Eagle Point Credit Releases Monthly Report

CLO (collateralized loan obligation) holder Eagle Point Credit Corporation (ECC) has released their monthly investment updated.

It is interesting that the price level of the common shares trades at a 45% premium to net asset value. ECC is trading around $14.40 while the net asset value is just above $10/share. Folks are obvious enamored by the 16% current yield. Of course if you held the common for a year or two you have a sizable negative total return–shares were at $21 2 years ago.

Of course we really don’t care too much about the commons shares–I don’t own them and never have owned any common shares.

We are interested in 2 term preferred that are outstanding as well as 2 baby bonds. The term preferreds have coupons of 7.75%, while the baby bonds have coupons of 6.6875% and 6.75%. All of these issues trade well with pricing between $25.70 and $26.50.

The outstanding issues can be seen here.

We are most interested–as an investor–or potential investor, 1st off in the asset coverage ratio–they must maintain a 200% or more asset coverage on their senior securities (debt and preferreds)–I currently calculate the ratio around 270%.

On the other hand we do care about the net asset value of the common shares–poor financials, over time can bleed into the baby bonds and preferred shares. The company showed a large unrealized gain of $38 million on holdings for the 6 months ending 6/30/2019. A year ago they showed a huge unrealized loss of $91 million. Of course virtually all of the assets are Level 3 (value can’t be directly observed)–the values are calculated by a 3rd party financial model. So you can expect plenty of volatility in net asset values.

ECC is a holder of primarily equity tranches of CLOs. The equity tranche represents almost 91% of the companies holdings. Potential investors always need to remember that the equity tranche represents the highest risk of the CLO.

I believe that as long as the economy is relatively strong (not in recession), the term preferreds and baby bonds present a risk/reward that might work for many folks. I have held a position in the past (term preferred and baby bonds) – and may again, but do not hold any at this moment.

The monthly update can be seen here.

2 thoughts on “Eagle Point Credit Releases Monthly Report”

  1. I don’t really understand this industry. But if the common is trading at a 45% premium to NAV, I wonder why management doesn’t just issue more common at a slight discount to the market and invest the proceeds. By comparison, I don’t think there are any mREITs that ever trade anywhere close to a 45% premium to book value. The idea of issuing more common seems so obvious, the fact that they are not doing it must mean I am missing something fundamental. (Anyhow, if they did issue more common, that would make the bonds and preferreds more creditworthy.)

    1. Roger–actually you hit the nail on the head. They continually issue new common shares. They sold $43 million in the last 6 months–in the 6 month period last year they sold $37 million. They always have an ‘at the market’ program operating to keep cash coming in. At the same time they sold $43 million in the lst 6 months they paid out $29 million to common holders (as well as almost $7 million on term preferred and baby bonds).

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