Eagle Point Credit Company (ECC) Earnings Call Transcript

Greetings, and welcome to the Eagle Point Credit Company Second Quarter 2026 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Darren Daugherty with Prosek. Please go ahead, sir.

Thank you, operator, and good morning. Welcome to Eagle Point Credit Company's Earnings Conference Call for the second quarter of 2026. Speaking on the call today are Thomas Majewski, Chief Executive Officer; and Ken Onorio, Chief Financial Officer and Chief Operating Officer. Before we begin, I would like to remind everyone that the matters discussed on this call include forward-looking statements or projected financial information that involves risks and uncertainties that may cause the company's actual results to differ materially from such projections. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement or projection of financial information made during this call is based on the information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law. Earlier today, we filed our second quarter 2026 financial statements and investor presentation with the Securities and Exchange Commission. These are also available in the Investor Relations section of the company's website, eaglepointcreditcompany.com. A replay of this call will also be made available later today. I will now turn the call over to Thomas Majewski, Chief Executive Officer of Eagle Point Credit Company. Tom?

Thanks, Darren, and good morning, everyone. We appreciate you joining the Eagle Point earnings call this morning. I'll start by providing some perspectives on the recent quarter. Let me begin with the headline results. Our net asset value for the quarter ended at $4.51 per share, and that's an increase of 8% from $4.17 at March 31. We generated a GAAP return on common equity of 12.7% for the second quarter. And during the quarter, we paid an aggregate of $0.18 per share in cash distributions to our common shareholders. The recovery in NAV was driven by a meaningful rebound in loan prices and CLO equity valuations following the volatility we experienced in the first quarter. Uncertainty surrounding the potential impact of artificial intelligence on software borrowers, together with the geopolitical developments, had weighed on leveraged loan prices and CLO equity valuations earlier in the year. As market sentiment improved during the second quarter, valuations recovered meaningfully, while underlying credit fundamentals remained resilient throughout the period. This supports our view that much of the first quarter decline reflected market-driven pricing pressure rather than a broad deterioration in credit. Software remained an area of focus during the quarter as investors continue to assess the long-term impact of AI across different business models. While AI will invariably create both winners and losers over time, many software businesses continue to benefit from recurring contracted revenue, sticky customer relationships and mission-critical products. We believe the market reaction earlier in the year was overstated to what we expect to be the actual impact on the broader software sector to ultimately be. The volatility earlier this year also improved the reinvestment optionality available within our CLOs. Lower loan prices enabled CLO collateral managers to purchase performing credits at discounted prices, while reduced repricing activity in the loan market helped preserve and, in some cases, modestly improve loan spreads. These dynamics support par building and spread enhancement within our CLO portfolios, which can contribute to stronger CLO equity cash flows and valuations over time. Throughout the quarter, we continued to actively manage our CLO portfolio by completing 8 resets and 7 refinancings of our CLO equity positions. This resulted in a weighted average CLO debt cost savings of 22 basis points for those CLOs. Each reset also extended the applicable CLOs reinvestment period to 5 years. These actions helped mitigate some of the headwinds CLO equity has faced earlier in the year and should support improved earnings and cash flows over time. Our portfolio's weighted average remaining reinvestment period at the end of the quarter stood at 3.4 years, and that's unchanged from March 31 and 15% longer than the market average. This longer reinvestment period provides greater protection against loan price volatility and positions our CLOs to capitalize on discounted loan prices and relative value trading opportunities when they arise. We also continue to see a meaningful pipeline of potential refinancing and reset opportunities. During the quarter, we deployed $111 million into new investments at a weighted average effective yield of 24.6%. We allocated capital across CLO equity and certain other differentiated credit opportunities where we believe we identified very attractive risk-adjusted returns. We also repositioned the portfolio by rotating capital away from a certain group of underperforming CLO collateral managers. While this resulted in realized losses, those losses had largely been reflected as unrealized losses in prior periods, resulting in minimal incremental impact on our NAV during the second quarter. Importantly, the repositioning allowed us to redeploy capital towards our core group of CLO collateral managers and selectively expand our exposure to other attractive credit investments sourced by Eagle Point. Additionally, we reached an important milestone in our new strategic partnership with Muzinich in Europe through the successful pricing of its inaugural European CLO. ECC benefits from the partnership through both its CLO equity investments and the value of the perpetual revenue sharing arrangement as additional CLOs are issued by the platform over time. Given Muzinich's established presence in Europe, we believe this platform is well positioned for sustained growth, similar to our strategic partnership with Muzinich in the United States, which continues to scale. Beyond our core CLO equity investments, we continue to selectively allocate capital to infrastructure credit, portfolio debt securities, regulatory capital relief transactions, asset-backed securities and other opportunistic private credit investments. These opportunities are sourced through dedicated teams with specialized expertise and origination capabilities across the broader Eagle Point platform, allowing us to access differentiated opportunities that complement our core CLO equity strategy. As of June 30, non-CLO investments represented 38% of our portfolio, which is up from 32% at March 31. And this provides differentiated sources of income and additional diversification for us across multiple types of assets. One recent example is our investment in Sports Illustrated Tickets, a specialty finance transaction, which was secured by World Cup tickets that the Eagle Point team originated. Following a 7-month holding period, the investment generated a 1.2 multiple on our invested capital when it was realized back in June. We believe Eagle Point's ability to originate attractive investment opportunities complements ECC's core CLO equity strategy and enhances long-term shareholder value. With that, I'll turn the call over to Ken to discuss financial results in more detail.

Thank you, Tom, and thanks, everyone, for joining us today. During the second quarter, the company generated net investment income or NII of $0.17 per share. NII less realized losses from investments was negative $0.62 per share. This compares to NII less realized losses from investments of $0.14 per share in the first quarter of 2026 and NII less realized losses from investments of $0.16 per share in the second quarter of 2025. Including unrealized gains, the company recorded GAAP net income of $70 million, or $0.53 per share. This compares to a GAAP net loss of $1.12 per share in the previous quarter and GAAP net income of $0.47 per share in the second quarter of 2025. Recurring cash flows from the company's investments totaled $62 million or $0.47 per share during the quarter, exceeding the company's common distributions and total expenses by $0.14 per share. We paid 3 monthly common stock distributions of $0.06 per share during the quarter and declared monthly common stock distributions of $0.06 per share for the remainder of 2026. We believe the current distribution level is appropriately aligned with the company's earnings and will support maintaining a sustainable distribution over time. Turning to our capital structure. We completed the full redemption of our ECCW and ECCX notes. These redemptions reduced our outstanding leverage and further extended the duration of our capital structure. We currently have no financing maturing before January 2029. All of our debt and preferred stock financing is fixed rate and a significant portion of our preferred stock financing is perpetual with no set maturity date. We believe this long-duration capital structure provides important stability and flexibility to support our investment strategy. We are unaware of any other publicly traded entity that invests primarily in CLO equity with perpetual financing and consider this to be a material competitive advantage for the company. As of June month end, the company had debt and preferred equity securities equal to 47% of total assets less current liabilities above our target range of 27.5% to 37.5%, within which we expect to operate under normal market conditions. We intend to return leverage to within our target range over time. Looking at our portfolio activity during the month of July, we collected $31 million in recurring cash flows and expect additional collections during the remainder of the quarter. Management's unaudited estimate of NAV as of July month end was between $4.33 and $4.43 per share, the midpoint being a 3% decrease from quarter end. With that, I'll turn it back to Tom.

Thanks, Ken. I'd now like to share some additional thoughts on the loan and CLO markets as well as share some color on how we're positioning the portfolio. During the second quarter, new CLO issuance totaled $33 billion. Reset activity for the quarter totaled $55 billion and refinancing activity totaled $39 billion. This activity created opportunities for CLO equity investors like ourselves to reduce liability costs and, through resets, extend the reinvestment periods when market conditions proved attractive. The S&P UBS Leveraged Loan Index rose 1.9% in the second quarter and returned an additional 80 basis points in July. Average corporate revenue and EBITDA growth remained positive during the quarter, supporting overall credit fundamentals across the broadly syndicated loan market despite continued dispersion in certain sectors and among certain issuers. The trailing 12-month loan default rate ended the quarter at 1%, which compares to 1.4% as of March 31 and remains well below its long-term average of 2.5%. ECC's look-through default exposure remains low at 14 basis points, significantly below the broader market average. We believe this reflects both the quality of our underlying loan holdings and our active portfolio management and disciplined investment approach. Loan prices recovered during the second quarter, although the improvement remained uneven across individual credits and was more pronounced outside software. Importantly, the proportion of loans trading above par did not return to levels typically associated with broad-based market repricing. We believe one of the most significant headwinds facing CLO equity over the last 18 months, loan spread compression has largely abated for now. Indeed, the weighted average spread of our CLO's loan portfolios was flat during the quarter. The June look-through portfolio had a weighted average loan collateral market price of 95.99%, providing opportunities for par building as performing discount loans repay or refinance at par. Turning to portfolio positioning. Our CLO portfolio metrics continue to compare favorably to the broader market. As of quarter end, CCC-rated exposures in our portfolio were 3.8%, which is better than the market average of 4.6%. Our weighted average junior overcollateralization cushion stood at 4.4%, also better than the market average, which was 3.8%. These metrics reflect our disciplined investment approach and focus on higher-quality CLO collateral managers and help position the portfolio to navigate periods of adverse market conditions. As I mentioned earlier, we have continued to selectively allocate capital beyond our core CLO equity investments to differentiated opportunities sourced and originated across the broader Eagle Point platform. We believe this diversification, together with our core CLO equity strategy positions the portfolio well to generate attractive risk-adjusted returns. Looking ahead, we remain constructive on the long-term outlook for CLO equity and the broader opportunity set across the Eagle Point platform. We remain focused on completing resets and refinancings where market conditions permit, deploying capital into attractive investments and continuing to expand our strategic partnerships and other private credit investment opportunities. We believe our disciplined portfolio management, active capital allocation and access to differentiated opportunities across our advisers platform [ serve use ] well to create long-term value for our shareholders. We thank you for your time and interest in Eagle Point Credit. [Audio Gap]

[Operator Instructions] And our first question will hear from Gaurav Mehta with Alliance Global Partners.

I wanted to go back to your comments around loan spread compression abating in the quarter. Can you maybe provide some color on what's driving that? And do you expect the loan spread abatement to be sustainable and maybe improve going forward?

Very good question. The lag in loan spread compression flowing through CLOs always takes a little while. So even in the first quarter, there were some repricings that then kind of manifested themselves. The pricing -- repricing was agreed, let's say, in the first quarter before things got choppy and then rolled through the portfolio in the second quarter. The spread on the underlying loan portfolio is roughly flat quarter-over-quarter. And frankly, we are seeing some loans actually move up in spread. In the software sector, in particular, one of the trends we're seeing is amendments and extensions. And as part of that, in certain instances, the loan spreads are actually getting reset wider in exchange for some degree of additional maturity time. So what drives loan spread compression is strong demand for loans not met by sufficient supply of new loans. And from there, loans get bid up to par, 1.5 par and smart CFO say, "hey, let's reprice our debt tighter." With most loans trading at discounts to par, that certainly has slowed. In addition, the CLO machine has certainly slowed down and quarter-over-quarter issuance volume from Q1 to Q2 of new issue CLOs down by a nontrivial amount as well. I don't remember the exact number, but I'm going to say judgmentally around 20%, 25%, showing that the new issue CLO arbitrage remains challenged, which is something that does reduce the demand for loans and therefore, keeping the prices lower. You can never declare a victory on these things. A bull market takes over tomorrow. Oddly, the spread compression is caused by bullish demand for loans, not the opposite. But where we sit today with a little bit of rate uncertainty, certainly some geopolitical uncertainty and a more challenged new issue CLO arbitrage, not that existing CLOs are necessarily unattractive, but not as many new ones are getting created. All of those augur well for certainly muted spread compression and has the potential even for spreads to widen a little bit, which we are seeing on some loans. But it is in a short way to put it, supply and demand driven. And hopefully, we're in a better situation now.

And as a follow-up, I wanted to ask you on your non-CLO investments that you guys made in the quarter. What's the yield on the non-CLO investments as compared to the CLO investments that you guys are making? And then I think in the prepared remarks, you also mentioned you guys are at 38% for non-CLO compared to 32% in March. What's the target number for that exposure?

So 2 questions there. What's the yield of non-CLO investments going in the ground? I don't know if I have the other.

Roughly low 20s non-CLO and also low 20s for CLO equity.

So conveniently both in the very low 20s expected yield on both cases. The bulk of the CLO purchases were either secondary or reset injections, if memory serves, not creating new CLOs at low 20s IRRs, but getting secondaries in the market. When we look at -- when we look at the non-CLO bucket, we -- as we think about ECC and its objectives, our #1 objective is to deliver attractive ideally double-digit returns for investors using credit investments with some complexity and where we can accept some illiquidity. For a very long time, CLO equity was where we believe that best opportunity to be. More recently, and this is market-wide, we certainly would have seen dealer research that suggested the CLO market was down double digits in 2025. And I think one report even suggested double-digit decline in the first half of 2026. So while we're trying our best to navigate, it's been -- it's obviously been a very difficult market for CLO equity, largely due to the demand for loans exceeding the supply and a significant amount of spread compression. So as we've looked to add other investments into ECC, we started highlighting it at the beginning of the year, and indeed, we're in the high 30s right now. We don't have a set target for where to get to with that. Could it go up or down from here? It really could go either way. As we think about how we're going to handle this and how we're going to manage the company, the first and foremost is getting good investments in here that will deliver very, very strong returns. We shared the SI Tickets investment. That's in addition to that specific World Cup facility, we also have a regular term loan to the company. We have some equity in the company. We have some other very attractive investments, some of which have gone full cycle beyond that SI Tickets World Cup special facility that are generating very, very attractive returns. Importantly, these are investments that we hold across the Eagle Point complex. This is not like we're doing something special just to add into ECC. And one of the advantages of having Eagle Point Credit as the adviser to ECC is the broader access to a much bigger investment suite than just CLO equity. So the short answer is I don't have a specific number to give you. The rationale is maximizing returns. The theory, the strategy is working. And importantly, it's things we're doing across the complex. Nothing -- we're not putting any investments in here of these originated investments that are specific just to this vehicle.

And next, we'll move to Timothy D'Agostino with B. Riley Securities.

Regarding gross capital deployed into new investments, in the release, there was mentioned about $111 million in 2Q '26. And then for 3Q '26 to date, it's up to about $125 million. So I was just wondering, are you seeing more favorable market conditions or just generally more capital to deploy?

A combination of both, frankly, I guess, some of it is we try and keep the company relatively fully invested. There is always some cash it's invariable with a portfolio of this size and complexity, some cash floating around in the system. What drives the deployment is a goal to ideally be close to fully invested at all times. The statement of any more going in is sometimes driven also by the sale proceeds. mindful, we did rotate out of some CLO equity positions. I'm going to say, we sold over $100 million of CLO equity on a market value basis during the quarter. So that also frees up a bunch of capital to reinvest somewhat into other CLOs and then a bunch went to -- a bunch have gone into other investments. As I look across the complex, of the $71 million invested during Q2, it looks like about $44 million went into CLOs and related investments and about $27 million into other investments, about $10 million into infrastructure credit, about $10 million into specialty finance, similar to things like SI Tickets.