Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eagle Point Credit Company Third Quarter 2018 Financial Results Conference 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, Lindsay, 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, 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.

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

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

A replay of this call can be accessed for 30 days via the company’s website eaglepointcreditcompany.com. Earlier today, we filed our Form 10-Quarter, third quarter 2018 financial statements and third quarter investor presentation with the Securities and Exchange Commission.

Financial statements and our third 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, Garrett. And welcome everyone to Eagle Point Credit Company’s third 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 our CLOs underlying corporate loan obligors.

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

At the end of course, we’ll open the call to participant questions. The third quarter saw us hard at work at Eagle Point across the board in terms of deploying capital, opportunistically selling certain holdings, resetting CLOs in our portfolio and directing capital markets activity on behalf of the Company.

During the quarter, we deployed approximately $42.3 million in gross capital into new investments; and similar to recent quarters, the new CLO equity that we purchased during the quarter had a higher weighted average effective yield than the weighted average of our overall portfolio.

Additionally, where we saw opportunities and appropriate pricing, we sold certain CLO equity and debt investments, locking in a net of penny per share of realized gains on investments during the period.

We also continued to leverage our advisors’ competitive strength and priced five resets and one refinancing of existing holdings during the third quarter.

For the third quarter, we generated net investment income and realized capital gains of $0.41 per common share, a $0.07 increase from the prior quarter but still below our common distribution rate of $0.60 per quarter. We’re mindful that we have been generating NII and gains below our distribution level for several quarters now.

Unfortunately, the GAAP portfolio yields have been a meaningful factor in the reduced level of NII. We also had an approximate $0.02 per share cash drag from issuance of chose via the ATM program during the quarter, which I’ll discuss more, later in the call.

And finally, our short-term cash flow from our investments is continuing to be impacted by ongoing reset and refi activity, although cash flow in aggregate remains well above our common distributions. With three resets already completed in the fourth quarter, we expect Q4 cash flow to have a somewhat similar impact.

As mentioned earlier, during the third quarter, we deployed $42.3 million of capital on a gross basis in both the primary and secondary markets and received $33 million in proceeds from the sale of investments. We made three CLO equity purchases, seven strategic CLO debt purchases and funded five existing loan accumulation facilities.

So, we’re very active in terms of deploying across a wide set of investments. The new CLO equity investments that we made during the quarter had a weighted average effective yield of 15.63% at the time of investment, again well above the weighted average yield of our overall portfolio, which as of September 30, stood at 13.99%.

This continues our ability to demonstrate -- this continues to demonstrate our ability to source accretive investments in a strong credit market through our advisors’ unique investment process. On the monetization side, we sold $15.5 million of CLO equity where we saw strong demand as well as $17.5 million of CLO debt securities.

Together, these sales allowed us to realize a modest net gain of $0.1 million, which was comprised of gains on opportunistic sales and partially offset by certain realized losses related to deals that were called during the quarter.

We would like to point out, although we had modest realized losses on the deals that were called, the overall combined IRR for the deals that were called was certainly positive for the Company.

As we’ve noted before, when we advisor believes the price available in the market is better than what our investment outlook suggests, we opportunistically sell investments. We’re pleased that we have had net realized gains on our investment portfolio in 9 out of the last 10 quarters.

Our advisor continues to concentrate on resets this year, using our advisor’s majority ownership of CLO equity classes to direct reset, typically lowering the cost of our CLO debt and lengthening reinvestment periods. We believe there are few other investors in the market with as many majority positions as our advisor.

And we believe it is a powerful advantage that we have at our disposal. In the third quarter, again, we priced five resets and one refinancing, bringing the total number of resets and refis that the Company has been involved with since January 1 of 2017 through the end of the third quarter in 2018 to 23 and 28 respectively.

As in the prior quarter, the resets completed in the third quarter created new reinvestment periods of up to five years for those CLOs and typically reduced those CLOs’ weighted average cost of debt.

We’d also like to point out, despite nine months of time decay this year from January 1 to September 30th, when you’d expect the weighted average reinvestment period of our portfolio to fall, in fact, the weighted average remaining reinvestment period of the Company’s CLO equity portfolio actually increased from the beginning of the year by roughly two months.

So, instead of nine months of decay, we had two months of growth. And that’s attributable to both our investment activity and our reset activity. Where appropriate, we plan to pursue additional CLO resets in an effort to lock in longer and lower cost liabilities for other investments in our portfolio.

As of September 30th, the weighted average effective yield on our CLO equity portfolio was 13.99%, down modestly from 14.08% the prior quarter and down from 15.29% as of September of last year. As I’ve noted previously, the weighted average effective yield includes an allowance for future credit losses.

A summary of the investment by investment changes and expected yield are included in our quarterly investor presentation on a name-by-name basis. On the capital front, we utilized our at-the-market program significantly during the quarter and issued of approximately 1.4 million common shares, all at a premium to NAV. Ken will provide more particulars.

But, since the program began last summer, through the end of the third quarter, we have received net proceeds from the sale of new common stock through the program of approximately $48 million.

This has been a very powerful program for the Company as it allows us to grow at a measured pace and align our capital raised generally with the piece of new investments. In October and so far through November 6, we’ve deployed $37.5 million of gross capital and receive $14.7 million from the proceeds of sales of investments.

Through November 6, three additional CLOs have been reset this quarter. And in addition to resetting existing investments, we remain active in pursuing new and attractive primary investments which we expect to pricing to CLOs that we expect to benefit from continued attractive financing spreads.

We’re also active in the secondary market for both buying and selling. Overall, our long-term outlook for our portfolio remains quite favorable. After Ken’s remarks, I’ll take you through the current state of the corporate loan market and CLO markets and our outlook for the remainder of 2018. I’ll now hand the call over to Ken..

Thanks, Tom. Let’s go through the third quarter in a bit more detail. For the third quarter of 2018, the Company recorded net investment income and realized capital gains of approximately $9 million or $0.41 million per weighted average common share.

This was comprised of net investment income of $0.40 per share, and net realized capital gains from the Company’s portfolio of a penny per share.

This compares to net investment income, net of capital gains and losses of $0.34 per common share, which was net of $0.20 of non-recurring charges in the second quarter of 2018, and net investment income and realized capital gains of $0.45 per share in the third quarter of 2017.

When unrealized portfolio appreciation is included, the Company recorded GAAP net income of approximately $11.2 million or $0.50 per weighted average common share for the third quarter of 2018. This compares to net income of $0.44 per share in the second quarter of 2018 and $0.12 per share in the third quarter of 2017.

The Company’s third quarter net income was comprised of total investment of $17.5 million, net unrealized appreciation or mark-to-market gains of $2.2 million and net realized gains of $0.1 million partially offset by total net expenses of $8.6 million.

At the beginning of the third quarter, the Company held $2.8 million of cash, net of pending investment transactions. As of September 30th, that amount was $24.3 million, reflecting the cash flow generation from our portfolio and issuance of common stock under our ATM program during the quarter.

As a result of deploying $42.3 million in gross capital during the third quarter, there was an additional amount of capital that only generated income for a portion of the quarter, which we expect to generate full income going forward. As of September 30th, the Company’s net asset value was approximately $383 million or $16.55 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 NAV as of October 31st was between $16.35 and $16.45 per share of common stock.

Based on the range midpoint, this is a decrease of approximately 1% since September 30th. Non-annualized net GAAP return on common equity in the third quarter was 3.1%.

The Company’s asset coverage ratios at September 30th for preferred stock and debt, as calculated pursuant to Investment Company Act requirements were 298% million and 575%, respectively. These measures are above the statutory minimum requirements of 200% and 300%, respectively.

As of September 30th, the Company had debt and preferred securities outstanding totalling approximately 33.6%, of the Company’s total assets less current liabilities, which is slightly below the prior quarter.

We’ve previously communicated management’s expectations under current market conditions of generally operating of the company with 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 fourth quarter through November 6th, investments that have reached their first payment date are generating cash flows in line with our expectations.

In the fourth quarter of 2018, as of November 6th, the Company received total cash flows on its investment portfolio excluding proceeds from called investments, totalling $20.8 million or $0.90 per common share, this compares to $22.4 million or $1 per common share received during the full third quarter of 2018.

Consistent with prior periods, we want to highlight some of our investments are expected to make payments later this quarter. During the third quarter, we paid three monthly distributions of $0.20 per share of common stock as scheduled.

October 1st, we declared monthly distributions of $0.20 per share of common stock for each of October, November and December.

Pursuant to our ATM program for common stock and 7.75% Series B term preferred stock, during the third quarter, the Company issued just over 1.4 million shares of its common stock, all at a premium to NAV for total net proceeds of the Company of approximately $25 million.

Additionally, the high issuance of at-the-market common shares resulted in approximately 2.2 million or $0.08 per share at NAV accretion for the quarter. I will now hand the call back over to Tom..

Great. Thanks, Ken. Let me first take you through some of the macro loan and CLO market perspectives that we have and how they might impact the Company, I’ll also touch on our recent portfolio activity.

Through September 30th, the Credit Suisse Leveraged Loan Index generated a total return of 4.36%, tracking ahead of where the loan index was at that point, while according to J.P. Morgan 65% of their index of loans was trading above par.

As a result, we’ve seen loan refinancing activity pick up a little bit in recent months but still at levels well below what was experienced over the past 18 months. During the third quarter, we saw retail loan fund inflows continue at a modest pace with loan funds growing by about $2.3 billion according to research from J.P. Morgan.

Notably, during the last week of October, we actually saw $1.5 billion of outflows from loan funds, but this appears to have reversed back to modest inflows according to more recent data. The total amount of institutional corporate loans outstanding reached $1.1 trillion as of September 30t.

That’s a 5% increase from the end of the second quarter, according to data from S&P. Institutional new loan volume was $88 billion in the third quarter of 2018, the lowest level since Q1 of 2016, due in large part to a significant drop in loan refinancing activity.

At 1.81% as of the end of September, according to S&P, the lagging 12-month corporate default rate remains low and in fact decreased during the quarter. We and most market participants continue to expect default rates to remain below the average over the near to medium term.

According to S&P Capital IQ, based on their poll of loan portfolio managers, 67% expected default rate to exceed the long-term average of 3.1%, beginning in 2020, and 33% expect that to occur in 2021. Notably, no respondents to their survey believe the historical average would be breached in 2019.

In our view, this is due to minimal impending maturities, a robust economy, and the large majority of the loan market, consisting of covenant light loans. The Company's overall credit expense remains well below long-term historic averages.

We think it’s important to highlight that just because defaults remain low, that doesn't mean loans will not experience periods of price volatility.

And should loan price volatility occur, we believe the Company and its investments are well-positioned to go on the offense and take advantage of lower loan prices, given the benefit of the long-term locked in place non-mark-to-market financing inherent in our CLOs.

This is why we spent so much time on resets and talk about lengthening our weighted average reinvestment period, more optionality for the CLO equity.

Many of you have seen in recent weeks that several of the mass media outlets have taken a keen interest in CLOs, spurred by remarks about the growth of the leveraged loan market and their cov light characteristics. I wanted to take a minute to generally respond to some of the negativity that we’ve seen in the press around the loan and CLO markets.

Unfortunately, at a high level, many of the mass media articles could perhaps be called filled with hyperbole and not really providing a lot of important data to backup their sentiment.

In particular, most omitted the mention of how CLOs have performed historically, which would have allowed the reader to have a significantly deeper context from which to understand the potential risks in CLOs. I'll provide that missing context here.

For all cash flow CLOs created between 2002 and 2011, which includes the entire period of the financial crisis, some of you may be aware that 96% of CLOs generated positive returns to the equity class. CLOs have been tested and withstood one of the worst recessions in nearly 80 years.

Further, many of the corporate loan defaults that occurred in 2008 and ‘09 were due to covenant violations, not actual payment default.

With so many loans now covenant light, we believe that will likely delay the onset of the next default cycle and may lower the cumulative default rate, as some companies may successfully navigate through tough times without missing a payment. Against that, perhaps when they do default, recoveries could be lower.

In addition, some articles have highlighted concerns related to degradation in lending standards. While the demand for loans does exceed supply and indeed is a borrower’s market, many loan terms have shifted in the borrower’s favor.

That said, we have yet to see an article mention that during the second quarter of 2018 revenue growth at the low investment grade companies increased an average of 14% year-over-year while EBITDA of that same set of companies grew an average of 12% from prior year.

Further, those growth rates have been accelerating, not decelerating over the past few quarters. While not impossible, we consider it highly unusual for companies with significant revenue and EBITDA growth to be at near-term risk of default. It just doesn’t make sense to us.

To be clear, we’re not being pollyannaish on credit and we’re not suggesting there are not risks unique to the current environment that warrant careful consideration. Indeed there are. We know eventually all cycles do turn. And we do agree with the rating agencies that recoveries will likely be lower in the next cycle.

However, there is an enormous difference between a credit cycle, which is what we experienced in 2001 and a credit crisis more akin to what we experienced in 2008.

When a credit cycle reversion occurs, what many people may be missing over the long-term is that CLO equity has historically benefited from loan price volatility since the CLOs have the ability to reinvest loan principal and lower price loans at that time.

That money can come from amortization, recoveries on defaults and relative value trades from selling other loans. This serves as a significant tool to mitigate credit expense.

To that end, we believe our CLOs are well-positioned as we continue to seek to maximize the reinvestment periods across our portfolio, giving our CLOs as much flexibility as we can, when tides eventually turn.

In the CLO market, through September 30th, we’ve seen slightly over $100 billion of new issuance, along with $97 billion of resets and $26 billion of refinancings, keeping new issues well on pace to beat last year’s record and setting resets up to potentially double last year’s record performance. We’re pleased to be a contributor to those.

With the expectation for rates to continue to rise for the foreseeable future, floating rate CLO debt interest remains strong with new issue triple AAAs often pricing in 115 bps over LIBOR context for some of the most well-known collateral managers. BBs have remained resilient despite the elevated CLO debt supply.

CLO equity has been reasonably well bid, despite liability widening, as the spread compression on the loan size has largely subsided. Our reset pipeline at Eagle Point remains strong and we expect to direct additional resets in the fourth quarter of 2018 and have a pipeline going into 2019.

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

However, we consider this money very well spent and that our investments will harvest increased cash flows to our CLO equity securities in the future, have we not taken these actions. Of course, wherever possible, our advisor seeks to keep those costs to a minimum.

Resets also typically accelerate certain tax deductions, allowing us to shelter certain taxable income during a year that reset is completed. As always, our advisor’s deep CLO vesting experience provides us with a notable advantage as we seek to generate additional value for our portfolio and our stockholders.

So far in the fourth quarter, we’ve reset three CLOs, we’ve deployed net capital of $22.8 million across CLO equity debt and loan accumulation facilities, and have put undeployed capital -- we are putting undeployed capital that we have to use as opportunistically as possible.

Beyond seeking to maximize the value of our existing investments, we continue to maintain good visibility on our new investment pipeline for the next few quarters. We have a number of accumulation facilities in place, which we expect over the coming months and quarters will be converted into new CLOs. Yet, there is never a rush to do it.

We like to do it when we believe it’s the best time. To sum up, we’re continuing to opportunistically invest in CLOs with effective yields above our portfolio’s current weighted average. We continue to utilize our advisor strength and proactively direct additional resets, which we should increase future cash flows to our CLO equity securities.

We look for other opportunities to reduce our cost of capital. We remain optimistic that spread compression continues at its slow pace and may slow further, which would hopefully allow our effective yields to begin to rise again.

We will continue to be proactive in the management of the Company and our portfolio in order to generate additional long-term value for our stockholders. Both Ken and I thank you for your time and interest today in Eagle Point. We’re happy to field any questions call participants may have..

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

Hey, Good morning, Mickey..

Hey, Tom and Ken, good morning. I’d like to start by asking about commodity related credits in the portfolio. In some ways, we’re seeing similar developments to what we saw in 2015 and 2016, when there was concern about the growth in China’s economy and declining commodity prices.

I’m not sure how that’s going to actually play out, but I’m curious as to how much exposure the portfolio has to energy and commodity investments?.

Good question. If you look at page 28 of the November 14th quarterly update, this lays out both our top 10 obligors and our top 10 -- the industries of the underlying obligors. And you can see and just -- like I’m 99% sure, energy and metals and mining is not on the list, indeed it is on the list..

It’s not. I looked at that page. That’s why I’m asking..

Yes. So, it’s certainly below 3 -- 3.5% or below 3.4%. In general, what I’ll say, and this is a bit of a generalization, but I think is directionally accurate.

If you think back to the oil price, dramas that the market felt a few years ago, what we saw was the high yield bond market had typically 16% to 18% exposure to energy related credits while the loan market had between 4% and 5%.

And this goes back credit training at many of the banks in mid 1980s and 1990s, where lending against companies that their main business was pulling stuff out of the ground was discouraged and sent onward to the ABL group. So, in general, the loan market has had far less exposure to commodity-linked businesses than the high yield bond market.

That said, any of these things, commercial services and supplies invariably -- which is 3.9% invariably includes a company that makes those that someone in the commodities business is going to use. So, it’s worth -- even if we are not lending directly to commodities companies, which in general we are not, there is always some embedded exposure.

At the same time, many of our companies are also users of commodities and lower commodity prices, price of oil for offshore drillers, we like it high; for airlines, we like it low. So, we kind of have it a little bit both sides. Overall, the exposure is quite limited.

We don't have it -- it's not a top 10 obligor, and I don't have a exact percentage here but it’s not something that’s pervasive in the loan market broadly, nor in our portfolio..

Thanks for that, Tom. If I could just follow up on that issue. I know you and your team spent a good amount of time looking at underlying collateral and prices for loans.

Have you seen pressure or volatility in the pricing for those credits yet, the energy and commodity-related credits? And was that reflected in your estimate for October NAV?.

We like loan price volatility at Eagle Point, like loan price volatility without defaults is frankly one of our best scenarios.

We have not seen -- when we made our October 31 estimates that factors in prices of all the underlying loans, yields, changes in spreads, it was not a particular driver; it was down $0.15 roughly to the midpoint, give or take, quarter-over-quarter.

The NAV was actually up during the third quarter and then slightly down on an estimate basis in October, but not a particular driver from energy related credits. And we haven't seen significant amount of volatility in energy price -- energy and commodity-linked price credits, although invariably, some names will have demonstrated some..

I understand. My last question, if I could just switch gears.

When we look at the lateness in the credit cycle which affects your estimated yield assumptions and also the remaining opportunity at the same time to refinance and reset CLOs in the portfolio, could you describe or give us a sense of the pathway for NII to at some point approximate the dividend?.

Sure. I guess, there is a number of factors, and as the board considers the distribution policy for the Company, we consider a wide variety of factors to talk about where we are in terms of earnings and where we are in the credit cycle.

First off, I draw participants’ attention to page 33 of the fund company deck, which shows the annual -- quarter-over-quarter revenue change for below investment grade companies. And what you will see is from mid-2016, even late ‘15 through 2018, revenue is growing at an accelerating pace for these companies.

Credit cycles invariably -- expansion periods invariably come to an end. We haven't seen one not end yet.

Against that, we think it's a pretty good sign that companies are growing their top and bottom lines at such significant rates, while there's always outliers and these numbers are averages on average, we think it's relatively low probability for a company to be growing its topline 13% and also defaults.

We know that time will turn, and that's why as we manage our portfolio, one of the -- number one objectives we have is lengthening our weighted average reinvestment period.

And this year, during the period, the first nine months, when you expect on a static pool to have nine months of decay of the reinvestment period, not only did we completely offset the natural decay, we actually increased our weighted average reinvestment period by about two months.

So, that’s 11 months of kind of positive progress in our view, in our weighted average remaining reinvestment period.

In terms of kind of the earnings power of the Company, where we are -- we’ve been in a period of transition, the weighted average effective yield 2-plus years ago, 2.5 years ago was in the 17 context, we’re right around 14 flat right now. And that's attributable to a couple of things, in my mind.

We’ve had a couple of CLOs, particularly some mid-2014 vintage CLOs that ended up underperforming. And in some cases, we’ve been recruiting them at zero percent effective yields, just treating all those distributions as a return of capital. A number of those CLOs were actually called during the third quarter.

And to the extent they were, I think, in most, if not all cases, minority positions for us where we got involved before we had exemptive relief, other investors, in some cases in consultation with us and other cases not, directed calls of those CLOs. And we did realize, have some modest realized losses from those.

Against that we have realized gains in excess of that. So, we still had a net positive for gains for the quarter. But, the kind of big part of that is now we’re starting to knock off some of the 2014 investments, which turned out to be tougher due to heavier energy exposure.

So, we’re knocking out some of the zero percent effective yield investments, and in general, putting in, expected yields well in excess of zero. The weighted average or the blended IRR in all of those investments was positive. So, it’s not as if we actually lost money overall in the investment.

But those investments in fairness did underperform our expectations. So, our objectives are to increase the weighted average effective yield of the portfolio. And at the same time, maintain the leverage within the company, within management’s band.

You’ll recall, a couple of quarters ago, we actually crept up to about 37%, now we’re back to 33 and change percent. Obviously, if we increase leverage to 40%, all else equal, we probably have higher earnings, that’s not something I’m comfortable doing.

And we stick by the range that we’re in, and I’m pleased, if you’ve you seen a kind of trickle down a little bit, basically through the ATM usage to kind of -- to get back closer to the midpoint of our range.

So, the overall thing, we’re cleaning up some of the lower yielding investments through calls for them kind of reaching the end of their natural life or putting new, more yield stuff in the ground.

And as we look what we’ve seen in terms of the pace of spread compression, which has been a nontrivial millstone for the Company that has certainly abated significantly..

So, Tom, if I understand you correctly, the amount of called CLO equity deals -- the sort of 14 vintage underperformed are meaningful enough that everything else remaining equal, as you rotate that cash into newer transactions, whether primary or secondary, the impact would be sufficient to increase the estimated yield on a portfolio?.

It would -- that unto itself should be enough to increase just by a virtue of eliminating zeros. And we’re putting stuff in the ground and the ‘15, ‘16 context today. So, to the extent we’re able to do that that would obviously be accretive.

That unto itself is not going to get us to $0.60 a share, to be perfectly candid; continuing to rotate into other more yieldy investments is an important piece of the puzzle.

And then, that’s relative value positioning within the portfolio, while in general we invest with a whole maturity where we underwrite every investment with a whole to maturity mindset.

As I highlighted through the call, we did have a fair bit of secondary trading, which was typically selling things at lower yields with a goal of replacing them with things with higher yields with better risk adjusted returns.

Couple of other tweaks that as I look at our portfolio, one thing that’s crept up a little bit is the CLO debt positions and it’s probably close to 10% of our overall portfolio right now, which every one of those -- 11% even, every one of those investments makes sense onto itself in fairness from an earnings potential for the Company.

We’re probably a little overweight CLO debt. And I mentioned in even in the post Q3 events, we have sold $15 million or so. I gave the amount of earlier of CLO debt, which is obviously yielding less than the common distribution. So, we got a number of things we’re working on.

We’re rotating out of the weaker 14s into actively yielding stuff, making relative value decisions within the portfolio, resetting which typically increases the weighted average yield. I’m seeking to lower the overall CLO debt exposure in the portfolio. And all of those as a collage we believe should direct the Company’s earnings higher.

Against that -- just one last thing, the other piece that we evaluate as a Board and we’ve said in this past is what is going to be our taxable income for the year. And as we all painfully know GAAP, cash and tax our three different numbers for CLO equity investors.

Where we look right now, our new tax yield begins in November 1, 2018; we’re still in preliminary estimate mode at this point. But as best as we can tell, we’ll probably have taxable income in line with our current distribution rate. Obviously, we can refine that as additional information comes in, and Ken and his team do that every single quarter.

But, we’re mindful that we have our druthers as we earn 60-plus in GAAP and we have 60 of taxable, that’s where we’re working to, and the taxable part obviously also governs what we’re required to distribute. So, it’s a combination of all of those that the Board considers..

Tom, that estimate you just gave for taxable income, you’re referring to the year that just finished, right?.

No, for the year that’s starting in a few weeks, year that’s starting December 1 -- we have December to November tax year. So, December 1, 2018 to November 1, 2019..

Okay..

November 30, sorry. Yes, sorry..

Okay. That’s it for me this morning. I appreciate your time. Thank you..

Great. Thanks, Mickey..

Our next question comes from Christopher Testa with National Securities. Your line is now open..

Hey, good morning..

Good morning, guys. Thank you for taking my questions. I just wanted to follow up. First, I just missed it, my phone cut out a little bit.

What was the taxable income estimate for the year ended this November?.

We haven’t -- for the current tax year, which ends November 30, 2018, we haven’t communicated anything along those lines..

Okay..

In the previous calls, there is going to significant impact to taxable income as a result of the expenses due to reset and refi activity this year..

We have said we don’t expect the special..

Yes. We don’t expect the special, or we don’t have the....

Got it. Okay..

It’s less than 240….

And just to clarify, for 2019, which starts December 1, 2018, on a normalized taxable basis, right, if we don’t do as much activity as we have done in this current year, we expect taxable income to be in line with our distribution rate..

Got it. So, really, the reason for the shortfall would be mostly the elevated reset and refi activity with all the upfront cost. But, if we assume that let’s say spreads widen, even just modestly, there’d likely be far less reset activity and you guys would get the benefit of increased reinvestment spreads.

So, taxable income would likely be up pretty materially year-over-year for you under those assumptions, is that right?.

That’s fair, yes. And to clarify, the tax expense associated with refis and resets is not related to the new -- it's not related to the refi or reset, it’s related to acceleration of the unamortized cost from the old deal.

So, all else equal, accelerating deductions is a good thing for companies and sometimes we are sitting here admittedly betwixt and between -- but all else equal, we know we are always supposed to accelerate deductions, and touchwood, will always do obviously within the confines of the code, everything will do in that direction. Your point is correct.

To the extent spreads widen, and let's say we did no further resets in the next taxable year, absent a significant pickup in credit expense, all else equal, taxable income would be up significantly if the refis and resets are significant buffer to taxable income..

Got it. Yes. No, that makes sense.

And kind of sticking with the theme, kind of speaking out loud, I just think that this is something that a lot of investors really have a hard time grasping, right? A lot of people just kind of look at the GAAP NII and say, look, they are not earning the dividend without realizing that there was a really, really big disparity between taxable cash and GAAP income, especially with CLO equity accounting.

As you guys kind of take this into consideration and look to the investor base, is there any inclination on your behalf going into 2019 to maybe break out estimated additional taxable income per quarter, or at least give us kind of CLO equity reductions to cost on the investment roll forward, so that we can sort of back into an approximate estimate?.

Chris, it’s as if you were secretly listening to our Board meeting. One of our directors asked, could you come up with a quarterly taxable income estimate, and unfortunately, we are unable to. In that, there are couple of factors.

CLOs have tax years that end randomly throughout the year; they are not lined up with our tax year, except in limited instances. And B, we only get annual taxable statements related to the CLOs, not unlike any sort of investment.

We left the meeting with it to do of working on it if there was a way, although I admit we were not super confident that we’d come up with a way to come up with the estimated accurate estimate. Probably, the biggest metric would be the refi and reset activity, all else equal.

If we do more refi and reset activity, you would expect taxable income to be lower; if we do less, you would expect it to be higher. Ultimately, I think we’ve done over 50 refis and resets since January of 2017, 51 against that that’s kind of most of the positions at this point.

And in the investor presentation which I’d highlight again, now includes name by name details. You can see all the deals we've done, resets too, this is on pages 23 and 24, and it also has the non-called days.

So, I mean you could take a few minutes of work, but you could probably extrapolate, while if these guys reset every single deal they could, here’s the accounts that it would be versus here’s the account they’ve done in the past to kind of give you some degree of flavor.

It’s hard to see a scenario where reset activity is not lower in the next tax year than it was in this past tax year, simply because we’ve done most of them..

Got it. Okay. That makes sense.

And are you guys able to disclose the dollar amount of cash costs for reset and refis year-to-date?.

Yes. And this is stepping away from tax more to a cash basis....

Sure..

I sort of known that question would come up….

Let me just clarify. This is not a tax expense and this is not an upfront tax expense and this is not an upfront GAAP effect. These are things that will factor into tax and GAAP in the future. This is purely cash..

Right..

Just cash. So, it’s $0.08 per share for the quarter, third quarter, and $0.28 year-to-date 2018..

Per share..

Per share..

Got it. Yes. Ken, you’ve become used to me asking that like a broken record. Thank you for that..

Those are not GAAP or tax measures....

Yes. That’s all I’m concerned with. Thank you. And Tom….

Another qualifier is that this -- there is always this quarter, it may show up in the subsequent quarter..

Got it. Okay. And we started to see, towards the end of October in the loan market, several hung deals, which is something that we have not seen for quite some time.

Are you looking at this -- is this potentially anything to read into that we might see some technical dislocation on the horizon or do you kind of see this more as an anomaly with not really a follow-through on it?.

A really good question. The loan market has hung in there broadly. Against that -- and I would still describe the market as a borrower’s market. However, companies pushing the frontier, one we’ve seen more than a few loans flex wider price, [ph] wider than the wide end of talk.

So, what we’re seeing is kind of really stock standard Ba3 loans still kind of can drive the shift. B2s and B3s that might have sale through six months ago, are a number of cases flexing wider. I’m not sure, I would call it a trend, but at a minimum, it’s in the good news category..

Got it. Okay. That’s fair. And the other kind of broader theme I want to discuss on is, single B rated and below deals, have hit a record high, I think 58% or 59% of the market now. Obviously, you guys and all CLOs have an allowance in a CCC bucket.

Can you just discuss A, what your thoughts are on the B rated that being a record? And B, if we indeed go into another credit cycle and there are defaults, what happens to a typical CLO structure in the event that the CCC allowance on the bucket is met or exceeded?.

Sure. Bear with me. I just want to see if I can find one or two data points on the portfolio, and I’ll address each of those questions. Ken is going to go grab one piece of information. Let me talk at a high level about what happens in those situations, and we can share some detail on the ECC’s portfolio.

So first, there is a common theme or misperception held by many in the market that CLOs are forced sellers of CCCs or defaults. That couldn’t be farther from the case. CLOs are well-suited to hold credits through periods of difficulty to whatever disposition the collateral manager thinks is best.

That could be, sell right away or that could be sit and wide it out until you get work out equity and a new credit 18 months from now in bankruptcy court, or anywhere in between. CLOs typically have a 7.5% bucket for CCC. And what that means is the collateral manager can actually purchase up to 7.5%, purchase the portfolio up to 7.5% CCCs.

To the extent there is downward migration in credit -- great, thank you Ken. We’ve got the September 2018 company tear sheet, which is also on our website which I’m going to refer to in a minute or two. So, you can buy or be migrated into 7.5% CCCs without any consequence whatsoever.

Then, after that, there becomes a haircut and OC test or CCCs above 7.5%. And the terms of any deal may vary but broadly think of it is kind of like the market -- lower of market of 50, for the lowest price CCC loans. We might have some CCC at par, and if we have some 40, maybe really lined up, you’re going to take that haircut on the worse loans.

And what that haircut means is that the reduction in the numerator of the OC test. And as of September 30th, the latest information we had, the amount of cushion on the OC test across our portfolio weighted average was 4.37%.

So, just to take some really basic numbers, let’s say a big downgrade wave came in, the market moves 17.5% CCC, I’ll just do this to make the math easy, then you’d have to take a haircut on that 10%. And let’s say….

Got it. Okay..

So, that would be whatever price or recovery. So, if you went to 12.5% CCCs, you take a 50% haircut, you’ve wave 2.5% off the OC cushion, we’ve got 4.3 points of those OC cushion. So, that holding all else constant, assuming all deals are average, going to 12.5% CCCs wouldn’t be a problem.

Right now where we stand, if you look on page two of that report, we’ve got 3, 4 -- 4.7% in CCC plus and below. So, we’ve still got headroom before we even get to the point where on average where haircuts kick out. Defaults are similarly treated, roughly at the lower of market or 50, and CLOs can hold on to defaults for as long as they like.

There is typically not a for sale requirement. At some point -- and if you look at our distribution of gradings of borrowers, this is on page two of that September 2018 report, you see 37.5% of our portfolio as rated single B, 15.3% rated B minus.

So, the some -- so that B minus category is the one that’s really at risk for -- really at risk for could some fall into CCCs, that’s as soon as -- those that are nearest to that threshold. Now, all of what we just walked through is in a everything else constant scenario.

It’s important to remember that through 2008-‘09, obviously an extremely difficult credit cycle, roughly half of all CLOs never actually failed their OC test. And it wasn't because there were no CCCs or defaults, can't look at these things static. The ability of collateral managers to reinvest in loans at discounted prices helps the numerator.

And frankly, any loan you buy typically at 80 or above, in some CLOs 85 is the threshold, those loans count as a 100 in the numerator.

So, while invariably there will be a period with elevated CCCs and elevated defaults, it’s just a matter of when, not if, the ability of CLO collateral managers to manage the structure and manage the test to keep the deals on sides, there is a lot of, shall we say arrows in the quiver that they have to work through those tricky situations.

So, what we just talked about was a purely static scenario, the ability to do other things to build par and keep the OC test on size pretty darn powerful..

And just one last one if I may. Obviously with a lot of complacency in the market there, there are sort of a narrower kind of bid-ask between would -- I guess you and probably a lot of people would call tier 1 managers and tier 2 and tier 3 collateral managers. Just as we -- the cycle continues to edge and there might be a pickup and volatility.

Just wondering if that kind of changes your thinking at all at potentially having to pay up more for what would be considered a tier 1 collateral manager versus the middle of the rotor or lower tier 1s?.

Yes. And I'll say our portfolio, no offense to any of the people in our portfolio, includes a mix of tier 1, 2, and 3, if you use the common parlance in the market to describe those collateral managers. What we see -- and we have a rigorous collateral manager evaluation and diligence process, both upfront and ongoing in terms of maintenance.

We seek collateral managers who have an edge in delivering superior returns for the CLO equity. There are quite a few purported tier 1 collateral managers where in our opinion their equity stinks, and we typically wouldn’t want to buy it.

Although, they have very low default rates and long-term track records, but that long-term track record hasn’t translated into CLO equity outperformance. So, when you look across our portfolio, what you will see is overwhelmingly a mix of themes of a variety of standings in the market, but each have a certain edge in delivering to the equity.

If you look -- I think, we’ve published it in here -- kind of shows some dispersion -- bear with me, going back to the portfolio on pages 23 and 24 of the deck, of the big deck, you can see our weighted average rating factor is 2818, [ph] but we don’t show the [indiscernible] but you could look through here, you can see some folks are running 3,100, maybe there is a 3,200 there is 2,700, 2,600 and let me make sure I see a 26 -- there is a wide dispersion -- 2,500 even.

There's a wide dispersion of worst and you can see the same thing in the weighted average spread while it’s 352 as the weighted average, there is some over 400 and there is probably some that are very, very low to 300. Those are very different style portfolios run by different firms.

And a lot of our investment process, take a step back, we don’t believe wharf [ph] was a correlate to equity return through the ‘08, ‘09 cycle. So, all else equal, one would think, the higher risk portfolio would underperform in a severe credit cycle.

Data we’ve seen from Wells Fargo over the years and our kind of personal experience is wharf is not really a factor in how CLOs perform in difficult cycles. It’s much more to do with the collateral manager’s behavior and skill. And what we look to do is see that these portfolios are consistent with the collateral manager’s skill and experience.

And then, our job is structures afford them the maximum flexibility when it really matters..

Okay. No, that’s good detail, Tom, and you’re right about the wharf factor and kind of returns. I’ve read a lot about that kind of being uncorrelated.

Do you think that kind of going back to my earlier point that, if we get a time of dislocation that sometimes it actually becomes nonsensical to maybe pay up for a Tier 1 manager because they’re commanding such a premium over what could be a similarly constructive CLO from with Tier 2 or Tier 3?.

I think that’s fair. Yes. And you might even see us rotate -- the purported tiers that people used to talk about collateral managers, in our opinion has little to do, I think that dominated more by debt investors than equity investors, the chorus of grouping of tiers, such that someone might be tier 3 from debt perspective.

But boy-oh-boy, they are crushing it for us as an equity investor..

Right. That’s your point as well. Okay. Those are all my questions. Thank you so much for your time today..

Thanks, Chris..

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

Tom, I wanted to pick up on kind of your conversation that you were having regarding the leveraged loan market and CLO markets. I mean, clearly, there’s been a robust CLO issuance in 2018, forecasts for 2019 look like they’re going to continue to be kind 100 plus billion CLO issuances.

Clearly there’s a lot of CLOs that are going to be coming to the market. But, I really wanted to get your kind of opinion on, do you guys -- how much time do you guys spend or how much does it affect your decision-making process, the quality of the leverage loans going into the CLOs? I mean, you touched on that a little bit.

But, clearly, where we are today, leveraged loan levels are very high, covenants and documents are much loose and spreads are a lot tighter than where we’ve seen over the last several years.

So, do the terms of the leveraged loans that are going into the CLOs, did that affect your guys’ decision making process? Do you guys ever step back and evaluate that in your decision to the kind of investment CLO equity, or are you more concerned with more of the structures of the CLOs, the liability spreads, reinvestment periods? Because obviously 2017, there is a lot of frothy conditions as far as leveraged loans, but those are some of the best performing CLOs, because of the tight liability spreads and reinvestment periods.

Just would love to hear your thoughts around that..

All of the above is the answer. To draw your attention just to a couple of market steps, this is on pages 15, 16 and 18 of our quarterly presentation. Certainly there’s a lot of loans, loans hitting $1 trillion is both notable, at the same time the compounded annual growth rate over the last three or four years is only 8 or so percent.

So, it’s not as if we’re seeing a massive spike in credit. And similarly on CLOs, when we look at what’s been going on there, while volume is high, you look at the difference between 2015 and 2016, 2016 and 2017 and 2017 and 2018, those are gross issuance numbers; resets are obviously neutral.

And what’s not counted in none ever [ph] publishes the stat of the calls. So, despite this being a $100 billion year, the net increase in outstandings is a little over $70 billion. So, that suggests $30 billion of calls, including some that we’ve been involved in. So, the issuance numbers are eye popping.

It can’t -- we encourage people not to look at that in -- on a standalone basis, but to look more holistically at all the different things going on in the market, the repayment activity as well. And then, finally, in terms of loans or page 16, we always like to point to the total return in the loan market.

The loan market is at 24 out of 26 years of positive return, going back to 1992. While past performance is not indicative of future results, which it says clearly at the bottom here, the asset class at least historically has had a pretty look track record of delivering positive returns.

And then, to draw your attention to page 18, which shows the spread on loans and a lot of people will say, oh, loans spreads are really tight these days and our answer is, well, it all depends on your perspective.

If you’re looking over the last three to five years, boy, it’s a bunch tighter; if you look over the long-term, it’s meaningfully above the long-term average.

To some degree though, while obviously we like loan spreads wider than tighter, at the same time the spread on loans is only relevant when we look at the weighted average cost of debt in our CLOs. And it’s not just looking at the AAAs, it’s looking at the full debt stack and kind of where things are.

If this chart were to widen on page 18 and go back to 400, sadly, I would say, the cost of CLO debt is probably also wider. Hard to see CLO debt not widening when loans widen. So, the two of them kind of work in sync on those CLO market -- probably more than -- a little bit more than half of all loans outstanding.

So, it’s hard to see them getting terribly out of whack. Now, against that, we’ve actually been a little slower in our pace of new issue deployment this year. And that’s been intentional.

While there is always naysayers who say the CLO arm doesn’t look great, you can look back on Bloomberg every single year and people will say that, we do ebb and flow in terms of our interest and issuance. And if you look, frankly some of the loan accumulation facilities we’ve had have been around for a couple of quarters.

We’re buying good loans, collateral managers are buying good loans when they like them. The tight folks we work with are seasoned issuers and who respect and value the long-term nature of our capital, they are not -- they don’t typically get fees during the ramp-up periods.

So, they have every motivation in the world to go and print the darn deal, against that that’s just not the way that this works. And we have found a group that are very patient and like to do deals when they make sense. So, of the new equity money that went in the ground in the third quarter, some was primary and some was secondary.

And frankly, we’ve in some cases seen more attractive secondary opportunities than primary. Sometimes that involves even getting into minority positions. But if you can get into at an attractive level, you will do it. Our strategy is very much an all weather strategy. The things we've done to add the most value this year frankly are resets.

In many cases, we are able to pull off what we call a reset upsize where we actually grow the deal a little bit. In one or two cases, we've done what we call a dividend recap where we actually add a new class and take money off the table when we do reset. So, we try and do the best thing for each deal at the point in time. It's ironic.

A lot of people were naysayers on our strategy around risk retention. We've done fewer deals, new majority deals since risk retention was repealed than we did during the entire period it was enforced, proving that it has little to do with our strategy ultimately.

But we’ve remained extremely selective, and we do stuff when we like it, and we never feel pressure to do when we don't..

Okay. That’s definitely helpful and good color on that. I just had one other question. I just wanted to get a little more detail about the partnership that you guys have announced with Alexandria Capital Partners. From my understanding, that partnership will allow them to access investment opportunities really across your CLO securities.

Can you just maybe provide a little of context with this? I'm not sure if you guys have similar partnerships with other firms across your platform or this is a one-off.

And how big of an opportunity is this or is it more just kind of a smaller income -- or kind of an incremental opportunity as you kind of build your CLO platform?.

Sure, yes. And what Ryan is referring to, we put out a press release yesterday just announcing a relationship with Alexandria Capital, which is a family office and high net worth investment manager. You'll recall the -- and obviously this call is to talk about ECC, this press release has to do from the advisor, has nothing to do with ECC.

You'll recall -- and you can see in our Form ADV and I don’t know if form PF is public, but certainly in our ADV, we have I think $2.6 billion under management at present. ECC is obviously a meaningful portion of that $500 million to $600 million.

The vast majority of our business is in things away from ECC and the relationship with Alexandria relates to a private vehicle that we manage and nothing to do with ECC. Finally, I don't expect it to be a radical shift in the AUM at Eagle Point..

[Operator Instructions] Our next question comes from Allison Rudary with Oppenheimer. Your line is now open..

Good morning. You guys have really addressed most of my questions. So, I will obviously pass for now..

All right. We were wondering what else you have left to go. Sorry. Remind us next time before the call. We’ll move you to the front of the queue. Apologies..

No problem. Thanks for the update..

Thank you, Allison..

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

Great. Thank you very much, everyone. We appreciate your interest and certainly the keen questions that folks asked. We are plugging away. And hopefully the strategy you’ve heard from us continuing to work on the refis and resets is very consistent with what you heard.

We’ve been able to make some good motions in the portfolio in terms of winding up some of the 2014 deals, which ultimately underperformed some of our expectations, although in aggregate we’re still profitable. And we look forward to wrapping up the year hopefully with a few more resets and continuing a robust investment program into 2019.

Ken and I will be around today. To the extent people have any follow-up questions, please feel free to follow up directly. Thank you for your time and interest in Eagle Point..

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