Good morning. My name is Lincy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eagle Point Credit Company Incorporated Second Quarter 2018 Financial Results 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]. Thank you. Mr. Garrett Edson, Senior Vice President, ICR, you may begin your conference..

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

Before we begin our formal remarks, we need to remind everyone that 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.

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 half year 2018 financial statements and second quarter investor presentation with the Securities and Exchange Commission.

Financial statements in our second 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.

I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company..

Thank you, Garret. And welcome everyone to Eagle Point Credit Company's second quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company, including information about our portfolio and the underlying corporate loan obligors.

Regular readers will notice certainly that we have made some enhancements and changes to the presentation this quarter, which we hope will be helpful to all investors.

As we've done previously, I'll provide some high level commentary on the second quarter and we'll turn the call over to Ken, who will take us through the second quarter financials in more details. I'll then return to talk more about the macro environment, our strategy and provide updates on our recent activity.

And then of course we'll open the call to questions. The second quarter was another quarter of considerable activity at Eagle Point with respect to making new investment, sales of existing holdings and resetting CLOs in our portfolio.

During the quarter, we deployed approximately $78.5 million in gross capital into new investments, and once again the CLO equity we purchased at a significantly higher weighted average effective yield than the weighted average for our overall portfolio.

Additionally, where we saw opportunities and appropriate pricing, we sold certain CLO equity and debt investments, locking in $800,000 of realized gains on investments during the quarter. We also leveraged our advisors' competitive strength and size and priced eight resets and one refinancing during the second quarter.

Beyond just our portfolio activity, we completed the effective refinancing of our 7% ECCZ notes with our new fixed rate 6.6875% 10 year ECCX notes. The Xs have the lowest cost of the funds that the company has ever obtained. The new X notes are over seven years longer than the Z notes they've replaced and were 31.25 basis points less expensive.

With the X notes in place, the weighted average maturity of our preferred stock and unsecured notes outstanding extended to over eight years from six years prior to those transactions during the quarter.

For the second quarter, we generated net investment income net of realized gains from the company's portfolio and capital losses from the financing activities of $0.34 per common share, which is a $0.16 decrease from the prior quarter and below our common distribution of $0.60 per share per quarter.

We note that we incurred $0.20 per common share of non-recurring charges and expenses in the quarter related to the ECCX issuance and ECCZ redemption. As we mentioned previously, we made an election to recognize debt issuance cost for the ECCX securities in the period in which they were incurred.

We also recognized the remaining unamortized ECCZ issuance cost during the quarter along with the Z note redemption. Later in the call, Ken will discuss the accounting associated with these non-recurring costs and the overall second quarter results in further detail.

While we've experienced the impact of spread compression over the past few quarters on our results. We've seen the pace of compression continue to slow in recent months. Most notably in July, according to a report from JPMorgan, there was not a single syndicated loan that repriced. It has been years since that has last been the case.

And we're optimistic that stabilization is beginning to occur and we’ve positioned ourselves to rebound well, as the cycle of spread compression dissipates, given our significant refi and reset activity over the past few years.

During the second quarter, again we deployed about $78.5 million of capital on a gross basis in both the primary and secondary markets, we made five primary CLO equity purchases, representing about $25.3 million in proceeds, 11 strategic CLO debt purchases and made investments in two new loan accumulation facilities.

During the quarter, three of our loan accumulation facilities were converted into CLOs. The new CLO equity investments that we made had a weighted average effective yield of 16.31% at the time of investment, once again well above the weighted average effective yield of our overall portfolio, which as of June 30th, was 14.08%.

This continues to demonstrate our ability to source accretive investments in a strong credit market, through our advisors investment process. On the monetization side, we sold $10.7 million of CLO equity, where we saw strong demand, as well as $11.7 million of CLO debt securities.

Together, these sales allowed us to realize $800,000 of net gains on our investments versus their amortized costs. As we have noted before, when our advisor believes the price available is better than our investment outlook, we opportunistically will sell investments.

Looking back, we’re pleased to note that we’ve had net realized gains on our investment portfolio or from our investment portfolio in eight of the nine last quarters.

We have talked about our advisors capabilities and active management approach on previous calls, which is a powerful advantage that we have at our disposal to create additional value for our investments.

To that end, as we have talked about previously, our advisor has been concentrating extensively on resets this year, using our advisors majority ownership of a CLOs equity class to direct resets and lower the cost of our CLO debt and lengthen reinvestment periods.

We believe there are few other investors with as many majority positions as our advisor. In the second quarter, we priced eight resets and one refinancing, bringing the total number of resets and refinancings that the company has been involved in since January of 2017, through the end of the second quarter to 18 and 27 respectively.

So 18 resets, 27 refis. The resets completed in the second quarter, created new reinvestment periods of up to five years for those CLOs and reduced those CLOs weighted average cost of debt. Further, our advisor continues to have a robust pipeline of future resets under evaluation.

As a reminder our reset typically causes a one-time reduction in CLO equity cash flows, as the cost associated with the reset are paid out of the applicable CLOs waterfall on the next payment date.

While there maybe -- the near-term cash flow maybe reduced as part of a reset, we believe this is money well spent and that our investments will harvest increased cash flows to our CLO equity securities in the future versus had we not taken these actions, particularly as spread compression continues to slow.

Of course, wherever possible, our advisors seeks to keep those service provide cost to a minimum. As of June 30, the weighted average effective yield on our CLO equity portfolio was 14.08%, that compares to 14.54% in the prior quarter, and 15.68% prior year.

As I have noted previously, the weighted average effective yield includes an allowance for future credit losses. A summary of the investment-by-investment changes in the expected yield are included in our quarterly investor presentation.

On the capital front, in addition to the ECCX notes issuance that I mentioned earlier, we utilized our at-the-market program during the quarter to issue approximately 360,000 common shares, all at a premium to NAV.

Ken will provide more on the particulars, but since we began the program last summer through June of 2018, we have received net proceeds from the sale of new stock through the program of approximately $23 million. In July and thus far in August we have deployed $8.4 million of capital, across CLO equity and debt investments.

Through August 8th, two additional CLOs in our portfolio have been reset and one of the company’s CLOs was refinanced that’s quarter-to-date activity through August 8th.

In addition to resetting existing investments, we remain active in pursuing, new and attractive primary investments, which we expect to price into CLOs and we expect to benefit from the continued low CLO debt financing spreads.

Overall, our long-term outlook for the portfolio remains favorable after Ken’s remarks I’ll take you through the current state of the corporate loan and CLO markets and share some of our outlook for the remainder of 2018. I’ll now turn the call over to Ken..

Thanks, Tom. Let’s go through the second quarter in a bit more detail. For the second quarter of 2018 the company recorded net investment income, net of capital gains and losses of approximately $7.2 million or $0.34 per common share.

This was comprised of net investment income of $0.37 per common share, combined with net realized capital gains from the company’s portfolio of $0.04 per common share, offset by a realized loss of $0.07 per common share from financing activity.

Please note NII was reduced by $0.13 per share due to issuance cost in other non-recurring expenses associated with the ECCX issuance. The current quarter compares to net investment income and net realized capital gains of $0.50 per common share in the first quarter of 2018 and $0.53 per common share in the second quarter of 2017.

The company’s NII and realized capital gains for the second quarter were net of $4.3 million or $0.20 per weighted average common share of non-recurring losses and expenses. Given the significant non-recurring losses and expenses reflected in our results this quarter, I will take a moment to provide some additional inside.

In the current quarter we recorded a $1.5 million realized loss or $0.07 per share related to the early redemption of our Z-bonds. Upon redemption of such debt, GAAP accounting requires any previously unamortized deferred debt issuance cost to be accelerated as a realized loss on extinguishment of debt in the statement of operations.

This cost is required under GAAP to be presented below the net investment income line. Additionally, we recognized a one-time $2.4 million expense or $0.11 per share related to the issuance of our ECCX bonds.

As we noted on our last call the company has changed its accounting policy to permit the option to elect fair value accounting on perspective debt issuances. By electing fair value accounting, the company can recognize cost associated with new debt issuances in the period they are incurred.

These costs are reflected in their respective expense line items, within the statement of operations all of which are above the net investment income line. Since we had not made such an election previously issuance cost related to ECCA, B and Y will continue to be accounted for on a deferred basis and amortized overtime.

In addition there was approximately $0.3 million or $0.02 per share in non-recurring interest expense for the period both the Z and X bonds were outstanding.

Please note to assist readers with our second quarter financial statements, we have added supplemental disclosure within the statement of operations illustrating the aforementioned non-recurring losses and expenses. For the current quarter, we advise you of the company voluntarily weighed approximately $0.3 million of its incentive fee.

The waiver is associated with the early redemption of the Z notes and represents an incentive fee reduction as if the remaining unamortized issuance cost from the Z notes has been expensed at the time of issuance.

Continuing with second quarter results when unrealized portfolio appreciation is included the company recorded GAAP net income of approximately $9.5 million or $0.44 per weighted average common share. This compares to net income of $0.39 per common share in the first quarter of 2018 and $0.88 per common share in the second quarter of 2017.

The company’s second quarter net income was comprised of total investment income of $17.4 million and net unrealized appreciation or mark-to-market gains of $2.3 million, partially offset by total net expenses of $9.5 million and net realized losses of $0.7 million.

At the beginning of the second quarter the company held $8.3 million of cash, net of pending investment transactions. As of June 30th that amount was $2.8 million, reflecting almost full deployment of our capital into investments.

As a result of deploying $31.3 million in net capital during the second quarter there was a significant amount of capital that only generated income for a pushed of the quarter, which we expect to now generate full income going forward. As of June 30th, the company’s net asset value was approximately $358 million, or $16.51 per common share.

Each month we publish on our website an unaudited management estimate of the company’s monthly NAV, as well as quarterly NII and realized capital gains or losses. Management’s unaudited estimate of the range of the company’s NAV as of July 31st, was between $16.64 and $16.74 per common share stock.

Based on arrangement point this is an increase of approximately 1.1% since June. Non-annualized net GAAP return on common equity in the second quarter was 2.69%. The company’s asset coverage ratios at June 30th for preferred stock and debt as calculated pursuant to Investment Company Act requirements were 284% and 550% respectively.

These measures are above the statutory minimum coverage requirements of 200% and 300%. As of June 30th, the company had debt and preferred securities outstanding totaling approximately 35% of the company’s total assets, less current liabilities, which is consistent with the prior quarter.

We’ve previously communicated management’s expectations under current market conditions of generally operating the company with a leverage in the form of debt and or preferred stock within a range of 25% to 35% of total assets.

Moving on to our portfolio activity in the third quarter, through August 8th, investments that have reached their first payment date or generating cash flows in line with our expectations.

In the third quarter of 2018, as of August 8th, the company receives total cash flows on its investment portfolio, excluding proceeds from called investments, totaling $19 million or $0.86 per common share. This compares to $25.4 million or $1.18 per common share, received during the full second quarter of 2018.

Consistent with the prior quarter, we want to highlight that some of our investments are expected to make payments later in the quarter.

During the second quarter, we paid three monthly distributions of $0.20 per share of common stock as scheduled, and on July 2nd, declared monthly distributions of $0.20 per share of common stock for each of July, August and September.

During the quarter, the company closed an underwritten public offering of 6.6875%, unsecured notes due 2028, resulting in net proceeds to the company of approximately $65 million inclusive of the partial exercise of the greenshoe. The new notes, trade on the New York Stock Exchange, under the symbol ECCX.

The company used the vast majority of proceeds from the offering to redeem 100% or $60 million aggregate principle amount of its 7% 2020 Z notes, effectively conducting a refinancing. This resulted in lowering the company’s ongoing interest costs, while also extending its debt maturities.

Pursuant to our at-the-market offering program for common stock and 7.75% Series B term preferred stock during the second quarter, the company sold approximately 360,000 shares of its common stock, all at a premium to NAV for total net proceeds to the company of approximately $6.4 million.

Additionally for the period from July 1st through August 8th, the company has sold approximately 560,000 shares of its common stock also at a premium to NAV with total net proceeds to the company of approximately $10.1 million. That said, I’d like now to hand the call back over to Tom..

Great, thank you, Kim. Let me first take the call participants through some macro loan and CLO market observations, and how they may impact the company. And then I’ll touch further on some of our recent portfolio activity.

Through July 23rd, the CS Leverage Loan Index generated a total return of 3.02%, tracking slightly ahead of where the CS Leverage Loan Index was at that time last year. According to JP Morgan, 42% of its index was trading above par, which is down from the 70% figure we noted on our last earnings call.

As prices of loans have declined slightly, as CLO liabilities have widened slightly. Causing investors to become a little more selective and require a little bit of higher returns in the loan market. During the second quarter, we saw our loans fund interest continued with funds growing by about $5.6 billion according data from JP Morgan.

The muted amounts of funds inflows are still acting as bit of a headwind for further loan refinancing and re-pricing activity, we view that as a positive. The total amount of institutional corporate loans outstanding exceeded $1 trillion and reached $1.05 trillion of as of June 30th.

And that’s an 11% increase versus the prior year and a 5% increase from the end of the first quarter according to S&P Capital IQ. Institutional new issued loan volume was $142 billion in the second quarter of 2018 and $271 billion for the first of half 2018.

Slightly outpacing last year’s performance, driven impart by re-financings, which did make up a significant part of the activity. We note the pace and severity of refinancing, however continues to slow. Institutional corporate loan market remains large and is a large and dynamic investible market for are CLOs.

In terms of defaults, rates of defaults -- instances of default remained quite low, with a lagging 12 month of default rate of 1.95% at the end of June according to S&P Capital IQ.

We expect rates to remain around these levels due to minimal and pending maturities and increasing robust economy and a larger majority of the loan market consisting of covenant like loans. The company’s overall credit expense remains well below long-term averages.

Should volatility and price dislocations occur we believe the company and its investments are well positioned to take advantage of those opportunities. In the CLO markets through July 23rd, we’ve seen $74 billion of new CL insurance, along with $74 billion of reset activity and $23 billion of refinancing.

Putting new issue on the pace to beat last year’s record and for resets we’ve already exceeded last year’s total according to data from Deutsche Bank.

With expectations for rates to continue to rise for the perceivable future floating rate CLO debt activity remains strong with new issued CLO AAAs often pricing in the LIBOR plus 110 basis point range for some of the most collateral managers. BBs have also been resilient despite the elevated CLO debt supply.

CLO equity remains reasonably well bid despite the liability widening as spread compression has subsided. We continue to have a robust reset pipeline and expect to direct additional resets in the second half of 2018, as I mentioned earlier we’ve already done a few this quarter up and more to come we believe.

As always our advisors deep CLO investing experience provides us with a notable advantage as we seek to generate additional value for our portfolio and stockholders.

So far in the third quarter we’ve reset two CLOs and refinanced one, we’ve deployed gross capital of $8.4 million across CLO equity and debt so for in the quarter and were putting undeployed capital to use as opportunistically as possible.

Beyond seeking to maximize the value of our existing investments, we continue to remain a good visibility on our new investment pipeline for the next few quarters.

To sum up, we’re pleased with the way our portfolio is currently constructed and we continue to opportunistically invest in CLOs with effective yields well above the portfolio’s current weighted average effective yield.

We continue to utilize our advisors strength and proactively directed additional resets, which should increase future cash flows to our CLO equity securities.

We’ve also significant improved the company’s debt maturity profile, while reducing -- while issuing debt at the lowest cost we’ve ever achieved, lengthening our maturities and lowering our costs of capital.

We’ll continue to be proactive in our management of our portfolio and our balance sheet to continue to create additional long-term value for shareholders. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to questions..

[Operator instructions] Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is now open..

Yes, good morning..

Good morning, Mickey..

Hey, good morning.

Can you hear me, okay?.

Yes we can..

Perfect. Good morning Tom and Ken. Clearly the high leverage of loan issuance this year has been translating to an extent into lower quality assets in terms of covenants and multiples that we’re seeing and I think you mentioned that in your prepared remarks.

Since, you’ve been investors in the CLO market for a long time, I’m sure you’ve seen this movie before.

So, I’d be interested in understanding, how this environment is affecting your investment strategy currently?.

Sure. It's certainly fair to say in the loan market, it's a borrowers' market overall. While we're pleased that there have been -- there were no repricings in July, which was a pretty momentous non-event here I guess. The tenure in terms of loans are still skewed in borrowers' favor.

Against that, what we're seeing is it's helping -- a couple of things are helping to -- two things are going the right way, which right now in our opinion offset the negative that you've just sighted. The first is what we're seeing is companies using runway when they do get in trouble to ride the ship.

And an example I will often point to is company weight [ph] watchers, which I'm sure many people know. A few years ago that first lien loan was trading at distressed prices and the stock was below $5 a share.

Had that loan had maintenance covenants, it nearly certainly would have defaulted then the company was roughly 10 times levered at its low point. Instead they went out and brought in a strategic investor and the company has turned around and the stock as of right now has gone from below 5 up to 77-70 on my screen right now.

They've turned it around a lot of that loan has paid down and the balance of the loan remaining is trading around par. And that's a loan that hadn't had heavy covenants nearly certainly would have been a default and might have been a pretty bad recovery.

So we share that as an example, that's not indicative of how every loan will work out unfortunately, but the point of that story and there is other loans like it is that with the benefit of some runway what we're seeing is some companies are actually able to kind of turn the corner.

So I would be disingenuous if I said credit quality is robust and we as lenders are getting all the terms we want, but unfortunately it's not the case. But we are seeing with many companies that those that do get into some trouble runway has been helping them.

And then B, an additional statistic that probably overrides all of this and it’s something we keep really close eye on you can see this in page 33 of our current quarter investor presentation.

And you’ll recall we used to kind of have a financial supplement and then kind of a company overview, we just put it all together this year and added some additional disclosures.

But on page 33 of the PDF deck, one of the things that gives us a really bit of confidence right now are feeling good is the continued quarter-over-quarter change in revenue for below investment grade companies.

And you'll see according to the last quarter we have data revenue actually increased 11.8% quarter-over-quarter and that's on top of a 9.6% quarter-over-quarter increase in the previous quarter. And at the end of the day, substantially all of the borrowers in our CLOs are B and BB rated.

The number one thing that helps those companies is revenue and EBITDA growth. And in general we're seeing that in the market right now regardless of your view on the things going on in Washington certainly a number of the policies that have been put into place have been pretty business oriented.

And we're seeing fairly significant growth coming overall in the economy and quite high GDP growth. And all of those things go to in our view mitigate the risk of near to medium term credit events. Not saying it won't be bad at some point, because we know it will be.

But where we look in the near to medium term frankly, we see growing revenue for most companies, which is certainly a net credit positive. And then the later documentation standards are the later ongoing maintenance covenants at least affording some companies additional runway..

I appreciate that example and your inside, Tom. I guess I just want to follow-up with what happens beyond the near to medium term. I probably should have asked with some expectation of a downturn at some point. And we could all argue about when that's going to happen nobody really knows.

I guess the concern in the market is that these loose terms and the high multiples down the road, when the economy does decelerate could show up in some more meaningful defaults. So is there anything specifically you are doing now to preempt that down the road or not..

Yes, so to look at multiples and this is on page 31 of that same deck. While there’s a lot of talk of leverage multiples inching up what you’ll see is really since 2014 the leverage multiples really haven’t moved around that much. They have moved up or down a 1 or 2 -- 0.1 or 0.2 or 0.3.

So we haven’t seen a tremendous increase in leverage we’re showing that seeing a hockey stick there. When things do get ugly and we do agree it’s a when not an, if our view on when is it’s a little later versus a little sooner, but we do agree it’s a when, not an, if.

The number one thing we’re working on in our portfolio is to buy as much reinvestment period as possible. And one of the things and lengthening the reinvestment period our portfolio in that our view is that when that day of credit dislocation occurs there will be a commensurate amount or may hopefully even greater amount of price volatility.

And if you look at history, certainly through the 2008-09 cycle CLOs that were in the reinvestment period during 2008-09 did very well and frankly the CLOs from 2006 and 2007 on average were some of the best performing vintages.

In many cases they had many of the worst credits, the weakest credits at the end of the last cycle, but their ability to keep proactively reinvesting during the time of distress when defaults go up nearly certainly prices fall and the ability to reinvest proceeds in those discounted prices was very, very powerful.

So I think quarter-over-quarter or rover the last six months normally you’d expect a weighted average reinvestment period to decay by about six months that has actually went up slightly, the weighted average end of reinvestment period versus where we were at the beginning of the year.

And that’s a function of our new issuance, new CLOs coming in and resetting existing CLOs we’ve been able to actually lengthen and totally mitigate the decay and modestly lengthen the reinvestment period of remaining in our portfolio.

And a lot of our strategy is to keep pushing that forward, we want as much runway as possible for when that inevitable day of reckoning occurs that we want to be able to have our CLOs [technical difficulty] offense on that day.

Finally what does it look like on that day that’s a common question and how bad will it be and what do these loans really do on that dark day, if we look back to S&P data or Moody’s data what we see is kind of over the last 20 to 25 years loans on average have recovered 80 and unsecured bonds have recovered in the high 40s on average.

And the two key differences historically between loans and bonds have been collateral and covenants. Unfortunately for many loans as you’re pointing out ongoing maintenance covenants are just a relative history. As a lender if you could have only one thing you would simply take collateral over covenants.

We know we’re unsecured un-covenanted has recovered and that’s just a little less than 50 and we know we’re secured covenant as and that’s a little more than 80.

The right answer is probably somewhere in between for what will happen next time and if you look at the footnotes in our financials the recovery rate that we use in our base case is very, very high 60s is my recollection currently and we’ll look at the exact number here 69.85 is the prevailing recovery rate that we’re using in our models a very precise number.

But kind of what that would suggest is our view is two-thirds of the outperformance of loans versus bond recoveries has been attributable to collateral and one-third to covenants, that’s a management estimate. But we think that’s a reasonable basis and that as a lender we’d rather have collateral all day and covenants if we can only have one..

That’s very helpful, Tom, Just a couple more questions if I may. From my perspective or I guess from investors perspective in general there’s a lot of moving pieces right now with CLO managers refinancing and resetting. But spreads backing up at least a little bit recently although we’ll if that sticks.

In the end your portfolio’s weighted average spread fell only 3 basis points this quarter, I think that might actually be the lowest number in quite a while.

So looking at the portfolio as it stands now what do you think is the outlook for the weighted average spread since in the end that’s what really supports the cash flow for CLO equity?.

Yes, I guess there’s two sides to the ledger, there’s the weighted average spread on the assets and weighted average spread on the CLO….

I'm referring to the -- Tom I'm referring to the arbitrage between the yields on the assets and the cost of debt on the CLO balance sheet..

Correct, and the number you said it, I think is that the weighted average spread on the portfolio fell 3 bps quarter-over-quarter..

Perhaps I don’t have it in front of me.

But, you see what I am getting at, right?.

Yes, so the reality is we can sustain any weighted average loan spread, as long as we have a commensurately low weighted average CLO debt spread.

One of the thing, we’re working on including in future quarters is the weighted average cost of debt within the CLOs as well, in this presentation, we haven’t included it yet, we want to make sure, we have all the numbers scrubbed perfectly.

But in the coming quarters, that’s something we’re going to include as well, so people can kind of see both sides of the ledger for us. Overall, the spread compression has abated, it’s not gone away completely, but compared to where we were a year ago.

But the overwhelming side is closer to a trickle at this point, obviously that could change tomorrow as well.

But that’s been a good fact, and while that’s come down a little bit a few basis points, quarter-over-quarter, we have been very proactive, we got eight resets done during the second quarter and two more already this quarter and there was other stuff in the market, if you look at what’s going on in the market right now, you can line it up to our portfolio pretty easily.

We are doing everything we can to reap out costs on the right side of the balance sheet, which will help increase our yields.

And even more important to your earlier question, position us defensively for when the cycle turns, in that certainly all of our 2014 vintage CLOs we are keenly seeking to reset all of those to the extent market conditions permit to get five more years of reinvestment period on those, which as we talk about when not if, that runway is the most important thing we can get.

So if we can save costs, and buy a runway, that’s obviously great, that’s the same thing we did within our balance sheet, paying of the Zs and issuing the Xs, lowered our costs and got seven more years.

That’s the trade we like and that’s how we’re positioning our portfolio both in within each CLO, lengthening the deals and then within ECC, lengthening the runway that we have on our balance sheet..

Okay. And my last question is more of a housekeeping question. Can you help us understand how unrealized gain was generated for the quarter, at the same time that the forecast effective yields were actually coming down, I think you would generally expect the opposite to be the case..

Let’s see. The -- probably the best way to put it CLO equity was pretty well bid, it wasn’t a radical unrealized gain, but it was a couple of million dollars.

And it -- obviously it’s the unrealized movement in price is not something we’ve been -- we price everything fairly and accurately, every single quarter we don’t spend countless hours looking at the dollar amounts of that magnitude.

The -- while the yield on the portfolio fell in aggregate, the bid all else equal the yield that investors were demanding to buy CLO equity was even lower -- moved by an even greater amount, I guess would be the kind of the banderas [ph] answer as to what happens..

So if I could paraphrase the markets been more optimistically living than you actually have been, is that -- would that be correct?.

I wouldn’t -- the market has been more keenly bidding CLO equity over the past few months, and we alluded to that in the prepared remarks that it does remain pretty strong, and that’s how we have been able to continue to generate realized gains in the portfolio.

There is always some special way to creating, or historically there has been a special way to create some gains in the portfolio and that’s due to the active trading in and out on the portfolio. We keep the core majority block typically in as set, but then do a lot of trading around the margins to help generate some of those gains.

And overall we have seen the demand remains strong, and I think a lot of equity investors are appreciating that the compression, which was thought of as a big risk a year ago, has subsided significantly. There is lower yield and higher marks..

I appreciate that and your time this morning. That’s it for me, thank you..

Great, thanks so much, Mickey..

Our next question comes from the line of Allison Rudary with Oppenheimer. Your line is now open..

Hi, good morning everyone and thanks so much for all of the detailed color. I -- you guys have covered a lot of my kind of questions and enquiries, but briefly I’d like to touch on the $1.4 million payment that the advisor made to the company for the incentive fees that were mentioned in your semi-annual report.

Is that related to the debt issuance or above and beyond the $323,000 or was that something separate? And maybe you could walk me through a little bit about what was going on there..

Sure, Allison, it's Ken here, it's totally separate. The reimbursement you're referring to in our subsequent event note in the financials was a result of the ECC regular review. It's a technical approval issue, and the technical approval is around timing versus whether the timing of the approval versus whether an investment was approved on that.

This relates to position that was still on the books several years ago. The reimbursement is a byproduct of working with the staff on the issue, and reflects a very conservative approach by the advisor. So the two are separate, the two items you raised, two separate events..

Okay.

And was that reflected in the financials this quarter?.

Not in this quarter, it's -- we noted as a subsequent event in our financial statement occurred in July. It would be something in the third quarter financial statements..

Okay. So I guess one of the reasons why I was asking this is because the incentive fee ex waiver this quarter was tracking substantially lower than it has been. And that could be because of some of the expenses associated with the issuance, but I was trying to get a feel for some of the moving parts there..

Sure. That will impact the incentive fee a little bit. So the incentive fee was lower this quarter primarily as a result of the above the line charges with the ECCX issuance..

So all of the upfront cost we expensed that all appears in interest expense and that has the effect of lowering NII, which have the effect of lowering our incentive fee..

Okay. That's extremely helpful guys, I really appreciate the color..

And then partial waiver just to extend upon that, the unamortized cost, the write-off related to old Z cost, according to GAAP is below the line expense, which so capital gains and losses realized and unrealized are not included in under the letter of the law in determining our incentive fee.

And as we kind of looked at ourselves having a below the line expense somehow escape a reduction in the incentive fee also that would have been above the line had it just been amortized over the -- had we paid off the Zs on the last day. That just didn't feel right.

So what we ended up doing was we -- I asked Ken to calculate what the reduction in incentive fee would have been have we expensed the unamortized amounts back on the days the days we issued the Zs two or three years ago, and lets' take that as a voluntary reduction in the Z. We're not obligated to do that.

But it itself is a little cheeky to move an above the line expense below the line. So we went back and recalculated. And that's what the paper say, and we -- I guess, we in theory had every right to do it. But it’s just -- that’s not the way we treat the company.

So we went back and said let's see what it would have been had we taken the charge, remaining unamortized charges upfront what would that have reduced our fee and we offered to wave it and the company accepted..

Okay, that's terrific. And I really appreciate that. And as I think about -- as we think about kind of the earnings profile of the company going forward. I'm aware that there are only a few levers that you guys can pull when it comes to affecting your -- the revenue line item and how your yields are calculated.

So as we kind of think about what's left in the portfolio what's resettable. And what you guys can do to drive that weighted average yield up. Obviously the point that I'm driving at is what can you guys do affect whether or not your portfolio as it is now or as it may grow can cover that $0.20 monthly distribution.

Can you just walk me through some of the dynamics and like maybe what the next couple of quarters could look like kind of going forward from here?.

Sure. And maybe just to kind a put a couple of reference points. So in the second or the first quarter, we were $0.41 of NII and $0.09 of realized gains to be at $0.50.

In second quarter we were $0.37 of NII and that -- make sure I'm right here, Ken, that included $0.11 for the ECCX issuance cost and $0.02 because we had 35 days or something of double interest when we had the Zs and Xs outstanding. So, if you added all that back, that’s a significant increase to the 37.

And mindful our performance fee would have been attractive to some of it as well. So, it’s not -- it doesn’t go directly from $0.41 to $0.50, but it simply goes directionally up. One of the things we’ve talked about in the first quarter, we had the drag from the proceeds of the January common stock issuance.

As we said on the prior call, we’re probably -- on the call back in May, we’re probably going to do a little less those overnight deals and both because of the impact on the stock price, not saying we won’t ever do it. But the impact on the stock price and then the cash drag that it allows us to get all the money deployed.

What we’ve been focused on more recently, Ken, shared with you some of the ATM stats, we have been using the ATM prudently, but with a goal. Even though the yield was down a little bit on the portfolio.

Having the portfolio not have the cash drag from that overnight deal, frankly has let us inch the earnings up, simply by virtue of being closer to fully invested. So, that’s A; and then B, as you look through the investments, this is on page 23 and 24 of the supplemental presentation.

One of the things we’ve done, you recall in the past we masked the deal names, equity 1, 2, 3, 4. We’ve gotten over that and we’re just lifting the whole portfolio name by name. So you can see what the earnings and cash were from each individual position.

And what you’ll see though is a lot of the 2016 vintage deals have not yet reached the day, only a small number of them had been refi or reset. And the 2016 vintage deals have amongst the highest debt cost of any deals we’ve ever issued.

So, once CLO that was reset or refi that was a -- this is you could find this Bloomberg this occurred -- it happened in the third quarter THL 16-1, which was a 2016 vintage deal as the name would suggest. We did a refi that in the third quarter.

So it hasn’t yet appeared here and we lowered our weighted average cost of debt somewhere between 70 and 75 basis points, if I recall the correctly. And so the potency of ripping out the cost particularly on the '16 vintage deals is goanna be very impactful, we believe over the coming months.

To the extent loan spreads stay unchanged or even trickle a little bit tighter. That refi was the most powerful refi we’ve ever done here. And then, similarly the reset we’ve done have reduced the cost, let’s say on average around 40 basis points within each CLO.

So, we still have a lot more to go, the 2016s and 2017s have a lot of room for cost reduction, as we shape on the right side..

Great, that’s outstanding and helpful color, and I really appreciate it. That’s it from me..

Thanks, Allison..

[Operator Instructions] Our next question comes from the line of Christopher Testa with National securities. Your line is now open..

Hey, good morning guys. Thanks for taking my questions today. Just want to follow-up a little, I appreciate the detail that you gave Mickey on the recovery rates. Tom, as we keep seeing a market where it’s not just cov light and there is pass-through debt and unrestricting subsidiaries, which are diluting collateral pools.

Is there anything that we can look at as a potential indicator of when you might actually be forced to take that recovery rate to something down further or do you think that probably close guess [ph]?.

That’s a good question. We continue to look at and watch what happens with loans that do get into trouble. In general, I’ll say there are very few average recoveries, either they are very, very good or very, very bad.

I don’t remember the last 80.6 or 69.7 or whatever recovery rate there has been, particularly the thing with the unrestricted subsidiary that you may be referring to the J.

Crew loan, which they were able to dividend their intellectual -- or distribute their intellectual property, the brands down to a new sub and pledge it to someone else other than us. People in the loan market call that getting J.

Crewed, that’s now a -- it exist in our view in a very small number of loans, the ability to do that that certainly would be an example of what Mickey was getting at weaker documents.

In general, I think the loan market recoiled so strongly when that was actually done, that I think many in the loan market will say that will never happen again, at least for a few years. And that kind of thing will get into loan documents.

So situations like that do exist in the market, but I would say it is by no means the norm and if anything I would say those kind of extreme things like that are outlier events.

So we do watch how loans that we own and loans that we don’t own, how their recoveries play out, we look at dealer forecast, we look at rating agency forecast, that number hasn’t moved around much in the past few years, but it is something we keep an eye on.

There’s a degree of judgment in it obviously our accountants review our financial statements as well and looking at both the default and recovery rates that we use.

So we keep an eye on as many market data points, I can’t tell you what the bright line will be to say to move that higher or lower, but it is an assumption, we watch ourselves on every one of these.

And you see these numbers if you look on page 16 of the footnotes a bunch of the different assumptions there you’ll see if you track those quarter-over-quarter they do move around upon bottom probably the recovery rate has moved around the least, but the balance of those do move around quite regularly..

Weighted average of the recovery rate as well as the range..

Okay, great. That’s helpful, thank you for that.

And you guys had mentioned that there is still a good amount of 2016 vintages, which are obviously going to be about the highest obtained refinances that have not yet been refi just wondering; A, what was the cost of your refis and resets during the second quarter; and B, what do you see in terms of the refi and resets through the remainder of the year? Are you guys waiting for triple AAAs to maybe come back in or are these just not eligible to be refinanced yet?.

Ken why don’t you answer the first one, I’ll answer the second..

So the estimated cost for the second quarter of the resets and refis was $0.14 per share..

And that’s a cash flow....

And keep in mind it’s what we executed in the second quarter. So it may show up a quarter or two down the road..

So that is weighted average cost per ECC share of banker and lawyer and rating fees for resets and refis. And most of that would come out in the July 15th payment, because those were related to Q2 events.

So one of the things if you would have picked up during our prepared remarks the cash we received so far in Q3 was less than the cash we received in Q2. A portion of that is attributable to that $0.14..

Got it. Okay, that makes sense..

And then strategically hopefully there’s no triple AAA investors listening on the call right now. The decision you make and this is one of the benefits of the scale of our portfolio, we don’t know where triple AAAs are going to be three months from now. They could be wider or they could be tighter or they could be the same.

And anyone who tells you otherwise either has a lot of money they’re going to put to work and going to tighten things or doesn’t know either. So what we look at we kind of make a decision, okay we have CLO X how much is the savings going to be today if we lock, if we do a refi or a reset today.

And I’ll use that THL 16-1 example again that was a refi, dealing one we’ve done recently.

And there if we’re able to save more than 70 basis points every day we weight cost us money to see if things are -- maybe we’re wrong and spreads are going to rip tighter tomorrow and we’re going to regret having done that against that the spreads rip tighter tomorrow we have five more deals to do.

So what we’ve kind of done is we’ve never said we’re vintage callers or market timers the diversity of vintage in our portfolio allows us to capitalize on whatever market opportunities present themselves at different times.

While we’ll push in a little harder at sometimes than others if we were wrong on that deal and we refi it too soon, then we’ll get THL 17-1 that one, yes, we’ll refi it’s something that right on the follow up that we have quite a few ready to go at any time.

And if we can save -- if we’re only going to say 5 bps maybe you don’t do it, if you are going to save 50 bps it’s hard to see an argument where you don’t do it. We can’t worry about the foregone opportunity of having saved 60 the next day..

Right. Okay, no that makes sense.

And Ken, what was the dollar amount of CLO equity inaugural distributions in the quarter?.

Chris, we don't have that information in the deck. I could certainly follow-up..

Okay, sure. No problem. And….

And just Chris, to hit on that that we didn't have -- we converted three you have to going back to one. There hasn't been boat load of new deals more of it has been resets. So we'll figure out the exact amount, but it's not a….

It's not going to move the needle, got it..

I wouldn't expect it would be a distorting number based on the number of new deals..

Okay. All right got it. And Tom, you had talked about in your prepared remarks some of the back of the spreads in the BSL market and some better terms. Just wondering in your opinion what differentiates whether what we've seen in terms of we could be optimistic about for you guys and CLOs in general.

What differentiates it from either being a blip or just being sustained through the fall? Like what do you think it really is going to be kind of defining moment when we know this?.

As to when we know --..

Whether you’d think that this is something that's just a couple of months and it's a little bit of a backup in spreads or this is the start of kind of more to come. I mean, what would you look at as an indicator that we're going to be seeing some credit market dislocation or just even more just borrower friendly turns..

Yes, the biggest swing factor of late and we think will be prospectively in the near-term is retail inflows. That if you're running an open-ended loan fund then you get $1 billion of inflows you have two choices, you can either invest and buy the best funds you can find or go off index.

So that's the dilemma those money managers face and their customers make the timing decisions and in general I think most are loath to go off index.

So if we were to look at -- if you were to say what would be a leading correlate of spreads ripping tighter on loans again I would say it'd be a big uptick in retail inflows versus the flip side, while we wouldn't see spreads widen radically if we saw retail outflows we'd likely see loan prices fall.

The spreads would stay the same for a while and probably be no repricings, but loan prices would actually drop during such a period. So mutual fund flows is certainly the biggest thing we would focus on. Obviously there could be other factors as well, but that's the first point in my list..

Got it. Okay, those are all my questions. Appreciate you guys taking the time this morning..

Thank you..

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

Hi, Ryan..

Hey, Tom. Just had two questions, most of my other ones have been answered.

Can you just explain, what was the thought process behind with the ECCX notes choosing to account for them using the fair value option method and taking those cost upfront? And then also along with that, does that mean that now, because these notes trade at quarterly fluctuations that happened in the future whether those bonds or notes essentially trade up that would increase you guys liability cost potentially putting some pressure on NAV.

And conversely if they traded down could that also reduce your liabilities and put some upward movement to NAV?.

Sure let me address the first part, and then Ken can address the NAV and GAAP impacts. The kind of the rationale for making the transition as we were -- one of the things hopefully you've heard from us both in our CLOs and in our management of ECC's balance sheet is we put out high value tenure.

And whereas if you look at like the KBW report that list all the baby bond and preferred issuances, a lot of firms do five and seven years, we're one of the few that goes out to 10 years. And our coupon is a little bit higher probably than it otherwise would have been, but for three year non-call 10 paper that also valuable.

So that's something we focus on first and foremost.

As we are deciding what to do with the Zs, which went off of non-call at the beginning of the year, admittedly we had a number of debates and discussions internally, we have got this $1.5 million of whatever their amount was unamortized costs and is that going to -- yes, I guess, it does create static, does that -- how should we tackle that, what does that mean, it became too much of a -- I wouldn’t say too much of a distraction, but we ended up spending a lot of time talking about that, versus just -- I mean the money was spent back in 2015 when we paid the bankers the fees, it’s just a recognition question.

Let’s just take that off the table prospectively, so there will come a time between 3 and 10 years from now, that we’ll do something with the Xs and that just won’t even be a factor in our discussion.

And I think that’s kind of a right way to think about it, if we can lock in much cheaper and much longer financing, hopefully the markets will cooperate on that day [technical difficulty] just the right quarter to take it and things like that shouldn’t -- ultimately were not a factor in our decision, but were things we’ve discussed.

To your point [Technical Difficulty].

[Technical Difficulty] and as the financial liability you have prices -- so the price liability goes up NAV will go down and vice-versa, if prices go down. So yes [Technical Difficulty] and if would show as any change which [Technical Difficulty]..

Okay, that makes sense and that’s helpful. And then just one, this is going to be probably tough to answer, but I am just trying to get a sense of I guess last year at this time, you guys had already declared a special dividend due to taxable income running higher than GAAP income.

I am just trying to get a sense of where we are in that sort of comparable with GAAP versus tax. In the past couple of years, if I look at the 2016 you guys had about a $1.2 million tax expense, I would assume that due to exercise taxes from taxable income running higher in 2017 it was almost $800,000.

If I look at the first two quarters of this year, of course there are some one-time items in Q2, taxes were about $67,000. So they seem to be -- you guys seem to be recording less tax expense in 2018 so far.

I am just trying to get a sense to me that would maybe indicate that maybe taxable earnings and GAAP earnings are a little both in sync running closer together, is that the right way to -- am I thinking about this correctly? And any color you could provide on that would definitely be helpful, as we kind of think about dividends going forward?.

Sure, a couple of things, a slightly mixing concepts. The tax expense that you would see on the statement of operations, that is related to Delaware franchise tax and other di minimus taxes nothing to do a little -- it’s just based on like shares outstanding or existing or assets. So it’s not so much income tax.

And we made some tweaks to our structure earlier this year to lower those ongoing taxes and I think that’s what you’re seeing, why the number is lower quarter-over-quarter. So that was some good advice from our lawyers and accountants had to lower of that, but that’s not what’s driving the taxable income and special distribution requirements if any.

On the last call, we did say, we were not expecting to make a special distribution, but we’re not expecting to need to make one for the tax year ended November 2017, which the distribution you’re referring to from August of 2017 was related to the tax year ended November 2016. The drivers of that have been kind of as follows.

The principle driver has been the cost or the -- we’re learning a lot about amortization of issuance cost here, within each of the underlying CLOs and we’ve shared we’ve done -- I lost track something 40 or 50 refis and resets together.

When you do a CLO refi or reset, within each CLO there are issuance cost which are amortized over the life, not unlike how we do with our issuance cost at ECC. And early retirement of that debt via a refi or reset causes a tax acceleration of those costs, it doesn’t interfere with GAAP, but it does come into play with tax.

So a fair number of our CLOs for the tax year ended November 2017, delivered K1s or PFIC information statements that had zero taxable income. Not that they weren’t lots of profits, but that the write-off associated with the refi or reset sheltered a bunch of that income.

We do expect, as we have done a lot of transactions this year as well, there’ll be some zeros that flow through, zero taxable incomes that flow through for the year ended November 2018.

So where we look right now, we don’t expect to need to pay a distribution, special related to -- the year ended November 2017, the year ended November 2018, we don’t know yet, we have a bunch of information in. But we don’t have all of the information, and we haven’t offered any guidance on that yet.

But we did so much activity in the year ending 2017 that we’re able to shelter a fair bit of taxable income..

That’s helpful.

On that -- those kind of a little bit directed towards potentially special dividends, but is the taxable income so far then tracking at least at or above the regular distribution?.

We haven’t given formal guidance on that, that is something we discuss with the Board regularly. I think we’re comfortable saying our ignoring refis and resets taxable income right now is running above the common distribution.

And then the question is, what is the impact of the refis and resets below, which could push us below the common distribution in the short-term. As you can see from looking at pages 23 and 24 of the portfolio, I think we’ve reopened the majority of the deals at this point. So maybe a 60% of the deals have been reopened for refi or reset.

So that suggest we’re a lot of the way through at this point. One of the things we noted last year, the market basically gave no credit for the special distribution and shareholder who is lucky enough to have bought the stock the night before we declared it, got $0.40 or $0.45.

Windfall the stock went up $0.45 or something that day and then went back down the it was X. So we’re -- all our sequel the market doesn’t seem to reward specials and we obviously want to reward long-term shareholders not the person who bought it the day before.

So as we look at things, what we look at is what we think is the sustainable GAAP income, which I think you’d hopefully can see some green shoots from some of the numbers we talked about looking at from 41 to 37 plus 11 plus 2 minus some additional performance fee, certainly trending in the right direction, there we believe.

And then from a taxable income perspective the bulk of the expense is the special acceleration we believe is behind us and we think overtime the taxable income will exceed the 240 per year..

Okay, that’s very helpful color. And those are all my questions, so I appreciate the time today..

Thanks, Ryan..

Our next question comes from Steven Bavaria, a Private Investor. Your line is now open..

Hey, Steve, how are you?.

Hi, guys, hello I am fine, how are you?.

Good, good..

Hey. I am following with the probably the main question that a lot of your retail investors like me and the guys who -- people who follow you on Seeking Alpha and other places have, when I -- I know the GAAP income doesn’t tell the whole story obviously with CLOs.

When I see in your release, that you received $1.65 per weighted average common share, and then when you take out the called investments, which is obviously return of capital, you had cash distributions of $1.18, which is almost twice your distributions to us.

Am I to read that as it would appear obviously that that in terms of real money coming in the door to pay the money that goes out to your investors, you’re really very well covered? Is that the right way to read that?.

Yes. As far as from a cash distribution perspective, yes..

And that means that -- I mean, obviously long-term GAAP has to equalize with all of that, but that there are a lot of timing issues that take years to work out on that. So that in terms of your -- covering your distribution, looking out this looks pretty solid.

These numbers sort of tell the story, right?.

And those cash flows admittedly are reduced by the one-time refi and reset expenses. So as I mentioned to one of the prior call persons with question, the cash flow is actually down, the Q3 cash flows to-date in below Q2 cash flows.

But that’s somewhat attributable to us having done eight refis and one reset in the second quarter, the cost of which are deducted from the July payment in the third quarter. There could be other factors moving around in the portfolio, but that’s a leading factor of what would move that around.

So if anything all else equal with no further resets, you would expect the cash to actually be higher in subsequent quarters, if everything stayed unchanged.

Obviously things will move around beyond just that, but your statement is correct, the portfolio is generating very strong cash flow and frankly some of that cash flow is muted on a one-time basis, because of resets and refis..

So we’ll keep clipping our coupons and reinvesting. Thank you..

Thank you, sir. Actually, Lincy we have - there was one question asked earlier from Chris Testa we have the answer to, which we’ll share..

Sure, this relates to Q2 and CLO equities making the first payment the amount was $1.6 million or $0.07 per weighted average common share..

And there are no further questions in queue at this time. I’ll turn the call over to Tom Majewski, for closing comments..

Great, thank you everyone. We appreciate your time and attention to the company.

Had a couple of GAAP things, that we got to talk about today with the Xs and Zs, hopefully trend and team you hear from all of this is continue to be very long-term focused, continue generating strong cash flow and stronger credit markets and position ourselves as best as we can, when things turn a little bit choppier in the future.

But we believe the company is well positioned for both these smoother seas and the eventual more choppy waters, whenever they do occur. We appreciate everyone’s time and attention and interest in the company this morning. If there is any further follow-up questions, please feel free to reach out to Ken or me. Thank you..

This concludes today’s conference call, you mall now disconnect..