Greetings, and welcome to Eagle Point Credit Company's Fourth Quarter and Year-End 2020 Financial Results. 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 Mr.

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, which may also be found on our website at eaglepointcreditcompany.com..

Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's fourth quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, 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 fourth quarter, the full year 2020 and some recent events. Ken will then walk us through the fourth quarter financials in a little more detail. I'll then return to talk about the market environment, our strategy and provide some other updates on recent activity.

And of course, we'll be happy to open the call to your questions at the end..

Thanks Tom. For the fourth quarter of 2020, the company recorded net investment income of approximately $7.5 million, or $0.24 per share. NII realized losses for the quarter resulted in a net loss of $0.80 per share.

As Tom mentioned before, the bulk of the realized loss had already been factored into NAV, and this was effectively an accounting reclassification of an unrealized loss to a realized loss as the impact of COVID eliminated any last hope of future cash flows from these investments.

This compares to net investment income net of realized losses of $0.23 per share for the third quarter of 2020 and net investment income net of realized losses also of $0.23 per share in the fourth quarter of 2019.

When unrealized portfolio appreciation is included, the company recorded GAAP net income in the fourth quarter of approximately $95 million, or just about $3 per share. This compares to GAAP net income of $1.40 per share in the third quarter of 2020, and a GAAP net loss of $0.47 per share in the fourth quarter of 2019.

Just as 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 fourth quarter GAAP net income was comprised of total investment income of $14.5 million and unrealized mark-to-market gains of approximately $121 million, partially offset by realized losses of $33.3 million and expenses of $6.9 million. As of February 9, we had $29.5 million of cash on hand net of pending settlements.

As of December 31st, the company's net asset value was approximately $362 million or $11.18 per share. Management's unaudited estimated range of the company's NAV as of January 31 was between $11.95 and $12.05 per share, which at the midpoint is a 7% increase compared to December's NAV per share.

The company's asset coverage ratios at December 31 for preferred stock and debt calculated pursuant to Investment Company Act requirements were 354% and 534%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%, respectively.

As of December 31, the company had debt and preferred securities outstanding totaling approximately 28.3% of the company's total assets less current liabilities, which is within our range of generally operating the company with leverage between 25% to 35% of total assets under normal market conditions.

Based on the midpoint of January's NAV estimate, this measure stood at 27.5% approaching the low end of our range. Moving on to our portfolio activity in the first quarter through February 9, the company received recurring cash flows on its investment portfolio of $30.7 million or $0.95 per share.

This compares to $27.6 million or $0.87 per share received during the full fourth quarter of 2020. Consistent with prior periods, we want to highlight that some of our investments are expected to make payments later this quarter.

During the fourth quarter, we paid three monthly distributions of $0.08 per share of common stock and are paying the same amount for each month in the first quarter. Additionally in February, we declared common distributions for each of April, May and June also in the amount of $0.08 per share.

Through our aftermarket offering program in the fourth quarter, the company issued approximately 598,000 shares of its common stock and approximately 30,000 shares of its Series B term preferred stock for total net proceeds to the company of approximately $6 million.

During the first quarter through February 9, the company has issued approximately 242,000 additional shares of its Series B term preferred stock for total net proceeds to the company of approximately $6 million. I will now hand the call back over to Tom. .

Great. Thank you, Ken. Let me take you everyone to walk-through on where we see kind of the macro, loan and CLO market and touch a bit further on our recent portfolio activity. In the face of a very difficult economic climate for much of 2020, the Crédit Suisse Leveraged Loan Index generated a total return of nearly 3%.

This was the index's 27th year of positive returns out of its 29 years of existence. And when you consider these are typically speculative grade credits these loans -- these are the loans that generate the raw materials within our CLO that generate the cash flow spanning nearly three decades.

A 90% success rate in investing in our view is very, very good. And this is what generates the cash that flows into our CLOs. Thanks to the rally in loan prices over the last few months according to data from S&P, a little more than one-fourth of the loan market is actually trading above par at the end of January.

Despite the ongoing improvement in the loan market, the significant majority of loans still trade at discounts even if more modest today and we believe there continue to be opportunities for our CLOs to reinvest and build par through buying loans at discounted prices both in the secondary market and new issue loans with OID.

Our CLO equity investments should be well-positioned to continue generating strong cash flows as we enter what we believe to be the early innings of the next expansionary period. Retail loan outflows continued early in the fourth quarter with total outflows for the quarter of a little over $0.5 billion.

That trend reversed in December of 2020 with retail inflows picking up and investors became more and more focused on the risks of investing in fixed rate bonds. And frankly December was the first monthly inflow to loan funds in some time and that trend has continued into 2021.

On a look-through basis, the weighted average spread in our portfolio increased slightly from 3.59% in September to 3.61% at the end of December. Frankly, we might see this trickle down a little bit in the coming months as demand for loans remain strong.

As I noted on our last call, an increasing number of loans in the market now include LIBOR floors, which further increases our interest collections when short-term rates are as low as they are at present.

The trailing 12-month default rate at the end of December stood at 3.83% according to S&P Capital IQ well below what was initially feared by many at the onset of the pandemic.

While many of the borrowers that defaulted in 2020 were actually on thin ice before the onset of COVID and thus COVID just accelerated the fall process for these weaker borrowers there were some COVID-related defaults ultimately.

Notably in January as I mentioned earlier, there were zero defaults or distressed transactions in the US and only one company has filed so far in February through Friday of last week. We still expect additional defaults in the coming months.

And most dealer research desks are forecasting 3% to 3.5% default rate in 2021, certainly much better than initially anticipated. However, when you look at the loan market only about 2% of the market is trading below 80, so frankly perhaps there is some potential upside to those default forecast too.

By definition, they're sort of assuming every -- every loan below 80 defaults and a bunch of others do. Maybe that's too conservative time will tell.

While defaults may continue at slightly elevated levels in the short-term, we believe the corporate default rate will remain lower than it otherwise would have frankly had more of these loans pretty had financial maintenance covenants.

Also corporate liquidity has been continually strengthened through both ability to access on the bond and loan markets and this provides additional buffers for companies against future economic setbacks. The company's default exposure as of year-end stood at about 1.24% and certainly well below the trailing 12-month default rate.

Further, only about 11.7% of our loans and our underlying portfolios mature prior to 2024 providing the significant majority of our corporate borrowers with years and years of runway before their debt is due. And just about 3% of our portfolio is trading below 80 at present.

Our portfolio's weighted average junior OC cushion this is on a CLO-by-CLO level weighted average, it's about 1.84% as of December and that's up from 1.12% at the end of September. But still below where it was on a pre COVID level reflecting that some CLOs did lose par during the year.

I do note that many of our largest holdings have significantly greater OC cushion than the average. In the CLO market in 2020, we saw about $93 billion of new issuance which when you consider the environment through much of 2020 is really very good performance. We also saw $11 billion of resets and $20 billion of refis.

Most of those were kind of anchored at the very beginning and end of the year as spreads were wider in the middle of the year. For 2021, Eagle Point our adviser expects about $100 billion of new issuance volume about $60 billion of resets and about $75 billion of refinancings.

With the market continuing to have plenty of liquidity and rates having to start really reflect more of an inflationary view here in 2021 we're watching this closely. We think there'll be plenty of reset opportunities and refi opportunities for us.

And with many companies having ample liquidity even if rates do rise, we certainly don't anticipate many inflation-driven defaults in 2021. CLO debt spreads have tightened significantly since the beginning of the year.

While it feels like junior mezzanine might have reached a resistance point lately, the demand for floating rate AAAs and AAs continues to feel quite robust. You might have read in the media that some of the large Japanese AAA players are on the sidelines.

Something interesting about the way many of those investors behave is they often take all or nearly all of the AAA class when they invest. The AAAs in some of the recently issued CLOs off of our platform have had much more broadly syndicated investor books sometimes with 10 or more investors in the AAA class.

We think this is very good for the market and it allows for many more investors to participate. Frankly, AAAs are often well oversubscribed these days. Taking advantage of this debt demand, as I mentioned a minute ago, we're actively working on resetings -- resets and refinancings of quite a few of our CLOs in the portfolio for the first half of 2021.

We have a calendar slated out for quite some time. More recently AAAs have tightened roughly to the 105 level maybe even seen one or two prints inside of that. This provides our CLOs with ample opportunities to pay off the old now expensive AAAs and issue new tighter paper.

98% of our equity positions by market value that were scheduled to make payments in January did so. Think about this less than one year after one of the largest crisis we've seen in a long, long time, 98% of our CLO equity is paying current distributions.

Our recurring cash collections in January of 2021 were 21% greater than our recurring collections a year ago in January 2020. If you've followed us for a while, you're certainly aware that the marks can move around on our portfolio no question about that.

But for the vast majority of our portfolio the cash just keeps coming and that's the name of the game here. To sum up, our portfolio generated a GAAP total return or ROE of nearly 20% last year. Cash flows on our portfolio continue to increase in January 2021 with cash flows higher than they were a year ago.

Our balance sheet remains strong and we have no debt maturities for nearly six years. We've got just shy of $30 million of dry powder available, demand for floating rate assets what we own is increasing and more and more investors are shifting out of fixed rate bonds into floating rate paper be it loans, CLO debt, even CLO equity.

So we've got what the market wants. And we know where our stock has historically been and where it is now. And Ken and I have several tools available to use on this front and know that we're focused there. While certainly not a straight line which would have been a lot easier, 2020 proved to be a very good year for the company.

2021 is off to a strong start and it feels like we're in the early innings of a new expansionary period. We're continuing to closely manage our investment portfolio and frankly, we're quite confident in the future. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to questions..

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Mickey Schleien with Ladenburg Thalmann. Please proceed with your question..

Hey, Mickey, good morning..

Good morning, Tom. Hey, good morning. How are you? Tom, a high level question.

I want to ask how you feel about the loan market equilibrium when you think about the very high level of CLO warehouses that are in place versus the level of M&A and LBO activity? You mentioned the level of loans trading at a premium in the market and that may indicate prepayment risk.

And as you show on your presentation on page 18, loan spreads are still above their long-term average.

How do you feel about the risk that loan spreads could decline more quickly than the CLO's ability to refinance their liabilities?.

Good question. And you're dusting off your notes from Q1 of 2018, if I were to suspect, where we saw both spread compression and to a lesser degree, we saw loans tighten and we saw CLO debt tightening more slowly. This time, as we look at where the loan market is, we are seeing some tightening.

And I alluded to, we're not crazy to think that weighted average spread will trickle down a little bit. I don't think it behaves as rapidly. If you look at that chart on 18, this is our current outlook.

If you look at the compression from 2016 to 2018 going from 391 to 348, and this is market-wide data we don't anticipate something like that playing out. Frankly, of those loans at premium, certainly, a fair number of them have still in soft call provision where they would have to pay a prepayment penalty to do anything.

That said one or two loans have opted to pay the prepayment penalty, which I guess gets paid through to CLOs at least which is nice. The key difference this time, I don't think we're going to see as much repricing as we did in certainly 2017 and 2018, we will see some.

A key difference though is on the right side of CLO balance sheets, I think the market is in much better shape and has the potential to tighten even greater. We started the year with AAAs kind of in around 130 area, and deals are kind of getting done around 105 area. This is just at the AAA level today. And some of that -- I guess a couple of things.

When you have some of those large players, who come in and just take the whole class, it's hard to get a lot of pricing tension when you're just dealing with one guy. We've seen deals one CLO we were involved in earlier in January, we went out with AAAs kind of talked at 120, low-120s, we ended up pricing it at 114, markets coming even since.

But that kind of movement really is very unusual in the CLO market. But that's attributable to that deal had over 10 different investors in it.

And that gives the syndicate manager strength -- and I don't think anyone was more than $60 million on say $300 million class that gives the syndicate manager strength to be able to kind of flex things tighter. At the same time, we have two other market trends. It's not an extreme view. It's a pretty common view to think right now, rates are going up.

While we think three-month LIBOR probably stays low for longer, the longer end of the curve five, 10, 20 year stuff certainly keeps trickling up.

So, if you're someone who's got to buy structured products buying fixed rate CMBS or autos and things like that, frankly there's a lot of paths to downside versus the CLOs, at least you don't have any substantive rate risk in your portfolio.

And then the final variable which we think augurs favorably is, there's far less captive or risk retention capital in the market today.

And roll the clock back to 2017, 2018, that would -- while the majority of CLOs were made compliant using vertical risk retention that was where the sponsor took 5% of every class, maybe 40% to 45% give or take of those CLOs were taking -- using horizontal retention where all the retention capital was put in the equity.

And to be polite, what I would say is much of that capital was, shall we say, return insensitive in that often cases there is a conflict of interest in that the collateral manager decides when to print using just calling down LP money that has the added benefit of starting their fees when they print a CLO.

So we saw a lot of CLOs get printed in 2017 and 2018 that in our opinion probably were too tight of a return profile. And -- but that had the effect of creating so much AAA supply that AAAs didn't tighten anywhere near as much as they have lately. So that's largely history in the rearview mirror.

So net, we've got a loan universe that's probably going to behave more slowly. They've got more lockouts. If anything, they're more focused on lengthening tenor than cutting cost in general as a borrower. There will be exceptions.

We've got a driving force into floating rate product and then we have much more disciplined issuers with third-party profit-oriented capital investors like ourselves driving issuance. So I think those three things will help.

And then when we look into our portfolio, if you look through way back in let's see pages 25 and 26, you can see the vast majority of our portfolio is out of the non-call period at this point. And that's very, very good. We've spent a lot of time mapping refis and resets whatever makes sense to do or calls in some cases of each of these investments.

And, whereas, in 2017 or 2018, I would have said a fair number of our CLOs are still in the non-call period. Our weighted average non-call period across our portfolio is only two-tens of a year right now. So that means we've got a lot more flexibility when we're managing the right side of CLO balance sheets.

So hear you loud and clear, compression was something we lamented a lot in 2017 and 2018. I think there's some pretty strong facts to suggest it won't reoccur anywhere near it did two to three years ago..

Thank you for that Tom. That's very helpful. And it actually has generated a follow-up question for me.

If anything if we look at the market today relative to a few years ago, CLOs on a relative basis representing even a larger share of demand, do you think CLOs are large enough portion of the market to actually dictate terms? In other words, they'll look at the arbitrage and accept a certain level of spread compression relative to where they think they can price the liabilities.

And, obviously, they want to keep the arbitrage in place.

Is that effect strong enough to mitigate the spread compression amongst loans?.

I wish. That unto itself is not frankly in my opinion in that -- while if you look at our data on page 15, CLOs control 62% of the loan market. You think we could just dictate terms. It's a law of large numbers and that there's often 100 to 200 different players in a given loan.

And invariably one of them -- more than one of them has to act a little more keenly than the others. So while it's good that we have such a big position and I think that's more helpful in workouts because there are so many folks in the -- hitting the buy button or considering things sadly I don't think we are able to act in unison to drive terms.

The one thing I will say, which will be better this time and we've seen it already is the folks buying CLO equity are much more like us today and far less in the way of risk retention or captive funds.

And when we start buying loans into a loan accumulation facility, we print when we want to, not because we want to turn on the collateral manager fees. So the community of investors that's supporting CLOs today is much more profit-oriented than some of the capital that was chasing deals a few years ago.

So the thing I think that will be the disciplined gating factor to not having a mismatch frankly is the behavior of equity investors, which I think the market is much better positioned where we sit today..

I understand. Tom your portfolio is now marked above pre-pandemic levels when we look at fair value versus cost. And the portfolio's cash flows increased sharply in the fourth quarter and are also back to pre-pandemic levels on a per share basis. But your average GAAP effective yields really haven't improved.

What accounts for that divergence, and does that reflect some pessimism on your part in terms of valuation?.

No. The -- there's always a bit of a lag between -- we reset the effective yields every single quarter at this point. There's a -- in fairness there's a bit of a lag between how things get projected. We would refresh the assumptions each quarter and you can see that in our financial statements.

One of the challenges the -- if anything to be critical of ourselves perhaps our default assumptions are overstated in the near-term, if I were to be critical obviously we like to be conservative on that.

And to the extent defaults don't happen if we continue with one default every six months or every six weeks that's certainly a much more tolerable pace. I could see some path to further upside in the effective yields, but it moves around a little more slowly than all else equal we would like it to.

Maybe it reflects a little conservatism but not pessimism..

Okay. A couple of simpler questions, Tom.

Do you believe it would be economical for you to redeem the 2027 notes and perhaps upsize them to increase your balance sheet leverage back towards the center of your target?.

Certainly we're mindful of where we are in leverage versus our target and we are comfortably below it. As we look across other 40 Act Vehicles notably BDCs, all the cool kids have been issuing left, right and center. So we're mindful the market seems open.

One thing, we're also mindful of is, I don't think there's been a deal done longer than five years. And right now all of our paper outstanding is original 10-year tenor. So as we kind of balance and everything actually becomes callable, one of them is callable already.

The Xs I think run off a non-call in April and the Bs actually run off non-call later this year. So we have tremendous optionality over our debt, whether we issue new bonds, or preferreds, or refinanced stuff, we grapple with all of those things. Mindful your colleagues in banking like to charge a few points to issue those deals as well.

On a five-year deal the tenor over which you're amortizing that cost, starts to get a little punitive. So we're looking at all different options and issuing debt or preferred is certainly one of the levers in our tool chest. To the extent, we did that and invested at a higher rate that would obviously be accretive to NII..

I understand. I have one more question, my last question.

Besides capital allocation, was the decision to take the realized losses this quarter also driven in any way by tax? And what is the outlook for return of capital in terms of your distributions going forward?.

Sure. So no, so a -- the realized loss was purely an accounting reclassification. The positions have been -- hopefully everyone is comfortable we fairly mark our book. The positions had been fairly marked going into year-end, anticipating little or no future cash flows from any of these investments.

And just kind of the reality of assessing the portfolios, where some of them, -- and this obviously is the benefit of a large diverse portfolio. There will be a few challenged names that popup. Whereas at the beginning of the year, you could at least make a credible argument on some of them having some further value.

Kind of post-COVID -- yeah, everyone took a little pain in COVID, some more than others. If CLOs were late in life in some cases we just decided, it wasn't -- you couldn't make a credible case. So that was something we rolled out. But it really was just an accounting reclassification moving from one bucket to the other.

We already took the unrealized loss, so that's why there was essentially no NAV impact from this. That doesn't -- but we didn't actually sell the securities. We still hang onto them. I mean, in theory, they could phoenix, we wouldn't bet on it. So that didn't trigger any sort of tax consequence onto itself.

The bulk of the sheltering of taxable income related to activity and frankly stuff that we help encourage. And I think we always try and -- I think many of the collateral managers we invest with, appreciate we have a heightened sensitivity and knowledge around tax.

A lot of the trading activity in CLOs last year really proved to shelter a lot of interest income. So we've got gobs and gobs of cash, because there were some realized losses. Even if they were just relative value trades we sheltered the vast majority of income last year.

I think there will be far -- where we sit today assuming market conditions stay similar to where they are, I think there will be far fewer realized losses this year within CLOs and potentially realized gains, which could flash through a significant amount of income up to ECC.

It's -- of all the -- we know GAAP tax and cash will equal over the life of a CLO. We have that -- that's probably the most read downloaded report on our website from 2015.

What I don't -- what we had not figured out and I can tell you, why, and no one has is accurately modeling taxable income into the future, in that we -- a big driver of that is collateral manager behavior. And I don't -- I can't say accurately, exactly, what buys and sales, we'll be doing in the fourth quarter of 2021 which would have a big impact.

Safe to say, where we sit today, it looks like taxable income should be up year-over-year. It could be meaningful. In theory, it could be above the distribution level frankly. But it's too soon to tell..

Yeah. That’s very helpful. Thank you for all your time this morning, Tom..

All right. Thank you for questions, Mickey..

You're welcome..

Next question comes from Randy Binner with B. Riley. Please proceed with your question..

Hi Randy..

Hey, Tom Good morning. So I -- yeah just on the re-class for the realized loss. What exactly are the buckets that those items moved from? And two, was it -- I understand that you already marked them, so there was already an unrealized loss.

Was it then move from held-to-maturity or available-for-sale? I'm just trying to understand the mechanics of where the re-class was?.

Ken, do you mind driving on that a little bit, maybe where we can see it on the balance sheet?.

Sure. So, it really is just a reclassification of categories. And if you go to our income statement, on the annual report page 19, on the ….

Okay..

…and you'll see that the two largest buckets. One is net realized gain/loss of $37 million. And then there's a net change in unrealized appreciation of $61 million at the bottom of the income statement. All that happened and then this is a net amount is that, unrealized loss.

And the net change in unrealized appreciation, depreciation moved into a realized bucket on the income statement. The other thing to be mindful of is, I would say this goes from like kind of below the line is an unrealized event to above the line as a realized event meaning that it's being noted through our earnings per share.

But on the face of the balance sheet just went from unrealized to realized and it is being reported as our -- as part of our earnings per share for the quarter. .

Okay. And then -- so yes so when you say buckets you're saying unrealized or realized….

Yes..

Which is fine. And so, I was just curious if you were saying it was more like held-to-maturity to available-for-sale or something like that? And it's not the case. .

No that was just -- correct. It's just an accounting line item. .

I mean everything is available for sale for you all right? I mean do you have some that's held for maturity?.

No. It's all available for sale. .

Yes. Okay.

And then -- so then the actual $33 million is kind of the residual or final amount of the loss or is that tax impact, or that was just whatever was not previously marked down?.

Correct. So the bulk of all of that... .

It was temporary previously. .

Okay. Got it. And then ... .

Yes that's correct. .

On the incentive fee -- I don't know Tom if you covered this in the opening comments you said something would have been $0.02 higher if not for something.

I didn't know if that was related to NII or incentive fees, but the incentive fee was lower than we modeled this quarter, but it could tend to be a little bit lower in the fourth quarter, just seeing if there's kind of a structural shift lower on incentive fees or if that's normal fluctuation.

And then the $0.02 item from your script, I didn't place that. So those are just kind of two cleanup questions. .

Sure. Let me drive on the latter. Maybe if you look at Page 29 of our investor deck you can see in the middle section there accrued income during Q4 2020 the negative $0.31, but that's probably -- it's in millions. So it's $310,000 of -- and you can see it's from a couple of positions of interest.

And these are mainly CLO debt that just accrues interest, but we did similar with the CLO equity a couple of these like flagship which is a Deutsche asset management deal that unfortunately has not turned out, as well as we could have hoped. We had some accrual on the interest, but that bond is picking. And we said, let's just write that off.

We're not sure we're ever going to be able to collect that. So that $0.02 was reversal. So prior periods accrual had that not happened NII would have been 26. And then on the incentive fee it's actually -- that's a pretty straightforward calc subject to meeting the hurdle gets the pre-incentive fee NII times the incentive fee rate. .

Is there any change in the incentive fee rate?.

No. .

For planning purposes. Yes I guess that's the more precise way to ask that. Okay. I think that's all we have. I mean I think - I'll ask one more. It's a little higher level but you can go through that McDermott example which is pretty I think interesting about where the workout environment is. We're pretty friendly I guess.

And I don't know if you take sides in the market or you kind of accept the market for what it is. But I mean do you see that environment changing? I mean it seems like it's just -- it's a pretty friendly credit environment in general. And I think case studies like that would be really supportive of your business model.

Obviously there's a lot to -- do you see that as sustainable in 2021? Like is that the backdrop we should plan on when we think about incentive fee?.

Yes. Hopefully not having a lot of E&P common stock. That's certainly -- any way we'll figure out how to dispose of that is my broad assumption. We've already -- I mentioned earlier, we're already sold enough to take our cost basis off the table.

So now it's just optimizing the profits, but we've -- if we invested 100, we sold 100 in proceeds already and just have the balance where we stand today. So what's going on, there's a common perception -- misperception CLOs can't hold defaults, CLOs can't hold CCCs. All the stuff is largely incorrect.

One thing that is correct is, CLOs in general can't put out money for things other than loans. While there's some relief on the Volcker Rule, that allows some bonds and things that's still just trickling into the ecosystem. So here, we knew this was going on.

Operationally, it was a real challenge to figure out, how to get these collateral managers to assign the right to do this to us, but we did it. I think all but one cooperated and in this case the good guys us one obviously a bad situation. We probably lost money as – through the CLOs on McDermott overall was a workout. So that's bad.

But in light of a bad situation, we at least offset a good bit of it. Another example, this didn't come into our portfolio directly, but was in there indirectly was like Serta Simmons.

And there – there was some top stories on Bloomberg for a while about this between Eaton Vance, who's a large holder of loans leading one side and Apollo's distressed fund was on the other side. And ultimately, Eaton Vance and the CLO band outwitted Apollo, Apollo sued and they lost.

And ultimately, the CLOs were able to kind of get in front of and stop what was contemplated to be something that would have been very CLO unfriendly and actually made it something that was very unfriendly to the distressed fund. So the market's opened up to it. Our CLO market's eyes have opened to it. And we're doing things to beat it.

It's not going to be perfect and there's going to be situations we lose and there's going to be some new trick up some in sleeve that come our way. But by and large, I think we've seen a meaningful shift through the course of 2020, where the CLO community can act more in concert and in unison.

Obviously, we want to get the best outcome for all of our investors. All CLOs are substantially aligned in that.

And while we're not directly buying and selling the loans and CLOs, because of our standing in the market, we've got the added ability to help make sure people are talking to each other that need to, which is a thing we can do to pull all in the same direction.

The underlying loan world, this kind of inter creditor warfare – intra-class creditor warfare is something that's going to be around for a while is our view in that many loans today have provisions that say 51% of the holders of a loan can consent to be primed to have someone else come in front of you.

And like in the case of that Serta Simmons, what you know 51% was held by CLOs, and they consented to put new money in at a fact coupon in front of the existing seniors.

That all came from the loan community – the par loan community in many cases CLOs, which had the advantage – or the benefit of disadvantaging other people subordinate in the capital structure, where that distressed debt fund was. So that's in a lot of loan documents today. Even loans today in many cases still have that.

And that really just tease up a path for credit. It used to be the loans versus the bonds or the bonds versus the mezz. It's now loan on loan. Thankfully, that goes back to CLOs owning 62% of loans in aggregate. To the extent, we work as a group we should be able to be on the winning end of more and more of those.

But where are there situations where there's security kick-outs and things like that, if it makes sense to do be assured, we're going to do everything we can to try and do them. And that we're learning about energy-related engineering companies very quickly..

There you go. All right. Well, thanks, thanks for all those color. Appreciate it..

No worries. We appreciate your time. Thank you..

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

Hey, Ryan..

Hey. Good morning, Tom. I just had a couple of questions. Number one, congrats on the really strong year in 2020 really good results.

And kind of on that point, 2020 was a very strong year is much stronger than the results that you guys have even put up over the last couple of years and certainly stronger, I think from the results that you guys put out kind of in the many kind of downturns driven by the energy markets back in late 2015 early 2016.

So despite the pandemic results were really good this year for Eagle Point.

And so I'm just wondering from a higher level, can you just talk about what about this pandemic allow you guys to – despite the volatility and a lot of damage being done from an economic standpoint, you guys being able to generate really good results? And then also depending on your answer to that question, do you think – obviously nobody knows what's going to cause the next downturn.

But do you think that there's something about the markets that you guys play in whether it's due to the volatility and your ability to take advantage of that volatility? Do you think that there's the opportunity that you guys will be able to continue to generate strong results in future downturns because of your guys' capital structure and the asset classes that you guys play in your opportunistic capabilities?.

Yes. So let me kind of walk through - you've got a couple of questions in there. Let me just make a note here. So at a high level, probably the best analogy in -- nothing is perfect. 2020 was kind of 2008 and 2009 all-in-one. Cycles just get faster and faster.

If you go back to like the REIT cycle in the early 1990s, in the RTC days, that's years and years to work out. You go to 2000, the tech -- and unfortunately tech and terrorism kind of 2002 -- 2000 to 2003 took two-plus years to work out. 2008, 2009, yes, it was kind of 15 months. Here it's like six months now. Couple of things helped the Fed.

I think Hank Paulson left something in the top drawer, open in case of emergency, the playbook, they pulled it out. They just did it. Not a lot of congressional wrangling, so that helped.

And there also wasn't a bad guy or if it was a bad guy, it was a bad guy overseas, so it wasn't -- people weren't looking for escape, go to Wall Street or anything like that. So all that helped and we made it through a cycle which we're not completely out of, but we're pretty far through it, far faster than others.

So if you were to just have taken this performance and spread it out over two years, I think you'd see it pretty similar to 2008 and 2009. Something that helped it similar to 2008 and 2009 which is different than the 2015, 2016 energy cycle, although 2016 was a really good year for us as well, here kind of all companies were impacted to some degree.

Obviously, some companies will never come back, but the vast majority will, but everything traded off and that compares to 2015, 2016 where you had energy kind of trade off, but a lot of other stuff didn't. So there you have problems with some stuff but you didn't have a lot of flex a lot of other deep discount ways to make it back.

Here you had deep discount ways to make it back across lots of different industries. You had to reevaluate companies based on their liquidity and real future profiles. But in general people are going to still buy cars.

Eventually people are going to get an airplane, airplane parts need to be made and so on and so forth, you could form a view and find discounted purchases, which was something that was harder to do in 2015. The other thing -- and we kind of look at performance across the asset class broadly in our portfolios in 2018 and 2019.

And I can't understate the impact -- of the distortive impact that the captive risk retention capital had on the market. This was return insensitive capital by and large.

One of the things you've heard us say the interest -- and this is the case with any business, the interest between management and ownership will vary at some point, either when do you start the business and when do you end the business. In the case of those captive vehicles, the keys to the kingdom were given all to management.

And frankly there were many, many CLOs that were printed in the 2017-2018 period, that in our opinion were just too tight and didn't really warrant creation. But that had the effect of keeping debt levels wide.

There was an unnatural supply of CLO debt, because there was a big, big block kind of 40% to 50% of the market of captive retention capital that was largely return insensitive.

That money -- it's not completely gone, but very few of those folks have been able to raise second funds, in many cases in our expectation, because they didn't perform so well, because they did deals that might not have deserved to work out.

That money is largely gone from the market today and we're seeing issuance and as we issue CLOs and as our competitors issue CLOs folks being much, much more disciplined with the pace of issuance and the upsizing and things like that, such that I think the tougher performance for the asset class broadly in 2018 and 2019 is something that's largely behind us.

And if you look at 2020 albeit with a cycle in between, my hope is that's kind of like an average year. Obviously, let's not have the cycle in between, but just on a straight-line basis that's kind of where we like to be.

When we look at our overall portfolio, the marks on it on the CLO equity, in many cases are still below where they were pre-pandemic.

To the extent you look at our marks broadly from 2017 and 2018 and think of that weighted average price is probably an applicable appropriate run rate price, there's the potential for future upside in the price of our portfolio. And if you look at the metrics in terms of defaults, obviously, who knows what can happen and lots of things can change.

Certainly, the way the market feels today, defaults is not going to be the big factor that we face today. There will be some degree of spread tightening on our -- on the loans. I think that's a likely outcome. Against, that, if our weighted average AAA, let me find that number is, we've got it here, weighted average AAA spread is 122 over.

New deals today are getting issued around 105 and the vast majority of our deals are callable. So, we've got some -- we've got a lot of path there. We've been handing out a lot of mandates lately to get those things done. So, our objective -- whereas we came into the year, let's say that 122 at year-end we were 10 to 15 basis points in the money.

Frankly, now our debt is expensive and we're going to do everything we can to rip out costs. One deal of note, I know people have asked in the past about some of our Zais exposure. Even Zais 5, which had 153 AAAs of January, I think we refied that around 125 already this year.

So even a deal -- that deal I think is still failing its OC test, we're able to refinance deals like that a whole bunch tighter. So we're going to drive very hard on the right side of our balance sheet. And I think, we're going to do it faster than the loan market comes in where we sit today..

Got it. That's helpful. That's very comprehensive and thorough response to a complicated and deep questions. I appreciate that. This next one is going to kind of ask you to maybe buzz out your crystal ball. At the end of December, you guys have a weighted average portfolio yield of about 11%, 11.05%.

There a lot of moving factors that go into how this can shift. Obviously, you did some opportunistic purchases at 19% in this quarter. So there may be some more opportunistic purchases in the future. There's primary issuance yield as well as kind of evaluating effective yield on your current portfolio on a quarterly basis.

So, would you anticipate -- and then obviously, there's trends in loan spreads and CLO pricing spreads, how those kind of move up to year.

Would you expect though the overall yield on your portfolio of around 11% to trend higher or lower throughout 2021?.

Where we sit today, I think, there's more of a positive bias on that. And the reason I say that is, to the extent, our default assumptions kind of prove too conservative. I think there's some potential there.

And then to the extent, rates stay lower longer, although we're floating rate due to the oddities of LIBOR floors and loans, we like LIBOR kind of the average -- what is the average LIBOR floor today, its south of one, not sure we published it. But let's say the average LIBOR floor is kind of 60 or 70 basis points today.

We like LIBOR as far away -- holding all else constant as LIBOR as far away from 60 basis points as possible. And right now, we're actually seeing a trend down. Even today three-month LIBOR is down almost another basis point to 17.5%.

So for loans with LIBOR floors to the extent, our CLO debt is earning LIBOR with a floor -- is that we only have to pay them LIBOR with a floor of zero, that excess also counts a spread the difference between actual LIBOR and the floor and the loans comes through as additional spread for us.

So we see a number of paths to some further upside besides what the models show today. To the extent that plays out over time that manifests just itself in higher and higher yields holding all else constant because the cash turns out to be better than we modeled.

And you're absolutely seeing it -- we're seeing it in the cash trends -- whereas July of last year was a toughy because we had a mismatch in LIBOR. LIBOR was set high for the debt and then all the loans kind of plummeted in rate here it's now working back in our favor and we think that's going to continue for at least some time..

Got it..

Potential upside -- more upside bias than downside bias where we sit today. .

That makes sense. Perfect. That’s helpful commentary. Appreciate the time today..

Great. Thanks so much, Ryan..

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

Ken, just a quick follow-up on the accounting of the realized loss. I don't want to beat a dead horse, but I don't see any new CLO equity positions. I do see that you exited -- I'm sorry, I don't see any exited CLO equity positions. I do see that you exited several CLO debt positions.

Were those CLO debt exits what caused the realized loss that you're discussing?.

No. These would be investments still on our balance sheet on our schedule of investments. So it's really just marking down the amortized cost of those investments to fair value. And that change or that differential between the cost and fair value is what's being recorded as a realized loss.

But to position themselves if you -- a great example I can give you as flagship, if you look at the cost where it was in September 30 versus where it was at 12/31, you'll see a significant decrease with the position of fair value roughly about the same what the position is still on the balance sheet because there is not that Tom and I would think but they could phoenix.

There is some option value to that position. We already took the hit. So it's still on our scheduled investments. .

Okay.

So in other words under GAAP, you don't necessarily need to sell a security to book that realized loss?.

That's correct..

Okay..

It was around – yes, Mickey it's around impairment accounting. .

Understand. That’s helpful. Thanks, Ken..

Sure..

Sure. That’s it. We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Thomas Majewski for closing comments. .

Great. Thank you very much, everyone. We appreciate your time and attention on Eagle Point Credit Company. Obviously, a year with some pretty dramatic swings, but from the starting point to the ending point a year we're quite proud of with a nearly 20% ROE.

As we talk about the outlook for 2021, while there's always risks and uncertainties hopefully you get a flavor of management's confidence looking into the future as we do believe right now we're at the early stages of the next expansionary period. Ken and I are available today, if anyone has any further questions happy to speak further.

And we do invite you to stick around and join us in 15 minutes for the Eagle Point Income Company call as well. Thank you very much. .

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