Have you ever invested in CLO-related investment vehicles?
CLOs, Collateralized Loan Obligations, are securitizations of a portfolio of Senior Secured Loans. Funds like Eagle Point Credit Company Inc. (New York Stock Exchange: ECC) invest in CLOs. The CLO market is the largest source of capital for the US senior secured loan market
As of 6/30/22, the CLO market was ~$107 billion in volume and on track to set a new record.
Eagle Point is a closed-end fund, a CEF, launched and managed by Eagle Point Credit Management LLC. It focuses on CLO securities and related investments (as well as other income-oriented investments), and each member of the senior investment team is a CLO industry specialist who has been directly involved in the CLO market for most of his career.
ECC owned 122 CLO equity securities, with 1,862 underlying obligors, as of 06/30/22, with ~94% exposure to floating rate senior secured loans. (ECC Site)
Their annual expenses seem much higher than other CEFs we’ve covered, at 6.51% for administration and other expenses. There is also a 3.21% interest expense:
The weighted average credit spread is 3.6%, with a B+/B rating and an average maturity of 4.8 years. CCP investments are mainly traded in US currency, 98.46%.
ECC earned net investment income, NII and realized capital gains of $0.43/common share, compared to $0.30 in the first quarter of 2022. Received cash distributions of $1.12/share and paid $0.14/share in ordinary distributions. NAV per common share was $10.08 as of 6/30/22, versus $12.64 as of 3/31/22.
In the first and second quarters of 2022, ECC’s total investment income increased by 50%, while NII increased by 75.6%. Net realized gains, which are uneven on a quarterly basis, were minimal, while net unrealized gains ranged from positive $57 million to -$153 million.
NAV/share fell -22.3% to $10.08 from $12.97/share in Q2 2021 due to further non-cash downgrades and a 26.6% increase in the number of shares . Interest expense continued to rise, rising 18.8% in the first and second quarters of 2022, after rising ~38% in 2021, as management increased portfolio size to fuel growth.
ECC pays $.14 per share monthly, earning nearly 16%, not including special distributions. Management declared a special distribution to common shareholders of $0.25/share to be paid on October 31, 2022 to shareholders of record as of October 11, 2022.
Since the NAV/Share is calculated at the end of each trading day, you should look at the most recent closing values to determine the current NAV discount or premium. Buying CEFs as ECCs at a higher discount than their historical average discounts/premiums can be a useful strategy, due to mean reversion.
At its 9/29/22 closing price of $10.60, ECC was trading at a discount of -6.36% to its NAV/share of $11.32, which is much cheaper than its average 1-year premium on the 6.29%, its 3-year average premium of 8.80%, and its 5-year average premium of 11.87%.
However, the average Price/Accounting for the debt CEF industry is only .85X, a 15% discount to reserve, so ECC is getting a premium against its industry. While ECC’s initial NAV/Share was $19.93, its 09/29/22 NAV/Share was $11.32. Nevertheless, ECC has paid a cumulative $16.54 in distributions since its inception in 2014.
The ECC portfolio consists of ~86% CLO equity positions, ~7% CLO debt, ~5% credit lines, plus cash:
ECC holdings appear to be well diversified, with Tech, Health Care, and Publishing making up ~27% of the top ECC industry holdings, and 7 other industries comprising ~29%:
All of the top 10 ECC positions are less than 1%. Univision fell out of the top 10 in the second quarter of 2022, replaced by McAfee.
The portfolio is also well phased into the future, with only ~8% due before 2025, when it starts to mature at a rate of ~16% between 2025 and 2027:
ECC has 3 Unsecured Notes maturing in 2028, 2029 and 2031, plus a Preferred Series maturing in 2031, and a Preferred Perpetual Series D, with redemption date in 2026.
Asset/debt coverage was 3.98X, as of 6/30/22, compared to 5.34X on 12/31/21, while asset/preferred decreased from 3.31X to 2.69X, as of 30/ 6/22.
ECC has outperformed the overall CEF Debt industry averages over the past month, year and so far in 2022; but it has lagged the S&P 500 over the past quarter, the year, and into 2022. However, it has vastly outperformed the CEF Bond industry and the S&P over the past year on a total return basis.
Given the current volatility of the market, you may want to simply add ECC to your watch list before taking the plunge; While its very attractive return gives it a better-than-market total return, shareholders are still swimming upstream against a very negative market.
If you’re interested in other performance vehicles, we’ve got you covered every Friday and Sunday at our items.
All Hidden Dividend Stocks Plus tables, except where otherwise noted.