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Edited Transcript of ECC.N earnings conference call or presentation 22-May-19 2:00pm GMT

Q1 2019 Eagle Point Credit Company Inc Earnings Call

Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Eagle Point Credit Company Inc earnings conference call or presentation Wednesday, May 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth P. Onorio

Eagle Point Credit Company Inc. - CFO & COO

* Thomas P. Majewski

Eagle Point Credit Company Inc. - CEO & Director

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Conference Call Participants

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* Christoph M. Kotowski

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Garrett Edson

ICR, LLC - SVP

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Presentation

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Operator [1]

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Good day, everyone. Thank you for standing by. Welcome to the Eagle Point Credit Company Inc. First Quarter 2019 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Garrett Edson, Senior Vice President, ICR. Please go ahead, sir.

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Garrett Edson, ICR, LLC - SVP [2]

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Thank you, Hannah, and good morning. By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call and which may also be found on our website at eaglepointcreditcompany.com.

Before we begin our formal remarks, we need to remind everyone that the matters discussed on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. 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 and projection of financial information made during this call is based on 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.

A replay of this call can be accessed for 30 days via the company's website, eaglepointcreditcompany.com. Earlier today, we filed our Form N-Q, first quarter 2019 financial statements and first quarter investor presentation with Securities and Exchange Commission. Financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company's website. Financial statements can be found by following the Financial Statements and Reports link and the investor presentation can be found by following the Presentation & Events link.

I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [3]

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Great. Thank you, Garrett, and welcome, everyone, to Eagle Point Credit Company's First Quarter Earnings Call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company, including information about our portfolio and the underlying corporate loan obligors.

As we've done previously, I'll provide some high-level commentary on the first quarter, then I'll turn the call over to Ken, who will take us through the first quarter financials in a little more detail. I'll then return to talk about the macro environment, our strategy and provide updates on our recent activity. Of course, we'll then open the call to anyone's question.

The first quarter was a strong one for the company, and we saw significant reversal of the mark-to-market losses from the fourth quarter. Cash flow from our portfolio remained solid during the first quarter, with recurring cash flows on our portfolio increasing both on an absolute and per share basis quarter-over-quarter.

While there were still approximately $11 billion of outflows from retail funds during the quarter, pressure from those 4 sellers was offset principally by demand for loans from other institutional investors. For the first quarter, the Credit Suisse Leveraged Loan Index delivered a positive return of 3.78% and through May 15, the total return on that index for the year is now 5.35%.

Corporate credit expense remains low. As of March 31, the 12-month lagging default rate has fallen to 93 basis points, lows not seen in many years. Overall, our NAV increased $1.30 per share from the level it was at, at the end of the fourth quarter. This is, of course, in addition to $0.60 of common distributions paid during the quarter. As we noted on our prior call, short-term changes in NAV typically don't signal a drop in cash flow the way such moves could with a BDC. Rather, we expect any future short-term drops in NAV may, in some cases, augur well for higher near-term cash flows as our CLOs are able to reinvest principle proceeds in what would be a buyers' market for loans. We believe the company remains well positioned to generate long-term value for stockholders.

In the first quarter, we continued to remain proactive with respect to our portfolio. During the quarter, we deployed approximately $58.5 million in gross capital into new investments, and the new CLO equity securities we purchased continued to have higher weighted average effective yields than the weighted average effective yield for our overall CLO equity portfolio. We also continued to leverage our advisers' competitive strength and priced 2 resets during the first quarter.

For the first quarter, we generated net investment income and realized capital gains of $0.36 per common share, while for several quarters, we have generated GAAP net investment income below our common distribution level, principally driven by lower GAAP portfolio yields on our CLO equity. When determining our common distribution level, we also evaluate the cash flow that we receive from our investments as well as our estimates for taxable income during each tax fiscal year. I, again, want to highlight that it is taxable income that sets a floor in our common distributions. Further, recurring cash flows from our investment portfolio exceed our expenses and common distributions during the first quarter just as it did through all of 2018.

During the first quarter, the company issued $7.5 million of new common stock via our ATM program. Through this issuance, the company captured approximately $0.05 per common share of NAV accretion for all shareholders during the quarter.

As mentioned earlier, during the quarter, we deployed approximately $58.5 million of capital on a gross basis in both the primary and secondary markets, and we received $44 million of proceeds from the sale of investments and loan accumulation facilities. We've added 6 new primary CLO equity positions, which include the conversion of 3 loan accumulation facilities and 1 strategic CLO debt position in the quarter. The new CLO equity investments had a weighted average effective yield of 15.58% at the time of investment. This level is well above the March 31 weighted average effective yield of 13.58% of our overall CLO equity portfolio, excluding called CLOs. This continues to demonstrate our ability to source accretive investments through our advisers' investment process and access to the market.

On the monetization side, we sold $5.1 million of CLO equity, where we saw selling opportunities as well as $2.9 million of CLO debt securities leading to a realized net capital gain of about $0.01 per common share in the quarter. We remain pleased that we have had realized net gains on our investments in 9 of the 12 last quarters. Net gain realizations across those 12 quarters totaled $0.36 per share, and going back to our IPO in 2014, the total gains we've had are $0.38 per common share.

Also, in the first quarter, as I mentioned, we priced 2 resets, bringing the total number of resets and refinancings that the company has been involved in from the beginning of 2017 through the end of the first quarter of 2019 to 57, split almost evenly between resets and refinancings. As in prior quarters, the resets created new reinvestment periods of approximately 5 years for the CLOs and reduced those CLOs' weighted average cost of debt.

Across our entire CLO equity portfolio, the weighted average remaining reinvestment period stood at 3.2 years as of March 31, and that's an increase from 2.9 years at the end of the first quarter of 2018. That extended remaining reinvestment period is due to our significant reset activity and portfolio -- a proactive approach to portfolio management. We believe this is meaningful value add from our adviser. Had our portfolio remained static over the last year, the weighted average remaining reinvestment period would have decreased by approximately 1 year. As I noted on our prior call, we will continue to selectively reset investments in our portfolio although we do expect the pace of resets and refis to be less robust this year than in the prior years.

As of March 31, the weighted average effective yield on our CLO equity portfolio, excluding called investments, was 13.58%, which compares to 13.4% in the prior quarter or 14.64% as of March 2018. This is the first positive quarter-over-quarter change in some time and reflects the recent cessation of loan spread compression in our portfolio. Indeed, the weighted average loan spreads of loans held by our CLOs actually increased from 3.52% to 3.53% during the quarter. As noted previously, the weighted average effective yield includes an allowance for future credit losses. A summary of the investment-by-investment changes in expected yield are included in our quarterly investor presentation.

In April and so far in May through the 15th, we've deployed $5.7 million of gross capital. We expect to remain opportunistic in resetting investments, existing investments, and active in pursuing new and attractive primary investments, which we expect to price into CLOs in the coming weeks and months. Additionally, we've continued to prudently utilize our at-the-market program during the second quarter and have issued over $27 million worth of new common shares. As a result of this issuance, the company benefited from an approximately $0.18 per common share NAV accretion for all shareholders second quarter to date.

In addition, earlier today, we announced the company's plan to redeem half of the existing ECCA preferred stock outstanding later this quarter. This action is driven by our desire to return the company closer to the midpoint of our 25% to 35% leverage ratio. And the Series A preferred stock was selected because that security has both our most expensive cost of capital and the shortest of remaining life.

Overall, we believe the economy remains strong given the low number of defaults we've seen in the market. We remain favorable on the overall market and certainly our portfolio. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets and as well as share our outlook for the remainder of 2019.

I'll now turn the call over to Ken.

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [4]

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Thanks, Tom. Let's go through the first quarter in a bit more detail. For the first quarter of 2019, the company recorded net investment income and realized capital gains of approximately $8.4 million or $0.36 per common share. This was comprised of net investment income of $0.35 per common share, and net realized capital gains from the company's portfolio of $0.01 per common share. This compares to net investment income net of realized capital losses of $0.38 per common share in the fourth quarter of 2018, and net investment income and realized capital gains of $0.50 per common share in the first quarter of 2018.

When unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $45 million or $1.93 per common share for the first quarter of 2019. This compares to a net loss of $3.62 per common share in the fourth quarter of 2018 and net income of $0.39 per common share in the first quarter of 2018. Just a reminder that our short-term cash flow generation is largely unaffected by the unrealized appreciation or depreciation that we record at the end of each quarter.

The company's first quarter net income was comprised of total investment income of $16.6 million, net unrealized appreciation or mark-to-market gains on investments and liabilities at fair value of $36.6 million, and net realized gains of $0.2 million, which were partially offset by total expenses of $8.4 million.

At the beginning of the first quarter, the company held $1.5 million of cash net of pending investment transaction. As of March 31, that amount was $1.3 million as cash received from investments was redeployed during the quarter.

As a result of deploying $58.5 million in gross capital during the first quarter, there was an additional amount of capital that only generated income for a portion of the quarter, which we expect to generate full income going forward. As of March 31, the company's net asset value was approximately $324 million or $13.70 per common share.

Each month, we publish on our website an unaudited management estimate of the company's monthly NAV as well as quarterly net investment income and realized capital gains or losses. Management's unaudited estimate of the range of the company's NAV as of April 30 was between $14.33 and $14.43 per share of common stock. Based on the range of midpoint, this is an increase of approximately 5% since March 31.

Nonannualized net GAAP return on common equity in the first quarter was $0.16 -- sorry, was 16%, primarily due to the recovery of portfolio evaluations after the challenging fourth quarter. The company's asset coverage ratios at March 31 for preferred stock and debt, as calculated pursuant to Investment Company Act requirements, were 267% and 517%, respectively. These measures are above the statutory minimum requirements of 200% and 300%, respectively.

As of March 31, the company had debt and preferred securities outstanding totaling approximately 37.4% of the company's total assets less current liabilities. This is outside of our normal range but reduced from 40.6% at the end of 2018. We've previously communicated management's expectations under current market conditions of generally operating the company with leverage in the form of debt and/or preferred stock within the range of 25% to 35% of total assets. By the end of April, given our estimated increase of NAV and second quarter-to-date ATM issuance, we are returning towards our target range. As Tom previously noted, we announced earlier today the company's plan to redeem half of the outstanding ECCA preferred stock later this quarter. This is driven by our desire to return the company closer to the midpoint of our 25% to 35% leverage ratio.

Moving on to our portfolio activity in the second quarter through May 15. Investments that have reached their first payment date are generating cash flows in line with our expectations. In the second quarter of 2019, as of May 15, the company received total cash flows on its investment portfolio, excluding proceeds from called investments, totaling $24.4 million or $0.99 per common share. This compares to $26.5 million or $1.13 per common share received during the full first quarter of 2019. Consistent with prior periods, we want to highlight some of our investments are expected to make payments later in the quarter.

During the first quarter, we paid 3 monthly distributions of $0.20 per share of common stock as scheduled. On April 1, we declared monthly distributions of $0.20 per share of common stock for each of April, May and June. In terms of our at-the-market offering program in the first quarter, the company issued approximately 464,000 shares of its common stock at a premium to NAV for total net proceeds to the company of approximately $7.5 million, resulting in NAV accretion of $0.05 per common share to all shareholders. Subsequent to the end of the first quarter through May 15, the company issued approximately 1.6 million additional shares of its common stock at a premium to NAV for total net proceeds to the company of $27.3 million, resulting in approximately $0.18 of NAV accretion per common share to all shareholders.

On May 16, the company recognized a realized loss of approximately $4.5 million or $0.18 per common share principally as a result of the write-off of residual amortized cost associated with the called and rolled CLO equity investment, the effect of which was already predominantly reflected in the company's NAV as of March 31 as an unrealized loss.

I will now hand the call back over to Tom.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [5]

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Thanks, Ken. Let me take you through some of the macro loan and CLO market observations that we have and how they might impact the company, and then I'll touch a bit further on our recent portfolio activity.

Through March 31, the Credit Suisse Leveraged Loan Index generated a total return of 3.78%, tracking ahead of where the index was at that time last year. At the same time, the vast majority of loans in the J.P. Morgan Leveraged Loan Index continued to trade at or below par. Loan retail outflows continued in the first quarter and according to JPMorgan, they saw about $11 billion of outflows. This selling was offset by demand from other institutional investors, which remained robust during the quarter. Given that most loans are trading at or below par, there have been minimal refinancing or repricings in the loan market so far in 2019. This has helped to significantly slow spread compression on our look-through loan portfolio.

The total amount of institutional corporate loans outstanding was $1.19 trillion as of March 31, and that's a 3% increase from the end of the fourth quarter according to data from S&P. Institutional new issue loan volume in the first quarter recovered from its lows in December but is still seeing some lingering effect from the market volatility at the end of 2018.

Despite the price movements, defaults continue to remain well below historic average. The lagging 12-month default rate as of the end of March was 93 basis points according to S&P Capital IQ, which are numbers we haven't seen in many numbers. We continue to expect default rates to remain below the long-term averages for the near to medium term due to minimal and pending maturities before 2022, a growing U.S. economy, and the large majority of the loan market consisting of covenant-lite loans. The company's overall credit expense remains below long-term averages as well, and as of quarter end, ECC's look-through exposure to defaulted loans was only 18 basis points.

As loan price volatility presents itself, we believe the company and its investments are well positioned to go on the offense and take advantage of lower loan prices given the benefit of our long-term, locked-in-place, nonmark-to-market financing, which is inherent in all of our CLOs. From our perspective, as long-term CLO equity investors and environment of technically driven loan price volatility, without an increase in defaults over the near to medium term is extremely attractive.

In the CLO market through March 31, we saw $29 billion of new CLO issuance along with $6 billion of resets and $3 billion of refis. For the full year, our adviser continues to expect $100 billion of new issue volume, $70 billion of resets and about $40 billion of refinancings, but should the market remain soft, we could see lower reset and refinancing activity than originally anticipated. We're continuing to opportunistically direct resets and refinancings though at a slower pace than in the past due to the fact that we've reopened the vast majority of our portfolios at this point and based on broader market conditions for issuing CLO debt. As a result, we expect our overall CLO equity cash flows to increase without the consistent impact of onetime reductions associated with the costs associated with a reset or refinancing.

Indeed, the benefit of our prior refi and reset activity can be seen in the weighted average AAA levels in our portfolio. This is a new data point that we've added in our quarterly investor deck and I hope you find it helpful, where we list the AAAs -- or the senior AAA spread for all of the different CLOs' equity positions that we have. As of March 31, the weighted average AAAs within our CLO equity portfolio was 121 basis points. This compares to a market level of 137 basis points at quarter end or 136 basis points as of a recent day in May. To put it bluntly, our weighted average AAA cost is meaningfully in the money today.

As always, our advisers' deep CLO investing experience provides us with a notable advantage as we seek to generate additional value for our portfolio and our stockholders. We have deployed net capital of $5.7 million across CLO equity so far in the second quarter, putting undeployed capital to use as opportunistically as possible. Beyond seeking to maximize the value of our existing investments and looking to be opportunistic with respect to the loan price dislocation we've seen, we continue maintain solid visibility on our new investment pipeline for the next few quarters.

To sum up, we've had a strong start to 2019, deploying over $58 million of capital into new investments. We saw a strong recovery in our NAV after the volatility of the fourth quarter. We've prudently accessed the market via our ATM program and issued over 2 million shares of common stock all at a premium to NAV and building approximately $0.23 per share of NAV for all shareholders. We continue to invest in CLOs with effective yields that are in excess of the portfolio's weighted average effective yield. We remain comfortable with the overall macro environment and pricing from a long-term perspective given the very low default rates currently being experienced. As a result, we have a strong opportunity to utilize our adviser strength and create additional value for our portfolio over the longer term. We will also continue to utilize our adviser strength and proactively direct additional resets, which we would expect to increase future cash flows to our CLO equity securities. And as spreads widen, we believe our effective yield will begin to rise once again. We'll continue to be proactive in our management in order to create additional long-term value for our stockholders. We're pleased with how the company is positioned right now going into the summer.

So we thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Christopher Testa with National Securities Corporation.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [2]

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I just want to talk a little bit on capital deployment. So the first quarter, you guys issued about $7.5 million under the ATM. This is -- Tier 1 manager is still having kind of effective yields of about 15%. I guess was the deployment a little bit light just given you guys have a large loan accumulation facility conversions? Or was there something else that you were maybe holding back for?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [3]

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Yes, that's a lot of it. Frankly, a number of the facilities were converted from loan accumulation facilities to CLOs, which was, obviously, what's supposed to happen with each of them. So -- and new capital was deployed, some of that into loan accumulation facilities and other into other CLO securities. But a big chunk was converting -- like, we had 3 conversions during the quarter.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [4]

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Got it. And kind of sticking with the theme on the Tier 1 managers versus maybe some of the others, given that the CLO market hasn't rebounded as much as maybe the broader loan market has, are you noticing more of a divergence between kind of the Tier 1 versus 2s and 3s and where those trade with CLO equity?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [5]

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It's a good question. The -- I guess the first collateral manager tiering is in the eye of the beholder, first off. Those that may be seen as Tier 1 by the AAA investors may not be our favorite as the equity. The -- so different points in the capital structure may have different perspectives on the tiering, I guess, of any given collateral manager. Has there been a particularly wide dispersion? Certainly, at the -- that latter part of last year and the beginning of this year, in general and softer markets. However you'd want to define it, you will see bigger kind of spread differential both in debt and in equity yields for Tier 1 versus Tier 3 collateral managers.

As I look through the new investments that went in the ground, the $55-and-change million somewhere as tight as 12%, 13% in expected yield and others had two-handle expected yields. Some of those were secondary market purchases. So there is a dispersion. It gets wider in softer markets. As the market has generally strengthened and you've seen, obviously, a -- I think we're -- the NAV went up, what, 16%, Ken?

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [6]

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Yes.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [7]

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The -- one obviously, that may be was total return. It was obviously a strong first quarter as the price of securities rebounded. In general, the spread between top and bottom tightened to some degree. So I think that's a long answer. The short answer is yes, we have seen things -- kind of the spread from the best to the worst tightened somewhat.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [8]

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Got it. And I know that we frequently discuss that obviously, there is the collateral manager is in the eye of the beholder, but was there any -- were there any actions or lack of actions taken by some of the managers in the fourth quarter with reactions to the volatility that made you reevaluate the managers either positively or negatively?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [9]

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Yes. We -- to borrow a quote I heard from someone else in the market, the fourth quarter was a little bit of like a rehearsal dinner perhaps for whenever more significant volatility comes. If anything, while we obviously like when NAV is up 16% versus down greater than that as it was in the fourth quarter, we might have liked loans to stay lower a little longer if we could have had our magic, if we could have called the market perfectly and directed what happened. This was a small period of time. You kind of have 6 to 8 weeks of opportunity. And we've reevaluated and evaluated, frankly, all of the major collateral managers in our portfolio.

I'm pleased to say most of our collateral managers -- there's really 3 things you can do during periods of volatility: you can increase spread; you can build par; and you can decrease WARF or improve the credit score of the portfolio. A small number did all 3 of those. Many did 2 out of the 3, which is -- it's hard to do everything frankly although a few of them did. So we generally saw a good performance. If you line up the collateral managers in our portfolio to a research report published by Wells Fargo related to the CLO market broadly, you'll see quite a few -- they ranked collateral manager performance, I believe, during the fourth quarter. You'll see quite a bit of overlap of names in our portfolio and names that were on their top 15 list.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [10]

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Got it. And were there any managers...

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [11]

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The community did pretty -- our teams did pretty well for us was our general feel but not 100%.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [12]

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Got it. I guess I'm getting at is, were there any managers that, I guess, you would entail, hold in high esteem and call Tier 1 that just didn't kind of live up to the task and really do 2 out of those 3 things during the volatility? You don't have to name names. I'm just asking if there was any.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [13]

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Yes. Yes. Well, so there is -- as an equity investor, some of our tiering might not line up with what the common market would call in terms of tiering, that tiering designation driven more by debt buyers than equity buyers because it is more of them and a lot more debt. I'd say overall, the people who did the best were those that we would have expected to do the best. And those that did the worst, in some cases, were a little disappointing but maybe somewhere we expected there'd be a little less in kind of situation.

So no gross disappointments, but frankly, part of our process is continual dialogue with many of the collateral managers and we share with them where they rank. They know it and they see it in the research reports. And obviously, people are all competitive and want to be the best at everything. We show to few people -- maybe they could have done a little better as well in a supportive and constructive manner, of course, but a few probably came up at the lower end and some of them, frankly, have some of the fancier names in the market.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [14]

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Got it. Okay. That's helpful. And we're at kind of through 26 weeks, I think, of straight outflows from loan funds. And I know you had mentioned in your prepared remarks that institutional money continues to soak these up. My question is just how much more do you think they could keep soaking these up? I mean if we reach a year straight of outflows, I know it depends on the volume of those outflows, but does this kind of portend maybe to more volatility kind of picking up in the latter half of the year?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [15]

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It's a very good question. If you would have asked me on January 1, and said, "Tom, we're going to see $11 billion of outflows in the first quarter," I certainly -- and I certainly would have taken the under on the CS Loan Index being up 3-and-change percent for the quarter. So at one level, there is that. Against that, we continue to see maybe $10 billion of -- at the end of the day is a drop in the bucket compared to the trillions and trillions of dollars invested overall in fixed income products. Obviously, loans are a small subset of that market at $1 trillion. But if we see where I sit today, if we see outflows kind of where they are right now or tapering, I don't think that augers for more volatility. If we see a significant pickup in loan outflows, then perhaps it would. We kind of like this market, loans in the mid- to high 90s without defaults ultimately for the medium term is great for CLOs, and we kind of like where we are right now.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [16]

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Got it. Okay. And last one from me and I'll hop back in the queue. You guys are redeeming half of the Series A. Just wondering, as we go forth through the rest of the year if the plans on the capital structure are maybe to eventually, obviously, redeem all that, but in that instance, would you be capturing in another preferred offering given the flexibility with asset coverage and being able to take the interest? Or do you think you'd go with the cheaper cost of capital via another unsecured debt issuance?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [17]

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A good question. As we mentioned earlier, the goal with the -- the goal with a partial redemption -- it's a 50% redemption, is to principally get us back in line to the midpoint of our 25% to 35% target band. We've said that for a long time and it's been a few quarters that we've been out of it. So being the strong capital demand we've seen on the ATM side for the common, we were able to raise stock at a nontrivial premium. I think Ken mentioned $0.18 of premium captured for all shareholders just in the second quarter alone. So that seems like a good opportunity. I mean all else equal, I guess the weighted average cost of capital of the platform goes up a little bit, but the broad goal is to get back to that 30% as the midpoint of the range all else equal.

As to what we would do in terms of future issuance, we like the mix of preferred and debt. We've kind of targeted a rough 50-50 band between them. That's not anything we've ever formally done but kind of -- that's the way it's kind of played out. So right now, our near-term objective is just continue to get the balance of the capital deployed that the company has. We do have some cash on our balance sheet still net of the pending redemption but -- so right now, more focused on the investment side than the balance sheet side.

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Operator [18]

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We'll go next to Mickey Schleien with Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [19]

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I wanted to start by asking about valuation inputs. I looked at these filings for the last 3 quarters and the inputs haven't changed hardly at all. The default rate -- you've provided a range of 0% to 2%. So that's weighted average. Has that weighted average moved over the last 3 quarters at all?

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [20]

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Not significantly, if at all, Mickey.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [21]

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And then 0% to 2% is a ramp. That's kind of important to highlight in that. It's -- quite unusually, these are large-cap loans to Dell Computer and things like that. They are very rare to have a first-period default. So the way our assumptions work is the first day a loan is in the portfolio, we assign a 0% chance of default. And over the -- over some period of time relatively quickly, it gets up to a 2% running default rate assumed for all loans but just mindful that lightly seasoned large-cap corporate loans have a -- quite a low instance of default.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [22]

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Right. And defaults are certainly running well below the 2%. So my question is, I'm trying to get a handle on the risks that the CLO equity market seems to be perceiving that the leveraged loan markets are not. I think, Chris, sort of alluded to that. Just looking at the yield to maturity in the last 3 quarters, it would seem that there's something going on in CLO equity that the leveraged loan market is not seeing. Can you give us any insight into that?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [23]

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Help me out there. What's -- there -- we're seeing something in the...

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [24]

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Well, I can ask -- let me ask the question this way. So the yield to maturity in September in the portfolio was a little over 11%, then it zoomed up to 21% in December. And now it's come back a little bit to 18%, but the leveraged loan market has, for the most part, recuperated all of its price weakness from the fourth quarter. So there seems to be a disconnect between CLO equity and the leveraged loan market, and that's what I'm trying to understand.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [25]

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Yes. I think that's a fair statement. Really up and down the capital structure in CLOs and I think many market participants would say CLOs have lagged in terms of recovery compared to many other assets, fixed income asset classes. As to why that is, different markets, different people behave differently. We think CLO represents CLO debt, and equity represent attractive relative value compared to other fixed income investment opportunities today. Your observation is accurate. And I think you'd find this related to any point in the CLO capital structure. There hasn't been a full recovery yet. As we mentioned, cash flow continued strong and frankly, in our portfolio, cash went up on an absolute and per share basis on recurring cash flows. It would suggest that investments are doing fine. Hopefully, over time, that augurs for further price appreciation and NAV appreciation in the portfolio if the markets keep going in the right direction. Perhaps there's more gas in the tank.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [26]

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Tom, could it be just simply that CLO equity is still relatively fragmented. I know it's probably more liquid than it was years ago. But relative to leveraged loan markets, it's more fragmented and less trading volumes. Could it be something as simple as that?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [27]

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Certainly, could be. I mean there are fewer -- it's pretty safe to say there are fewer market participants in the CLO market versus the loan market versus the bond market and certainly versus the equity markets. So there are -- there can be idiosyncratic events at firms that may turn them on or off for investing in CLO securities, completely unrelated to CLOs. There was a period of time when one major U.S. bank, due to things unrelated to CLOs, stopped buying CLO AAAs for a while. There was someone who bought a lot and spreads widened there, well, like, AA spreads tightened simply because there was one fewer buyer in the market for a period of time, again, unrelated to CLOs. That buyer, I believe, has resumed.

So yes, there can be some quirks. Generally, on the way down, CLOs, you could see the S&P down big a couple of days before CLOs catch a cold. It kind of goes and this was highly simplifying equities, bonds, loans, then CLOs on the way down. And often, we're the last guy on the rebound as well. So we are seeing some of that definitely right now.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [28]

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I understand. Switching gears, looking at your -- the tax characteristics of your distributions. Last year, about 70% was from NII. This year, so far, it's been 100% from NII. Other than the costs related to refinancings and resets last year, has there been any other trends that have improved the tax characteristic of distributions? And do you expect that 100% level to hold for this year?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [29]

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Well, I guess approved -- or improved, yes. We have this debate. What we call as equal companies like the least -- yes, like the most GAAP profits and the least taxable income. Obviously, we'll pay our fair share of tax, but in general, the -- all else equal, we like it as low as possible. What happened last year with the significant amount of refi and reset activity, that causes an acceleration of the recognition of issuance cost related to those old CLOs and taxable income felt like it was -- that 70%-30% number sounds about right. So 30% of the distributions that people received last year was treated as a return of capital for tax purposes, and they wouldn't have had to pay tax on that. Where we sit today, we've put out those formal number?

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [30]

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It's put out normally through April.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [31]

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This is Section 19 notice...

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [32]

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Yes, the Section 19 notices have been 100%. And where we're tracking right now with the significant reduction in refi and reset activity. And frankly, if you look at our portfolio position by position, we list which ones we refi-ed and reset. You can see quite a few of them have already been refi-ed or reset, and quite a few that aren't are still in the non-call period. And just based on overall market conditions, we expect to have less. So that provides -- those refis and resets in the past provide a shelter for taxable income. To the extent we're doing less of that activity, we have less shelter, which all else equal, would suggest higher taxable income year-over-year.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [33]

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All right. And my comment in terms of improvement relates to the fact that, yes, that return of capital is nice, but it is still cash being paid out to do the refinancing, the resets. That's what I was referring to.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [34]

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There's not well -- let me just clarify on that. So when a refi or reset gets done, we're not actually writing or typically not writing a check for expenses. I mean it's something that's deducted from the next equity payment although that expense, the new refi and reset expense, is not what's causing the deduction. What's causing the deduction is the acceleration of the amortization of the original issuance expense, which normally would be amortized over the life of the transaction when there's an early call or refi or repayment. The old expense gets accelerated. The new expense, which comes out of the next equity payment, is now amortized over its appropriate life.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [35]

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I understand. But there still are fees to the banks and the attorneys and the accountants, et cetera, that have to be paid for as well, is that right?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [36]

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It's paid for out of the CLO as a reduction of the equity distribution.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [37]

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Sure. I got it. Just a couple of more questions. What were the main factors that drove the realized losses on the called deals this month relative to where they've been valued historically? And will the scope of that loss be similar on a tax basis to the GAAP figure?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [38]

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So a good question and we wanted to give people forward guidance on it just because it's something that's -- it's larger than usual. The vast majority of the amount, 90% or something like that, relates to a call and roll of one specific investment in our portfolio. This was 2016 vintage CLO that went through what's effectively a reset but technically a call and roll, and I'll explain the distinction during the second quarter is when that ultimately transpired. The overall investment has been a positive IRR for the company in the single-digit percentages, last I saw. So not -- it's probably underperformed a little bit of what we expected but still been a comfortably positive IRR. We sought to reset the investment, which we thought was in the best interest of the investment itself.

This CLO, as did a lot of late 2016 CLOs, faced probably the toughest batch of spread compression of any of the CLOs in our portfolio. That late vintage of late '16 deals got hit particularly hard, and the CLO was not exclusive to it. Often when we do a reset, which is, again, where we just -- we reopen the documents, re-lengthen the reinvestment period, hopefully lower the debt cost, what not, we're able to keep the same CUSIP for the equity and the same security and use the same box. In the case of this 1 transaction, a few minority holders -- or minority equity holders were less willing to participate and perhaps wanted some of the supplemental economics that Eagle Point gets.

So in this case, we decided to basically wind up the old vehicle, move the assets to a new vehicle, which caused, unfortunately, an extinguishment related to the old deal and had to become a realized loss what was previously unrealized. So the actual -- the NAV impact is essentially 0 because we've had the position marked fairly going into it. So you wouldn't, all else equal, see -- maybe there's $0.01 or something like that, but for all intents and purposes, it had been carried at around the level that we had the realized loss come in at.

Prospectively, that investment will generate, we believe -- well, let me tell you. It looks like a 16-and-change percent effective yield rolling forward. We locked in some very good debt cost and also made some favorable adjustments in the collateral manager fee relationship in that transaction. We do think of that as the exception and not likely to occur often. Obviously, market conditions could change. But it's kind of just an unfortunate situation of that one with a couple of recalcitrant holders but still an overall positive IRR to date. So...

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [39]

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Right. That's a really helpful explanation. One last question, if I may. So we are back to hearing news about a trade war and perhaps we were caught off guard, but I just want to step back and ask, how exposed do you think CLOs are to the ratcheting up of the trade war, which now looks like it might be protracted?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [40]

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Yes. We certainly have some degree of exposure. In general, these are American companies doing business in the United States, although many of them are multinationals, and Dell Computer likes to sell their computers everywhere in the world. And I'm sure they get parts from China as do lots of folks. I don't believe -- well, we certainly don't have any direct exposure to Apple, but that's one I've seen in the news lately, where they make a lot of their products. They might not be able to move around quickly.

Overall, I guess there's really 2 things when we think about this uptick in trade war. Tweeting/dialogue are kind of two-pronged. We're talking tariffs of 25% on about $300 billion of goods. So that's $75 million -- $75 billion against a GDP of almost $20 trillion. So it both sounds like a big number on an absolute basis, but if you were to say we're going to increase taxes by $75 billion on a $20 trillion economy on a percentage basis, that's actually pretty small. Unfortunately though, at the sort of macro level, we don't see it as -- even if these things stay the way they are, we don't see it as doom and gloom for the entire economy. Against that, will there be some specific companies that it hurts more than others? Absolutely. But there's not anything in our portfolio at present that we would see as an outlier in terms of a big position facing significant pressure as a result of this. But our overall goal is -- our overall objective is that the -- we think our overarching view is we think it's -- well, it gets a lot of soundbite-type headlines, the actual quantum when you consider the overall size of the economy, relatively minor.

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Operator [41]

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(Operator Instructions) We'll go next to Chris Kotowski with Oppenheimer.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [42]

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I wonder if you can kind of translate between the front page of your press release with the Subsequent Events section and the $44.1 million of distributions and translate that into Page 24 of the presentation. And you mentioned that the company received $24.4 million of -- excluding the called proceeds. Is that the number that's comparable to the $21.16 million on Page 24. And then also kind of how much of the $44 million is treated as a return of capital? And does any of that provide any insight as to second quarter either net investment income or taxable income?

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [43]

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A couple of things there.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [44]

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Well, I'm trying to get relating to those 2 pages. So...

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [45]

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Yes. So the subsequent event, so the first thing and that's referring to an April, May time frame. And the investor deck, the Page 24 that you've quoted is a March time frame. So when this shows up next quarter, you'll see recurring CLO equity distributions of $24.4 million and uncalled CLO equity distributions of that difference -- so which is roughly just shy of $20 million. So it's 2 different timeframes. And unfortunately, Subsequent Event isn't going to be in the first quarter with investor deck material, but it will show up conceptually the same way. You'll just have a comparable recurring equity distribution in a big $20 million-or-so called -- proceeds from called CLOs.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [46]

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Okay. And is most of the proceeds from called CLOs then going to be treated as a return on capital?

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [47]

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Look, it's -- basically it's going to be return of capital and what it would do is reduce the amortized cost of the called CLO, $20 million. The gap that we had and the reason why we've noted the subsequent event on a $4.5 million realized loss is that would be the gap between the total proceeds received on a called deal versus the current amortized cost. So there's a return of capital and reduced amortized cost, and then over time, there was issue about fall-off of schedule of investments.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [48]

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Okay. So -- but then -- I mean, I guess, we still see the $24.4-plus million whatever you get between now and here at the end of the quarter versus the $21.6 million. I mean so -- I mean that's reasonable to expect a significant step up in the recurring CLO distributions. And I guess then the next question is, is there anything we should read into that fact in terms of what it means for either net investment income or taxable income? I mean is there a way we can -- if we were clever enough, could we figure out how the one would drive the other?

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Kenneth P. Onorio, Eagle Point Credit Company Inc. - CFO & COO [49]

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Yes. So the first thing, so recurring distributions and the reason why we quote total proceeds received versus recurring CLO distributions, the recurring amount is going to be slightly comparable to a little bit of an uptick. The total proceeds is where you're going to see a significant increase. Those proceeds, when they are received, they're going to be redeployed into new investments and obviously would generate income, et cetera. The call on taxable versus how this would impact taxable income, obviously, when we are recognizing a return of capital on an investment, we are not going to be -- we are not going to pick up any additional income. We may see amortization of any outstanding uncapitalized or acceleration of any unamortized cost, which would be negative to income, but we don't believe that would be significant, so can't predict taxable income. We don't think that would be a large driver. Where we will see a prospective benefit is when those called proceeds are redeployed into new CLOs.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [50]

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Yes. Okay. And -- but -- I mean, I guess, I still think the recurring CLO distributions, I mean, you called it an uptick, about $21 million to $24 million. That sounds significant. I mean is there anything to read into what that means for a recognized investment income in 2Q?

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [51]

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So GAAP investment income recognition is based on the effective yield on the portfolio, not the specific cash received. So if we have a position that's a $10 million position at a 15% effective yield over the course of a year, we'd record $1.5 million of income. Hopefully, we've gotten $2.5 million of cash and treated that $1 million difference as a return of capital such that we've done -- have a carrying value of $9 million in that very simplified example. The period-to-period changes in cash flow will -- they don't immediately manifest themselves in a change in GAAP income. However, what I would highlight is cash flows going up that excess cash flow. We're going to accrue what we're going to accrue because whatever the effective yields were to the extent we get more cash, more of that's treated as a return of capital, which the next time we go to recast the effective yields, holding all else constant, you'd expect to see that yield go up and then accruing at an even higher rate.

So it may be -- the answer is yes, but there's a little more of a lag than you'd -- probably than anyone would like. The flip side, what I -- or the most important takeaway that I'd like to highlight on it is that we are seeing and we have made certain to say that it's both on an absolute and per common share basis, the recurring cash flow is increasing. And this is the result of all the reset and refi activity that we've done as well as the underlying CLO collateral managers being able to do better things in a high 90s market versus a par 50 market that they might have been in, in the third quarter of last year. So we take those as good signs, but there is a little lag before it turns up in GAAP P&L.

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Operator [52]

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And there are no further questions in queue. I'd like to turn it back over to Mr. Majewski for any additional or closing remarks.

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Thomas P. Majewski, Eagle Point Credit Company Inc. - CEO & Director [53]

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Great. Thank you very much for everyone for your time and participation on the call today. We've tried to slightly expand some of the information that we've provided, and that's been based on feedback from the research community and investors. We do hope you find it helpful. We appreciate everyone's continued interest in Eagle Point Credit Company and look forward to speaking with many of you again very soon. Thank you.

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Operator [54]

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That concludes today's conference. Thank you for your participation. You may now disconnect.