Good day, everyone. Thank you for standing by. Welcome to the Eagle Point Credit Company Inc. First Quarter 2019 Financial Results Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead, sir..

Thank you, Hanna 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 the 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-Q, first quarter 2019 financial statements and first quarter investor presentation with Securities and Exchange Commission.

Financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company’s website. The financial statements can be found by following the Financial Statements and Reports link and the investor presentation can be found by following the Presentation and Events link.

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

Great. Thank you, Garrett and welcome everyone to Eagle Point Credit Company’s first quarter earnings call. If you haven’t done so already, we invite you to download our investor presentation from our web site, which provides additional information about the company including information about our portfolio and the underlying corporate loan obligors.

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

Of course, we will then open the call to anyone’s question. The first quarter was a strong one for the company and we saw significant reversal of the mark-to-market losses from the fourth quarter.

Cash flow from our portfolio remains solid during the first quarter with recurring cash flows on our portfolio increasing both on an absolute and per share basis quarter-over-quarter.

While there were still approximately $11 billion of outflows from retail funds during the quarter, pressure from those forced sellers was offset principally by demand for loans from other institutional investors.

For the first quarter, the Credit Suisse Leveraged Loan Index delivered a positive return of 3.78% and through May 15, the total return on that index for the year is now 5.35%. Corporate credit expense remains low. As of March 31, the 12-month lagging default rate has fallen to 93 basis points, lows not seen in many years.

Overall, our NAV increased $1.30 per share from the level it was at, at the end of the fourth quarter. This is of course in addition to $0.60 of common distributions paid during the quarter.

As we noted on our prior call, short-term changes in NAV typically don’t signal a drop in cash flow the way such moves could with the BDC, rather we expect any future short-term drops in NAV may in some cases augur well for higher near-term cash flows as our CLOs are able to reinvest principal proceeds in what would be a buyer’s market for loans.

We believe the company remains well-positioned to generate long-term value for stockholders. In the first quarter, we continue to remain proactive with respect to our portfolio.

During the quarter, we deployed approximately $58.5 million in gross capital into new investments and the new CLO equity securities we purchased continue to have higher weighted average effective yields than the weighted average effective yield for our overall CLO equity portfolio.

We also continue to leverage our advisors’ competitive strength and priced to reset during the first quarter. For the first quarter, we generated net investment income and realized capital gains of $0.36 per common share.

While for several quarters we have generated GAAP net investment income below our common distribution level principally driven by lower GAAP portfolio yields on our CLO equity.

When determining our common distribution level, we will also evaluate the cash flow that we received from our investments as well as our estimates for taxable income during each tax fiscal year. I again want to highlight that it is taxable income that sets a floor in our common distributions.

Further, recurring cash flows from our investment portfolio exceed our expenses and common distributions during the first quarter just as it did through all of 2018. During the first quarter, the company issued 7.5 million of new common stock via our ATM program.

Through this issuance the company captured approximately $0.05 per common share of NAV accretion for all our shareholders during the quarter.

As mentioned earlier, during the quarter we deployed approximately $58.5 million of capital on a gross basis on both the primary and secondary markets and we have received $44 million of proceeds from the sale of investments in loan accumulation facilities.

We have added six new primary CLO equity positions which include the conversion of three loan accumulation facilities and one strategic CLO debt position in the quarter. The new CLO equity investments had a weighted average effective yield of 15.58% at the time of investment.

This level is well above the March 31, weighted average effective yield of 13.58% of our overall CLO equity portfolio excluding call in the CLOs. This continues to demonstrate our ability to source accretive investments through our advisors investment process and access to the market.

On the monetization side we sold $5.1 million of CLO equity where we saw selling opportunities as well as $2.9 million of CLO debt securities leading to a realized net capital gain of about $0.01 per common share in the quarter. We remain pleased that we have had realized net gains on our investments in 9 of 12 last quarters.

Net gain realizations across those 12 quarters totaled $0.36 per share. And going back to our IPO in 2014 the total gains we have had are $0.38 per common share.

Also in the first quarter as I mentioned we priced two resets brining the total number of resets and re-financings that the company has been involved in from the beginning of 2017 through the end of the first quarter of 2019 to 57, split almost evenly between resets and re-financings.

As in prior quarters, the resets created new reinvestment periods of approximately 5 years for the CLOs and reduced those CLOs weighted average cost of debt.

Across our entire CLO equity portfolio the weighted average remaining reinvestment period stood at 3.2 years as of March 31 and that’s an increase from 2.9 years at the end of the first quarter of 2018. That extended remaining reinvestment period is due to our significant reset activity and portfolio proactive approach in portfolio management.

We believe this is meaningful value add from our advisor. Had our portfolio remained static over the last year, the weighted average remaining reinvestment period would have decreased by approximately by 1 year.

As I noted on our prior call, we will continue to selectively reset investments in our portfolio although we do expect the pace of resets and refis to be less robust this year than in the prior years.

As of March 31, the weighted average effective yield on our CLO equity portfolio excluding called investments was 13.58% which compares to 13.4% in the prior quarter or 14.64% as of March 2018. This was the first positive quarter-over-quarter change in some time and reflects the recent cessation of loan spread compression in our portfolio.

Indeed the weighted average loan spreads of loans held by our CLOs actually increased from 3.52% to 3.53% during the quarter. As noted previously, the weighted average effective yield includes an allowance for future credit losses, a summary of the investment by investment changes in expected yield are included in our quarterly investor presentation.

In April and so far in May through the 15, we have deployed $5.7 million of gross capital. We expect to remain opportunistic in resetting investments, existing investments and active in pursuing new and attractive primary investments which we expect to price into CLOs in the coming weeks and months.

Additionally, we have continued to prudently utilize our at-the-market program during the second quarter and have issued over $27 million worth of new common shares. As a result of [indiscernible] issuance, the company benefited from an approximately $0.18 per common share in NAV accretion for all shareholders, second quarter to date.

In addition, earlier today, we announced the company’s plan to redeem half of the existing ECCA preferred stock outstanding later this quarter.

This action is driven by our desire to return the company closer to the midpoint of our 25% to 35% leverage ratio and the Series A preferred stock was selected because that security is, has both our most expensive cost of capital and the shortest of remaining life.

Overall, we believe the economy remains strong given the low number of defaults we’ve seen in the market. We remain favorable on the overall market and certainly our portfolio. After Ken’s remarks, I’ll take you through the current state of the corporate loan and CLO markets and as well as share our outlook for the remainder of 2019.

I’ll now turn the call over to Ken..

Thanks Tom. Let’s go through the first quarter in a bit more detail. For the first quarter of 2019, the company recorded net investment income and realized capital gains of approximately $8.4 million or $0.36 per common share.

This was comprised of net investment income of $0.35 per common share and net realized capital gains from the company’s portfolio of a $0.01 per common share.

This compares to net investment income, net of realized capital losses of $0.38 per common share in the fourth quarter of 2018, and net investment income and realized capital gains of $0.50 per common share in the first quarter of 2018.

When unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $45 million or $1.93 per common share for the first quarter of 2019. This compares to a net loss of $3.62 per common share in the fourth quarter of 2018 and net income of $0.39 per common share in the first quarter of 2018.

Just a reminder that our short-term cash flow generation is largely unaffected by the unrealized appreciation or depreciation that we record at the end of each quarter.

The company’s first quarter net income was comprised of total investment income of $16.6 million, net unrealized appreciation or mark-to-market gains on investments and liabilities at fair value of $36.6 million and net realized gains of $0.2 million which were partially offset by total expenses of $8.4 million.

At the beginning of the first quarter, the company held $1.5 million of cash, net of pending investment transaction. As of March 31st, that amount was $1.3 million as cash received from investments was redeployed during the quarter.

As a result of deploying $58.5 million in gross capital during the first 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 March 31, the company’s net asset value was approximately $324 million or $13.70 per common share.

Each month, we published on our website an unaudited management estimate of the company’s monthly NAV as well as quarterly net investment income and realized capital gains or losses. Management’s unaudited estimate of the range of the company’s NAV as of April 30 was between $14.33 and $14.43 per share of common stock.

Based on a range of mid point, this is an increase of approximately 5% since March 31. Non-annualized net GAAP return on common equity in the first quarter was 16%, primarily due to the recovery in portfolio valuations after the challenging fourth quarter.

The company’s asset coverage ratios at March 31 for our preferred stock and debt as calculated pursuant to Investment Company Act requirements were 267% and 517% respectively. These measures are above the statutory and minimum requirements of 200% and 300% respectively.

As of March 31, the company had debt and/or preferred securities outstanding totaling approximately 37.4% of the company’s total assets, less current liabilities. This is outside of our normal range, but reduced from 40.6% at the end of 2018.

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

By the end of April, given our estimated increase of NAV, and second quarter to date ATM issuance, we are returning towards our target range. As Tom previously noted, we announced earlier today, the company’s plan to redeem half of the outstanding ECCA preferred stock later this quarter.

This is driven by our desire to return the company closer to the midpoint of our 25% to 35% leverage ratio. Moving on to our portfolio activity in the second quarter through May 15, investments that have reached their first payment date are generating cash flows in line with our expectations.

In the second quarter of 2019, as of May 15, the company received total cash flows on its investment portfolio, excluding proceeds from called investments totaling $24.4 million or $0.99 per common share. This compares to $26.5 million or $1.13 per common share received during the full first quarter of 2019.

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

On April 1, we declared monthly distributions of $0.20 per share of common stock for each of April, May and June.

In terms of our at-the-market offering program in the first quarter, the company issued approximately 464,000 shares of its common stock at a premium to NAV with total net proceeds to the company of approximately $7.5 million resulting in NAV accretion of $0.05 per common share to all shareholders.

Subsequent to the end of the first quarter, through May 15, the company issued approximately 1.6 million additional shares of its common stock at a premium to NAV for total net proceeds to the company of $27.3 million, resulting in approximately $0.18 of NAV accretion per common share to all shareholders.

On May 16, the company recognized a realized loss of approximately $4.5 million or $0.18 per common share, principally as a result of the write-off of residual amortized cost associated with called and CLO equity investment, the effect of which was already predominantly reflected in the company’s NAV as of March 31 as an unrealized loss.

I will now hand the call back over the Tom..

Thanks, Ken. Let me take you through some of the macro loan and CLO market observations that we have and how they might impact the company and then I will touch a bit further on our recent portfolio activity.

Through March 31, the Credit Suisse Leveraged Loan Index generated a total return of 3.78% tracking ahead of where the index was at that time last year. At the same time, the vast majority of loans in the JPMorgan Leverage Loan Index continue to trade at or below par.

Loan retail outflows continued in the first quarter and according to JPMorgan, they saw about $11 billion of outflows. The selling was offset by demand from other institutional investors which remained robust during the quarter.

Given that most loans are trading at or below par, there have been minimal refinancing or re-pricings in the loan market so far in 2019. This has helped significantly slow spread compression on our look-through loan portfolio.

The total amount of the institutional corporate loans outstanding was $1.19 trillion as of March 31 and that’s a 3% increase from the end of the fourth quarter according to data from S&P.

Institutional new issue loan volume in the first quarter recovered from its lows in December, but is still seeing some lingering effect from the market volatility at the end of 2018. Despite the price movements, defaults continue to remain well below historic average.

The lagging 12-month default rate as of the end of March was 93 basis points according to S&P Capital IQ which are numbers we haven’t seen in many years. We continue to expect default rates to remain below the long-term averages for the near to medium-term due to minimal impending maturities before 2022, a growing U.S.

economy and the large majority of the loan market consisting of covenant-light loans. The company’s overall credit expense remains below long term averages as well and as of quarter end, ECC’s look-through exposure to defaulted loans was only 18 basis points.

As loan price volatility presents itself, 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 our long-term locked-in place non-mark-to-market financing which is inherent in all of our CLOs.

From our perspective, as long-term CLO equity investors, an environment of technically driven loan price volatility without an increase in defaults over the near-term to medium-term is extremely attractive. In the CLO market through March 31, we saw $29 billion of new CLO issuance along with $6 billion of resets and $3 billion of refis.

For the full year our advisor continues to expect $100 billion of new issued volume, $70 billion of resets and about $40 billion of re-financings, but should the market remain soft, we could see lower reset and refinancing activity than originally anticipated.

We are continuing to opportunistically direct resets and re-financings but with a slower pace than in the past due to the fact that we have reopened the vast majority of our portfolios at this point and based on broader market conditions for issuing CLO debt.

As a result, we expect our overall CLO equity cash flows to increase without the consistent impact of one-time reductions associated with the cost associated with a reset or refinancing. Indeed the benefit of our prior refi and reset activity can be seen in the weighted average AAA levels in our portfolio.

This is a new data point that we have added in our quarterly investor deck and I hope you find it helpful, where we list the AAAs or the senior AAA spread for all of the different CLOs equity positions that we have. As of March 31, the weighted average AAAs within our CLO equity portfolio was 121 basis points.

This compares to a market level of 137 basis points at quarter end or 136 basis points as on a recent day in May. To put it bluntly our weighted average AAA cost is meaningfully in the money today.

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 our stockholders. We have deployed net capital of $5.7 million across CLO equity so far in the second quarter putting un-deployed capital to use this opportunistically as possible.

Beyond seeking to maximize the value of our existing investments and looking to be opportunistic with respect to the loan price dislocation we have seen, we continue to maintain solid visibility on our new investment pipeline for the next few quarters.

To sum up, we have had a strong start to 2019 deploying over $58 million of capital into new investments. We saw a strong recovery and are now after the volatility of the fourth quarter.

We have prudently accessed the market via our ATM program and issued over 2 million shares of common stock all at a premium to NAV and building approximately $0.23 per share of NAV for all shareholders. We continued to invest in CLOs with effective yield that are in excess of the portfolio’s weighted average effective yield.

We remain comfortable with the overall macro-environment in pricing from a long-term perspective given the very low default rates currently being experienced. As a result we have strong opportunity to utilize our advisor strength and create additional value for our portfolio over the longer term.

We will also continue to utilize our advisor strength and proactively direct additional resets which we would expect to increase future cash flows to our CLO equity securities. And as spreads widen, we believe our effective yield will begin to rise once again.

We will continue to be proactive in our management in order to create additional long-term value for our stockholders. We are pleased with how the company is positioned right now going into the summer. So we thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions..

Thank you. [Operator Instructions] And we will go first to Christopher Testa with National Securities Corporation..

Hi, good morning guys. Thank you for taking my questions..

Hi, Chris. Good morning..

Good morning. Just want to talk a little bit on capital deployment.

So the first quarter you guys issued about $7.5 million under the ATM, this was Tier 1 manager is still having kind of effective yields about 15%, I guess was the deployment a little bit light just given you guys have a large loan accumulation facility conversions or was there something else that you were maybe holding back for?.

Yes. That’s a lot of it frankly, a number of the facilities were converted from loan accumulation facilities to CLOs which is obviously what’s supposed to happen with each of them. So, and then new capital was deployed, some of that into loan accumulation facilities and other into other CLO securities.

But a big chunk was converting we had three conversions during the quarter..

Got it.

And trying to sticking with the theme on the Tier 1 manager, of course maybe some of the others, given that the CLO market hasn’t rebounded as much as maybe the broader bond market has, are you noticing more of a divergence between kind of the Tier 1 versus Tier 2s and Tier 3s and where those trade with CLO equity?.

Good question. I guess, the first collateral manager tiering is in the eye of the beholder, first off..

Right..

Those that may be seen as Tier 1 by the AAA investors may not be our favorite as the equity. The so the different points in the capital structure may have different perspectives on the tiering, I guess of any given collateral manager.

Has there been a particularly wide dispersion, certainly at the latter part of last year and beginning of this year in general and softer markets, however you want to define it, you will see bigger kind of spread differential both in debt and in equity yields for Tier 1 versus Tier 3 collateral managers.

As I looked through the new investments that went in the ground, the 55-and-change-million, somewhere as tight as you know 12%, 13% and the expected yield and others had two-handled expected yield. Some of those were secondary market purchases. So, there is a dispersion, it gets wider in softer markets.

As the market has generally strengthened and you’ve seen obviously as I think we were – the NAV went up about 16%, Ken?.

Yes..

So that maybe be it was total return. It was obviously a strong first quarter as the price of securities rebounded in general, the spread between top and bottom tightened to some degree. So, I think that’s a long answer. The short answer is yes, we have seen things kind of the spread from the best of the worst type somewhat..

Got it.

And I know that we frequently discuss that obviously there is, you know, the collateral manager is in the eye of the beholder, but, was there any actions or lack of actions taken by some of those the managers in the fourth quarter with reaction to the volatility that made you reevaluate the managers either positively or negatively?.

Yes. The to borrower quote I heard from someone else in the market, the fourth quarter was a little bit of like a rehearsal dinner perhaps for whenever more significant volatility comes. If anything, while we obviously liked what NAV is up 16% versus down greater than that as it was in the fourth quarter.

We might have liked loans to stay lower a little longer, if we could have had our magic, if we could have called the market perfectly and directed what happened. This was a small period of time, you kind of have six to eight weeks of opportunity and we’ve reevaluated and evaluated frankly all of the major collateral managers in our portfolio.

I’m pleased to say, most of our collateral managers, there’s really three things you can do during periods of volatility. You can increase spread you can build par and you can decrease VaR for improve the credit score of the portfolio.

A small number did all three of those, many did two out of the three, which is hard to do everything frankly although a few of them did. So, we generally saw a good performance.

If you line up the collateral managers in our portfolio to a research report published by Wells Fargo, related to the CLO market broadly, you’ll see quite a few, they ranked collateral manager performance, I believe during the fourth quarter. You’ll see quite a bit of overlap of names in our portfolio and names that were on the, their top 15 list..

Got it. And were there any....

The community did pretty well. Our teams did pretty well for us, was our general feel, but not at....

Got it. I guess I’m getting at it. Were there any managers that I guess you would hold in high esteem and call Tier 1 that just didn’t kind of live up to the task and really do two out of those three things during the volatility. You don’t have to name names and perhaps if there was any..

Yes. So there’s – as an equity investor, some of our tiering might not line up with what the common market would call in terms of tiering, that tiering designation driven more by debt buyers than equity buyers, simply because there is more of them and a lot more debt.

I’d say, overall the people who did the best were those that we would have expected to do the best and those that did the worst in some cases were a little disappointing, but maybe some where we expected they’d be a little less on – in kind of situation.

So no gross disappointments, but frankly, part of that process is continual dialogue with many of the collateral managers and we share with them where they rank. They know it and they see it in the research reports and obviously people are all competitive and want to be the best at everything.

We showed a few people maybe they could have done a little better as well in a supportive and constructive manner of course, but a few probably came up at the lower end and some of them frankly have some of the fancier names in the market..

Got it. Okay that’s helpful. And, you know, we’re at kind of 26 weeks I think of straight outflows from loan funds, and I know you had mentioned in your prepared remarks that institutional money continues to soak these up.

My question is just, how much more do you think they could keep soaking these up? I mean if we’re reaching a year straight of outflows, I know it depends on the volume of those outflows, but does this kind of pretend maybe to more volatility kind of picking up in the latter half of the year?.

It’s a very good question. If you would have asked me on January 1, and said Tom we’re going to see $11 billion of outflows in the first quarter, I would certainly would have taken the under on the CS loan index being up 3% and change for the quarter.

So at one level there’s that, against that, we continue to see $10 billion at the end of the day as a drop in the bucket compared to the trillions and trillions of dollars invested overall in fixed income products. Obviously, loans are a small subset of that market at a $1 trillion.

But if we see where I stood today, if we see outflows, kind of where they are right now or tapering, I don’t think that augurs for more volatility. If we see a significant pickup in loan outflows then perhaps we would.

We kind of like this market loans in the mid to high 90s without defaults, ultimately for the medium term is great for CLOs and we kind of like where we are right now..

Got it. Okay. And last one from me and I’ll hop back in the queue. You guys are redeeming half of the series A.

Just wondering as we go forth through the rest of year, if the plans on a capital structure are maybe to eventually obviously redeem all of that, both – in that instance would you be peppering in another preferred offering, given the flexibility without the coverage and being able to take the interest or do you think you would go with the cheaper cost of capital via another unsecured debt issuance?.

A good question. As we mentioned earlier, the goal with a partial redemption is a 50% redemption is to principally get us back in line to the midpoint of our 25% to 35% target band. We’ve said that for a long time and it’s been a few quarters that we’ve been out of it.

So being the strong capital demand we’ve seen on the ATM side for the common, we were able to raise the stock that are non-trivial premium, I think Ken mentioned $0.18 of premium captured for all shareholders just in the second quarter alone. So that seems like a good opportunity.

I mean all else equal, I guess the weighted average cost of capital of the platform goes up a little bit. But the broad goal is to get back to that 30% as the midpoint of the range, all else equal. As to what we would do in terms of future issuance. We like the mix of preferred and debt.

We’ve kind of targeted a rough 50-50 band between them, and that’s not anything we’ve ever formally done, but kind of that’s the way it’s kind of played out. So right now, our near-term objective is just continue to get the balance of the capital deployed that the company has.

We do have some cash on our balance sheet still net of the pending redemption, but right now more focused on the investment side than the balance sheet side..

Got it. Alright, that’s helpful. And thanks for your time today..

Great. Thank you..

We will go next to Mickey Schleien with Ladenburg..

Hey, good morning Mickey..

Good morning Tom and Ken.

I wanted to start by asking about valuation inputs, I have looked at these filings for the last three quarters and the inputs haven’t changed hardly at all, the default rate you provided a range of zero to 2%, so that hasn’t given weighted average, has that weighted average moved over the last three quarters at all?.

Not significantly if at all..

Okay..

And then zero to 2% is a ramp. That’s kind of important to highlight and that it’s quite unusual, I mean, these are large cap loans to Dell Computer and things like that. They are very rare to have a first period default.

So the way our assumptions work is the first day a loan is in the portfolio we assigned zero percent chance in default and over some period of time relatively quickly it gets up to 2% running default rate assumed for all loans which is mindful that lightly seasoned large corporate loans have quite a low instance of default..

Right.

And defaults are certainly running below the 2%, so my question is I am trying to get a handle on the risk that the CLO equity market seems to be perceiving that the leverage loan markets are not, I think Chris sort of alluded to that, he was looking at the yield to maturity and the last three quarters, it would seem that there was something going on in CLO equity that the leverage loan market is not, can you give us an insight into that?.

Help me out there, we are seeing something….

Let me ask the question this way, so the yield to maturity in September in the portfolio was a little over 11, then it zoomed up to 21 in December and now it’s come back a little bit to 18, but the leverage loan market is for the most part recuperated all of its price weakness from the fourth quarter, so there seems to be a disconnect between CLO equity and leverage loan mark and that’s what I am trying to understand?.

Yes. I think that’s a fair statement. Really, up and down in the capital structure in CLOs. And I think many market participants would say CLOs have lagged in terms of recovery compared to many other assets, fixed income asset classes as to why that is different markets, different people behave differently.

We think CLO represents CLO debt and equity represents attractive relative value compared to other fixed income investment opportunities today. Your observation is accurate, I think it find us related to any point in the CLO capital structure there hasn’t been a full recovery.

As we mentioned cash flow continues strong and frankly in our portfolio cash went up on absolute and per share basis on recurring cash flows which suggest investments are doing fine. Hopefully over time that augurs for further price appreciation and NAV appreciation in the portfolio if the markets keep going in the right direction.

Perhaps there is more gas in the tank..

Tom, could it be just simply that CLO equity is still relatively fragmented, I know it’s probably more liquid than it was years ago, but relative to the leverage loan market it’s more fragmented and less trading volume, could it be something as simple as that?.

Certainly it could be, I mean there are fewer, pretty safe to say there are fewer market participants in the CLO market versus the loan market versus the bond market probably versus the equity markets. So there are – there can be idiosyncratic events as firms that may turn the motor off for investing in CLO securities completely unrelated to CLOs.

There was a period of time when one major U.S. bank do the things unrelated to CLOs, stop buying CLO AAAs for a while. There were someone who bought a lot and spreads widened there while AA spreads tightened simply because there was one fewer buyer in the market for a period of time, again unrelated to CLOs. That buyer I believe has resumed.

So yes there can be some quirks generally on the way down, CLOs, you could see the S&P down, big a couple days before the CLOs catch a cold. It kind of goes – this is highly simplifying equities, bonds, loans, then CLOs on the way down and often we’re the last guy on the rebound as well. So we are seeing some of that certainly right now..

I understand. Switching gears, Looking at your – the tax characteristics of your distributions last year about 70% was from NII. This year, so far it’s been 100% from NII.

Other than the costs related to re-financings and resets last year, has there been any other trends that have improved the tax characteristic of distributions? And do you expect that 100% level to hold for this year?.

Well, I guess improved, yes, we have this debate. All our sequel companies like the least like the most GAAP profits and the least taxable income. And obviously we’ll pay our fair share of tax. But in general the – all I think we like it as low as possible.

What happened last year with the significant amount of refin and reset activity that causes an acceleration of the recognition of issuance costs related to those called CLOs and taxable income fell, it was 70-30 numbers sounds about right.

So 30% of the distributions that people received last year was treated as a return of capital for tax purposes and they wouldn’t have to pay tax on that. Where we sit today, we put out those formal numbers..

Put out those formal number through a section 19 notices.

Yes, the Section 19 notices have been 100% and where we’re tracking right now with a significant reduction in refi and reset activity. And frankly if you look at our portfolio, position-by-position, we list which ones we refi and reset.

You can see quite a few of them have already been refi-ed or reset and quite a few that aren’t, they’re still on the non-called period. And just based on overall market conditions, we expect to have less.

So that provides those refi-ed and resets in the past provide us shelter for taxable income to the extent we are doing less of that activity we have less shelter, which all else equal would suggest higher taxable income year-over-year..

Alright. And my comment in terms of improvement relates to the fact that, yes, that return of capital is nice, but it is still cash being paid out to do the refinancing using the reset, that’s what I was referring to..

Let me just clarify on that, so when a refi or a reset gets done, we’re not actually writing or typically not writing a check for expenses, it’s something that’s deducted from the next equity payment, although that expense, the new refi and reset expense is not what’s causing the deduction.

What’s causing the deduction is the acceleration of the amortization of the original issuance expense, which normally would be amortized over the life of the transaction, when there’s an early call or refi or repayment, the old expense gets accelerated, the new expense which comes out of the next equity payment is now amortized over its appropriate life..

I understand.

But there still are fees to the bank and the attorneys and the accounts that has to be paid for as well, is that right?.

It’s paid for out of the CLO as a reduction of the equity distribution..

Sure, I got it. Just a couple of more questions.

What were the main factors that drove the realized losses on the called [indiscernible] deal this month relative to where they’ve been valued historically? And will the scope of that loss be similar on a tax basis for the GAAP figure?.

So okay, good question and we wanted to give people forward guidance on it, just because it’s something that’s, it’s larger than usual. The vast majority of the amount, 90% or something like that relates to a call and roll of one specific investment in our portfolio.

This was a 2016 vintage CLO that went through and was effectively a reset, but technically a call and roll and I’ll explain the distinction during the second quarter when that ultimately transpired. The overall investment has been a positive IRR for the company in the single-digit percentages, last I saw.

So not a – it has probably underperformed a little bit of what we expected, but still been a comfortably positive IRR. We sought to reset the investment, which we thought was in the best interest of the investment itself.

This CLO as did a lot of late 2016 CLOs faced probably the toughest batch of spread compression of any of the CLOs in our portfolio that, that late vintage of late 16 deals got hit particularly hard and this CLO was not inclusive to it.

Often when we do a reset which is again where we just – we reopen the documents, re-lengthened the reinvestment period, hopefully lower the debt costs, whatnot, we are able to keep the same QSIP for the equity and the same security and use the same box.

In the case of this one transaction, a few minority holders were – minority equity holders were less willing to participate and perhaps wanted some of the supplemental economics that Eagle Point gets.

So in this case we decided to basically wind up the old vehicle, move the assets to a new vehicle, which caused an unfortunately an extinguishment related to the old deal and had to become a realized loss what was previously unrealized. So the actual – the NAV impact is essentially nil because we had the position marked fairly going into it.

So you wouldn’t call [indiscernible] maybe there is a $0.01 or something like that, but for all intents and purposes, it had been carried at around the level that we had the realized loss come in at. Prospectively, that investment will generate what we believe let me tell you, it looks like a 16% and change effective yield rolling forward.

We locked in some very good debt costs and also made some favorable adjustments in the collateral manager fee relationship in that transaction.

We do think of that as the exception and not likely to occur often, obviously market conditions could change, but it’s kind of just an unfortunate situation of that one with a couple of recalcitrant holders, but still an overall positive IRR to-date..

Right. That’s a really helpful explanation.

One last question if I may, so we are back to hearing news about a trade war and perhaps we were caught off guard, but I just want to step back and ask, how exposed do you think CLOs are to the ratcheting up of the trade war which now looks like it might be protracted?.

Yes, we certainly have some degree of exposure. In general, these are American companies doing business in the United States, although many of them are multinationals and Dell Computer likes to sell their computers everywhere in the world. And I am sure they get parts from China as do lots of folks.

So I don’t believe while we certainly don’t have any direct exposure to Apple, but that’s what I have seen in the news lately of where they make a lot of their products, they might not be able to move around quickly. Overall, I guess there is really two things when we think about this uptick in trade war, tweeting/dialogue are kind of two pronged.

We are talking the tariffs of 25% on about $300 billion of goods. So, that’s $75 billion against a GDP of almost $20 trillion. So it sounds like a big number on an absolute basis, but if you were to say we are going to increase taxes by $75 billion on a $20 trillion economy on a percentage basis, that’s actually pretty small.

Unfortunately though in the sort of macro level, we don’t see it as – even if these things stay the way they are, we don’t see it as doom and gloom for the entire economy.

Against that, will there be some specific companies that it hurts more than others? Absolutely, but there is not anything in our portfolio at present that we would see as an outlier in terms of a big position facing significant pressure as a result of this.

But our overall goal is – our overall objective is that we think our overarching view is we think it’s – while it gets a lot of sound-bite type headlines, the actual quantum when you consider the overall size of the economy relatively minor..

That’s very helpful. I appreciate that and I appreciate your time this morning. Thank you..

Thanks Mickey..

[Operator Instructions] We will go next to Chris Kotowski with Oppenheimer..

Good morning, Chris..

Good morning. And if you can kind of translate between the front page of your press release with the subsequent events section and the $44.1 million of distributions and translate that into page 24 of the presentation and you mentioned that the company received $24.4 million of excluding the called proceeds.

Is that the number that’s comparable to the $21.16 million on page 24 and then also kind of how much of the 44 is treated as a return of capital and does any of that provide any insight as to second quarter either net investment income or taxable income?.

A couple things of there. While I am trying to correlating between those two pages. So....

Yes, so the subsequent event, so the first thing that’s referring to an April-May timeframe and the investor deck Page 24 that you’ve quoted is a March timeframe..

Right..

So, when this shows up next quarter, you’ll see a recurring CLO equity distribution of $24.4 million and then core CLO equity distributions of that difference which is roughly just shy of $20 million. So, it’s two different timeframes. And unfortunately, subsequent event is going to be in the first quarter investor deck material.

But it will show up conceptually the same way, you’ll just have a comparable recurring equity distribution in the big $20 million or so-called proceeds from called CLOs..

Okay.

And is most of the proceeds from called CLOs then going to be treated as a return on capital?.

So basically, it’s going to be a return of capital and what it would do is reduce the amortized cost of the called CLO 20. The gap that we had and the reason why we noted, the subsequent event on a $4.5 million realized loss is that would be the gap between the total proceeds received on the called deal versus the current amortized cost.

So, there’s a return of capital and we do say amortized cost and then over time the recession would fall off the schedule of investments..

Okay.

So, but then, I mean I guess we still see the $24.4 million-plus whatever you get between now and here the end of the quarter versus the $21.6 million, I mean so I mean it’s reasonable to expect a significant step up in the recurring CLO distributions, and I guess then the next question is there anything we should read into that fact in terms of what it means for either net investment income or taxable income? I mean, is there is there a way we can if we were clever enough could we figure out how the one would drive the other?.

Yes. So, the first thing, so recurring distributions, and the reason why we quote total proceeds received versus recurring CLO distributions, the recurring amount is going to be slightly comparable to little bit of an uptick. The total proceed is you’re going to see a significant increase.

Those proceeds when they’re received, they’re going to be redeployed into new investments and obviously will generate income et cetera. So, call it taxable versus how this would impact taxable income, obviously when we are recognizing a return of capital on an investment, we are not going to be we’re not going to pick up any additional income.

We may see an amortization of any outstanding uncapitalized or acceleration of any unamortized costs which would be negative to income, but we don’t believe that would be significant.

So capital taxable income we don’t think that would be a large driver, where we’ll see a prospective benefit is when those called proceeds are redeployed into new CLOs..

Okay. And, but I mean I guess I still think the recurring CLO distributions I mean you call it an uptick about $21 million to $24 million and that sounds significant.

I mean is there anything to read into what that means for a recognized investment income in 2Q?.

So, GAAP investment income recognition is based on the effective yield on the portfolio, not the specific cash received.

So, you know, if we have a position that’s a $10 million position at a 15% effective yield over the course of a year, we’d record $1.5 million of income, hopefully we’ve gotten $2.5 million of cash and treated that $1 million difference as a return of capital such that we’d been have a carrying value of $9 million in that very simplified example.

The period-to-period changes in cash flow, will they don’t immediately manifest themselves in a change in GAAP income, however, what I’d highlight is cash flows going up, that excess cash flow we were going to accrue what we were going to accrue, because whatever the effective yields were, to the extent we get more cash, more of that is treated as a return of capital, which the next time we go to recast the effective yield, holding all else constant, you’d expect to see that yields go up and then accruing at an even higher rate.

So maybe the answer is yes, but there’s a little more of a lag than you’d probably than anyone would like.

So flip side what I is the most important takeaway that I’d like to highlight on it, is that we are seeing and we’ve may we’re starting to say this both on an absolute and per common share basis, the recurring cash flows increasing and this is the result of all the reset and refi activity that we’ve done as well as the underlying CLO collateral managers being able to do better things in a high 90s market versus a par 50 market that they might have been in third quarter of last year..

Okay..

So, we take those as good signs but there’s a little lag before it turns up in GAAP P&L..

Okay. Fair enough. That’s it from me. Thank you..

Alright. Thank you very much..

And there are no further questions in queue. I’d like to turn it back over to Mr. Majewski for any additional or closing remarks..

Right. Thank you very much for everyone for your time and participation on the call today. We’ve tried to slightly expand some of the information that we’ve provided and that’s been based on feedback from the research community and investors. We do hope you find it helpful.

We appreciate everyone’s continued interest in Eagle Point Credit Company and look forward to speaking with many of you again very soon. Thank you..

That concludes today’s conference. Thank you for your participation. You may now disconnect..