Eagle Point Credit Company Inc. (ECC) Earnings Call Transcript

Thanks, operator, and good morning everyone. It's a pleasure to welcome all of you to the Eagle Point Credit Company earnings conference call covering the third quarter of 2025. 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. Before we get started, I want to remind all participants that the topics we'll cover today include forward-looking statements or projected financial information, and those carry risks and uncertainties that could lead to the company's actual results differing materially from those projections. If you'd like more detail on the factors that might affect the company as well as the statements and projections discussed here, please see the company's filings with the Securities and Exchange Commission. Every forward-looking statement or projection of financial information we make on this call reflects information available to us as of today's date. We undertake no obligation to update our forward-looking statements unless the law requires us to do so. Earlier today, we filed our third quarter 2025 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 available later today as well. At this point, I'll hand things over to Thomas Majewski, Chief Executive Officer of Eagle Point Credit Company. Tom?

Thank you, Darren, and good morning, everyone. It's wonderful to have all of you joining us on today's call. Our team remained quite active in managing the portfolio this quarter, both by deploying capital into new investments and by rotating and optimizing the holdings we already possess. Approximately $200 million was allocated to new investments, as we took advantage of attractive opportunities in the primary and secondary markets. The CLO equity investments we closed during this quarter had a weighted average effective yield of 16.9%. Beyond that, we acted proactively over the quarter to complete 16 refinancings as well as 11 resets, which strengthened the earning capacity of our CLO equity portfolio and helped to partially offset the loan repricings we faced throughout the year. Notably, we still maintain a robust pipeline of additional resets and refinancings planned for 2026. Recurring cash flows in the third quarter totaled $77 million, which works out to $0.59 per share. That compares with $85 million, or $0.69 per share, in the second quarter, representing a decline. During the quarter, the company delivered net investment income less realized losses from investments of $0.16 per share, consisting of $0.24 of net investment income, offset by $0.08 of realized losses from sales on certain investments. Those realized losses from investments were primarily driven by rotating some of our weaker CLO equity positions. Such marks had mostly already been reflected in NAV as unrealized mark-to-market losses and had no meaningful effect on our NAV. As of September 30, our NAV stood at $7 per share, down 4.2% from $7.31 per share at June 30. The company achieved a GAAP return on equity of 1.6% for the third quarter. Our portfolio's weighted average remaining reinvestment period, or WARRP, ended the quarter at 3.4 years, roughly 26% above the market average of 2.7 years. That is slightly higher than the 3.3 years reported at June 30, reflecting our long-term strategy of seeking to maximize our portfolio's WARRP whenever the reset market is open. As I mentioned at the beginning of this call, we focused our efforts this quarter on portfolio rotation and optimization, which should ultimately bolster our cash flows and earning power going forward. Being a majority CLO equity holder in most cases gives us multiple levers to pull in order to unlock value for the company over time. As many of you know, the loan market has dealt with pressure from loan repricings over recent quarters. Repricing activity did ease when credit markets were recently shaken by the idiosyncratic bankruptcy of First Brands. Even so, 42% of loans are once again trading above par, and repricing activity could come back. I'd also point out that ECC's exposure to First Brands was small, and losses related to that name remained comfortably within our annual credit loss assumptions; additionally, we saw an uptick in LBO activity during September, which benefits the market broadly and supports loan spreads. Our portfolio's look-through default exposure as of September 30th stood at 34 basis points, which is well below the broader market levels. To phrase it another way, more newly originated loans should relieve some of the strain caused by narrowing spreads, and in the end that helps both our cash flows and the way our NAV trends over time. During the quarter, we made use of our at-the-market program, selectively issuing $26 million in common stock at a price exceeding NAV. Through our continuous public offering, we likewise divested approximately $13 million of our 7% Series AA and AB convertible perpetual preferred stock. From where we sit, that amounts to a highly attractive cost of capital for the firm and provides a real competitive advantage. As far as we are aware, no other publicly traded company centered on CLO equity investing provides a program this appealing. Through 3 monthly distributions of $0.14 per share, we delivered $0.42 per share in cash distributions to our common shareholders across the quarter. As of September 30th, our portfolio's look-through default exposure came to 34 basis points, a level comfortably under the broader market's. Earlier today, we announced regular monthly distributions of $0.14 per share for the first quarter of 2026. In setting the monthly distribution level, the company's Board of Directors takes numerous factors into account, including cash flow generated by the company's investment portfolio, GAAP earnings and the company's obligation to distribute substantially all of its taxable income. Before I hand the call to Ken, I'd like to highlight Eagle Point Income Company, which also trades on the New York Stock Exchange. Its ticker symbol is EIC. That entity's primary investments are junior CLO debt securities. At 11:30 a.m. Eastern today, we'll host EIC's investor call, and we invite you to join us for that call too. Ken will now walk through our financial results. Following his remarks, I'll offer some additional perspective on the loan and CLO markets more broadly.

Thanks, Tom, and I appreciate all of you being on the call today. In the third quarter of 2025, we posted net investment income, after subtracting realized losses from investments, of $21 million, which works out to $0.16 per share. On its own, net investment income came to $0.24 per share. That's versus NII minus realized losses from investments of $0.16 per share during the prior quarter, and NII minus realized losses of $0.23 per share in the third quarter of 2024. On top of that, in the third quarter of 2025 we booked losses from forward currency contracts amounting to $0.01 per share. Once unrealized gains are included, GAAP net income for the quarter came to $16 million, or $0.12 per share. Compare that with GAAP net income of $0.47 per share in the previous quarter and $0.04 per share in the third quarter of 2024. Our third quarter GAAP net income broke down as investment income of $52 million plus unrealized gains on investments and forward currency contracts of $4 million, partly offset by financing costs and operating expenses of $21 million, realized losses on investments of $10 million, distributions and amortization of costs on temporary equity of $6 million, unrealized losses on certain liabilities held at fair value of $2 million, and realized losses from forward currency contracts of $1 million. Just to remind everyone, temporary equity means our multiple series of perpetual preferred stock. We also posted an other comprehensive loss of $2.5 million during the third quarter. As of September 30, our asset coverage ratios for preferred stock and debt, figured under Investment Company Act rules, stood at 239% and 529%, respectively. Both sit above the statutory thresholds of 200% and 300%. During the third quarter we put close to $200 million of gross capital to work in new investments. At quarter end, debt and preferred securities outstanding represented 42% of total assets less current liabilities, which is above our 27.5% to 37.5% target range for running the company in normal market conditions. In line with our long-range financing strategy, every bit of our financing carries a fixed rate, and nothing matures before April 2028. Beyond that, a large share of our preferred stock financing is perpetual, with no fixed maturity date. So far this quarter, through October 31, we've brought in $70 million of recurring cash flows, and we anticipate further collections over the rest of the quarter. Management's unaudited estimate of NAV as of the end of October was somewhere between $6.69 and $6.79 per share. With that, I'll hand things back to Tom for market insights and closing thoughts.

Thanks, Ken. Turning to the broader market, the fundamentals for loans are still pretty solid. For the third quarter, the S&P UBS Leveraged Loan Index delivered a 1.6% return, and it has kept performing nicely through October with a 30 bps gain for the month. Five leveraged loan defaults occurred in Q3; and as of September 30, the trailing 12-month default rate came in at 1.5%. That's higher than the 1.1% recorded as of June 30, yet it remains far under the long-term average of 2.6%. Most of that rise in the default rate came from the heavily covered First Brands default, even though the effect on the wider CLO market turned out to be minimal. On a look-through basis, First Brands made up just 30 bps of our portfolio, and we don't see it as a broad signal of credit deterioration. Although the First Brands loan was itself sizable, keep in mind that a substantial share of it sat in BDCs rather than CLOs. Our look-through default exposure in the portfolio as of September 30 was 34 bps, comfortably under the levels seen in the wider market. Since rates are anticipated to decline further, we think defaults ought to stay subdued because loan issuers will face reduced interest costs. On top of that, corporate fundamentals throughout the loan market are still fairly resilient, with issuers by and large continuing to expand revenue and EBITDA even with the impact of inflation, tariffs and interest rate shifts over recent years. In the quarter, roughly 6.8% of the leveraged loan market, or about 27% annualized, was prepaid at par. Generally speaking, loan issuers keep taking proactive steps to address their near-term maturities, and the maturity wall — which we've discussed on earlier calls — continues to get pushed out. Unfortunately, even though extending the maturity wall is a positive, a lot of these borrower refinancings have come with lower spreads on the loans, which has produced the spread compression we've discussed in recent quarters. On the CLO side, volume for the quarter reached $53 billion. That was a modest increase over the $51 billion seen in the prior quarter. Reset activity for Q3 was $69 billion and refinancing activity was $36 billion, and both figures showed substantial quarter-over-quarter growth. Our portfolio metrics keep standing out relative to the market. At quarter end, CCC-rated exposures in our CLO equity portfolio were 4.6%, below the broader market average of 4.8%. Likewise, just 2.7% of loans in our CLOs were trading under $80, versus 3.4% for the market. Our weighted average junior OC cushion was 4.6%, far above the market average of 3.7%; all of these are key measures that highlight the quality of our CLO equity portfolio. And on the whole, we think our portfolio is of higher quality than the market at large. The Fed's recent rate cuts have had only a limited direct effect on CLO equity, since our returns are mostly driven by spreads rather than base rates. For the CLO equity asset class, reduced rates are often helpful in several ways, since they relieve some of the interest burden on loan issuers. It also supports a pickup in LBO activity, which feeds new loan supply and could lead to wider loan spreads down the road. As we look forward, our near-term investment pipeline has us excited. Following the volatility seen earlier in this year, market conditions have kept stabilizing, and loan fundamentals remain resilient. Should CLO debt spreads stay flat or keep tightening, we anticipate acting on more than 20% of our portfolio and unlocking reset and refinancing upside over the coming months and quarters. In closing, we deployed capital opportunistically at attractive levels, completed resets and refinancings that bolstered the recurring cash flows on our portfolio, and kept portfolio metrics that compare favorably with the broader market; we stand positioned with strong fundamentals, meaningful reinvestment optionality inside our portfolio, and the flexibility to seize opportunities as they come up. We appreciate your time and your interest in Eagle Point Credit Company. Ken and I will now open the call to your questions. Operator? Note: The source excerpt does not contain the value 80%, so it could not be woven in without adding a fact not present in the input.

I want to pick up on your comments about portfolio resets and refi. My recollection is that you mentioned over 20% of the portfolio will be reset and refi'd. Could you give me some additional color on when that will happen, and what effect it would have?

Absolutely. As we mentioned, Q3 saw us complete an enormous volume of refis and resets; we took a very proactive stance with the portfolio. As for what lies ahead, we think it makes sense to take action on another 20% of the portfolio across roughly the next 1 to 2 quarters. Whether that happens is entirely a function of market conditions. The key thing I'd direct you to in our investor deck is Page 28 — or 25 through 28 now — where every CLO we hold is shown position by position along with what the AAAs are. You'll see the weighted average AAA spread is 134 basis points over SOFR. Right now, generically, you should think of the market as 120 to 125 basis points, some deals wider, some deals tighter. But — then begin looking through the deals with the highest AAA spreads, and those are the ones we'll target. It's a mix of triaging and arriving at an educated decision. Figuring out which CLOs will deliver the biggest potency for us, whether or not we're doing a refi or reset, which ones offer the most upside savings or the value in lengthening the reinvestment period — it's as much an art as a science. You can see over the course of the year, we've completed — I think we're on pace for comfortably more than 75 different corporate actions. So a highly, highly proactive ownership program. And I would expect that to keep going as long as market conditions permit; we may have even a few more scheduled for this year and we will kick off into next year; so I would expect a slow and — not slow, but a steady reduction in AAA costs across the CLO portfolio and lengthening or lengthening of the reinvestment periods of those that were resetting. That said, it all depends on the market, and there's been a stretch of time. If you look back to Q1, it was reset mania until March 1. And then we put pencils down because the market didn't cooperate, proverbially; so there is always that market caveat, but we are working very hard, and we'll do everything within reason to keep the cost lower on the right side of our balance sheet. And I would say no one in the market has done more than us is my belief.

The next thing I'd like to ask about is opportunities for investment in the near term. Could you give us some detail on what you're observing in both the primary and secondary CLO equity markets?

Sure. At present, the market remains open and busy. On the primary side, we keep seeing abundant issuance opportunities. We hold a number of loan accumulation facilities, which serve as something of a forerunner to putting together CLOs. A portion of those are mature and prepared to be turned into CLOs, depending on whether we bring any additional ones this year, which is somewhat contingent on market conditions. As you surely know, insurers purchase heavily among the rated tranches, and they tend to have yearly budgets they need to put to work, and they share a curious tendency to spend that budget prior to year-end. Consequently, you occasionally observe a bit of a backup during the final week or 2. So we might complete 1 or 2 more this year, yet there's definitely a strong pipeline heading into Q1 of next year; and on the secondary side, CLO equity worth hundreds of millions of dollars changes hands each week. Today's market is by no means inexpensive. It's not — the bond — equity isn't simply being handed out. Even so, select opportunities do remain available. We've been both purchasers and sellers in the secondary market. One item we mentioned in our remarks involved some rebalancing and trimming across a handful of collateral managers and positions where we possibly identified greater risk than potential gain. That said, we've also been putting money to work in the secondary market in investments where we see additional routes to upside. So the market is open and busy at present, and we take part actively in each segment of it. Still, we stay highly selective regarding the areas where — in the investments we are making.

Tom, you brought up how First Brands affected loan spreads. Can you describe what's been happening with CLO and asset spreads in October, and perhaps into mid-November, compared with September?

Let's take a look. Loan spread compression has eased a bit — though a few weeks doesn't establish a trend. I wish I had better news on that front. Across our portfolio — many people ask about default rates and similar topics. The thing I dislike most at present, and you've heard this from us on earnings calls for several quarters, is spread compression, and the weighted average spread on these loans has fallen by roughly 50 basis points, more or less, across the past year. That's not a good situation. Through our reset and proactive reset and refinancing program, we're doing our share to tighten on the right side. Here's an analogy I enjoy sharing — and it is just an analogy — we hold well over 1,000 loans along with a little over 100 CLOs. Imagine a wall of sand approaching from one direction. That represents the loans repricing, while on the opposite side our team is hurling boulders; so things simply move at differing speeds and at times with differing activity. As you suggest, every cloud has a silver lining. And although First Brands is definitely not the credit market's proudest chapter, strangely enough it was a repricing they were pursuing that led to uncovering the fraud and the quality of earnings — from what I understand, the quality of earnings report was being readied. And through that process, certain matters at the HoldCo above the borrower came to light. So that has definitely cooled the repricing market. Right now there are considerably fewer repricings than you'd anticipate given that 40% of the loan market trades above par. Sadly, I'd say it's premature to claim victory. And we — I wouldn't be shocked to see things pick up somewhat more, yet it has definitely slowed following the First Brands news. by a substantial degree.

Tom, you basically set up the question I had lined up next — the longer-run outlook for spreads, specifically on loans. Turning to Page 19 of your deck, it looks as though those spreads are moving back toward their long-term mean. As you said, nothing is guaranteed. Spreads are capable of widening and tightening across prolonged periods. Still, taking the broad perspective and weighing capital supply against demand in the loan market, where do you think loan spreads head over the long haul?

That one's tough. We show 2 averages. We show the 35-year average, approximately, and the 10-year average as well. Clearly, the 10-year figure appeals to me more than the 35-year one. Here's what I'd say: look at the average going back to before 2007, in the genuinely old days — and our good friend Peter Gleysteen might recall this — I may be a little off, he could know better. Loans carried 2 spreads, 250 bps and 275 bps, right? If you called the loan desk at Chemical or Manufacturers Hanover years ago, those were the 2 options you had. Clearly, the market has become far more sophisticated. Back in 2006, loan spreads were at 250 basis points — I recall modeling 240 to 250 bps spreads as a CLO banker — and at that time AAA tranches priced at only 25 to 30 bps over, which meant funding costs in the market were far, far lower. Whether we like it or not, the loan market and the CLO market are linked in a manner that cannot be reversed. CLOs hold roughly two-thirds of the loan market, maybe a little more right now; so despite spreads reaching a 10-year low of 3.47%, I'd gladly call a bottom — I just can't bring myself to do it. Looking at the long-run average going back to the early 1990s, one major factor molded it: at that time you could earn LIBOR plus 25 basis points on AAAs, and today we're 100 basis points away from that. So if you made me choose, inside the 10-year range we're closer to the floor than — well, certainly than the ceiling, presuming a few other credit-related events appear. Frankly, given how the media cycle works, take an example — our friends at Citibank for a period there, it felt like nothing they did could turn out right. The Revlon loan situation and that roughly twenty-seven trillion dollar wire transfer—every one of those missteps seemed to attract scrutiny. As far as I can tell, credit markets will probably get that same sort of media attention. I saw a Bloomberg headline about a facility held in a BlackRock BDC that took a significant write-down—again, probably just one credit inside a portfolio holding hundreds, yet it got coverage. On the positive side, that could help drive loan spreads lower and might even create the conditions for them to widen. One thing we mentioned is that M&A activity seems to be increasing, and that's a good sign. In terms of what's going on, a lot of those same loans are just getting repriced and traded around, refinanced, and repriced at tighter levels — 250 basis points and 275 basis points tighter. When we do see new names come into the market — and it feels like we are, since loan spreads are lower — M&A gets a little easier. Maybe we'd get some new supply, and that would help. So I can't call a bottom. I'd love to; based on this chart, we're at the 10-year low. Hopefully, that means there's room to go higher. The attention we're getting, from the media and the credit industry overall, is probably a positive factor, at least when it comes to spread compression, as odd as that sounds.

Thanks for that, Tom. That largely matches what I had been thinking. If I could, a few additional questions. Page 24 indicates that recurring cash flows came in under the combined amount of the distribution plus your operating expenses. So what I want to know is what caused that drop? And would you also take us through the elements the Board weighed as it looked at that decrease and decided to hold the dividend where it was?

For the second part, we came prepared with an answer. As for the first part, several things — the biggest one was spread compression, which played a meaningful role. I would put the weighted average spread down roughly 8 basis points — 8 bps for the quarter; so that's — it's — and although we are bringing costs down on the right side of the balance sheet through resets and refis, regrettably our weighted average did not come down 8 bps quarter-over-quarter; so that is the main way it showed up; that being said, there are — and we mention this regularly, but as I reviewed it the other day, it appears there is an outsized share of investments in the portfolio that have not yet made their initial payments. So we are seeing some green shoots. It isn't the case that all of it is paying yet, and it's not that those investments are troubled, just somewhat of a lag in getting — and when you put money into investments, it can take 6 months before the cash flow switches on; so a portion of that main cause is spread compression, partly offset by certain reset activity that we undertake. The reset activity itself even damages cash flows during the first quarter, since you must pay the bankers, the lawyers, the rating agencies, and all of that is funded out of your distribution in the quarter when you do it; so often the equity distribution declines for one period because of that activity; so those are a few of the things happening there. At ECC, we kept the distribution at $0.14 per month for the first quarter. The Board takes into account any number of factors, every factor concerning both the outlook for the company, the portfolio, the economy. Taxable income are all inputs in there. Naturally, the Board examines these matters each and every quarter. There is no single item that particularly drives the decision, but a collage of all the factors fed into the Board's decision.

Got it. Just one more thing, Tom. You mentioned that borrowers are capitalizing on narrower spreads, and that CLO managers along with equity holders such as yourselves are doing the same thing—using those tighter spreads to refinance. However, unless I'm mistaken, your priciest obligation, the Series F preferreds, is going to be callable before long. I could be off, but my belief is that I have it right.

To me, that sounds like January. Do I have that correct, Ken? Yeah, Ken is grinning even as you bring that up merely to indicate...

All right, Tom, got it. Yeah, I have trouble keeping up with every one of them. Still, those are the priciest. Their call dates are coming up fast. Given where things stand today, would refinancing them be logical? Put another way, did Ken's grin just widen?

The banker's grin may have widened too. I bet they're tuned in. That said, yes — when we examine the capital structure, and you'll find this on Page 10 of the deck, that's a really sharp catch on your end. Rates have definitely dropped quite a bit. We're sitting above our target leverage limit — target leverage guidelines, rather, the ones we've said we intend to operate the company under — and we remain comfortably inside our statutory limits; and we've discussed how we're proceeding quite gradually at the moment given our position, we have that 7% perpetual preferred program issued via Eagle Point Securities, the Series AA, BB; that — as I've said, this represents a meaningful competitive advantage. No other vehicle primarily focused on CLO equity possesses a program like it. That program is something I love; and might you envision us launching or pursuing something with the F, Naturally, the Board will make those calls on the proper dates. That said, January 18, 2026 is the call date, and I wouldn't be shocked if Ken has something set to remind him near that date.

For my first question, it's kind of a follow-up to the broader topics you've been covering. But on the point that there's still quite a bit of room for some borrowers — the asset side of the CLOs — to refinance. You still have remaining opportunities on the liability side. Quarter to quarter, one may be more significant than the other. Over the long haul, though, those movements should roughly offset one another, so to speak, and the arbitrage opportunity remains the same. Should we think about it that way?

By and large, yes. Over the long haul, in any given period, it either widens or tightens. When loans widen on a given day, CLO debt usually widens as well. That's kind of an unfortunate fact. Luckily, CLO debt has a longer duration than loan debt. And we — these cycles continue, credit spreads tighten, then credit spreads widen, back and forth. What helps is that loans have shorter terms than CLO debt, so when credit markets get turbulent, you see — going by history, and we have this data on our site reaching back to 2014, you'll find periods when the portfolio spread on the underlying loans increases and sometimes increases quite a lot. The AAAs we're locking in today could remain for 12 years if needed. So what you're describing is completely correct. Over the long run, these things tend to even out well; and some of that just comes from the CLO market and loan market, again, being so tightly linked. There are periods; and if you'd listened to our calls in 2018, I'm sure the recordings are gone now, but the transcripts are still there, we might have grumbled about the same problem of spread compression hurting us; and then it flipped, and we'd locked in those AAAs. And the stretch from January 2020 through the end of January 2021 was a great period, not a straight line, but a great finish; so eventually, all of this should even out. It rarely feels like it evens out on any given day. While we're sitting at the low on spreads over the last 10 years at 347 basis points, I'd love to call a bottom.