Eagle Point Credit Company (ECC) Earnings Call Transcript

Thank you, Darren, and good morning to all of you; we're glad you could be with us today for the Eagle Point Credit Company earnings call. I'll start by covering a few highlights from the quarter. During the third quarter, net investment income after subtracting realized losses totaled $0.29 per share, which was considerably higher than the $0.18 per share we distributed in total for the quarter. Our results benefited from income generated by the early repayment of a private infrastructure credit investment that was sourced via the wider Eagle Point platform. That contributed an additional $0.11 per share to earnings in the quarter. If you set aside what that early repayment added, adjusted net investment income along with realized gains comes to $0.18 per share, which matches what we distributed for the quarter. What this deal demonstrates is the worth of our ability to reach differentiated investment opportunities throughout the wider Eagle Point platform, and we expect that access to keep producing incremental earnings for ECC. I'll go into more detail on this later in my remarks, but as a preview, this segment of our portfolio has done very well, and at quarter end it makes up roughly 38% of our total portfolio. Apart from that single early payoff, I'll offer some additional color on how this segment of our portfolio has performed over time. We anticipate that it will account for a larger share of our portfolio in the quarters ahead. Beyond our solid earnings, investment cash flows at the company came to $46 million, or $0.35 per share, for the quarter, and that amount fully covered both common distributions and total expenses. Net asset value stood at $4.17 per share as of September 30th, down 8% from June 30. GAAP return on common equity for the quarter was negative 2.8%. Looking at the wider market backdrop, changing expectations around interest rates added to market volatility over the quarter. Even though leveraged loan prices went up a little, loan spreads narrowed slightly during the early part of the quarter, and by the time the quarter closed, CLO equity was yielding more, which meant CLO equity valuations came down. That said, since just 27.7% of loans were trading above par when the quarter ended, repricing activity will probably stay limited in the near term, and the spread compression that had been weighing on CLO equity in earlier quarters seems, for now, to have eased. In our view, stable underlying loan spreads combined with chances to lower CLO financing costs via refinancings and resets create a favorable setup for CLO equity over time, especially compared with the last two years, which were tough for the CLO market as a whole. In the leveraged loan market, we're seeing some encouraging signs that the software sector is stabilizing — default activity has been fairly limited, and loan prices are up 3.3% since the end of the first quarter. As we've said on earlier calls, we think worries about AI disruption may be overblown for a lot of software businesses, especially those delivering mission-critical solutions backed by strong customer retention and recurring revenue under long-term contracts. Our view remains that AI will more often complement these businesses than replace them, though we continue to monitor how things develop and what the implications could be for the sector. On CLO equity, it's important to distinguish between the impact of benchmark interest rate movements and that of credit spread movements. CLO equity is essentially a spread arbitrage investment, since the underlying loan assets and the CLO debt liabilities both generally carry floating rates. Because of that, shifts in short-term benchmark rates usually have only a limited direct effect on the CLO equity arbitrage; since CLO debt spreads stayed fairly steady this quarter, we have actively seized chances to lower CLO debt financing costs via refinancings and resets, which improves the spread between the income our CLO's underlying loan assets generate and what the CLO liabilities cost. This quarter we finished seven resets and nine refinancings in our CLO equity portfolio, producing a weighted average CLO debt cost savings of 20 basis points for those CLOs we reopened; beyond cutting debt costs for the CLOs that were reset, we also pushed their reinvestment periods out to five years. These steps put our CLO equity investments in position to gain from better cash flows over time. Going forward, we still see attractive refinancing and reset opportunities, since 25% of our CLO equity portfolio has AAA spreads above 130 basis points and is expected to leave its non-call period within the next year. From where we sit, this creates substantial chances for us to build on what we've already achieved in reducing the expense of CLO financing and in generating stronger cash flows out of our CLO equity portfolio. The resets we completed contributed to a longer reinvestment runway across that portfolio as a whole. As of quarter end, the weighted average remaining reinvestment period for our CLO equity portfolio stood at 3.6 years, compared with 3.4 years on June 30th — a figure that runs 20% higher than the broader market average, something we consider highly significant. With that extended reinvestment runway, the collateral managers of our CLOs have greater flexibility to capitalize on discounted loan prices and on relative value trading opportunities, while also helping to cushion the impact of market volatility. Regarding where we deployed money, this quarter saw $62 million go toward new investments, carrying a weighted average effective yield of 19.6%. In addition to our CLO equity holdings, we continue to shift capital actively into complementary private credit areas — infrastructure credit, portfolio debt securities, regulatory capital relief transactions, asset-backed securities, specialty finance, and equipment leasing investments among them. By September 30th, such investments accounted for roughly 38% of our overall portfolio, over twice the 16% recorded twelve months earlier; dedicated teams throughout the wider Eagle Point platform originate them, giving ECC exposure to specialized investment expertise and opportunities spanning a broad range of credit markets. We continue to participate in the CLO primary market on a selective basis, and during the quarter we took advantage of opportunities to originate two new CLO transactions. Notably, we obtained particularly favorable terms on collateral manager fees, including rebates that rank among the strongest we have achieved in more than ten years of investing in the CLO asset class. Because of those terms, yields remained attractive despite the broader challenges that much of the new issue CLO equity has been encountering. Our strategic partnership with Muzinich keeps moving forward as well, in both Europe and the United States; over in Europe, the first CLO closed in the third quarter, they priced their second European CLO not long ago, and there is a live pipeline for issuance in that market. Because Muzinich already has an established presence in Europe, we think the platform can scale faster there than it managed to in the United States. On the U.S. side, we finished a reset that pushed one of the platform's CLOs out to a fresh five-year reinvestment period, and we are now warehousing for the platform's eighth new issue. We feel good about the way the U.S. The platform has expanded, and there's also the matter of how little SOFR exposure it carries compared with a lot of peers. With the Muzinich platform continuing to grow, ECC is positioned to benefit from our attractive CLO equity investments as well as our perpetual revenue-sharing arrangements. Beyond the CLO portfolio, we continue to uncover appealing opportunities in niche segments of private credit, where appetite for inventive capital remains robust.

By allocating more of our capital to these investments, ECC gains access to extra income streams and returns whose drivers differ from those of CLO equity. The key point is that we stay committed to putting capital to work opportunistically instead of aiming at a fixed split between CLO equity and other private credit investments. What we do is deploy capital wherever the most compelling risk-adjusted return opportunities appear, with the goal of maximizing long-term total return for our shareholders. We have been very selective when identifying these opportunities, focusing particularly on investments backed by tangible collateral; our time-tested underwriting techniques have been applied to a broad range of assets, from power generation at one end to a granular pool of sports and events tickets at the other. Since 2020 we have been investing across these complementary credit asset classes, and their significance within our portfolio has been growing. ECC has a well-established record of producing attractive returns in these strategies. In fact, since 2020 we have put over $800 million into credit assets beyond CLOs, and across those investments we have generated a gross IRR, excluding company-level expenses, of roughly 18%. Of that portfolio, nearly $350 million has been fully realized, and it produced a gross IRR of approximately 28%. As our third quarter results show, these investments can generate meaningful investment income for ECC shareholders; that is especially appealing given the market-wide challenges CLO equity has confronted over the past two years. More broadly, we believe that access to the full breadth of the Eagle Point platform strengthens our ability to pursue attractive risk-adjusted returns across different market environments. I would also like to mention that we have refreshed our investor presentation this quarter. To give shareholders a more comprehensive view of our investment portfolio, including additional detail on our private credit investments beyond CLO equity. With that, I will turn the call over to Ken to discuss our financial results in more detail.

Thanks, Tom, and I appreciate all of you being with us today. In the third quarter, the company produced net investment income, or NII, of $0.31 per share. NII after subtracting realized losses from investments came to $0.29 per share. That compares with negative $0.62 per share in the second quarter of 2026 and $0.16 per share in the third quarter of 2025. As Tom noted, our third quarter results got a boost from refinancing a private credit investment, which added $0.11 per share to third quarter NII. Leaving that impact aside, normalized NII plus realized gains from investments stood at $0.18 per share for the quarter, matching our common distributions. Once unrealized losses are included, the company posted a GAAP net loss of $16 million, or $0.12 per share; that compares with GAAP net income of $0.53 per share in the prior quarter and GAAP net income of $0.12 per share in the third quarter of 2025. Cash flows from the company's investment portfolio in the third quarter totaled $46 million, or $0.35 per share, matching both the company's common distributions and total expenses. We paid three monthly distributions on our common equity of $0.06 per share in the third quarter and declared monthly distributions of $0.06 per share for the first three months of 2027. In our view, the current distribution level lines up appropriately with the company's earnings potential and represents a distribution that is sustainable over time. At September month-end, the company had debt and preferred equity securities outstanding equal to 49% of total assets less current liabilities. Our long-term target range sits between 27.5% and 37.5%. Earlier today, we announced the full redemption of our ECCC term preferred equity along with a 25% partial redemption of our ECCV unsecured notes. We continue to focus on bringing leverage back within our target range over time. Moving on to our capital structure, we currently have no debt maturities before January 2029. Every piece of our debt and preferred equity financing carries a fixed rate, and a substantial share of our preferred equity financing is perpetual, with no set maturity date. It's our belief that this long-duration capital structure delivers important stability and flexibility to support our investment strategy. We know of no other publicly traded entity that invests primarily in CLO equity with perpetual financing, and we see this as a material competitive advantage for the company. Shifting to our fourth quarter activity, we collected $42 million in cash flows from the investment portfolio during October and anticipate further collections over the rest of the quarter. Management's unaudited estimate of NAV as of October month-end ranged from $3.73 to $3.83 per share, with the midpoint marking a 9% decrease from quarter end; with that, I'll hand it back to Tom.

Thanks, Ken. We know the last two years have been a tough stretch for ECC and for other investors in CLO equity. As we look forward, we stay constructive on both the long-term outlook for our CLO equity portfolio and our private credit investments. Given the opportunities we are seeing across the Eagle Point platform, we do expect that CLOs will keep becoming a smaller share of our portfolio as time goes on. We believe our capacity to reach differentiated investment opportunities throughout the broader Eagle Point platform, together with our proactive style of portfolio management, puts ECC in a good position to deliver increasingly strong returns for shareholders over time; we appreciate your time and your interest in Eagle Point Credit Company. Ken and I will now open the call for your questions. Operator?

Morning, Tom. Is my voice coming through fine?

Morning, Mickey. Yes, we can hear you.

Great. Tom, I wanted to begin with a really broad question, and you kind of mentioned this in your prepared remarks, but clearly, over the last several years, broadly syndicated loan spreads have tightened more than CLO liability spreads have. I get it, and I believe the market gets it, that part of that comes down to timing; but the key point is that CLO equity economics have worsened considerably. Do you think we're nearing some kind of cyclical trough in CLO equity returns, or has something fundamentally shifted in the market that might keep returns weak for a long stretch? I ask because it sounds like you've also made an internal choice to somewhat cut back your CLO equity exposure.

Fair question. The brief answer is that, directionally, yes; we can never claim anything is permanent, but what's been happening in the CLO market for going on two years now hasn't produced good returns for equity holders, plain and simple. A major observation on our side—and since no one has exact figures, a degree of judgment is required here—is that we estimate a substantial majority, over 75%, and possibly a larger share still, of new CLOs have had backing from captive CLO funds. That could mean a fund, or a collateral manager able to tap internal capital, or alternatively firms unlike ours and many of our competitors familiar to everyone on this call, which operate with a profit motive and therefore decline to invest when the economics of a new arbitrage deal appear unattractive. So what we've observed — and let's just take our assumption, our estimate, our best estimate as a given — is that it creates excess demand for loans, because they're out buying loans left and right since they need to ramp their CLOs, and it creates excess supply of CLO debt, in the sense that if the market is willing to buy a certain amount of CLO debt, they push a little more into it. If you look at our spread over time, our weighted average loan spread, going back roughly two years, in our investor decks, you can see on the CLO book it was far, far higher than it is today. AAA spreads have definitely narrowed, though the basis point and percentage moves are far smaller than before—and of course what really counts is the whole stack. Recall COVID: NAV fell hard in March 2020. Spread compression had nothing to do with it. Fear, uncertainty, and declining loan and CLO security prices drove that drop. Loans weren't repricing; then suddenly we bounced back, and that year plus the next ranked among the strongest in company history. What has happened since is that the loan spread—with loans continually repriced tighter—has essentially erased that value. Companies simply won't refinance even when the market is soft; they'll keep their cheaper financing in place longer. We believe the market has shifted, at least over the medium term. In the past, new issue CLO equity was purchased by disciplined investors such as ourselves, and we think that has changed—a notable new trend has emerged. Looking back to the risk retention period around 2017 and 2018, even at that time—and this is a judgment call and somewhat out of date by now—captive vehicles purchased half of CLOs, while the other half were issued under what was termed vertical risk retention, in which the collateral manager purchased 5% of each class and a third-party investor such as ourselves would purchase the majority of the equity, which kept the market honest in a sense. Whereas previously that figure was roughly 50%, our current estimate puts it above 75% flowing into non-economic capital. We regard this shift as unlikely to reverse anytime soon. Should a reversal occur, the result would be a temporary decline in loan prices, though CLO debt might tighten somewhat. Our mandate is generating returns for investors, and we are dissatisfied with both the share price and the NAV. Looking at the public CLO funds as a group, the performance of their underlying portfolios tells a comparable tale. Here's how I'd put that in plainer spoken terms: Eagle Point is involved in a lot of different areas, and we began discussing this as it became more prominent early in the year. At this point, most of our assets under management sit outside the CLO market. Since all of us hold shares in the company, the ideal outcome would be a consistent 15% gross return annually, with everything running smoothly. But the truth is that our CLO equity investment approach has not delivered that result across the past 18 months. When we at Eagle Point evaluate the strongest opportunities throughout every one of our areas, and it makes sense—for any of a number of reasons—we try whenever we can to bring those into ECC's portfolio. Ultimately, our purpose here is to earn money on credit investments. On your question: yes, we believe the market has undergone at least a medium-term shift.

Tom, the subject of captive funds coming up is interesting. From what I've heard anecdotally, it might really be well above 90%, and that's meaningful. Either way, during your prepared remarks you said you're part of new CLOs in which the collateral manager, I suppose, takes a reduced fee structure. So is this basically a case where third-party CLO equity investors such as yourselves are competing for those captive funds? Going forward, what does that imply for the arbitrage?

With the limited number of CLOs, the new ones we've taken part in, I would sort of split them into two groups. There's a small number in which the fund has, where ECC holds a revenue interest in the collateral manager. There, honestly, we're even inside their captive fund. What I mean is, you can see a limited partnership interest in a captive fund. In that case, we're helping build the business that we own our ECC and other clients here hold a revenue share in. The limited number of other investments we've made have mainly gone toward our best-performing collateral managers, the ones who've delivered the best results for us, or among the best, let's say, across an extended period of time. And those folks also had the foresight to appreciate, "Gee, well, these people at Eagle Point have been investing with us for between 10 years and 15 years. Let's keep that relationship going, even if it's a little bit smaller right now." They'd rather keep, shall we say, keep the dialogue warm than say, "Sorry, there's nothing to do." We have concentrated on those we believe have performed in the top bands for us and where we think there's potential to keep doing that. At this point it's a pretty small list.

Okay, that comes across as something opportunistic rather than a secular trend.

Yes.

Tom, I'd like to ask about software. To start, could you give us some idea—at least as of the close of the third quarter—of what software loans typically make up when it comes to CLO collateral? And more to the point, look, how AI will disrupt software is, to my mind, still a question that's incredibly hard to answer. I'm not smart enough to know how it will look three, four, or five years down the road. I'm genuinely curious about how collateral managers are handling that risk, and maybe even more so, how you're underwriting it, and what assumptions you're building in for that sector in particular when you calculate your estimated yields or effective yields?

I'll take the last part first, then get to the bigger question. We don't assume a particular loss level for any single sector. We're not sitting there saying, "We think technology will default at 3% and media at 2%." That's not how we view it, and I don't believe the market views it that way either, particularly. Even inside technology, which covers software and services—roughly 9.5% of our look-through portfolio—there are many different flavors. Much like healthcare, which has come down somewhat in our portfolio, technology has many different flavors. In the same way, we also hold technology hardware and equipment, which differs from software and services. So we don't make particular assumptions for each category or each industry. That said, when a meaningful number of loans are trading at low prices within those categories, we typically apply extra stresses in our effective yields for loans trading below certain thresholds. It's possible a higher default rate gets assigned to one of those loans or categories, but not because of the category. It's because of the loan's price. As for the bigger question of what all this AI stuff means, a lot of money is changing hands; it's actually remarkably good for the U.S. economy and nominal GDP growth of around 6%, give or take. I remember being in the Pacific Rim in 2016 or 2017. The U.S. was sitting at 1.5%, 2% GDP growth, and the country I was in was posting 6% GDP growth. I was like, "Wow, this is" And they considered that slow. I couldn't even imagine us getting there; that was a decade ago. AI in the near term is definitely creating very real jobs, all the data center construction, the building of plants and chip plants; in Arizona, there's that Taiwan Semiconductor Company, the outfit that builds all those chips for Apple, putting up this giant factory in Arizona in America. These are real, tangible jobs with a tremendous multiplier. That much is really good. Is it possible that certain data centers and other operations will fail, causing significant financial losses in some segments? Certainly. Will other initiatives succeed remarkably well? That is our belief. Recall the near-term positive aspect: many jobs are being generated for individuals performing real work, which we view favorably. The broader comparison we continually return to is the parallel with e-commerce. Consider the period from the mid-to-late 1990s through the early 2000s: would Amazon drive every retailer out of business? No. Did it cause many stores to close? Yes. Stroll along Greenwich Avenue and you will find it remains quite occupied, though the tenants differ from what existed 25 years ago. Perhaps in certain respects the mom and pop shops that could not compete have disappeared and similar situations occurred. Yet the effect of Amazon and associated e-commerce on retail has been real, though by no means has it resulted in 60% of Main Street sitting vacant. Consider Amazon—I am using Amazon purely as an illustration—and consider cloud computing. A statistic I encountered recently indicates that 70% of Fortune 500 companies still rely on mainframes for critical processing. Ken and I, we have no mainframe at this firm. We operate a wire room, and it connects to a cloud environment, and I am confident there is a backup plus a backup for that backup. Simply because this technology has progressed in numerous other respects, or because e-commerce constitutes a substantial share of our GDP, does not mean things have been eliminated. Will a transformation occur? Without question. Does it require more time to materialize? In my view, does the effect take longer to propagate? In my view, yes. Nevertheless, could it prove quite substantial? In my view, the response is affirmative on that point too; however, it remains somewhat further off than I believe the headlines imply. Uncertainty surrounds that path.

This is my final question, and it's probably more technical in nature. There's been a lot of discussion over the past few years about liability management exercises. When you examine those, do you treat them as a kind of quasi-default, and do you make some assumption regarding a recovery? Or in what way do you factor that into your effective yield assumptions? That's all from me this morning.

Yeah, so there are basically two different ways. Certain LMEs are pro rata, meaning each investor, each holder of the loan receives the identical new package of holdings. Others are non-pro rata, where some holders get bigger and some get better outcomes, while others end up with inferior outcomes; so it has changed both the way we have underwritten collateral managers and how they are able to navigate LMEs; this is different from an old-fashioned bankruptcy. Honestly, certain firms handle this better than others do. As an initial step, we've conducted substantial diligence across the wider collateral manager community concerning their histories with LMEs; beyond that, in the way we've examined it, the manner in which it kind of works through — suppose a loan inside a CLO has undergone an LME — how that gets picked up in our analysis comes down to this: where are the loans or securities you receive back, and where do they sit in terms of marks? That will determine whether we impose an extra haircut for anticipated losses on them. Regrettably, quite a number of companies have experienced several LMEs. That’s going to keep happening somewhat, though ideally it stays fairly small; even so, how our effective yield ends up being affected depends on what take-back instruments cost, which instrument is used, and varying recovery rates on loans that aren’t senior secured, among other things like that.

I appreciate that. That covers everything I wanted to ask today. Thanks for your time.

Great. Thanks a lot, Mickey.

Yeah. Hi, good morning. Appreciate you fielding all the questions. On my side, I suppose, reflecting on the last couple of quarters — clearly, when we think about 2025, much of that was driven by the market. Then for 2026, it looks like the NAV has bounced around somewhat here: $4.17 in 1Q, then roughly $4.50 in 2Q, and then back down to $4.17 here in 3Q. I was hoping to get a sense of something, and it may be tough to put a number on it, but has the shift in how you invest — leaning somewhat more toward infrastructure credit or regulatory capital relief, beyond CLO equity — contributed to a steadier net asset value, or is the market doing that too? Again, separating those two effects might be difficult, but I'd love to hear a bit more on it. Thank you.

The short answer is yes. To give you the fuller picture, ultimately what moves NAV comes down to security prices and the cash coming into our portfolio, minus what goes out to investors and what the company spends. When the investments we hold do better, the result is either larger distributions or a higher NAV — ideally some mix of both. As for how CLO equity gets priced, I've sometimes described those swings as overdone and unjustified, though I haven't put it that way on today's call. That's my hope as well — that it begins climbing again. Moving approximately 40% of the portfolio out of the CLO market has been a deliberate component of our investment approach, aimed at reaching assets that offer greater stability and, above all, a stronger total return. As we noted in the press release and in parts of the prepared remarks, we have put more than $800 million since 2020 into investments outside the CLO market. Before expenses, costs, and similar items, the gross IRR on those was roughly 18%. I don't believe we've disclosed the split between realized and unrealized — or perhaps we did publish one of those figures?

Yeah, it might be. It's in the-

Yes, that's right. Roughly 3/8 of it has been realized so far, and the IRR on that is actually stronger than the blended figure across the entire $800 million-plus. This is far from a minor side item. I'd say the company is in significantly better shape thanks to that investment and the expanded investment program. Back when it represented 5% or 10% of the portfolio, it probably didn't merit much discussion. Now that it's approaching — now that it's above one-third of the portfolio — it does merit discussion. Our view is that these investments overall will be more stable and, more importantly, will produce a higher total return over the coming quarters and years than traditional CLO equity would.

All right, that helps a lot. I was looking at the leverage ratios and asset coverage — roughly 204% at quarter end, and of course that 200% minimum stands out. You bought back some preferred after the quarter closed. It would be useful to hear a bit more on how you intend to handle this over the longer term, clearly remaining above 200%, and then getting back inside your leverage target. Thanks very much.

Yeah. So, one of the good things is that we have a dividend, a distribution right now that recurring NII supports. Never mind cash flow or anything like that. Clearly, we picked up an extra $0.11 of net NII because one investment paid off early, which triggered some additional interest income. But on the whole, it's about getting NII to match or beat our monthly distributions, and at the moment we're in the zone on that. It's about making investments that frankly have appreciation potential — that's another piece of it. Then, gradually and steadily, while no near-term maturities exist, we understand how important it is to stay on the right side of the 200 ACR, and today we announced a redemption of 1.5 secure, or one and a portion of securities, aiming to keep us on the right side of that ACR. When CLO securities prices fall — and they really did this time last year, we saw a big drop — we came a little closer than we would like. We discontinued the Series AA Preferred program. For us as a borrower it's a great piece of paper; for the investors it's a great piece of paper too; but unfortunately the more important test for us is the 200 ACR, and we're very mindful of staying on the right side of it; then gradually, through better investment performance, getting back into the target ratio.