Eagle Point Credit: 13% return, strong Q1 2022, low NAV premium
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 LLC (NYSE: ECC) invest in CLOs.
United States The leveraged loan market returned to growth in 2021, up 12% in 2021, after a flat year in 2020, faced with confinement. CLOs hold 63% of this market, the largest market share, followed far behind by loan mutual funds, at 13%, and Banks, at 12%. Hedge funds, insurance companies and other funds make up the balance of the market. There has been over $100 billion in CLO trading volume per year on average over the past 5 years.
The Credit Suisse Leveraged Loan Index has recorded only 2 negative returns over the past 30 calendar years, with an overall average annualized return of 5.5%:
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 113 CLO securities, with 1,852 underlying obligors, as of 03/31/22. (CEC website)
Its annual expenses seem much higher than other CEFs we’ve covered, coming in at 5.09% for management and incentive fees, plus 0.80% for other expenses. There is also 2.86% interest charges:
ECC invests mainly in Equity and Subordinated Debt tranches, with CLO Equity representing 83% of its portfolio, followed by CLO Debt, at ~8%, and Loan Facilities, at 6.2%:
Technology, healthcare and publishing make up over 27% of ECC’s top industry holdings, with 7 other industries accounting for approximately 31%:
ECC’s top 10 debtors include well-known names such as Cablevision, American Airlines and CenturyLink.
As of 3/31/22, the weighted average remaining reinvestment period of ECC’s CLO shares was 3.1 years, with only 10.5% of its loan portfolio maturing before 2025.
The CLO industry has had an average reimbursement rate of around 32% since 2003, with the 2018-2020 period seeing much lower and declining rates, which reached around 18% in 2020, until they rebound to 30% in 2021:
ECC had a strong Q1, with total investment income up around 56% and NII up around 64% from Q1 21. NAV/Share was up 5.2%, with a much higher number of shares, which was up 27.5% from a year ago. Realized and unrealized gains, which are erratic on a quarterly basis due to timing issues, both declined.
The weighted average effective yield of ECC’s overall portfolio was 16.78% as of 03/31/22.
2021 has been a big year of growth for ECC, with total investment income up around 39% and NII up around 25.5% from Q1 21. NAV/Share grew close by 20%, even though the number of shares has increased by more than 16%.
Management reduced ECC’s monthly distributions from $0.20 to $0.08 in 2020, but increased monthly distributions by 2 in 2021, to $0.10 then to $0.12, in addition to paying a special distribution of $0.50. They increased the monthly payment again in April 2022, from $0.12 to $0.14:
At $12.68, ECC has a very high yield of 13.25%. It will then be ex-dividend on 06/09/22, with a payment date of 06/30/22:
This distribution coverage table aggregates monthly ECC payments into quarterly amounts. Management uses a non-GAAP NII/share figure, which excludes one-time expenses, to derive its distribution coverage, which also includes realized gains/share. The non-GAAP coverage figure was 1.05X in Q1 22 and has averaged 1.23X over the past 12 months.
One-time expense was $0.10/share in Q1 22. Coverage was 0.79X, but has averaged 1.08X over the past 12 months.
ECC also has 2 preferred issues and 3 baby bonds. Series C Preferred are selling at ~$24.40, below face value, yielding ~6.9%, while Series D Preferred are selling at ~$22.85, also below face value , and yield ~7.35%.
ECCV 2029 tickets sell for around $23.30 and yield around 5.8%.
ECCW 2031 Notes are above par, at ~$25.20 and yielding ~6.7%.
ECCX 2028 Notes are also above par, at ~$25.24, and yielding ~6.6%. Management announced on February 22 that it would redeem 50% of ECCX 2028 tickets.
Insiders invested $20.7 million in ECC and ECCX.
At its closing price of $12.68 on 1/6/22, ECC was trading at a premium of 1.52% to its net asset value/share of $12.49, which is much cheaper than its average premium of 4.49% over 1 year, its average premium of 12.35% over 3 years, and its average premium over 5 years of 11.57%.
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 inception NAV/unit was $19.93, its 4/29/22 NAV/unit was $12.49. However, ECC has paid cumulative distributions of $16.12 since inception.
ECC has outperformed the CEF debt industry and the S&P 500 over the month, quarter, year and so far in 2022. Meanwhile, its 13.25% is considerably higher than the return industry average of 7.28%.
A look back shows a mixed record of NAV and price performance, with ECC primarily outperforming the Morningstar US CEF Senior Loans category in 2020-21 and 2016-2017, while underperforming in 2015 and 2018.
There is a lot of volatility in this new rate hike environment, with two 50 basis point hikes expected from the Fed before the end of the summer. We are keeping an eye on ECC at the moment and adding it to our watchlist, and we might start a position on any significant price declines.
If you’re interested in other high-performance vehicles, we cover them every weekend in our articles.
All charts by Hidden Dividend Stocks Plus, except where noted.