguously lower spread means less money into the system.

To quantify it, if you look across in our, I'm going to mix a couple of examples here, you can see this trend occurring.

If you look on page 5 of our investor slide deck, the third to the right column, weighted average portfolio spread, you see we’re at 398 as of year-end, roll that back prior quarter, we added the prior quarter amounts that was suggestion from one reader, 4%.

And then separately on our website, we have our January tier sheet that 398 is down to what 396. And the trend in loans has continued tighter certainly since that report was cut. What's going to change that? We're starting to see the refi wave, I’ll say, certainly stop accelerating and maybe even decelerating.

Some of the things that drive this are retail inflows. If you run an open end loan fund and you get x hundred million of cash inflows, you need to buy or else you're off index. So that that creates very, very strong demand and in many cases without regard to spread, because not investing is a very strong statement for folks managing those funds.

Against that, the CLO market does remain the largest holder of loans, holding roughly 50% of syndicated loans. So it can't get out of whack with the CLO market for too long and without getting into specific credits, there certainly have been a number of loan re-pricings that have failed been pulled in the past two weeks.

We wish that happened I guess on all of them to some degree, but the trend versus even a month ago was - that was unquestioned - that was unthinkable that they'd be pulled has already started happening. So we’ve seen things pull back.

If you look back in the past few years of history, 2016 was an exception, but certainly 2012, 13 and 14 were periods that were also characterized by strong re-pricing in the first quarter. And that has typically waned at some point in the first quarter or second quarter. Who knows if it repeats itself this time? But that's in the bad category.

A couple a mitigants though to our program which is very important, CLOs are both a borrower and lender. As we mentioned in the prepared remarks, we're returning the favor to the senior debt holders and our AAAs and typically down to BBB where we're going out and re-pricing the debt tighter on our creditors within each CLO.

And what that has the effect of doing is lowering the future costs of financing as a spread over LIBOR within our CLOs. I think we've gotten five done already this year within ECC and as I mentioned in the remarks, we have a robust pipeline of more of those in the works.

Importantly, whereas loan spreads move around up and down and if something were to go haywire tomorrow, you'd expect loan spreads to start winding again. Once we re-price the CLO debt tighter, that's a permanent shift and it can't move wider on us again.

So we're tightening much longer liabilities than we are having - than the assets themselves that are tightening. So we're able to squeeze on the other side and we're getting - we're squeezing a longer security.

And then finally, I don't have a number in front of me, but I think you'd see the total amount of re-pricing this year is only about 15% of the loan market, while it's certainly pushing things the wrong direction. It's from a spread perspective, it's not a giant. It's not half the market or some extreme like that.

Finally, the last bit I would say is each of our two efforts around this are expected yields include assumption for spread compression. Each individual investment, when we underwrite the investments and re-underwrite them, we factor in an allowance for spreads to come down in the future.

So all of our investments, when we make them assume that, which is obviously what's happening today. On the flip side, we also assume corporate defaults and the only substantive defaults in our portfolio that I'm aware of and is a very, very small holding, it's not a top ten or anything like that is Avaya [ph] which is a technology company.

I'm looking at that one on Bloomberg right now, it's quoted at 79 and an eight. So while spreads are coming down, credit expense has been extraordinarily low. And that's a very good mitigant. Our assumptions assume both spread compression and credit expense.

We're getting a little more compression than we'd like, but credit cost has been pretty darn low, actual credit costs..

Those are very helpful answers, Tom. If I could just follow-up with one more question. Perhaps, we've seen less than robust demand for growth capital in this cycle as - which is evidenced by the amount of cash that companies have on their balance sheets and some reluctance by boards and senior management to commit to capital investments.

Since the election, obviously the stock market has started to discount a more robust economy.

So I'm curious whether you're seeing more demand for loans with the use of proceeds geared more toward growth capital as opposed to whether it's refinancings or M&A or other, given that growth capital is perhaps the most interesting use of proceeds?.

A very, very good question. And just a couple of points on that. Certainly of the loan market activity, I think we said over 70% in the first month has been refinancing activity. So that's not achieving what you're talking about. That leaves a little less than 30% left over.

Without having hard numbers in front of me, just looking at the loan market as we do, it does seem the majority of the loans coming through are for acquisitions unless companies saying, hey, let's go borrow some dough to go build a new plant.

While there are certainly a few of those and frankly a number of the acquisitions have meaningful growth elements as well, I would suspect it's the minority of that sub 30% bucket that is unfortunately getting driven towards new growth initiatives today of the loans being - of the new loans being - new and reset loans being cast in the market.

Against that, obviously we've had a very significant change in Washington. That change is only about one month old and large CapEx decisions do take some time and with the phrase, animal spirits has been heard in the market and certainly the stock market, the Dow's closer to 21,000 now than 20,000 even has responded quite strongly.

I would expect these things to take a little more time before we would see it translate into the loan market perhaps even certainly the second quarter, if not even the second half of 2017..

The next question comes from Christopher Testa from National Securities. Your line is open..

So thanks for taking my questions. Just starting out with high level question, I'm just curious how you're weighing obviously a very challenging reinvestment environment versus as you were noting the ability to refinance at very cheap rates.

In your opinion, where does this come out in the end? Do you think that being able to refi at L+140 or so is enough to offset the spread compression seen in the secondary market?.

In general, certainly, the refinancings are very, very helpful. The 140, just to kind of share the low 140, that was kind of a new issue AAAs in the fourth quarter. Today, new issues are - many of them are in the 120s, but interestingly, this was kind of a subtlety in the remarks. I talked about a yield curve developing in the CLO market.

Investors will buy refinancing AAAs at even tighter levels. So many have been in the 120s, some in the one-teen and there may have even been one or two in the market not that we've been involved with those at the 10 something on the AAAs. So whereas a year ago, I think we issued one CLO, which had roughly a LIBOR plus 160 AAA cost.

CLOs today, many of them can be refinanced much, much tighter, one-teens is probably a very reasonable AAA expectation on a quality refi. As we work through history, an important part of our investment strategy is vintage period diversification in that it is very difficult to call vintages without the benefit of hindsight.

And certainly through our portfolio, some of the 2014 vintage CLOs, many of those have some of the highest energy exposure. Against that, some of the early 2000, late 14, early 15 CLOs had much lower energy exposure [indiscernible] in choppy credit markets.

So each of the different vintages, even micro vintages within a year can behave very differently. And then finally, I'll say in my experience investing at the extremes in CLOs has in many cases turned out to be very good. Unfortunately, you don't know of the extreme until time has passed.

But if we look at some of our 2013 vintage investments, there's one CLO in the portfolio, which has some AAAs as tight as L+105 and that was the original new issue spread from way back when. So that deal is still not even accretive to be refinanced.

So we've enjoyed the benefit of very cheap financing on that, even though when we ramped up the loans, they were very expensive, not unlike today.

The flip side, when we've issued some CLOs with very wide AAA costs, where we get very frustrated that it's so expensive on those days against that we can buy loans, very often the CLOs can accumulate loans at very cheap prices on those days and then what you know, those are some of the CLOs top of our list to refinance today.

So we have to balance both sides of the ledger history, hindsight is really the only way to call for sure any particular period.

We seek to bake in vintage period diversification within our portfolio and then to the extent we lock in financing costs that are too high today, let's say maybe spreads tighten further tomorrow, presumably, there's lower credit expense and with the passage of a little bit more time, we’d have the ability to even refinance those CLOs.

So it's getting that steady long term locked in financing with the option to refinance it is the number one part of our investment program..

Got it. That’s great color. Thank you. And just sticking with the theme on reinvestment opportunity, are you seeing any sort of bifurcation on loan markets today, potentially maybe some larger retail names that you might be looking at.

Is there any sort of light at the end of the tunnel so to speak for reinvestment right now in terms of sector?.

So of kind of sectors of getting particular focus, certainly retail is probably the biggest one right now and there's a handful of names in those syndicated loan market, invariably, some of them are in some of our CLOs that might be trading between $0.50 and $0.70 on the dollar for the first lien loans.

In today's market, that's a pretty depressed price. Against that, many of those companies also have very interesting brands and web presences and e-commerce distribution and things like that. So it's the old fashioned, you have 200 stores and malls across - malls across the country that's certainly a dying breed.

But within retail, there's also highly specialized retail, bridal dresses, fishing gear and things like that that pet Supplies that seem to be remarkably inelastic in good or bad times. So that's certainly an area of focus. There are a handful of legacy energy names that remain in CLOs.

It’s a very, very small percentage and you can see in our portfolio, it's not even a top ten holding. Two years ago, we were publishing how much we had I think on a monthly basis. Now it's not even a top ten holding. If anything, there might be some upside in some of those legacy names.

And then there is what we’ll call idiosyncratic kind of the last piece and we talked about Avaya as a loan that defaulted in the past few weeks. Again, that loan is trading, quoted in the very high 70s.

For a bankrupt name, that's a pretty strong statement from the market there and there invariably will be other idiosyncratic events, but away from retail, that's probably the only area where it's kind of a red light industry today where you really want to focus on all the names.

And even within that, many will be fine, but there will be some that will pose problems..

Got it. That's great. Thank you. And just curious you had mentioned you made several secondary market purchases during the fourth quarter. So I guess just a question as to what's the catch there, what made those attractive, what’s there, some increased cyclical industry risk, just any color there is appreciated..

Yeah. The notable one in the fourth quarter was, actually - sorry was thinking in the first quarter, was a bit of a build to majority position across a number of minority trades. So we’re always happy to do those where we can buy a couple of minority pieces and build that to majority rights.

In the fourth quarter, we made a handful of minority investments as well, generally smaller pieces, particularly wide yields were available. There is not a particular theme of why they are where they are. In one or two cases, they might have had higher energy exposure in the past, but has been cleaned up, but losses were taken along the way.

So it's a maybe a lower dollar price investment, which could pretend for a higher yield prospectively, but where the prior owner took some of the pain on the energy exposure before we stepped in..

Okay. Great. And just the last one for me.

Just with regards to switching up recalculating the effective yield now and at least on an annual basis, just wondering what the primary incentive for doing that was? Is it because you're effectively looking at whether spreads are going to compress again significantly and you might have to take down the yields or you’re not sure if they're going to widen significantly and you’re going to have to take those yields up.

Just curious what led to that change?.

Yeah. Overall, we think of expected yields as kind of a long term yield for an investment. Mindful, there's evidence by the questions on this call, a lot of things move around in CLOs in any given month certainly over any given year. And we think of our assumptions very much as a long term assumption.

We were still assuming spread compression in the first quarter of last year. That was pretty darn conservative one year ago. But today, no one's asking about the falls anymore, now, everyone is asking about spread, if you replayed the call from a year ago, you'd have the opposite. And our assumptions include both of that. They’re very long term based.

Against that, within the course of any given CLO, things can go better than planned, can go worse than planned. Even if we have very heavy spread compression over the next year, perhaps that means we have fewer credit expenses than we contemplated over the next year.

So it could go either way and what we thought made sense, we still want to think of very much as a long term approach, but revisiting it a handful of times in the life of a CLO, what we'll do is on the annual anniversary of each CLO, so CLOs created in the first quarter of 2013 will be refreshed again in the first quarter of 2017 and so on and so forth.

We’ll do that for each investment. And then in addition, should there be a new additional purchase or a refinancing or a reset or a sale, many of the reasons that Ken laid out, we’ll go back and reopen those in the quarter as well where something happened.

So the goal to be long term, but maybe not hold to maturity I guess would probably be the tweak..

And if there is not an event specific to that CLO, but some large market moving event or spread blowout 300 basis points or something like that, would they essentially all be recalculated at that point?.

Sure. It’s Ken here. So if there is a market, a broad market event or a broad market circumstance that has a broad effect across the portfolio, we would recast the entire portfolio. So there is something significantly out there that was non-temporary in nature, we would recast the entire portfolio.

So if there is something that affects the one position that we would call recalibrating or recasting that we could extrapolate to the remainder of the portfolio, we would recast the entire portfolio..

[Operator Instructions] Next question comes from Merrill Ross from Wunderlich. Your line is open..

Hi.

A question that might not be possible to really answer, but I was looking for an order of magnitude on the refinanced CLOs that you mentioned used this year so far and order of magnitude on the yield pickup or is there improvement in net present value if they were extended?.

Sure. And obviously every CLO varies from where you're starting from and where you're refinancing to and how much time is left. Broadly in many of the CLOs where we've been involved in the refinancings, we’ve lowered the gross debt between probably 25 and upwards of high-30s basis points. Mindful, there's obviously frictional costs in doing that.

In general, we see refinancings kind of improving the effective yields about 200 points. Some could be more, some could be less, but for each CLO that gets refinanced, if you had to put one number, we’d probably 200 basis point pick up from any of the refinancings..

[Operator Instructions] I have no further questions in queue. I turn the call back over to the presenters for closing remarks..

Great. Thank you very much everyone for joining the call and we appreciate all the very thoughtful questions from call participants. Certainly 2016 ended up being quite a strong year for the company. As we look forward to 2017, certainly market momentum has been very strong for us.

We continue to be very proactive in our management of the portfolio and frankly we have quite a bit of activity on the refinancing front, something that a year ago, we certainly were not talking about.

Where we manage the portfolio and where we like to see each of our CLOs behave is optimizing within the circumstances, the market circumstances that we're in. Right now, conditions feel very good. Spreads are tightening. No one's asking - a few people are asking about defaults and instead, we're talking about how can things get.

We're doing our part to lock in low financing costs for as long as possible in these markets. At some point, invariably, something will - a spanner will get thrown in the works and spreads will widen and stocks and security prices will fall and we will position the company to be able to capitalize on that volatility when it occurs.

But certainly in the near term, I'm very focused on extending and locking in lower and lower financing costs as long as we can within our portfolio. So we appreciate everyone's participation in the call.

We're very proud with the conversion over the monthly distributions on the common stock and laid out in the press release the schedule of distribution dates.

We did have two in March, just to deal with some of the burdens of effective dates and ex-dates with just some of the logistics of that and then going forward, I think we've declared through May 31 at this point and we’ll try and make the plan of going three at a time prospectively once we get past May.

So we appreciate everyone's participation in the call, very pleased with the performance last year and things are off to a very good start this year. So thank you very much..

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