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Checking Out The Latest Baby Bond From Eagle Point Credit Company

Apr. 08, 2021 7:37 AM ETEagle Point Credit Co LLC (ECC)ECCX, ECCY, OXLC3 Comments


  • ECC is planning to issue its third baby bond - ECCW - with a 6.75% coupon maturing in 2031 and callable in 2024.
  • We take a look at the relative value picture both across the ECC capital structure as well as relative to the OXLC baby bond.
  • Our view is that while ECCW should look more attractive versus the ECC bonds and preferred, it will be less attractive versus OXLCL.
  • Looking for more investing ideas like this one? Get them exclusively at Systematic Income. Learn More »

After several years of an unchanging CLO CEF baby bond population, it quickly doubled over a span of a couple of weeks. While this is likely overstating the growth of the sector as we've gone from just 2 to 4 bonds, it is still a notable event in our view. In this article we take a look at the recently announced baby bond from the Eagle Point Credit Company (NYSE:ECC). Our main takeaway is that, while ECCW should look more attractive versus the other ECC bonds and preferred, it will be less attractive versus OXLCL.

A Bigger Picture

Is the additional issuance of two new baby bonds a coincidence or is there a broader trend at work? In our view, the recent issuance of two new CLO CEF baby bonds is a direct result of four different dynamics.

The first is that both of the CLO Equity baby bond issuers deleveraged in the previous year which left room for them to add borrowings. Secondly, the funds' NAVs held up remarkably well this year, which left these funds with lower leverage than their target due to the prior deleveraging. Thirdly, bonds carry lower interest rates than preferreds, all else equal, though at the expense of additional 1940 Act conditions, and so can be more attractive to funds on a pure leverage cost basis. And fourthly, none of the funds have been tempted to use bank-facing borrowing instruments like credit facilities or repo despite their significantly lower interest cost versus senior securities.

Prior to the COVID crash, the Oxford Lane Capital Corp. (OXLC) was the only CLO Equity fund using a repo for a part of its borrowing at a rate that is almost exactly half of its recently issued bond. The fact that none of the funds have been tempted back

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This article was written by

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Analyst’s Disclosure: I am/we are long ECCW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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