Today's Animal Spirits Talk Your Book is brought to you by Eagle Point Credit Management.
Go to EaglePointCredit.com to learn more about their collateralized loan obligation strategies.
That's EaglePointCredit.com.
Welcome to Animal Spirits, a show about markets, life, and investing.
Join Michael Bagnick and Ben Carlson as they talk about what they're reading, writing, and watching.
All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the
opinion of Redholz Wealth Management. This podcast is for informational purposes only and should
not be relied upon for any investment decisions. Clients of Redholz Wealth Management may maintain
positions in the securities discussed in this podcast.
Welcome to Animal Spirits with Michael and Ben. One of the themes of this year,
unbelievably so, I guess, is the rush into money market funds and the yields on cash that's available.
On today's show, we went almost to the other end of the world in terms of income strategies.
We spoke with Tom from Eagle Point Credit Management about what they do with their
portfolio of collateralized loan obligations. This might be the longest one we've ever done.
Yeah, we went pretty deep on this one because frankly, we're learning a lot about this too,
right along with the listener. Yeah, so I don't want to step on too much of this because this is a
we went deep and this is good and I think you'll enjoy learning about CLLO. So here is our conversation
with Tom and Juski. Welcome to Animal Spirits with Michael and Ben. We are excited today to be
joined by Tom and Juski. Tom is a managing partner at Eagle Point Credit Company. Welcome to the show.
Great. Thanks very much for having me, Michael. All right. This is going to be new to our audience
and candidly newer to us. We're talking about the loan market. We're talking about collateralized
loan obligations, which is something that it's a market that's grown over the years, but it hasn't
really been in the lexicon since the bad times. So where should we begin? How about just a quick
introduction? Who is Eagle Point Credit Company? Sure. Eagle Point Credit Company is a publicly
traded fund that invests in the equity tranches of CLLO's or collateralized loan obligations.
I'm the CEO of the company and the managing partner of the external advisor Eagle Point Credit
Management. ECC's assets total about $750 million plus or minus. And our advisor Eagle Point Credit
Management manages about $8 billion of assets on behalf of principally institutional clients
and some retail clients. So I guess the first place that I would start is if somebody's trying
to get access to this, because this looks a little bit different than the typical investment,
whether it's a mutual fund or an SMA or an ETF. If somebody is trying to approach this,
let's just say ECC is the ticker of the parent company or maybe you can correct me from wrong,
what is in that portfolio? What are they getting? They're getting access to the loans inside of
the portfolio. Are they getting access to the parent company and how investors are viewing that?
What are they getting from that investment? Sure. An investor buying ECC stock today buys into the
current portfolio within ECC, which is substantially all CLLO equity. There's a small amount of CLLO debt
and a few other small securities in there, but the vast majority of its portfolio is CLLO equity.
We believe it's one of the largest and most diverse portfolios of CLLO equity in the world,
and it's something that's available to investors. They can buy the stock at trades on the New York
stockers change under ticker ECC. Obviously, intraday liquidity, whatever folks want to get in and
are out. It's as easy as hitting buy or sell on your phone. The stock pays a monthly distribution
of a pretty handsome distribution, which is something that's been well received by shareholders.
A long time ago, we paid it quarterly. And enough folks said, why don't you just pay it monthly
if your portfolio generates so much cash, which it does. So we were happy to oblige a bunch of
years ago. Before we get into the CLLO stuff, maybe you can just give us a little bit of background
on why this is a BDC and for people who are unaware what that structure is and how it works
and why you guys chose to go that route with this fund. Sure. The ECC is actually not a BDC.
It's a 40-act investment company that has not made the BDC election. It's basically a closed and
mutual fund. BDCs are the same thing except they make a special election to be treated as a BDC.
And then they get certain additional things, some additional leverage they can take on.
And it also changes some of the things they can do. They can issue stock below NAV and things
like that upon shareholder vote. We don't have any of those provisions in ECC. But it looks and
feels a lot like a BDC. And frankly, research analysts who cover it are often the same research
analysts that cover BDCs. At the end of the day, the strategies at the core are fairly similar
to a typical BDC in that we're generating high current cash flow for our shareholders
coming from loans to American companies. Very similar to what BDCs do. In many BDCs often lend
more in the middle market space and on a direct lending basis where they might be the lender of
record. And if you look in their portfolio, you might see a loan to company XYZ, your company ABC,
which is probably a middle market company you've never even heard of in the United States.
ECC invests principally in the equity tranche of CLOs. These CLOs are US CLOs, so again,
lending to American companies on a secured basis. But ours are typically larger cap and
called broadly syndicated loans. The underlying loans that make up a typical COO
are going to be a wide variety of a market basket of the American economy. Companies like American
Airlines, cable vision in New York City, Hilton Hotels has been a loan borrower. Lots of different
companies like that that are household names that you do business with every single day.
So maybe we should take a step back and just describe what is a collateralized, is a collateralized?
Yeah, collateralized. I would say it's a collateral collateralized. Okay, it's the
Iced. What is a collateralized loan obligation? A collateralized loan obligation is basically a
securitization of a pool of corporate loans. These are small pieces of big loans to big American
companies. The loans are typically floating rate and typically senior and secured, meaning they
have a first priority in a company's capital structure. Now, many of the borrowers in the
CLO market or the loans that we lend money to through our CLOs are typically below investment
grade companies. So they're often rated double B or single B, which is below investment grade
from the rating agencies. Despite that, in theory, higher risk, the loan index has performed
exceptionally well. Over the last 31 years, the Credit Suisse Leverage Loan Index has had positive
returns in 28 of the last 31 years. And I'm unaware of any other risk asset class that's had such
consistent positive total returns. And that's the raw material that feeds the income into our CLOs
that we're then able to generate the strong cash flows out to our investors.
So this is something like a high yield credit rating. What is the default rate that people
could expect for something like this? Sure. So indeed, it's the same ratings as high yield bonds.
Unlike high yield bonds, so there's two big differences between loans and bonds.
Loans are floating rate versus bonds are fixed rate. So certainly being in fixed rate paper has
been very painful for many investors in that sector, the things we invest in are principally
floating rate. And we're also senior and secured. So when companies do get into trouble and we'll
get to the default rate in just a minute, companies will get in trouble when you're lending in below
investment grade land, the recovery rates are typically much higher on loans than unsecured bonds,
simply because you have a collateral package and you're first in line for repayment.
Now, in terms of defaults, there's very rarely an average default year. The average default rate
over the last 30 years for loans is between 2% and 3%, according to most measures,
some different people measure it slightly differently. But sometimes defaults are very, very low.
Last year, we saw several months in a row with no corporate loans defaulting.
And other times the default rate has gone up. The highest default rate we saw was back in
somewhere around 2009 when the trailing 12-month default rate hit about 11% for the loan market.
On the surface, that sounds pretty bad. High yield bonds sometimes have had default rates even higher
than that first off. But what made CLOs work and what originally attracted me to the asset class,
you know, 20, 25 years ago, is something that's very unique in securitizations.
If you compare to, you might have heard of mortgage-backed securities or auto loan securitizations,
most of those securitizations are static pools. And what that means is you get the loans that
you get at the beginning. You hope they all pay off at par a few of them won't, but assuming most
do, it's all going to be okay. In a CLO, there's typically a five-year reinvestment period.
And what this means is that any time a loan pays off has an amortization payment. You know,
partial pay down these loans have some degree of typically quarterly amortization to the extent
a loan defaults and you're going to recovery or to the extent the collateral manager or
servicer of the CLO sales alone for the first five years, the principal from any of those sources
can be used to reinvest in new loans. Now, sometimes it's better to reinvest in loans in the primary
market, newly issued brand new loans. And sometimes it's better to invest in the secondary market.
When loans are on sale and sometimes they're trading very, very cheap. And a lot of people
ask us or everyone asks us about the default rate. A very interesting statistic about the syndicated
loan market is the prepayment rate. And these are essential and they go together coupled with
the price of loans in the secondary market. The long-term average prepayment rate for loans is
about 30 to 35% per year. So if you start with a pool of 100 loans on an average year, you're going
to get about a third of your money back at par that you can go reinvest in the market. Now,
when choppier times like these, the prepayment rate slows for sure. And right now we're running
between 12 and 15% on an annualized basis, so much slower than the long-term average.
Sorry to break in. Why is the prepayment rate so high? Is that because companies are borrowing
at such high rates that they want to pay down quicker? What is the reason for that?
So the L in CLLO is the L in LBO. We're typically the financiers of Blackstone and KKR and Apollo
and folks doing leverage buyouts. While there are public company borrowers, companies like
American Airlines that I cited and maybe 10 or 20% of the market is actually public,
quite a few companies in CLLOs that we lend money to are leveraged buyouts and we're the
providers of that leverage. And what typically happens if a sponsor like one of those firms buys
a company, they're typically going to hold it for between two and five years. They're going to
reduce some costs, they're going to streamline operations, hopefully get some new contracts,
and then try and sell the company. Typically when they sell the company, they have to repay the
old debt. And so that triggers repayment coming back into the loan market, which is great news.
In many cases, not all the time, but when things are in the choppier waters, like they are now,
the loan index is around 93 cents on the dollar right now. So if you're getting par dollars back
for the first five years of your CLLO, you can go take those par dollars and reinvest at 93.
Roll the clock back to April of 2020, certainly a dark and uncertain day in the economic world
and all the world. Up 2% of the loan market paid off at par in April of 2020. Think about that.
Loans were 80 cents on the dollar in the secondary market and simply by opening the mail,
if you were running a portfolio of loans, you got 2% of your money back at 100 cents on the dollar.
You could go reinvest that at 80 and you made up, frankly, for a handful of COVID mistakes that
you might have made. So the default rate is very interesting. The prepayment rate is misunderstood
and I have a theory that's held up my entire career, I hope it continues to, and I believe it will,
is that in credit, the rumor is always worse than the news. If default rates go to 10%, and
that's not a prediction, but if they were, loans are probably not trading at 95 cents on the dollar.
Where are they, like 65? Probably. That's where they were last time. Maybe there were 75,
something like that, but every loan that doesn't default pays off at par. It's a binary outcome
for every credit investment in the world. And to your point, if we see a situation where there's
10% defaults, we hope loans are trading at 65. That would be great. And every loan that doesn't
pay off, doesn't default, continues to make par paydowns. And when stuff, if the market traded
down to 65 at a broad level, some loans are going to be at 70, some are going to be 60.
It's not a standardized market in those days. And the ability to sell alone at 70 and buy alone,
you like more at 60 within a CLL, as long as you're in the reinvestment period, is very, very valuable.
Tom, sorry to jump in with the tangent question because I have so many more things to ask you on
the matter at hand. But what are the differences between a CLL and a boogeyman acronym, the CDO,
that we heard about in O8? Because that, I'm sure you get investors that are like,
I don't want to touch that. So what are some of the differences?
I get that question every single day. And I suspect they will every single day. It's a lack
of a retire. Garbage in, garbage out, quality in, high cash flows out. It's really as simple as that.
While the acronym sounds the same, what the CDOs of the mid-2000s invested in,
were very junior pieces of securitizations of mortgages to subprime borrowers. Now,
20 years ago, 30 years ago in the 1990s, subprime mortgages were at 18%. They were 50 LTV.
They were very, very conservative loans. You could make a lot of mistakes as a lender and still
have a positive return. By the time we got to 2006 or 7, those rates were 2.5%. There were no
stock loans and 90 LTV. Not a lot of margin for error in that case. Overlay our recession,
overlay some fraud in the mortgage market with people who get a W2, somehow needing a no-doc loan.
Why that happens doesn't make a lot of sense. Those things all turned out very, very poorly.
So if you put investments in that all go to zero, it doesn't matter what the structure is,
there's nothing really we can do to help you. The loan market, while 2008 was a negative year for
the loan market, had you invested in loans just on an unlevered basis on January 1 of 2008.
By the end of 2009, you had a positive total return. It wasn't the most fun ride for sure,
but when all was said and done, even with 11% of corporate America defaulting,
you ended up with more money than you started with. That's just in loans and CLOs you did
exceptionally well because CLOs could keep reinvesting their paydowns in good loans trading at distressed
prices. Those loans paid off at par. All right, so getting back to ECC, I'm looking at a chart,
and with those in the show notes, you've got a great quarterly update with a lot of information
that shows a cumulative distributions per share by year. I need to know how you went from $2.35
a share in 2015 to $10.40 in 2018 to $18 in 2022. This seems a little bit worrisome just
from the skeptics point of view. Tell me what I'm missing. How is this going up until the
right in such a steady fashion? How are you doing this? That chart you're looking at in our investor
deck is a cumulative distribution. I wish it was an annual distribution.
No such luck there. No such luck there. If it was annual, I think our stock would be trading at a
higher price. See, I knew it was too good to be true. But look at that chart. It's incredible.
The consistent high cash flow that these investments generate let us pay very high cash
distributions to our shareholders. The one thing that's never too good to be true is cash in
your bank account. That's the number one best return on an investment. Shareholders who own
ECC who don't take advantage of our discounted reinvestment option get a lot of cash in their bank
every single month. That's the chart that shows. Head you invested. Our IPO was $20 a share.
You've gotten 18 and change back in distributions. We're on pace to get to $20 a share really soon.
You still own the company. I'm glad you mentioned this because the stock price is not the thing.
If you only look at the stock price without the total return, you're completely missing what's
happening. It's like looking at junk bonds just the price without the total return.
Correct. This is very much about the current cash flow.
I would imagine since you gave that anecdote about if there's a 10% default rate in loans
traded at $60 or $0.70 in the dollar, it actually makes sense to me that people in this space would
have those sort of overreactions because they're looking to protect the downside and there's probably
going to be some overreactions. That would mean if you're just looking at the price,
it's probably going to be more volatile than you would assume when you look at the income.
That's very, very fair. A couple things to share around that. To talk about the market in general,
the best vintage for CLOs prior to the financial crisis was 2007. You would think that's odd.
Think that credit standards in 2006 and 2007 were very weak. Every bad credit that was done into
that bubble, Tribune and TXU and some of the greatest defaults are all in there. However,
that batch of CLOs generated a median return to the equity investors between 18 and 19%.
Not because they had great credits, but because they could reinvest when loans were at 65 cents on
the dollar for everything else. They had the 10% default rate, 11% default rate that we talked about.
Yeah, but you had to go through how to get that. It wasn't a straight line, that's for sure.
But compared to investing in bank stocks, for example, CLO equity did much, much better than
hedge-owned banks over that same period. That's really what we think of as CLO as a better bank.
Let me posit this to you. We do what every bank, we CLOs do what every bank does. We borrow from
people at a low rate, in our case it's the CLO debt, and we lend out at a higher rate. We have a
positive net investment margin, the difference between what we lend it and what we borrow at.
So that's great. That's what banks have done since the beginning of time, and it works out a lot of
the time. What a CLO has that no other bank has has ever figured out is we borrow long and lend short.
So I'm sure you've had a number of podcasts recently about bank failures and all the terrible
things going on in the banking world. Hopefully the worst is behind us. We'll see.
Farsa Republic is down 43% today, so.
I saw that, yes, indeed. It's selling 100 billion dollars of fixed rate assets.
That's a toughy. Frankly, had these banks own CLO triple A's, which are floating rate,
instead of fixed rate mortgages, they might be in better shape today.
All right, so you borrow long to lend short. That's the one that's the first.
But so no bank ever does that. Banks take deposits from you and me, or checking account your savings
account, maybe a one-year CD, and they lend out, they lend 30-year mortgages. We do the opposite.
A CLO borrows for 12 years and makes five to seven-year loans. Those loans typically pay off
in three or four years, because we talked about that prepayment rate. And then for the first five
years, any of those paydowns can go by new loans. Every loan in a CLO has to mature before the
maturity date of the CLO debt. And I can promise you every credit will do one of two things.
It will default or pay off at par. And as long as those maturity dates are all before our CLO
debt is due, we can see every loan through to its ultimate outcome. And along the way,
there's no market to market triggers. And that financing is locked in place. So if loans are
65 cents on the dollar, that's not good news. But it actually probably is good news because we're
reinvesting cheap. But the lenders into a CLO, the people who buy the CLO debt, can't make us put in
more money. They can't force us to sell loans based on the price of performing collateral.
So who are you borrowing from? So we actually borrow, so our CLO's
issues tranches of CLO debt. There's AAA, AA all the way down to double B. It's floating rate,
which is nice. It's 12 year legal final. It has a two year non-claw period. And the people who buy
that at the top of the capital structure, kind of AAA, AA, and single A is often banks and insurance
companies are some of the largest investors. Some of the largest banks in the United States,
not all of them, but several of them have between 1% and 3% of their gross assets in CLO AAA.
Several large Japanese banks, several large insurance companies. Further down the capital
structure, kind of between triple B and double B is often mutual funds and some insurance companies
and hedge funds. And folks looking for a little more of a return, you can kind of get a high
single-digit, low-double-digit return, still in a nice floating rate asset.
You mentioned the floating rate thing a few times. How often do those rates reset for you?
Every 90 days. So our assets and liabilities off of LIBOR converting to SOFR and everything
resets. And what are those changes looked like in the last 18 or 24 months as rates have changed
considerably in the rest of the economy? So radically, rates, three month LIBOR was below
half a percent not too long ago. It was below half a percent for a long time that went up,
then COVID brought it right back down to close to zero. And now we're back up to,
if I look on the screen right now, three month LIBOR is five and a quarter percent.
For us, it almost doesn't matter in that our loans earn LIBOR, but we pay LIBOR or SOFR to our
CLO debt. So it's kind of a wash between the two. While we don't increase our distribution,
we don't get a lot of extra money when rates are going up. Importantly, we're not under water
when rates are going up, which fixed rate investments would be.
So time in 2022, there was this weird paradox where investment grade bonds, at least the index.
So I'm thinking about LQD underperformed high yield dramatically because there was so much interest
rate risk and there was really no corporate spreads. I mean, corporations were fine.
Yeah, there was no stress really in 2022. So how did that impact your performance in 2022?
So LQD and the underlying index there is typically fixed rate,
unsecured bonds issued by investment grade corporates. Our CLOs invest in floating rate
secured loans to below investment grade companies. The loan index was down modestly last year,
down about a percent give or take compared to investment grade down, depending on which
index. 15%, something like that. One of the only large asset classes to be positive last
year other than cash, frankly, was CLO triple A's, which had a positive return
due to the high current coupon and their coupon just kept going up throughout the year.
All right. A few questions from the investor point of view. This might be ridiculous,
but just maybe levels that are give people this versus that. What's the difference between
investing in something like ECC versus a floating rate ETF, bank loan or senior loan or whatever,
something like that? Sure. So the underlying investments, the raw, most underlying investment
in those funds is actually the same thing as in CLOs. So if we were to look at BK, LN or...
SRLN. SRLN. Funds like that. The vast majority, if not all of those loans,
are going to be some of the same loans underlying a CLO. A CLO, we list our top 10
obligors and the materials you see. And you can see we have well over 1,000 different companies.
So one difference is our portfolios, underlying portfolios are going to be much more granular.
It's just impossible to have 1,000 different loans in a CLO and a loan ETF like that.
And then those funds are typically open-ended funds with daily ups and downs where investors
either redeem in, buy in, buy out. The bid ask spread on loans is non-trivial. It's when you trade
a loan, in general you have to pick up the phone and speak with someone. They don't trade on an
exchange or something like that. So if there's big flows in or out of an open-ended loan fund ETF,
invariably investors are bearing some degree existing shareholders, even if you're standing
still are bearing a non-trivial amount of bid ask spread as the fund manager has to actually buy or
sell to meet those flows. We intentionally set up EPC as a closed-end vehicle. So investors have
liquidity, daily liquidity in the market. But if an investor buys or sells, I don't have to go
invest quickly or sell quickly in that they're just selling shares amongst themselves without
redeeming from the vehicle. Is there ever a big swing in terms of a premium or discount to your
vehicle? I would imagine that sometimes there must be. Absolutely. Since our inception, we've traded at
a handsome premium to NAV, which is very unusual for a closed-end fund. And frankly, there's closed-end
funds that have strategies of investing and closed-end funds at discounts. One of the things that I
think has made our strategy attractive and our shares attractive and why the stock trades at
a premium most of the time, frankly, is it generates such a high cash flow and it's a very unique
strategy. And even amongst our peer group, I'd fancy to say investors consider our implementation
of the strategy in the space to be above average. You mentioned the implementation. I imagine this
is active. There's not an underlying index here. Correct. So there's sadly no daily index for
CLO equity. There is a loan index that folks can look at. And in general, our strategy
meaningfully outperforms the loan index. Our implementation of it being part of, well, ECC might
have 750 plus million of assets being part of a broader $8 billion fund management complex,
which is all of Eagle Point Credit Management. ECC is able to invest alongside of several other
private portfolios that we manage. And we actually have exemptive relief from the SEC,
which lets ECC invest simultaneously with our private funds on the exact same terms in CLOs,
which gets ECC a lot of much more diversity than would otherwise get while having a majority
strategy. And the vast majority of dollars in ECC are in CLOs where Eagle Point collectively
across all of our different portfolios is actually the majority investor in the CLO equity.
And that gives us a number of important protective rights in that we can call a CLO if we want.
We can force the portfolio to be liquidated. We can refinance the CLO if debt spreads have come in
and it makes sense to repay the old triple A's and it's new triple A's at a lower level. Things
that take a lot of time and effort to do. Eagle Point has majority investments in over 100 different
CLOs as a firm. And through that, it gives us a number of these very important protective rights.
We couldn't in a typical portfolio the size of ECCs, you couldn't have that many positions because
there's just a minimum dollar amount to be in that majority position. So ECC unto itself would
be much more concentrated. So some investors view ECC as a way to get access to our broader
private strategies but through a public vehicle with the benefit of daily liquidity.
For this product, obviously it's publicly traded. You might not know exactly but give us a general
sense of who the investors are in a strategy like this. Sure. I'll leave it to investors to
look up specifically. If you look up on the holders key of Bloomberg, which is HDS,
you'll see quite a few different institutional money managers and institutional firms
that own our stock. And if you compare the typical, you'll also see my name on there as well in the
top 15. Not to brag. No, no, no, but we love our cooking here, frankly. It's very, very good.
Way better than the alternative. Absolutely. The insurance companies,
money managers, banks, a wide variety of investors, but a significant amount of our stock is held by
institutional investors, which is very unusual. And when bankers call us to talk about things with
ECC, they often say, oh, you have a very unusual shareholder register when they look at the hoop
files publicly about investing with us. But we take that as a compliment that investors are doing
things they might not normally do, but we take that as a strong endorsement that they like our
cooking. We'll get to the distribution stuff in a second, because that's really why investors are
buying this thing. But I'm looking at a chart of leveraged loan fund flows. Why do you think
investors in this asset class are so fickle? Because there was a lot of volatility of money
moving into and out of leveraged loans. Why is that the case? Is that because they're so sensitive to
interest rate environment? Or what is it? It's a little bit of interest rate fear. It's a little
bit of credit fear, recession fear. The whims in and out of the loan market through these retail
loan funds baffle me. I can usually figure out why, but I admit sometimes I'm surprised by some of
them happening. Now, that said, these retail loan funds end up being a very small part of the loan
market, but they get a lot of attention of the loan markets somewhere between, or somewhere around
1.4 trillion. Give or take a little bit, depending on where you draw the line on loan size.
CLOs on the majority of the syndicated loan market at this point. The loan mutual funds are probably
10% give or take. I don't have the exact number handy. But so if we see a billion dollars in or
out of loans in a given week or two billion dollars, and sometimes it's two billion in, one
billion out, it does move all over the place as you hit on Michael. It's a big number on one hand,
but it's a small number when you consider it a part of a trillion dollar plus market.
All right. Let's talk about the distribution. Right now you're yielding, I don't know, 15
some odd percent. How stable is that? Have you guys ever had to cut the distribution? What should
investors expect getting into this? Because I understand that this is an investment for income,
but we're all human beings and I'm looking at a price chart and it is a relatively volatile.
There was a massive drawdown in COVID along with everything else, but really massive, almost 70%.
So talk to me about the stability of the distributions because at the end of the day,
that's why people are coming to this space. Sure. So over the life of ECC,
initially we started as quarterly distributions. At some point, after having enough shareholder
meetings, we switched to monthly distributions. Right now, we're paying 14 cents a month in common
distributions on a stock that's right now quoted at $11.21 a share on the screen I'm looking at.
In addition, over the past few years, we've been paying special distributions in addition
to the normal monthly distributions. One of the things to maintain our RIC status,
our tax-free status that ECC itself doesn't pay any tax is we have to pay all of our taxable
income out to our shareholders. So the good news is from time to time, we announced additional
special distributions. So late last year in November, we declared an additional 50 cents special
distribution. Again, that's cash going directly to our shareholders' pockets. More recently,
beginning in February of this year, we started declaring in addition to that 14 cent monthly
common distribution an additional running two cents a month common distribution and we indicated
that we expect that to continue for at least the rest of the year. So to maintain our RIC status,
we do have to pay out distributions equal to our taxable income. The good news for shareholders
is CLO is typically generate a lot of taxable incomes. We have to keep paying out a lot of cash.
The underlying securities generate tons and tons of cash. Even during the depths of COVID,
our portfolio still generated millions and millions of dollars of cash flow. We were not in a situation
where we didn't have cash coming in and it gives us the tools to pay cash out to our shareholders.
Over time, the distribution certainly over the last few years, going back to 2011, it was
eight cents a month, got it up to 10, 12, 14, a couple of specials along the way. I'm just adding
up here. I think we had a dollar 50 and specials paid out to shareholders since the latter half
of 2021. That's in addition to the current monthly distribution.
So how would you set expectations for investors in this fund in terms of thinking through that
how that distribution looks over the long term as an investor? If they're sticking with it,
and again, maybe trying to ignore some of the price fluctuations?
Sure. So over the past eight years, we've paid continuous distributions first quarterly,
then monthly. We've never missed one. The cash on the portfolio, the portfolio just
generates so much cash in that CLOs. I made that bank analogy earlier to bring it forward a
little bit further. CLOs are like a bank, but without retained earnings. So we have JP Morgan
or Citibank. They pay some degree of dividend and they keep the rest of the money in the bank.
They do whatever they want to do with it. In the case of a CLO, all of the net investment margin
gets paid out in cash to us as the equity holders every quarter, as long as all the tests within
the CLO are on sides. You've never not paid a payment, but have you ever have the payments
ever gone down month over month? They must have. We did reduce the distribution in the depths of
COVID as blue trip companies did. Many, many companies did. I'm not aware of too many that
increased. And that was just in the Fed. The Fed actually increased that distribution.
Fair enough. That's very fair. That is true. That's the one guy on the other side.
But companies large and small lowered their distribution. So in our eight years of being
public, that's the only distribution decrease we've had. And the board takes a long-term view of how
we should distribute cash to shareholders. We look at the cash flow generation of the portfolio.
We look at the historic where it's been earning and where we think it will be earning. We look at
what our taxable income will be, which sets a floor on what we need to distribute. And a
combination of all of those go to set our distribution policy.
All right. So can you explain for somebody who's considering this, there is no free launch.
This is a ludicrously high distribution. I shouldn't say ludicrous. It's a very high
distribution. There have to be material risk above and beyond what you can get from a treasury.
Obviously, aside from the large price fluctuations, what are some fundamental risks where it's not
just price fluctuations, but something seriously goes wrong. So what are the risk that investors
should consider? Sure. So you've hit the nail on the head.
The biggest risk I think of when I invest in this personally is the mark-to-market risk on a short-term
basis of the price of the stock, just like the underlying securities that we invest in,
just like the S&P 500 moves up and down, sometimes several percent in a day.
The cash flows on our portfolio each year more than have supported the distributions every single
year. So we're distributing cash that we're collecting from our investments. That's very,
very important. And then what I would encourage investors to do is look at how we've performed
in times of stress, and the most notable stress is the COVID period. And if you look at our nav
from January 1, 2020, so you heard about some virus far, far away in Asia, but no one really
knew what was going to happen, and you look at the distributions we paid in our nav at the end of
2021, you'll see a very, very strong return. So while the price even moved around a little bit
during that, more than a little bit during that period, through times of stress, our COO investments
actually outperform the broader market, and we generally think we'll do the best over the
medium term when things get really, really choppy. In terms of our risk factor within our portfolio,
the biggest thing I look at as a risk manager is how much reinvestment period we have left
across our portfolio. And this is something we publish on an investment-by-investment basis,
play in the back of that deck, and we give the weighted average. And I look very hard to make
sure I have several years of remaining reinvestment period across our portfolio. Because remember,
we talked about at the beginning, when loans pay off or have amortization payments or default and
recover, we can go reinvest in the secondary market for new loans or by used loans at discounted prices.
And defaults will move in cycles. Sometimes they're low, sometimes they're high. They're
going to go up and down again over the next 10 years more times than we can count. But I'm pretty
confident, certainly in my opinion, when the price of loans go up, the price of loans will go down.
And as long as our CLOs are in the reinvestment period, we're positioned to be on the offense
during that time frame. And we think do the best.
Tom, where can we send people to learn more about this strategy?
So we welcome people to visit EaglePointCretic.com. We do have a phone number on there. A toll-free
number, feel free to call in. We're happy to chat with potential shareholders.
We have a ton of information up there. I'm very, very transparent about our portfolio
and all the details about them. And if folks have more questions, feel free to call into our
investor relations line. And we're happy to talk further.
Perfect. Thanks for coming on, Tom.
We appreciate your time. Thank you, Ben and Michael.
Okay. Thank you, Tom, again, for coming on. Remember, learn more at EaglePointCretic.com
and then send us in the email, annalspearspod at people.com.
.