Eagle Point Credit: 16% return, 6% discount, monthly payer (NYSE: ECC)
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. (NYSE: 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 had a volume of approximately $107 billion and was on the verge of setting a new record high.
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 held 122 CLO equity securities, with 1,862 underlying obligors, as of 06/30/22, with approximately 94% exposure to variable rate senior secured loans. (CEC website)
Its annual expenses seem much higher than other CEFs we’ve covered, coming in at 6.51% for management and other expenses. There is also 3.21% interest charges:
The weighted average loan spread is 3.6%, with a B+/B rating and an average maturity of 4.8 years. ECC’s investments are primarily traded in US currency, at 98.46%.
ECC realized net investment income, NII, and realized capital gains of $0.43/common share, compared to $0.30 in Q1 22. It received cash distributions of $1.12/share and paid $0.14/share in ordinary distributions. The net asset value per common share was $10.08 as of 6/30/22, compared to $12.64 as of 3/31/22.
In Q1-2 2022, ECC’s total investment income increased by 50%, while the NII increased by 75.6%. Net realized gains, which are lumpy on a quarterly basis, were minimal, while net unrealized gains fell from positive $57 million to -$153 million.
Net asset value/share fell -22.3% to $10.08 from $12.97/share in Q2 2021 due to higher non-cash markdowns and increased share count by 26.6%. Interest expense continued to rise, rising 18.8% in Q1-2 22, after rising around 38% in 2021, as management increased portfolio size to drive growth.
ECC pays $0.14/share monthly, which yields nearly 16%, not including special distributions. Management has declared a special distribution to common shareholders of $0.25/share to be paid October 31, 2022 to shareholders of record as of October 11, 2022.
Because NAV/unit is calculated at the end of each trading day, you should review the most recent closing values to determine the current NAV discount or premium. Buying CEFs like ECCs at a larger discount than their historical average discounts/premiums can be a useful strategy, due to mean reversion.
At its closing price of $10.60 on 9/29/22, ECC was trading at a -6.36% discount to its net asset value/share of $11.32, which is significantly cheaper than its average premium of 6.29% over 1 year, its average premium of 8.80% over 3 years, and its average premium over 5 years of 11.87%.
However, the average price/pound for the CEF debt industry is only 0.85X, a 15% discount to book, so ECC gets a premium over its industry. While ECC’s initial net asset value/unit was $19.93, its net asset value/unit as of 09/29/22 was $11.32. However, ECC has paid cumulative distributions of $16.54 since its inception in 2014.
ECC’s portfolio consists of approximately 86% CLO equity positions, approximately 7% CLO debt, approximately 5% loan facilities, plus cash:
ECC’s holdings appear well-diversified, with technology, healthcare and publishing making up about 27% of ECC’s top industrial holdings, and 7 other sectors making up about 29%:
All of the top 10 ECC positions are below 1%. Univision dropped from the top 10 in Q2 22, replaced by McAfee.
The portfolio is also well-laddered forward, with only ~8% maturing before 2025, when it begins to mature at a rate of ~16% from 2025 to 2027:
ECC has 3 unsecured notes maturing in 2028, 2029 and 2031, plus a preferred series maturing in 2031 and a preferred series D perpetual, with a redemption date in 2026.
Asset/Debt coverage was 3.98X, as of 06/30/22, compared to 5.34X as of 12/31/21, while Assets/Preferences decreased from 3.31X to 2.69X, as of 06/30 /22.
ECC has outperformed broad CEF debt sector averages over the past month, year and so far in 2022; but has lagged the S&P 500 over the past quarter, year and into 2022. However, it has significantly outperformed the CEF debt industry and the S&P over the past year, based on of the total return.
Given the current volatility in the market, you might just want to add ECC to your watch list, before jumping in – while its very attractive yield gives it a better total return than the market, shareholders are still swimming upstream faced with a very negative market.
If you’re interested in other high-performance vehicles, we’ve got them covered every Friday and Sunday in our items.
All charts by Hidden Dividend Stocks Plus, except where noted.