Eagle Point Credit Company (ECC) Earnings Call Transcript

Thanks, operator, and good morning. It's a pleasure to welcome all of you to Eagle Point Credit Company's Earnings Conference Call covering the second quarter of 2026. Joining us on today's call are Thomas Majewski, our Chief Executive Officer, along with Ken Onorio, who serves as Chief Financial Officer and Chief Operating Officer. Prior to getting started, I'd like to remind everybody that the topics we discuss on this call contain forward-looking statements or projected financial information, which carry risks and uncertainties that could lead to the company's actual results differing materially from those projections. To learn more about the factors that might affect the company as well as the statements and projections included here, please consult the company's filings with the Securities and Exchange Commission. Every forward-looking statement or projection of financial information we make on this call rests on information available to us as of today's date. We disclaim any obligation to update our forward-looking statements unless the law requires us to do so. Earlier today, we filed our second quarter 2026 financial statements and investor presentation with the Securities and Exchange Commission. You can also find these in the Investor Relations section of the company's website, eaglepointcreditcompany.com. A replay of this call will be made available later today as well. I'll now hand the call over to Thomas Majewski, Chief Executive Officer of Eagle Point Credit Company. Tom?

Thanks, Darren, and good morning to all of you. We're glad you could join us for Eagle Point's earnings call today. I'll kick things off with a few observations about the quarter we just finished. Let's start with the top-line results. Net asset value per share came in at $4.51 at quarter-end, which represents an 8% gain over the $4.17 recorded at March 31; GAAP return on common equity for the second quarter was 12.7%. Also during that quarter, cash distributions to holders of our common stock totaled $0.18 per share in the aggregate. Driving the NAV recovery was a substantial bounce-back in loan pricing and CLO equity valuations after the turbulence seen in the first quarter. Concerns about how artificial intelligence might affect software borrowers, along with geopolitical events, had pushed leveraged loan prices and CLO equity valuations lower earlier in the year. As sentiment in the markets strengthened through the second quarter, valuations came back significantly, and credit fundamentals underneath stayed resilient the whole time. That reinforces our belief that the first quarter's drop mostly stemmed from market-driven pricing pressure, not from any widespread weakening in credit. Software stayed in the spotlight during the quarter, since investors keep evaluating what AI means over the long haul for various business models. AI will certainly produce both winners and losers eventually, yet plenty of software companies keep benefiting from contracted recurring revenue, sticky customer relationships and mission-critical products; in our view, the market's earlier reaction was overstated relative to what we anticipate the true effect on the wider software sector will be. The early-year volatility likewise enhanced the reinvestment optionality inside our CLOs. Cheaper loan prices let CLO collateral managers buy performing credits at discounts, and slower repricing activity in the loan market helped maintain and occasionally slightly boost loan spreads. Such dynamics assist par building and spread enhancement in our CLO portfolios, which can lead to stronger CLO equity cash flows and valuations down the road. During the quarter, we stayed active in managing our CLO portfolio, finishing 8 resets and 7 refinancings across our CLO equity positions. For those CLOs, this produced weighted average CLO debt cost savings of 22 basis points. Every reset additionally pushed the relevant CLOs' reinvestment period out to 5 years; these moves helped offset some headwinds CLO equity encountered earlier in the year and ought to support better earnings and cash flows over time. At quarter-end, the weighted average remaining reinvestment period for our portfolio was 3.4 years, which matches March 31 and is 15% longer than the market average. That extended reinvestment period offers stronger protection against loan price swings and puts our CLOs in position to take advantage of discounted loan prices and relative value trading opportunities as they emerge; we're also still seeing a substantial pipeline of possible refinancing and reset opportunities. Over the course of the quarter, we put $111 million to work in new investments, achieving a weighted average effective yield of 24.6%; our capital was allocated among CLO equity and certain other differentiated credit opportunities in which we believe we found highly attractive risk-adjusted returns. We additionally repositioned the portfolio, rotating capital out of a certain set of underperforming CLO collateral managers. Although that produced realized losses, those losses had for the most part already shown up as unrealized losses in earlier periods, so the incremental effect on our NAV in the second quarter was minimal. Significantly, the repositioning let us redeploy capital toward our core group of CLO collateral managers and selectively grow our exposure to other appealing credit investments sourced by Eagle Point. In addition, we hit an important milestone in our new strategic partnership with Muzinich in Europe when its inaugural European CLO priced successfully. ECC gains from the partnership via both its CLO equity investments and the worth of the perpetual revenue sharing arrangement as the platform issues additional CLOs over time. Because of Muzinich's established presence in Europe, we believe this platform is well positioned for sustained growth, much like our strategic partnership with Muzinich in the United States, which keeps scaling. Past our core CLO equity investments, we keep selectively allocating capital to infrastructure credit, portfolio debt securities, regulatory capital relief transactions, asset-backed securities and other opportunistic private credit investments. These opportunities come through dedicated teams possessing specialized expertise and origination capabilities throughout the broader Eagle Point platform, which lets us reach differentiated opportunities that complement our core CLO equity strategy. At June 30, non-CLO investments made up 38% of our portfolio, which is up from 32% at March 31. And that gives us differentiated sources of income plus additional diversification across multiple types of assets. One recent illustration is our investment in Sports Illustrated Tickets, a specialty finance transaction, which was secured by World Cup tickets that the Eagle Point team originated. After a 7-month holding period, the investment produced a 1.2 multiple on our invested capital when it was realized back in June. We believe Eagle Point's capacity to originate attractive investment opportunities complements ECC's core CLO equity strategy and boosts long-term shareholder value. With that, I'll turn the call over to Ken to discuss financial results in more detail.

Appreciate that, Tom, and thank you all for being here. For the second quarter, net investment income, or NII, came in at $0.17 per share. When you subtract realized losses from investments, NII was negative $0.62 per share. Put that next to the first quarter of 2026, when NII minus realized investment losses was $0.14 per share, and the second quarter of 2025, when that figure stood at $0.16 per share. Once unrealized gains are factored in, GAAP net income for the company was $70 million, which works out to $0.53 per share. That compares with a GAAP net loss of $1.12 per share in the prior quarter and GAAP net income of $0.47 per share in the second quarter of 2025. Recurring cash flows generated by the company's investments reached $62 million, or $0.47 per share, for the quarter, which topped the company's common distributions plus total expenses by $0.14 per share. Three monthly common stock distributions of $0.06 per share each were paid out during the quarter, and for the rest of 2026 we've declared monthly common stock distributions at $0.06 per share. Our view is that the present distribution level lines up well with the company's earnings and will help sustain a distribution that holds up over time. Now on to the capital structure. We finished redeeming all of our ECCW and ECCX notes. Those redemptions brought down our outstanding leverage and stretched out the duration of our capital structure even further; at this point, no financing of ours matures before January 2029. Every piece of our debt and preferred stock financing carries a fixed rate, and a large share of the preferred stock financing is perpetual, meaning there's no set maturity date. In our view, this long-duration capital structure delivers meaningful stability and flexibility that supports our investment strategy; we don't know of any other publicly traded entity whose primary investments are CLO equity and that has perpetual financing, and we see this as a significant competitive advantage for the company. At June month end, debt and preferred equity securities held by the company equaled 47% of total assets less current liabilities, which sits above our target range of 27.5% to 37.5%, the range we anticipate operating within under normal market conditions. Our intention is to bring leverage back inside that target range over time. As for portfolio activity in July, we brought in $31 million of recurring cash flows and anticipate further collections over the rest of the quarter. Management's unaudited NAV estimate at July month end fell between $4.33 and $4.43 per share, with the midpoint representing a 3% decline from quarter end. With that, I'll hand things back to Tom.

Thanks, Ken. I want to offer a few further observations regarding the loan and CLO markets, along with some detail on the way our portfolio is positioned. New CLO issuance during Q2 came to $33 billion. Resets in that quarter amounted to $55 billion, while refinancings reached $39 billion. For CLO equity investors such as us, that activity opened the door to lowering liability expenses and, by way of resets, lengthening reinvestment windows at times when market conditions looked favorable. The S&P UBS Leveraged Loan Index gained 1.9% during Q2 and added another 80 basis points in July. Corporate revenue and EBITDA growth on average stayed in positive territory over the quarter, which supported credit fundamentals generally throughout the broadly syndicated loan market, even with continuing dispersion in some sectors and among some issuers. The trailing 12-month loan default rate closed the quarter at 1%, versus 1.4% at March 31, and it continues to sit well under the long-term average of 2.5%. At ECC, look-through default exposure remains modest at 14 basis points, far beneath the broader market average; in our view this speaks to both the quality of the loans we hold and our hands-on portfolio management and disciplined investment approach. Loan prices bounced back during Q2, though gains were uneven from credit to credit and more noticeable outside software. Importantly, the share of loans trading above par did not climb back to levels usually linked with broad-based market repricing. In our view, one of the biggest headwinds CLO equity has faced over the last 18 months — loan spread compression — has for the most part eased for now. In fact, the weighted average spread across our CLOs' loan portfolios was unchanged in the quarter. The June look-through portfolio showed a weighted average loan collateral market price of 95.99%, which creates chances for par building as discount loans that are performing get repaid or refinanced at par. Now to portfolio positioning. Our CLO portfolio metrics keep comparing well against the broader market. At quarter end, CCC-rated exposures in our portfolio were 3.8%, better than the market average of 4.6%. Our weighted average junior overcollateralization cushion was 4.4%, again above the market average of 3.8%. These metrics speak to our disciplined investment approach and our emphasis on higher-quality CLO collateral managers, and they help put the portfolio in position to handle stretches of unfavorable market conditions. As noted earlier, we have kept selectively allocating capital beyond our core CLO equity investments toward differentiated opportunities sourced and originated across the broader Eagle Point platform; we believe that diversification, alongside our core CLO equity strategy, positions the portfolio well to deliver attractive risk-adjusted returns. Going forward, we remain constructive on the long-term outlook for CLO equity and the wider opportunity set across the Eagle Point platform. Our focus stays on finishing resets and refinancings where market conditions allow, putting capital to work in attractive investments, and continuing to grow our strategic partnerships and other private credit investment opportunities. Our approach to managing the portfolio with discipline, allocating capital actively, and reaching distinctive opportunities throughout our advisers platform, we believe, positions us effectively to generate long-term value for shareholders; we appreciate the time you've given and the interest you've shown in Eagle Point Credit.

I'd like to revisit what you said about loan spread compression easing during the quarter. Could you shed some light on what's behind that? Also, do you think this slowdown in loan spread tightening will hold, and perhaps even get better down the road?

Great question. The delay before loan spread compression works its way through CLOs always takes some time. So even during the first quarter, certain repricings occurred and then showed up. Let's say the pricing — the repricing — was settled in the first quarter prior to conditions turning choppy, and then it moved through the portfolio during the second quarter. Spreads across the underlying loan portfolio are basically unchanged versus the prior quarter. And honestly, we're observing certain loans where spreads are actually rising. Within the software sector especially, amendments and extensions are one of the trends we're noticing. As part of that, in some cases, loan spreads are in fact being reset wider in return for a certain amount of extra maturity time; so what causes loan spread compression is robust demand for loans that isn't matched by enough supply of new loans. From that point, loans get pushed up to par, 1.5 par, and smart CFOs say, "hey, let's reprice our debt tighter." Since most loans are trading below par, that has definitely slowed down. On top of that, the CLO machine has definitely decelerated, and quarter-over-quarter issuance volume from Q1 to Q2 for new issue CLOs is down by a significant amount too. I can't recall the precise figure, but judgmentally I'd say roughly 20%, 25%, which shows that the new issue CLO arbitrage is still challenged, and that's something that lowers demand for loans and thus keeps prices lower. You can never claim victory on these matters. A bull market could take over tomorrow. Strangely, spread compression comes from bullish demand for loans, not the reverse. But as things stand today, with a bit of rate uncertainty, certainly some geopolitical uncertainty, and a more challenged new issue CLO arbitrage — not that existing CLOs are necessarily unattractive, but fewer new ones are being created. All of that points toward certainly muted spread compression and could even allow spreads to widen somewhat, which we're seeing on certain loans. But to put it briefly, it's driven by supply and demand. And hopefully, we're in a better place now.

Then for my second question, I'd like to hear about the non-CLO investments you completed during the quarter. How does the yield you're getting on those stack up against what the CLO investments are bringing in? Also, I believe your prepared remarks noted that non-CLO sits at 38%, versus 32% in March. Where do you want that exposure to land?

Two items there. First, what return are the non-CLO investments currently being put to work at? As for the rest, I'm not sure I have it in front of me.

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

Okay, so in both of those cases, the expected yield happens to sit right in the very low 20s. From what I can recall, most of those CLO purchases were secondaries or reset injections — we weren't forming brand-new CLOs at IRRs in the low 20s, we were picking up secondaries out in the market. And when we turn to the non-CLO bucket — as we consider ECC and what it's trying to accomplish, our top priority is generating appealing returns, ideally in the double digits, for investors by way of credit investments that carry some complexity and where a certain amount of illiquidity is acceptable; for a really long stretch, CLO equity was the place we thought that opportunity was strongest. Lately — and this is true across the market — we've definitely come across dealer research pointing to the CLO market being down double digits in 2025. One report, I believe, even pointed to a double-digit decline during the first half of 2026. So even though we're doing our best to steer through it, this has clearly been a really tough market for CLO equity, mostly because demand for loans has been outstripping supply alongside a hefty dose of spread compression. So as we've sought to bring other investments into ECC, we began calling attention to it early in the year, and sure enough, we sit in the high 30s at present. We haven't set a target for where that figure ought to land. Might it rise or fall from where it is now? Honestly, it could go either direction. When we think about how we'll approach this and how we'll run the company, the most important thing is bringing in solid investments that will produce exceptionally strong returns; we told you about the SI Tickets investment. Beyond that particular World Cup facility, we also hold a regular term loan to the company. We have a bit of equity in the company. We have several other highly appealing investments, a few of which have already run their full cycle past that SI Tickets World Cup special facility and are throwing off exceptionally appealing returns. Crucially, these are investments held throughout the Eagle Point complex; it isn't as though we're doing something unusual purely to feed ECC. And one benefit of having Eagle Point Credit serve as ECC's adviser is the wider access to a far larger investment suite than CLO equity alone. So the brief answer is that I can't hand you a specific figure. The reasoning behind it is maximizing returns. The theory, the strategy, is delivering results; and crucially, these are things we're doing throughout the complex. Nothing — we aren't placing any of these originated investments into this vehicle that exist solely for it.

About the gross capital put to work in new investments — the release mentioned roughly $111 million for 2Q '26. Then for 3Q '26 so far, that figure has climbed to around $125 million. So I was just curious: are you seeing better market conditions, or simply more capital available to put to work?

Honestly, it's a mix of the two, I'd say. Part of it is that we aim to keep the company pretty much fully invested. With a portfolio of this size and complexity, there's invariably some cash sitting around in the system. What pushes deployment is the objective of ideally being near fully invested at all times. The note about more money going in is also sometimes tied to sale proceeds. Keep in mind, we did rotate out of certain CLO equity positions. I'd say we sold more than $100 million of CLO equity on a market value basis over the quarter; so that also unlocks a chunk of capital to redeploy somewhat into other CLOs, and then a good amount has gone into other investments. Looking across the complex, out of the $71 million invested during Q2, it appears roughly $44 million went into CLOs and related investments, and about $27 million into other investments — around $10 million into infrastructure credit, and about $10 million into specialty finance, similar to things like SI Tickets.

All right, that's helpful. Now, regarding infrastructure credit — I get that you're diversifying the portfolio somewhat — but across the last 3 quarters, that sleeve appears to be the one that's grown substantially. At year-end it stood at roughly $31 million, and by 2Q '26 it had reached around $112 million. So I'm just trying to get a sense of what you're seeing in that sleeve, especially since you're after better risk-adjusted returns, but with the focus specifically on infrastructure credit. Is there any additional color or commentary you can offer on that sleeve?