Greetings, and welcome to Eagle Point Credit Company’s Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Garrett Edson of ICR. Thank you. You may begin..

Thank you, Rob, 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 Web site at eaglepointcreditcompany.com..

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 Web site, which provides additional information about the company, including information about our portfolio and the underlying corporate loan obligors.

For today's call, I'll provide some high level commentary on the third quarter and more recent events. Then I'll turn the call over to Ken who will walk us through the third quarter financials. I’ll then return to talk about the macro environment, our strategy and provide updates on some recent activity. We'll also open the call to your questions.

During the third quarter, the U.S. economy continued its gradual recovery as many shutdown orders were relaxed and governments globally provided liquidity to the market. Worse case scenarios for corporate credit that some predicted back in March have not materialized.

Today, many research desks are actually reducing their near-term default projections..

Thanks, Tom. Let's discuss the third quarter in a bit more detail. For the third quarter of 2020, the company recorded net investment income net unrealized losses of approximately $7.2 million or $0.23 per common share.

This compares to net investment income net unrealized losses of $0.28 per common share in the second quarter of 2020 and net investment income plus realized gains of $0.37 per common share in the third quarter of 2019.

When unrealized portfolio appreciation is included for the third quarter, the company recorded GAAP net income of approximately $44.5 million or $1.40 per common share. This compares to GAAP net income of $1.71 per common share in the second quarter of 2020 and a GAAP net loss of $1.59 per common share in the third quarter of 2019.

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

The company's third quarter GAAP net income was comprised of total investment income of $16 million and net unrealized multimarket gains of $37.3 million, partially offset by expenses of $7 million and realized losses of $1.8 million. As of October 31, the company had $12.9 million of cash on hand net of pending settlements.

As of September 30, the company's net asset value was approximately $268 million or $8.45 per common share..

Great. Thanks, Ken. Let me take you through where the macro loan and CLO markets currently stand, then I'll touch on our recent portfolio activity as well. The Credit Suisse Leveraged Loan Index continued to see a nice recovery, generating a total return of nearly 4% for the third quarter of 2020.

As of September 30, the CS Leveraged Loan Index was down less than 1% and as of November 13, the Index had actually reached positive territory for the year. This is remarkable in our opinion, when one considers how dire the outlook was for credit back in March.

According to S&P, 13% of the loan market was trading below 90 at the end of September and that compares to 22% at the end of June. This is a very big improvement and we're happy to see it.

Despite the improvement in the loan market, we believe opportunities continue to exist for our CLOs to reinvest and build par through buying loans at discounted prices. .

Thank you. At this time, we'll be conducting a question-and-answer session. . Our first question comes from Randy Binner with B. Riley. Please proceed with your question..

Good morning. Thank you. I have a few. Just on the commentary on the OC tests you mentioned is trending better and I think from Page 30 of your deck, it's up to 112 basis points.

Just as a reminder, is that the right figure to be looking at? And where could that trend back to do you think? Can it get back to historic levels?.

Sure, a very good question. Yes, on Page 30, the 112 basis points, that's the number and you can see that's up from 83 basis points at the prior quarter end. Some of the drivers of that are going to be a factor of how much triple C we have in any given portfolio.

And if you look back on pages 25 and 26, you can see the triple C percentages or triple C plus/Caa1 or lower over on the right-hand side. You can see quite a few of the CLOs are over 7.5%. And there's a haircut taken in typical CLO. There's a haircut taken in the OC test for excess triple Cs.

So as we – the way to think about this broadly is to the extent we had more triple Cs or the price of triple C loans fell, that would hurt the OC cushion.

At the same time, if we have fewer and fewer triple Cs or the price of triple Cs rally, because the OC test looks at a market value of the triple Cs, then we could actually get more cushion in the test.

In addition, the other factors in there should a loan default would be a detriment to the extent there are trading gains or losses in the portfolio that can help or hurt the OC cushion. As to where it could get to, there's no functional limit on the upside. And to the extent you look at our average is about 13.5%.

If you think of the average triple C as being around $0.70 on the dollar, just pick that as a number, you're taking a haircut over 7.5%. So 13.5 minus 7.5 is 6 points. If times 30%, you could be – we could be taking off 180, 200 basis points off the OC test on average as a result of the high triple Cs.

So to your question, if the triple C buckets continue to come down, which is certainly the trend we've been seeing across many CLOs, you could see a path to get back to the threes..

Thank you for that. And then I guess the follow-up question is, understand the marks have been better but we have – some of your credits – and this is my perception. And if I'm mistaken, please correct me.

But I feel like some of your credits would be more exposed to kind of worsening COVID trends in the economy maybe versus corporate credit more broadly.

And so do you have a concern that if kind of the incidence of COVID continues to increase, there's more lockdowns that you could see a reversal or do you feel like kind the current credit trend is still catching up and moving in a positive direction and if it’s helpful to talk about certain subsectors to describe it, please do?.

Sure. So to the first part of the question, I don't think we have a particularly adverse selection of above average COVID exposure versus broader below investment grade credit. At a high level, and if anything, I think the trend in the portfolios have been for collateral managers to reduce exposure in COVID-related industries.

So I struggled to see us being in an adverse selection. And perhaps we've been fortunate enough to get to a better situation. So when we look at these shutdowns and you look at changes in unemployment and changes in GDP, a year ago people would be fussing over 50 basis point shift in GDP quarter-over-quarter.

Then we have this gigantic drop in the second quarter and then the slow recovery now. And all of a sudden, that double digit default rate from what was functionally near full employment at the turn of the year, yet we're sitting here with 95% of our investments still paying current. So at a high level, that's bad inputs and a good result.

To the extent we see more shutdowns and/or more restrictions, which is unambiguously a trend throughout the country right now, that's a bad fact.

But I don't see it as a dire fact, in that things that are helping us, certainly the Fed is providing a lot of capital into the investment grade market, which then by sort of definition brings along the high yield market, which brings along the loan market as well.

And frankly, the high yield market has been a source of funding for many loan borrowers who might have needed additional liquidity. And whereas when we started this COVID period back in March, you would think broadly of the average leveraged borrowers having three to nine months of liquidity as a broad generalization.

Hard to see companies not having doubled or tripled their liquidity runway through different measures of cutting expenses and putting additional debt on their balance sheets. While that debt does eventually need to be repaid, it's typically many, many years out in the future before that's due.

So if we were to see another turndown and slowdown in economic activity, I think companies have much stronger balance sheets today. Even the cruise lines and airlines and hotels. Hilton just did a bond deal yesterday at 4%.

So – even guys who would be squarely in the crosshairs have raised a ton of liquidity, which is great, which would give them more runway. And then as soon as we get some degree of political resolution in Washington, obviously no guarantees there, it's hard not to see some degree of additional stimulus coming out helping those who are unemployed.

And when you think about how we made it through such a high unemployment rate with a relatively low default rate, that's largely because the government masked it in my opinion by sending checks to lots and lots of people every single week.

Those checks have stopped, but to the extent something resumes in the new year, I think that would also be an offsetting fact. Long answer, but hopefully you kind of get the flavor of how we're thinking about it..

No. Yes, that's exactly what I was looking for. I'll drop back in the queue. Thank you..

Thank you..

Our next question comes from Chris Kotowski with Oppenheimer. Please proceed with your question..

Yes. Good morning. Thanks for having me. I guess my first question was in terms of the distributions, you highlighted the fact that third quarter distributions are up 50% from the second quarter.

And I'm wondering, is that a function of the improvement in the OC cushion or is it kind of the natural lumpiness from quarter-to-quarter? And is there a way to kind of triangulate between, say, moving back to a 3%-ish OC average – OC cushion, what kind of impact that would have on your distributions from the CLOs?.

Sure, a good question. A little bit of none of the above on the first part and then we'll talk about how the OC tests could impact the second – impact future distributions. The principal thing, and if you look at the chart in our deck on – let me find the page, on Page 23, this is a chart we don’t like. We started at $1.08, $0.90, $0.68, $0.53.

That’s a CAGR no one’s a fan of. The Q4 cash flows in October as we shared of over 50% from the Q3 levels. So what caused the degradation? Broadly the drop in the cash flows from Q1 to Q2 were new OC failures and CLOs that were making payments, all of a sudden diverting cash flows to either buy new collateral or pay down the triple As.

The drop from Q2 to Q3 broadly was due to a pretty grievous LIBOR mismatch back in the second quarter in that CLOs -- given CLOs sets its LIBOR rate four different times a year. Loans set their LOBOR rates at – probably one loan sets their rate every single day in a given CLO portfolio or pretty darn close to it.

As LIBOR fell precipitously during the second quarter, many CLOs were burdened with paying roughly 1% LIBOR during the second quarter, but loans kept resetting lower and lower and lower. And in many cases, we actually had a negative LIBOR basis, which is what manifested itself in the reduction in cash flows from Q2 to Q3.

So just due to a timing of the rapid movement in LIBOR rates, we were borrowing at 1% LIBOR proverbially and investing at a much lower LIBOR rate which is bad. Roll the clock to October, two good things happened.

Principally, LIBOR stayed low which then – and as more and more loans have now LIBOR floors, we were borrowing from the CLO debt investors at about 25 basis points LIBOR, but investing about half of the portfolio, a little less than half in loans with 1% LIBOR floors.

So all of a sudden, whereas in the second quarter, we had a negative basis in LIBOR, here we had a positive basis. To the extent LIBOR stays low, which is certainly the broad expectation in the market, even the current five-year swap rate is 45 basis points, current three-month LIBOR is 22 basis points.

So the market is saying the short-term rates are going to stay low for quite a period of time. Many, many loans have 1% LIBOR floor, so we're actually now in a positive basis which we expect will continue and certainly as long as rates stay low that will keep going. So we don't think it's a one hit wonder with the October payments being so far up.

Then to the second part of your question, the OC cushion. The OC test is a binary test. You either pass it or you fail it. So there's not a reduction if the OC goes a little down, you trim a little. It's kind of an all or none test. You could partially pass it and cure , but that's usually when these things go, they go by enough of a margin.

I guess it's possible you could have a tweener. But nearly all of the CLOs you can see are either comfortably passing or failing by a non-trivial amount. So that OC cushion, the real thing to look at is deal specific.

And so the question to ask yourself is, do I think these deals can come back on size? Some of our highest payers are the ones that are off size. Those are the ones often with the most aggressive and most spreading portfolios.

As we construct our portfolio of CLO equity, we seek to have both conservative portfolios and more aggressive portfolios and it's a continuum.

And as you'd expect in choppier times, the more aggressive feels, frankly, are the ones that are more likely to be off size, principally concentrated in Marathon and Zais if you had to kind of put it into two shelves.

That said, each of the teams at those shops are working keenly, they have in many cases meaningful personal co-investment, and even part of their fees are deferred. So there's significant incentive to get those transactions on size. I think some have the potential to, while others might have a more challenge period ahead of them.

So when you're looking at our future cash flows, the question is deal by deal. And broadly, we're seeing a trend of OC cushions improving on the failing deals, but it takes a while for some of the most severe portfolios..

Okay. And then you talked about the LIBOR floors.

I’ve been kind of under the impression that most leveraged loans had LIBOR floors for years and I'm just kind of thinking, is the percentage different now than it was, say, in 2015 and '16 when we were also there at zero LIBOR?.

Yes. So mindful that loans typically prepay – so yes is the short answer. Mindful that loans typically prepay at a pretty rapid rate kind of 30%, 35% per annum in normal market conditions. It slowed somewhat during the COVID period. If you see on Page 19, we show the annual prepayment rate for loans, which I guess averages just less than 33%.

So the universe of loans keeps changing. From 2015, indeed, the vast majority of loans had LIBOR floors as LIBOR crept up to 2%, 3%, it seems like so long ago, what do you know, the loan borrowers as they were issuing new loans or refinancing, they said, hey, maybe let's not put a floor in.

And markets kind of said we're at 3%, 2%, doesn't really matter, that's fine. So now we're in a situation where probably between 40% and 50% of the market broadly has LIBOR floors. That said, the vast majority of new loans getting issued today do – or a significant majority do have LIBOR floors of new loans getting created.

So the market kind of let that slip away in a high LIBOR day, but the trend is certainly coming back our way..

Okay, got it. All right, that's it for me. Thank you..

Great. Thank you, Chris..

Our next question is from Mickey Schleien with Ladenburg Thalmann. Please proceed with your question..

Yes. Good morning, Tom and Ken. Hope you're well.

Tom, would you describe trading in CLO equity currently in terms of – in the secondary markets in terms of volume and bid-ask spreads? I'm asking because sort of in the middle of the year, it was very choppy with wide spreads and that causes difficulty both in terms of making investments and in terms of valuations. So, curious where we stand now..

Certainly volume has continued to pick up broadly. One of the things – and we've been active on a number of investments we both bought and sold in the secondary market for CLO equity and debt. So the market is open and active. You see a typical pickup in activity right about now kind of right after payment dates.

So if the CLO is typically paying October 15, October 30, now is the time we just got the payment, people will look to refresh or buy or sell things in their portfolio. So we're probably at a period of time with some meaningfully increased activity.

There's a number of B Wix today that actually have CLO equity on them, including maybe even one or two matchers within the Eagle Point complex.

The bid-ask spread is an interesting dynamic in the CLO market, in that the -- while some dealers maintain inventory and a significant block of inventory, the vast majority of CLO equity trades on a customer-to-customer basis with a dealer intermediating for a small fee, in the case of CLO equity, typically at quarter point.

So there might be Bank A in between of customers 1 and 2. In theory, you don't know who the other person is. And the dealer just takes a small markup. So it's not as if you're kind of working off an offer sheet which you might be in the loan or high yield market where the dealers are going to have between 0.5 and 2 point market.

Here you're able to get to a much tighter – the difference between the buyers and sellers pay as much lower because you don't have a dealer taking risk in between, against that buyer and seller expectations may vary and that does give rise to a non-trivial spread, where you put a bond out for auction, the highest bid might be 60.

You'll get a couple bids in the high 50s. The seller didn't want to sell below 65. So there's nothing to do and the auction fails or it's DNT is what it's called, does not trade.

There's probably – I think buyers have gotten a little more realistic and sellers have gotten a little more realistic, just probably in April that was close to no secondary activity. And I'll say the volume has picked up slowly, gradually, not every month. Has been up month-over-month, but in general the volume has picked up.

While there's still a few unrealistic sellers out there, when you put stuff out for bid, you'll definitely get 5 to 15 bids depending on the security. And it's really just your choice as the seller if you want to take them..

Thank you for that. That's helpful, Tom.

And how would you characterize the investment opportunity in the primary markets within CLO equity?.

I'd say it's recently gotten better, in that probably the best piece of news is many CLOs are able to get done now with five-year reinvestment periods again. To kind of roll the clock back if we were talking in February, we would have said, oh, CLOs have a five-year investment period and that's standard to your non-call.

Then all the bad things happened in March and by April we were seeing CLOs get done on a static pool basis or with a one-year reinvestment period, we didn't participate in any of those. We did begin to participate in CLOs that had three-year reinvestment periods, which was kind of commonplace, say, between March and September.

That's actually kind of – and those had one-year non-calls and that's actually going to help us, because we did two – maybe two CLOs back in late Q2 or early Q3, we did an Octagon deal and a CIFC deal, both of which have triple As, like 150s, 160s, 170s context, which could easily be refinanced tighter.

And thankfully, those only have one year non-calls. So while we had to suffer only getting a three-year reinvestment period, you can be assured if markets stay the way they are today, we’d keenly try and refinance those deals as soon as Q2 next year, whenever they roll off of lock.

Seeing deals go up to five years now is even better but at the price of a two-year non-call, but we are seeing triple As broadly in the 130 context, which is generally in line with probably the long-term average over the last seven plus years in the CLO market. So --.

They were pretty amazing when you think about it, right?.

Yes. Well, again, roll over -- 95% of our portfolio by market value is still making current payments where we were at double digit unemployment rate, radical double digit GDP contraction, no CLO forcibly liquidated. Some turned off payments for a while and now they're gradually coming back on size.

We have a stable hand and ECC itself has a stable hand that obviously we like everything to pay all the time. Something bad is going to happen at some point in the future as well, we've got the steady hand both within the CLOs and within the company to be able to weather those storms.

Now that we're back to five-year issuance, we'll probably turn up the gas a little bit. The one drawback when I talked about the price of loans that so many -- what was the stat, a pretty small, only 13% of the loan market was below 90. That is both good and bad news. It's improved from 22% below 90 at the end of June.

But when you're creating a new CLO, you want to buy loans cheap. When you've already got a CLO, you like loans to go up I guess. So the price of loans certainly has continued to rally. The loan index is positive for the year. So loans are not being given away by any stretch, making it a little more difficult to make new CLOs work.

That said, deals are getting done. We have a number in formation phase. Whether we do anything more this year, kind of still to be determined, but we're actively evaluating..

Okay, I understand.

Tom, if we look at your portfolio, broadly speaking, could you give us a sense perhaps of what percentage of your portfolio is in vintages you believe may not survive the impact of the pandemic and will have to eventually be unwound? This may be I’m thinking maybe the 14, 15, 16 vintages with a lot of oil and gas and maybe more retail in them, things like that..

Yes, that's a very astute question. That 14 vintage apparently was entered for all participants the 14 vintage, particularly the middle of 14 had particularly high oil and gas exposure in those portfolios. The beginning of 14 didn't and the end of 14 didn't generally, but the second and third quarter really, really were -- was pretty darn high.

So that's a bad fact. And many -- if you have started with high energy, already kind of used some of your cushion dealing with that, when that all went pear shaped in 15 and 16.

When you look at our portfolio, probably the biggest thing I would look at is those that could be the most problematic are those with low or negative OC cushion and those that have nothing left in the reinvestment period. That's where you could see things be kind of the least good. And I'll even compare two CLOs here.

Just make sure I get the right row. If you look at Zais 3 versus Zais 5, so these are both CLOs that are failing their OC test right now, Zais 3 we’re able to get a reset off in Q2 of '16. We did that via Goldman I remember. That deal’s got 2.8 years left to go. And so lots and lots of runway. Zais 5 we worked on doing a reset of that.

We struggled to get the triple As placed. And unfortunately on that one, the reinvestment period is over. So despite the reverse order, because 3 was reset, if I had to bet on one of those horses, I'd bet on 3 versus 5 just by virtue of it's got a lot more runway to go.

So it's a combination of OC cushion and remaining reinvestment period that should kind of form the collage of how you think about which deals might be tougher..

I appreciate that. If I could switch gears, maybe to yields. There was about a 60, 70 basis point decline in the average effective yield, excluding non-call deals. So I was curious.

We did not have a lot of time to look at your presentation materials before the call, so I was curious if there was something specifically driving that? And if we think about the future, you've talked about relatively speaking very strong cash flows in October, which implies cash yields meaningfully higher than they've been in the last couple of quarters.

And I'm wondering with that trend, can we expect you to book more of that into income through the effective yield just to reflect the dynamics in the market?.

Yes, let me hit one or two points and maybe Ken will comment a little further around it.

So one thing that moved against us, when everyone – we model CLOs the short-term basis risk of LIBOR high versus – the high LIBOR that we set for CLO debt versus the low LIBOR we were earning at in Q2 is not something that the average industry model really factors in.

People kind of assume LIBOR cancels each other out with the exception of LIBOR floors.

So broadly, if you were to look at where our yields were and what our cash flow projections were, back at the beginning of the year, we wouldn't have projected the significant drop on a deal – forgetting about deals that went off size of deals that continued paying, we didn't model the drop in cash flows simply because we didn't model that LIBOR we’ll be paying 1% and investing at lower than 1%.

So when you have less cash coming in versus your accrual, then kind of your amortized cost stays higher than it otherwise would have. So when you're going into recasting, and we recast these every quarter now, now we're starting in a situation where we have a higher than expected amortized cost.

So whatever future cash flows you have are going to be – it's just going to be a lower yield because you've got more basis that you're lending those cash flows over.

And then, Ken, do you want to comment any further around that?.

That's exactly right, Tom. It's a function of cash relieving your amortized cost as well as any accreted costs which will include interest receivable, which is not fully relieved when cash flows came in lower than expected.

So I think if you follow the cash, Mickey, that will be decreasing the basis where – and as long as projected cash flows in the future continue to sustain and in some cases go up, the yield should follow.

There may be a little bit of a lag because when those cash flows quarter lag, whereas cash flows are coming in, they are amortizing the current costs which is going to be used as a basis for the protection in the next corner..

I understand. Thank you for that, Ken. And my last question, Tom, triangulating your GAAP cash and taxable incomes, obviously, very difficult for analysts or for investors, but --.

And for company management..

Yes, I know. Ken and I have talked about that. So this year or I guess year-to-date, there's been some return of capital reported. I think some of that is obviously because in the first quarter you, at least on a GAAP basis, you over distributed, but now you're under distributing.

And then we've seen this dynamic where the CLO managers are reducing their triple C buckets. I suspect some of that is active selling and harvesting, but the consequence of that is maybe perhaps generating tax losses, which will depress taxable income.

So, looking ahead, I'm trying to understand where the distribution may end up when we're past COVID, given that NII is now running comfortably ahead of the dividend and things look like they're moving in the right direction..

Yes. I think you hit the nail on the head. There's definitely some losses getting realized in the CLOs, even though they might not impact our current cash collections can have the impact of sheltering taxable income for some the largest positions in our complex, which may include positions in ECC.

We've hired an accountant to do a couple of preliminary estimates. And I think the answer is, unfortunately answers vary. Some CLOs, to the extent we own them in PFIC form, are typically floored at flashing zero income that can't flash up a negative taxable income to us.

But it wouldn't surprise me to see some CLOs in the portfolio that are still generating full cash flows without interruption will be flashing zero taxable income to us this year. So, we like cash without the burden of tax. That's a good fact, in general.

Against that, others will be failing OC test, but my general – and not paying cash and actually still flash us taxable income because they didn't take the losses. So it will be a little more scattered. Overall, I think it's safe to say the taxable income will be down year-over-year.

Against that, as you point out, where the GAAP earnings are comfortably in excess of the – the NII is comfortably in excess of the distribution. The cash is up 50 was in excess of the distribution last quarter and sub 50% quarter-over-quarter and expenses don't really go up that much when cash goes up that much. So those are some good facts.

Hopefully, a path to both build back NAV over time, both through appreciation and getting extra cash off the investments. I'll say we – when we set the new distribution rate back in the spring, we tried to be prudent and conservative with it. So we weren't trying to squeeze every last cent out. So perhaps there's more good things to come as well.

But we'll continue to watch the portfolio behave. These are long-term decisions we make, not short-term decisions. And as our number one objective, let's just keep the cash flow coming, keep hopefully getting more and more of the investments back on size, and that can kind of help the Board set the distribution policy into next year..

I understand. Those are all my questions. I appreciate your time. Thank you very much..

Thanks, Mickey..

. Our next question comes from Ryan Lynch with KBW. Please proceed with your question..

Hi, Ryan..

Good morning, Tom. Good morning, Ken. It's been a really good discussion you guys have had so far this morning. I just have two questions. The first one is probably for you, Ken. If I look at your net income this quarter of $1.40 per share, and then I look at your $0.24 dividend, that's about $1.16 net income after distributions this quarter.

Your NAV was only up about $1 this quarter.

So I was just curious, could you bridge that $0.16 gap?.

Sure. That $0.16 will be the change in other comprehensive income during the quarter, which we report separately from the income statement..

And what was driving that?.

That's the change in the – so we have one of our unsecured notes is using the fair value option of accounting. As a result, when there is a change in the fair value, we need to bifurcate that fair value through what is market related, versus what might be individual company risk or individual credit risk.

As you probably could recall from the beginning of the year, there was a significant decrease in the fair value of that liability which would increase NAV and increase income. So we bifurcated that out at the time. And what you're seeing is a reversion of that effect coming back.

So if you just look at the change between the two quarters of that other comprehensive income, that will get you to the $0.16 per share..

Yes, so it's just the mark-to-market on the exes basically --.

A portion of it..

Okay, got it.

Then maybe just a rough math about the $27 million of net capital deployed in the quarter, roughly how much of that was deployed to new primary issuance CLO equity versus secondary CLO purchases and/or loan accumulation facilities or CLO debt? And just going forward, given the broader loan market has started to recover pretty nicely, CLO equity markets are starting to recover nicely as well, where are you seeing the best opportunities to deploy capitals? Are more going to be in primary issuance opportunities or are you still going to be pretty active in the secondary markets?.

Sure. So let me give you a couple of stats here. During the third quarter, on a gross basis, ECC deployed 35.1 million into CLO equity. And of that 8.4 was in the secondary market and everything else was in the primary market. We also sold 4.8 million of securities obviously on the secondary market.

During the quarter, we bought – we put new money in to loan accumulation facilities of 30.1 million and we took cash out of loan accumulation facilities of 26.4 million. We actually net sold CLO debt, looks like we bought 19.8 million and sold 27.1 million. So very active in the portfolio across all the different categories of investments.

In terms of the rationale on primary versus secondary, some of the primaries looking through – all the primaries in Q3 were actually all post-COVID de novo primaries. We did one in Q4 that was a part of one of the predecessor, pre-COVID accumulation facilities. But maybe even just one post Q3.

So the four primary deals were all entirely post-COVID portfolios that were built. Kind of where we're seeing the best value, and I’ll maybe just also highlight here, we're actively trading within CLO debt as well to the extent the company had extra cash.

Debt opportunities in general are more plentiful than equity opportunities, buying things, selling at a couple points higher, we're happy to do that as well, while we're also looking for CLO equity opportunities. So that explains some of the debt portfolio turnover.

Where we see the best opportunities today, really clean, long, secondary CLO equity, long as to a lot of reinvestment period remaining and lots of OC cushion. Like if you have more than three years reinvestment period and more than 3 points of OC cushion, that's kind of the Holy Grail right now. And that bid very, very keenly.

Someone showed us a piece of paper yesterday. We didn't buy it. It would have been a sub 15% yield if we hit the level the seller was looking for.

Where we have been putting new money into the ground broadly and across the CLO is kind of 15.7 to 18.6 it looks like for the CLO purchases during the quarter in terms of the expected yield measured at time of purchase.

The thing we liked the best, is tough to find, as always the case but I'm looking for CLOs with lower OC cushions, if you look at a CLO that only has 1 point of OC cushion versus 3, the market is going to value that very differently and say, well, this is thinner. It's got a higher risk of interruption, not very true.

But then you have to overlay the collateral manager. And this is kind of where our deep inside knowledge in the market and personal connections and just knowing how people act really comes to be helpful in that some CLO managers have never missed a payment to the equity.

There's usually a reason for that, because they focus very hard in the days leading up to the payment dates to keep their deals on size, even if it's close. So these are tough to come by, but we have from time to time been able to source these buying things that are – be hopefully longer but with lower OC cushion.

Very good CLO managers in some cases got unlucky with COVID. You could have had a couple of really good names that -- we had a couple of Jims or whatever it may be that in January were considered very good credits changed radically.

So you could have something that's lower cushion, but with the CLO collateral manager of the D&A to keep it on size and focused, that's something that we really gravitate towards. I wish we had 20 of those opportunities. They're pretty scarce, however. So we look at a collage of all of these.

I expect we’ll continue to keep deploying in both the primary and secondary markets, certainly to the extent we can get up to five-year reinvestment periods on new CLOs. I guess even a three-year new deal will help lengthen our weighted average, a five-year will help lengthen it even more. So that's something we're going to focus towards.

That said, we will continue to look for cheap secondary opportunities when they exist..

Okay, that's really helpful commentary and really good color on the market opportunities. Those are my questions. I appreciate the time today..

Thanks so much, Ryan..

Our next question comes from Chris Kotowski with Oppenheimer. Please proceed with your question..

Hi. Yes. Thanks for taking the follow up. I have a question which I think is kind of basically like Mickey's, but I’m not sure I totally understood it. So let me ask it my way.

I'm looking at Page 24 of the supplement and kind of if you think about the relationship between the distributions received from CLO equity and the investment income, you recognize as investment income in the current quarter was like 76%, last quarter it was 70. If you go back, for most of the year it was probably closer to 50%.

So, it seems like more of the distributions are slowing down to the income line, less of it is being treated as a return of capital and as we can see from that other line on Page 24.

And so what is driving that and what should we expect for the next couple of quarters? Roughly this is what we see in the second and third quarters dropping down from distributions to investment income, is that what we should expect or should we expect it to revert back to where it was a year or two ago?.

Sure. So it's Ken here. And just one aspect before I get into the detail of the answer is this is a Q3 2020 view, the cash flows are the ones that are received in the current quarter and the income is also recorded for the current quarter.

In large part the cash flows that are coming in, in the current quarter reflect income that was accrued or recorded in the previous quarter. That said, to your point, if there's less expected cash coming in, there would be more of a shift towards recognizing that as income versus return of capital.

So if we fast forward this to Q4 where we're recording the cash flows coming in or ones that are received in the fourth quarter versus previous income, you will start to see a reversion of that effect where you'll see more of a balance between income and return of capital.

So it may not be all the way that we were in the first quarter, but you'll start to see steps towards it..

Okay..

So, broadly if you think of our yield staying flat even if it we went down modestly.

But if cash flow is up 50% and yield is flat, all that excess in theory should flow down as return of capital, if that makes sense?.

Okay. I guess the more that number increases the more of it is going to be a return of capital..

Correct..

Okay.

And is there any way if we were clever enough, would there be a good way for us to model that and figure out what percentage we should plug into our models for fourth quarter and first quarter?.

The income is going to be largely driven by the effective yield. There could be gains and losses. There's obviously CLO debt and loan accumulation facilities.

But on the CLO equity, the effective yield which we put at the end of the quarter was 11 and change times the beginning, times the amortized cost of the CLO equity, not the market value, take that 11% and change divided by 4x amortized cost, that's going to give you a rough cut at the CLO equity income.

The cash, we've kind of – we've told you what the cash is. So prior to Q4 you could figure that out. And then for Q1 and onward, to the extent you think LIBOR is going to remain low, that cash projections and OC tests aren't going to – deals aren't going to come back or go off size. That's a pretty good base case for keeping that cash flow consistent..

Okay. All right. I think I got it. Thank you..

Okay, great. Thanks, Chris..

Our next question comes from Steven Bavaria , a private investor. Please proceed with your question..

Hi, Steve. Steve, I’m having a hard time hearing you. Are you on the line? Are you muted, Steven. I think he’s actually dropped off. Maybe we’ll just move on to Mickey again. And if Steve comes back, we’ll pick him up..

Our next question is from Mickey Schleien with Ladenburg Thalmann. Please proceed with your question..

Tom, just a quick follow up looking at the right-hand side of the balance sheet. We look at hopefully what will be a much better economic situation a year from now. It's conceivable that the fair value to cost of the portfolio will be a lot better than it is today.

And your leverage measured on fair value could decline to levels that would be less than optimal.

So my question is, if that were to occur, do you have more appetite to issue unsecured notes or would you prefer to issue preferred shares in that scenario?.

Got it. So broadly, we seek to run the company at 25% to 35% leverage. Ideally, we're right at the midpoint of that. If you set a range, you kind of want to be at the middle. We are at the upper end of the band, but in the band as of September 30.

Broadly the way we've thought about the use of debt and preferred is we've kind of gone roughly halfsies between the two, never perfectly so. Each of them have different pros and cons. That is the cheapest source of financing for the company in that there's no management fees in kind of our shareholder-friendly fee structure.

So there's – I think we have about 100 million of debt outstanding give or take. That's all money that we manage on behalf of the company without any sort of base management fee. So that's accretive.

On the flipside, the preferred stock, which we did repay the As last year and the beginning of this year, we still have I think 45 million of the Bs outstanding, give or take. Those aren't even callable until October of next year I think. There's a lot of ways to go before the Bs are even callable. Those do attract a management fee.

Those have the advantage of also being deferrable. We could defer a payment on those for up to two years, not that we have any intent to but that's always a nice option. And b, it attracts the lower asset coverage ratio of 200% versus 300%. So as we kind of look at the collage, we've generally run the company kind of 50/50 between the two.

Repaying the As has kind of moved us a little more debt than preferred. But to the extent you saw the company at the low end or below the range, we consistently try to get back to the range. So in that case, it's possible we'd look to do something..

I understand. That's helpful. That was it for me. Thank you..

We’ve got Steve back on it looks like..

Yes. Our next question is from Steven Bavaria , a private investor. Please proceed with your question..

Hello, Tom. I hope I’m coming through now. A technical glitch here..

We can hear you perfectly..

Great. Just a question. You paint a wonderfully positive picture that I've heard elsewhere about the speculative grade universe, the companies that are the underlying borrowers being in a much better position now than they were probably at the beginning of the year to deal with whatever comes next with COVID and its economic consequences.

I'm trying to square that with the projections from our friends at Standard & Poor's who throughout the summer and as most recently as October are still projecting a speculative grade future default rate up in the 12% area, which would be right about where it was back in 2008, 2009 at the height.

Do you have any thoughts on whether they're just wrong or how – whether we're talking about different parts – different subsets of the universe to try to square the two views?.

A very good question. So yes, there's a little bit of a different universe set and there's probably a different view between rating agencies and banks right now. And rating agencies publish lots and lots of different default outlooks and maybe they even have competing departments sometimes.

In one report from S&P, this is on a report from November 2nd, they predicted the S&P/LSTA Leveraged Loan Index 12 months trailing default rate by number of issuers would increase to 8% by June of 2021 was their forecast. So the other thing is, are you looking at notional, outstanding or by count? And all else equal --.

That's down from their October. Okay. Well, that means they're bringing it down a bit --.

Now this is by count. It could be different by dollars. So there's a little bit there. Moody's, on the other hand, their global default rate will rise to 7.2% by the end of 2020 and peak in March at 8.1%, before dropping back to 6.3 in October of 2021 is the Moody's outlook. Now compare that to Bank of America and JPMorgan offering loan default rates.

JPM saying this year is 3.5%, next year is 3.5 and I think BofA has guided down to 3.5 next year as well. So the bankers are a little more – even both, the bankers are a little more optimistic than the rating agencies. Maybe the right answer is somewhere in between.

But just to frame it is will CLOs typically have lower defaults than the broad market, while there's a few outliers the other way, if their current market rate is somewhere in the very low 4s. At present, ECC has about 2% default exposure. So in general, the CLO universe I'd say broadly has lower default exposure than the overall market.

And then when you look at our portfolio, one of the metrics – let me draw your attention to a particular page. Let me give you the exact page. I was looking for a number we actually don’t publish, the below 80 numbers in our portfolio. In general, the percent of what – we talked about the below 90 in the market and then the below 80.

This is when you look at loans, what percentage are trading below 90, are trading below 80 and so on and so forth? Broadly, the percentage below 90 has come down a bunch and the percent below 80 market-wide has also come down a bunch. And in my opinion, stuff that's trading below 80 today, really at a minimum have to scratch your head at.

But market-wide, that's probably in the 7% to 9% -- 7% to 8% range broadly. I might be off a little bit on that. Those are the names in the market that kind of knowing what we know today, the market price is a reasonable indicator of default probability. Those are the ones that are really the watch list names in my opinion.

Obviously, higher price ones can fall, but even that's indicating mid to upper single digits. And that typically looks at the likelihood of default over the next one to three years. Even a company like Belk, which is a retailer in the Southeast, that one's trading in the 30s.

I think the market still thinks they have a moderate liquidity runway, but maybe not a lot of ultimate recovery value..

Great. Thank you.

It sounds like the assumptions that you've got in your own yield model probably reflect closer to what the banks are projecting, I'm assuming?.

Yes, broadly and the variables, kind of the big variables to think about the default rate, the recovery rate and the reinvestment price. And that's predicated on being in the reinvestment period and being able to reinvest, but it's the collage of those three that really drive how these things will perform.

To the extent – that goes to my comment earlier on two deals with the same collateral manager, I take the one with two plus years of reinvestment period versus zero, just because I know they've can have a much easier time trying to fight their way out of it in the one deal versus the other..

Thank you very much..

Thanks, Steve..

We have reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to management for closing comments..

Great. Thank you very much. We appreciate everyone's interest in Eagle Point Credit Company and certainly appreciate the thoughtful and insightful questions. We look forward to speaking with folks in the first quarter as well and also invite people to join Eagle Point Income Company’s call which will begin promptly in 18 minutes. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation..