Eagle Point Credit Co Inc. Q4 FY2023 earnings call

• The company had a strong fourth quarter and 2023, with a GAAP return on equity of 20.79% and total return on common stock of 18.92% assuming reinvestment of distributions.
• Received recurring cash flows in Q4 of $60.7 million, exceeding aggregate common distributions and expenses by $0.14 per share.
• Actively managed the portfolio, deploying $34 million in net capital into new investments. Issued approximately 4.5 million common shares at a premium, generating NAV accretion of $0.03 per share.
• Strengthened the balance sheet by raising $47 million of net proceeds through the issuance of Series F term preferred stock due in 2029. All financing remains fixed rate with no maturities prior to April 2028.
• Eagle Point Income Company's portfolio performed well, with net investment income exceeding common distributions, and its monthly distribution increased.
• The CLO equity portfolio's weighted average remaining reinvestment period stood at 2.4 years, above the market average of 1.6 years.

For the fourth quarter, the company had net income and realized capital gains totaling $0.33 per common share. Recurring cash flows on the portfolio in the fourth quarter were $60.7 million, or $0.82 per common share. NAV per share as of December 31 was $9.21, a modest decrease from September 30 but up 2% for the full year. The weighted average effective yield of the CLO equity portfolio was 16.7% based on amortized cost, an increase from 16.29% at the end of September. Eagle Point Income Company (EIC) generated net investment income of $0.56 per share in the fourth quarter, and its monthly common distribution was raised by 11% to $0.20 per share.

• Expect portfolio cash flows to be higher in the second quarter as timing-related factors subside.
• Anticipate increased activity in completing resets and refinancing CLOs to lower debt costs and increase the weighted average remaining reinvestment period.
• Have a strong pipeline of primary and secondary CLO equity investments under evaluation. Potential to invest in the primary market as economics become more favorable.

• Market volatility could impact portfolio performance. While defaults have been below historical averages, there's a possibility of a spike in defaults.
• Interest rate changes could affect the cost of debt and the performance of underlying loans. However, the company's fixed rate financing provides protection from further rate increases.
• Dependence on the CLO market, where a significant portion of issuance in 2023 was by captive investors, could impact investment opportunities.

Q: How do you see the potential to call deals beyond their reinvestment period and rotate capital into the primary market?

A: Later in life CLOs have options like sell, call, reset, or refinance. With the triple A market having come in significantly and loan prices up, optionality is more in the money. Activity could pick up, with proceeds potentially going into new issue or secondary markets.

Q: How to think about GAAP NII and cash flows in a declining rate environment?

A: Increases in rates have potential to affect defaults, but the main driver is refining and resetting to rip out costs on the CLOs balance sheet. The company operates within a 25-35% leverage band and doesn't plan to significantly increase leverage. Effective yield and cash flow from the portfolio are key drivers.

Q: What's in the recurring cash distribution and how does it relate to GAAP income?

A: Recurring cash flow is from interest waterfall in CLOs. GAAP income uses effective yield with a reserve for losses analogous to a loan loss reserve. Default rates have been below expectations, and recurring cash flows are robust. The difference is due to accrual vs. realized accounting for taxes.