Eagle Point Credit Company Inc. (ECC) CEO Tom Majewski on Q1 2022 Results - Earnings Call Transcript

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Eagle Point Credit Company Inc. (NYSE:ECC) Q1 2022 Earnings Conference Call May 24, 2022 10:00 AM ET

Company Participants

Garrett Edson - ICR

Tom Majewski - CEO

Ken Onorio - CFO and COO

Conference Call Participants

Mickey Schleien - Ladenburg Thalmann

Ryan Lynch - KBW

Steven Bavaria - Seeking Alpha


Greetings, and welcome to Eagle Point Credit Company First Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Garrett Edson of ICR. Thank you. You may begin.

Garrett Edson

Thank you, Doug, and good morning. By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call and which may also be found on our website at eaglepointcreditcompany.com.

Before we begin our formal remarks, we need to remind everyone that the matters discuss on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website, eaglepointcreditcompany.com.

Earlier today, we filed our first quarter 2022 financial statements and our first quarter investor presentation with the Securities and Exchange Commission. Financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company's website. The financial statements can be found by following the Financial Statements and Reports link, and the investor presentation can be found by following the Presentation and Events link.

I would now like to introduce Tom Majeski, Chief Executive Officer of Eagle Point Credit Company.

Tom Majewski

Thank you, Garrett, and welcome, everyone, to Eagle Point Credit Company's first quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio.

It was a very productive start to 2022 for Eagle Point. We actively managed our portfolio, deploying $66 million of net capital into CLO equity and debt investments during the quarter and also priced 3 reset transactions. Our portfolio continued to generate strong recurring cash flows. And early in the quarter, we completed a very successful refinancing of much of our debt and preferred stock. This will generate significant savings and contribute to an improved bottom line moving forward.

As a result, we once again generated NII and realized gains before nonrecurring items above our regular common distributions. While markets are certainly choppy today, we expect our NII momentum from the first quarter will continue into the second quarter and continued our current distribution level into the third quarter.

For the first quarter, our net investment income and realized gains before nonrecurring items totaled $0.40 per share, exceeding our regular common distributions for the quarter. Recurring cash flows received in our portfolio in the first quarter were $41.1 million or $1.03 per share, which was $0.32 above our total expenses and regular common distributions paid. April's cash collections have totaled $43.5 million ahead of the total for the first quarter.

NAV per share ended the first quarter at $12.64. Since the end of the quarter, we estimate our April NAV to be between $12.44 and $12.54 per share, reflecting a roughly 1% decline based on the midpoint of that range. Still, our NAV has increased from before the onset of COVID and is up roughly 18% since the end of 2019.

We believe there are a few other income-oriented funds that are listed that have had NAV increased so materially over this time frame. We completed a timely -- a very timely offering of our new 5.375% ECCB notes right before the spike in rates earlier this quarter and locked in new long-term fixed-rate financing. This was both our largest $25 denominated issuance ever and also our lowest cost of capital to date by a healthy margin.

We used the proceeds from this offering to retire our remaining 7.75% ECCB preferred stock, our 6.75% ECCY notes and half of our 6.6875% ECCX notes. These actions provided us with several meaningful benefits. We achieved significant savings on interest expense going forward.

All of our financing remains fixed rate and unsecured, protecting us in what seems to be a very pronounced rising rate environment, and we extended our weighted average debt maturity and now have no maturities prior to April of 2028. Those of you who have been on our calls before know we've never had any repo-style financing or any unfunded revolver commitments.

We continue to raise capital prudently for our -- at the market program and issued about 3.5 million common shares that are premium to NAV, generating an accretion of $0.04 per share for shareholders. We also tapped the ATM to issue about 280,000 of our Series C preferred shares, the ECCCs and 89,000 of our Series D perpetual preferred shares.

Together, these sales generated additional net proceeds of approximately $57 million during the first quarter. Given the continued strength of the company's performance and are confident in the outlook for our portfolio, we raised our common distribution by $0.17 -- 17% rather to $0.14 per share in April. We've continued with that increased distribution rate now into the third quarter.

As of March 31, the weighted average effective yield on our total portfolio and our overall portfolio rather was 16.78%, down slightly from 17.04% at the end of December. Our portfolio's weighted average effective yield was aided by strong cash flows, our proactive reset and refinancing program, our ability to put new investments in the ground at attractive levels, few borrowers defaulting and muted levels of loan repricings.

As I mentioned, during the quarter, we deployed $66.3 million of net capital into CLO equity and debt investments. We completed 3 resets and converted 3 of our loan accumulation facilities into new CLOs. Across the 9 CLO equity purchases that we made during the first quarter, the weighted average effective yield was approximately 18%.

We continue to find attractive CLO opportunities in the primary and secondary markets and have deployed an additional $50 million of net capital into CLO equity and debt securities during the month of April.

On the monetization side, we opportunistically sold a few CLO securities and other investments. Collectively, these sales allowed us to realize gains of about a penny per common share. And while we typically underwrite investments with a long-term hold mindset, we do sell investments where we see good rotation opportunities. In addition to our deployment of capital, we remain active in the quarter with our reset and refinancing program taking advantage of the strong demand for CLO debt in the first quarter to lower our cost of funding and enhance future cash flows for several of our CLOs.

For our 3 resets that we did in the first quarter, we saved an average of 17 basis points on the debt and lengthen the remaining reinvestment period of each back out to 5 years. With CLO debt spreads wider due to the recent volatility in the markets, we expect refinancing and reset volumes to be muted in the near term, but we'll continue our pipeline in the months ahead when market opportunities present themselves.

As we've consistently noted, resets and refinancings are a key part of our adviser's value proposition for our majority CLO equity strategy, proactive involvement with each investment, both at the time of acquisition and throughout its life cycle. We are always seeking to create value for our shareholders.

Thanks to our ability over the past year to capitalize on this attractive reset and refinance environment as of the end of the first quarter of 2022, our CLO equities weighted average remaining reinvestment period stood at 3.1 years. This is an increase from 3.0 years at the beginning of the year and from 2.4 years at the beginning of 2021.

So despite the passage of 15 months through our proactive portfolio management, the reinvestment period on our CLO positions actually increased meaningfully. These actions allow the company to increase prospective cash flow while also being better positioned to take advantage of future loan price volatility. As we manage the company's portfolio, we seek to keep the weighted average remaining reinvestment period as long as possible.

Looking ahead, we are keenly aware of the impact of rising rates, the Fed curtailing purchases of securities and geopolitical challenges that are facing the world. We remind you that while loan prices have been declining recently, rising rates are typically a positive for CLO equity.

While we remain mindful of the challenging market environment, we've been through a number of economic cycles and are well positioned to take advantage of market dislocations, adding to the company's investment portfolio where we see opportunities.

With our portfolio's strong CLO equity weighted average effective yield, favorable cash flows, low defaults and lack of loan repricings, we are confident in the continued earnings potential of our portfolio. And we believe the company is well positioned to continue increasing NII as 2022 moves along.

I'd like to also take a moment to highlight Eagle Point Income Company, which trades under ticker symbol EIC. For the first quarter, EIC generated NII and gains of $0.33 per common share and with this rising rate environment remains very well positioned to increase NII over time, given its junior debt focus, particularly CLO BBs, which is heavily correlated with rising rates. We invite you to join our call at 11:30 a.m. today and to visit the company's website, eaglepointincome.com, to learn more.

Overall, we'll keep a watchful eye on our portfolio in the broader economy. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets and share our outlook for the remainder of 2022.

I'll now turn the call over to Ken.

Ken Onorio

Thanks, Tom. For the first quarter of 2022, the company recorded net investment income, net of realized losses of $12 million or $0.30 per share, which is net of $0.01 per share in distributions on the Series D preferred stock. This compares to NII and realized losses of $0.37 per share in the fourth quarter of 2021 and NII and realized gains of $0.28 per share for the first quarter of 2021.

NII and realized losses for the first quarter of 2022 or net of nonrecurring expenses and realized losses of $0.10 per share related to offering costs associated with the issuance of the company's ECCV notes and the acceleration of unamortized deferred issuance costs associated with the full redemption of the ECCB preferred stock and ECCY notes.

Excluding these nonrecurring items, NII and realized gains would have been $0.40 per share, an amount above our first quarter regular common distribution level. When unrealized portfolio depreciation is included, the company recorded a GAAP net loss of $21.2 million or $0.53 per share for the quarter. This compares to GAAP net income of $0.20 per share in the fourth quarter of 2021 and GAAP net income of $1.09 per share in the first quarter of 2021.

The company's first quarter GAAP net loss was comprised of total investment income of $26.8 million, offset by total net unrealized depreciation of $33.2 million, realized losses of $0.9 million, expenses of $13.5 million and distributions on the Series D preferred stock of $0.4 million. The company's asset coverage ratios at March 31 for preferred stock and debt calculated pursuant to Investment Company Act requirements were 307% and 451%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%.

Our debt and preferred securities outstanding at quarter end totaled approximately 33% of the company's total assets less current liabilities. This is within our range of generally operating the company with leverage between 25% to 35% of total assets under normal market conditions.

Moving on to our portfolio activity in the second quarter through April 30, the company received recurring cash flows on its investment portfolio of $43.5 million or $1.03 per share. This compares to $41.1 million received during the first full quarter of 2022.

A reminder that some of our investments are expected to make payments later in the quarter. As of April 30, we had approximately $30 million of cash available for investment. Management's estimated range of the company's NAV per share as of April 30 was between $12.44 and $12.54. The midpoint of the range reflects a modest 1% decrease from March 31.

During the first quarter, we paid 3 monthly distributions of $0.12 per share. Beginning in April, we were pleased to increase our monthly common distribution to $0.14 per share, a 17% increase from the prior amount. A reminder in order for the company to maintain a direct tax status is required to distribute effectively all of its taxable income within one year of its tax year-end.

For our tax year end November 30, 2021, we estimate taxable income will exceed the aggregate amount distributed to common stockholders for the same period. As a result, the company paid a special distribution of $0.50 per common share on January 24 to stockholders of record as of December 23, 2021.

The company's final taxable income and the actual amount required to be distributed in respect to the November 30, 2021 tax year will be determined when the company files its final tax returns.

I will now hand the call back over to Tom.

Tom Majewski

Great. Thanks so much, Ken. Let me take everyone through some of our thoughts on the loan and CLO markets right now. The Credit Suisse leverage loan index was essentially flat in the first quarter, down about 10 basis points. We would note that in a rising rate environment, floating rate loans and CLO debt typically have outperformed other fixed income products. And indeed, on both investment-grade bonds and high-yield bonds were both heavily negative during the first quarter. Corporate defaults remain quite low with no defaults recorded in the loan market during the first quarter of 2022.

At quarter end, the trailing 12-month default rate stood at 19 basis points amongst historic lows. Equally importantly, the percent of loans trading below 80% or low to 80% of par, something we consider to be a good leading indicator of defaults remains low as of current measures between 2% and 3%. So not a big issue there at present.

Despite loan retail inflows during the first quarter in anticipation of the rate hikes, which have started to come, the percentage of loans trading at over par stood at only 1%. As a result, repricing activity in the loan market is essentially zero. And this is very important for us and that spread compression is a risk in CLO investing. Loans repricing tighter.

On a look-through basis, the weighted average spread of our CLO's underlying loan portfolio is actually increased 3 basis points during the quarter versus where it started. Our portfolio's weighted average junior over collateralization cushion or OC Cushion was 4.68% as of March 31, a meaningful increase from the 3.89% where it stood at the end of December.

In the CLO market, we saw $31 billion of new issuance in the first quarter. We also saw $17 billion of resets and $4 billion of refis during the quarter. Since late March, the price of many risk assets, equities, junk bonds, so on and so forth have fallen even investment-grade bonds are down significantly this year, as I mentioned earlier. While loans and CLOs continue to perform well -- continued to perform well from a price perspective for much of April, as of May 20, the year-to-date CS leverage loan index total return is now negative 2.6%. This reflects a 2.7% decrease in the price of loans since the beginning of May.

From a historical perspective, CLO security valuations, both debt and equity, have had at least some correlation to the CS leverage loan index as the value of the underlying loan portfolios is a factor in the way many CLO investors look at valuing CLOs and where they would trade them. While we believe the CLO market doesn't give ample consideration to the more attractive reinvestment opportunity, that's now presented for CLOs within the reinvestment period. This is often how the market behaves.

So although the results will vary by individual investment and past performance is, of course, not indicative of future results, the value of many investments in the company's investment portfolio, you should think of as typically correlated to moves in the Credit Suisse leveraged loan index.

And while the price of loans and many CLO securities may have fallen so far in May, due to the locked-in nature of the financing of CLOs, we find periods like these often spur a very attractive future medium-term returns as our CLOs within the reinvestment periods can actively reinvest paydowns and make trades in a nicely discounted loan market.

We don't think the market gives enough credit to that, in our opinion.

To sum up, net investment income and realized gains, excluding nonrecurring items, once again exceeded our regular common distributions in the first quarter. We raised our monthly common distribution by 17% to $0.14 per share beginning in April, and that distribution rate has continued into the third quarter.

We paid a $0.50 special distribution back in January with a potential for one more special distribution later this year, we'll know that once we've finalized our taxable income for 2021 at some point over the summer.

Cash flows on our portfolio remains strong and April's collections exceeded the first quarter's collections, benefit of improved portfolio, the resets, rising interest rates, all working in our favor. New CLO equity investments that went into the portfolio during the first quarter had a weighted average effective yield of 18%, and we continue to source and deploy investments with very attractive yields in our opinion.

We are actively managing our portfolio, and we'll continue to trade the portfolio and when market conditions permit continue with resets and refinancings. We also importantly locked in our lowest cost of financing ever just before rates started moving up in earnest, the new bonds that we have, the ECCBs, we believe will pay dividends for the company in terms of cost savings and stable financing for many years to come.

We're investing in floating rate investments in a rising rate environment, and we're financing ourselves with fixed rate. That's usually a very good formula. It was a strong start to 2022. As we continue navigating this challenging market environment, we expect to be opportunistic and proactive with respect to our investment portfolio. As Ken mentioned earlier, as of month end, we had about $30 million of dry powder in the company's balance sheet, and we'll continue to look for opportunities in the market particularly seeking those where the motivated sellers.

We'll continue paying consistent monthly distributions to our shareholders while continuing to generate attractive risk-adjusted returns.

We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

Mickey Schleien

Can you hear me okay?

Tom Majewski

We can.

Mickey Schleien

Tom and Ken on Slide 34 of the deck, it shows that EBITDA for borrowers is growing slower than revenues. So that implies margins are declining, which I assume is due to rising cost inputs. But on the previous page, you show that interest coverage ratios on outstanding loans improved and leverage multiples decline. So it could imply that lenders are being more conservative. Am I interpreting that correctly? And how do you feel about the ability of borrowers to service their debt if we enter into a recession down the road?

Tom Majewski

Sure. Well, so if we look at the charts here, this is on Page 33 of the ECC investor presentation. And there's not perfect data available yet in the market in that many of these companies are private borrowers. So what these charts show just kind of hit on it. The top two are outstanding loans and then the lower two are just newly issued loans that were issued during a particular period. So if you look at the lower chart for a minute, you can see, in general, the debt to -- the leverage multiple actually crept up a little bit in 2021, up from 5.1 to 5.3 of new issued loans and the interest coverage margin substantial was unchanged, suggesting perhaps spreads of borrowers was a touch tighter during the quarter. But if you look over the trend, if you look at leverage, certainly over the past five years from '16 onwards, it hasn't really moved that much. I mean these things move around 1/10, 2/10 of a turn. So the quality, if you just use leverage as a measure, a substantially unchanged up a hair over the last half a decade. When we look at the impact of rising rates, there's two components of it. First, the good news, these investments all float. The bad news for the companies is the unhedged and they got to pay the higher interest. You can see the impact of that, if you look at the bottom right chart on Page 33, kind of from ‘16 to ‘19, that's what happened at rates, kind of LIBOR went from 0 or close to 0 to 2 and change percent, maybe even hit 3%, I'm not sure. So you can see the impact of the decline there. Then overlay -- you can see the decline from the impact of rising rates. Then overlay your question, gee, let's say there's a recession, EBITDA on companies probably doesn't grow, probably declining. How bad would that be? You could just -- if you think about just broadly a ratio at 4 times coverage, that means for every $100 of interest expense companies have, they've got $400 of EBITDA. So if EBITDA were to drop by 25%, they still have $300 of EBITDA to service their debt. Let's say, rates move up another 100 basis points to 200 basis points. That 100 goes up depending on the given loan, the still the bulk of the cost of spread, not the base rate maybe that debt service goes to 150 million, 125, something like that. So in a scenario where you had EBITDA drop and rates go up, even there, you still got a good bit of cushion in terms of the company's ability to service their debt. And even just looking at what's been going on in the market with the -- this is kind of live on the call with the housing numbers, which came out, which admittedly -- or in my opinion, I think, are some of the least reliable stats are the most subject, most prone to revision. We're seeing the swaps for swap market significantly lowering the chance of a 0.5 point rate hike in September. We'll see ultimately what shakes out in the future. This is just one day of data. But as we look at things, very rarely do we see companies go -- get into a defaulting situation because of rising rates and a decline in EBITDA, kind of that combination. Long theory, it could happen. Some companies will have a decline in EBITDA that usually would cause a default in my experience. It's pretty infrequent to see big heights and rates cause payment defaults in loans at a high level.

So it's something we've got our eye on. You can see the stats leverage largely unchanged over the last five years. You can see the impact of rising rates from the ‘16 to ‘19 period. It was down, the debt service coverage, but it wasn't tremendously down. We feel pretty confident that, that won't be the issue that we're talking about if we do get into a recession.

Mickey Schleien

So besides this sort of headwind, I wanted to ask about the CCC bucket, which on your April monthly update was at 5.7. And we know there's been a lot of growth in the share of B minus issuers in the market. And that's in line with your portfolio at about one quarter. So again, if the economy decelerates and we see downgrades from B minus, that could start to stress the CCC limit. How are you managing that risk? Perhaps are you going more up market, looking for higher quality managers or something else? Or do you feel it's not a big risk?

Tom Majewski

So I think April was one of the first months, maybe in 18 months where we saw net downgrades versus upgrades for underlying corporate borrowers. So these things do move around a little bit. As we look, the number one thing I can say -- let me go back, I'll read the exact number back again. Junior OC Cushion increased from 4 68 -- to 4 68 from 3 89 at the beginning of the year. So that gives us more cushion. And just to kind of -- as a refresher, if a CLO goes over 7.5%, which is the typical threshold for CCCs and the lowest priced loans that are rated CCC above 7.5% get counted at market price in the numerator of the OC ratio. So in theory, the lower market are 70 or in that context, depending on the individual transaction. So to the extent we had 10% CCCs, let's say, you'd have some degree of reduction in the OC numerator. Against that, we've got a really healthy OC cushion here at 4 68. I don't remember where that was going into COVID, but -- it wasn't that far off from there if memory serves. And in the depths of COVID, when it was one-third of the loan market or something like that was downgraded, we did have some CLOs interrupt payments for most of the miss of the minority that missed most of that minority missed, I think, for one period, a few went out to two or three.

As we look at our portfolios, though, these are long-term investments. You can see the dispersion of CCC bucket, CCCs, the dispersion in WARF and the dispersion of junior OC Cushion on Pages 25 and 26. There's a wide variety of styles. And what we look to find are CLO collateral managers who have the DNA to deliver superior returns to the equity class over time. Unfortunately, in our opinion, that's a relatively small subset of CLO collateral managers, but those are who we look for and short-term movements in trends of CCCs or things like that typically don't change our behavior.

Mickey Schleien

And if you can indulge me with one more question. I see that the cash flow per share received, which you show on Pages 23 and 24 decline. Was that due to the lag in the repricing of CLO assets and the effect of their floors versus the cost of their liabilities as rates increase? Or was that something else that we should be aware of?

Tom Majewski

Yes. Q4 and Q3 had a bunch of what we call flush payments. These were like in Q3,’21 I'm thinking about we had $1.23 of cash flows there. So we call them -- when we say recurring cash flows, what that means is excluding calls because that can be a big swing. But first period cash flow as we consider in the recurring bucket because we usually have a couple every single quarter. The -- in Q3 of '21, we had a couple of resets of Q3 2020 CLOs, Octagon 40-something and a CIFC, CLO which were kind of we took millions of dollars out of each of those transactions if memory serves. So that one end of Q4 2021 were driven up by a significant number of flushes both from new issue and reset transactions. If you look back to kind of Q1, Q2 of '21, you see we were in that $1, $1.09 ZIP code kind of consistent with where we are in Q1 of '22. And then as Ken mentioned earlier, our April collections are actually up a little bit from -- on a per share or on an aggregate basis from where we were in Q1. So if anything, the Q3, Q4 numbers probably were a little -- were artificially inflated due to some kind of special distributions coming out. But I think we're at a pretty comfortable run rate. And that number, as you can see, so I'm just looking at the Q1 number, I mean there's $0.32 of excess beyond the expenses and distribution. So the portfolio generates a ton of excess cash.

Mickey Schleien

And Tom, when you refer to flush payments, you're referring to extraction of equity capital, sort of like a dividend recap in the private equity world, correct? Or am I misinterpreting that?

Tom Majewski

You nailed it. So there's two kind of flushes. There's -- on a -- when you create a new CLO on the first and second payment dates, typically, if we're able to have some trading gains and things like that, within the CLO or buy the loans at a lower price than modeled, that excess principal can be paid out as an equity distribution. And then as part of a reset, to the extent you're able to either issue more debt or there were significant gains in the portfolio, you're able to take that out as well. So those are -- and if you think about the -- the summer of 2020 CLOs, we had to put in more equity than usual, and we were able to take a lot of that out through multi-million dollar dividend recaps.


Our next question comes from the line of Ryan Lynch with KBW. Please proceed with your question.

Ryan Lynch

First question I had was you guys had done a really impressive job of increasing the reinvestment period on your CLOs from 2.3 times in the last year to 3.1 years today. I'm just curious, as we look forward, given the environment that we're in right now, which I would describe it as rising rates as well as certainly -- a lot of economic certainty out there, the potential for slowing economic conditions today. Does that change your ability to reset CLOs in that environment? Or what would change your ability to be able to reset those make it easier or worse?

Tom Majewski

Yes. So rates unto themselves is not a factor. Rate is the number one factor. And there's good news and bad news. I suspect in the very near term, our reset and refinancing activity will slow significantly. I certainly alluded to that in the prepared remarks. Again, not to do with rates per se, spreads have gapped out on CLO debt. So the bad news is a lot of -- if we were to try and go out with a issue a new CLO today, it's probably playing so far plus 150, give or take, on the AAAs, maybe some a little better, some a little worse. If you look at our AAA spread on a weighted average basis, this is on Page 26 of the portfolio, it's at 1.11%. So that would suggest it would be cost negative or would cost you more to get a refi or reset done today. That's really good. It's both good and bad. The bad news is we're probably not going to get as many refis and resets done in the near term. The good news is our debt is 40 basis points in the money, plus or minus, 10 times levered. And while the value of CLO securities, people look at, oh, what's the price of the underlying portfolio and loans are down 2.5 points plus this month. When I look at it is like, geez, we can go reinvest pay-downs at $0.95, $0.96 on the dollar buying very -- within our CLOs, having the CLO collateral managers doing it on buying those loans at very attractive prices with financing we locked in for verbally yesterday. So what that means probably don't see a continued increase in the weighted average remaining reinvestment period in the near term. But we're at or above where we were kind of going into COVID, and that's very important. We're not predicting a COVID style event or anything like that. But in good markets, we try and lengthen that as long as we can, and we did it. We're in a choppier world now. We've got -- in our opinion, you've got bad stuff going on in Ukraine. The Fed stopping buying securities, the largest investor in the world or one of them kind of exiting the market. That's not so good, which provides, I think, for some tough liquidity conditions across a lot of different markets, not just loans and CLOs you've got rising rates and some degree of slowdown in economic activity, which is opposed to what's supposed to happen when the Fed rises increases rates. So we've got a number of bad facts out there, frankly, against that, our CLO debt is very much in the money. Our CLO debt doesn't have any sort of mark-to-market triggers. And the ability to keep reinvesting at cheap prices is more attractive than ever.

One other thing to hit on a recession does not equal a default cycle. And this is really important. Just because -- let's say, we have to see GDP contraction for two quarters in a row. It doesn't mean we're going to see a big wave of defaults. And if anything, I think companies through what they went through in 2020 have, I'll call it, fatter balance sheets. They have longer maturities, you probably have more cash sitting around and in my opinion, in general, better able to weather a slowdown for a period of time. CFOs we were not in the situation, but Ken's compatriots, companies looking at zero revenue in Q2 of 2020 in some cases. And that was obviously not us, thank goodness. But I think a lot of companies are pretty well battle-tested in terms of stability on their balance sheets more so than they would have been three years ago. So while it's hard to -- no one can consistently predict the future time and time again. If we do see a slowdown in economic activity, which we're certainly seeing the early signs of, I think, broadly, companies are better positioned today to go into it than they were COVID and 15, 16, which suggests perhaps while we could see some ratings movement, we don't see as much default movement as folks would say. And the best thing I can say, the market price of loans, less than 3% of loans are trading below 80%. We can -- who cares what the rating agencies are saying. That's buyers and sellers saying, where they think -- we kind of think of that as the default line and that below 80% is still comfortably below 3% today, which is great.

Ryan Lynch

That's a good point regarding the slowdown recession. It's not all automatically equal a huge spike in default. Also, I would just say, yes, it seems like, obviously, we were all looking at the same economic picture in all the companies. You talked about them being better positioned today than a couple of years ago, at least everybody today eyes wide open at the headwinds and preparing accordingly doesn't mean the can stop what's coming, but at least to the parent for that. The other question I had was -- and I don't know if you mentioned this in your prepared remarks. I'm interested to get a little bit of your color on what's happening in the secondary market for CLO equity or low investment-grade CLO debt tranches. Obviously, leveraged loan prices have traded down maybe 4 points or so year-to-date. And so I'm just curious of I don't know if you said this in your prepared comments, out of your capital deployed in Q1, what was the split between primary issuance and secondary purchases? And then separately, I'm just wondering what is kind of trading activity and how attractive are those secondary purchase opportunities because you mentioned if they did trade off, I would assume that they probably have more attractively priced CLO debt as you just mentioned new primary issuance, it sounds like the AAA paper has been widening out, but they also have shorter reinvestment periods on the secondary market. So just curious on how you're viewing that market today? And should we expect you to be more active in that market, if there continues to be a little more turbulence in loan prices.

Tom Majewski

Yes. It's a collage of all of the above. If you did -- you'd have to do math based on things I said. We made nine new equity investments during the quarter, and we converted three accumulation facilities. So those were three that – we were the three out of the nine. We’re in the majority in the kitchen driving the ship the way we normally do. Off the other six that was a mix of primary and other secondary opportunities. So a market basket of Eagle Point cooking, majority, other new issue and other secondaries that we would have purchased. And I mentioned we've got about $50 million into the ground in April as well a nontrivial amount of that was also in the secondary market.

CLOs often lag broader markets and equities are down tech stocks are down and then high-yield bonds are down and loans and CLOs often catch the cold a little later. And if you look back like at 2014, we caught the cold a little later than everyone else. That's kind of what happened here. And it was -- if the CS loan index was largely flat for the first quarter compared to IG and high-yield and stocks, which rolled down a ton kind of once May ran around, that's where the loan index is down 2.7% since the beginning of May. So what that means is the price of many CLO securities is down. We caught the cold. So in what I said here from a historical perspective, CLO security valuations have generally had at least some correlation to the Credit Suisse leveraged loan index as the value of the underlying loans -- underlying loan portfolios is a factor in the prices that traders put to CLO securities where they're willing to buy and sell. But at the same time, we also don't believe the CLO market gives ample consideration to the more attractive reinvestment opportunity that's presented for CLOs within the reinvestment period in times like this. So the bad news, if you just say, "Oh, my god, these loans are down. CLOs must be worse off." And CLOs aren't rallying today by any stretch. The flip side, so you have the liquidation value of the -- liquidation value of the loan portfolio is falling. In general, in a risk-off world, people are going to apply higher discount rates and demand higher yields, buying junior debt or CLO equity. So you kind of have two things going the wrong way. What I don't think people give enough credit to is, gee, you're reinvesting at 95%, 96%, 97%. And I think that's something that's mispriced. Our average loan price as of April, give or take, is around $0.95 on the dollar on a look-through basis in our portfolio. And we've looked kind of roll the clock forward, any month end where the loan prices were in that 95% or lower area the prospect of returns over the next kind of one to three years usually are quite good for CLO equity. Obviously, past performance is not indicative of future results, but these are the markets I think that goes to prove my point that even if things are down in the month of May, the market is not giving a due credit to the in-the-moneyness of our reinvestment option. And the quantitative measure I can give you, we got AAAs on a weighted average of 111 basis points and a 150 market. And those AAAs are far longer than the loans that we're buying today. So that's the piece of the puzzle that doesn't get picked up.

Now the bad news is there's not 10 people puking out for selling we're not seeing cheap bonds coming our way, cheap equity coming our way left right and center. I kind of wish it was. And invariably, we'll see some transient. There's always people who have stopped lost stuff at more shorter date hedge fund type investors -- there's not enough of those in our opinion. But that was the point we mentioned -- we had $30 million of cash on the balance sheet at April 30. Portfolio continues to generate cash flow well in excess of what we distribute. So we are very much on the offense in these markets.

Ryan Lynch

That's very helpful color and commentary on what's going on in the market and how you guys are kind of playing in that. So that's all for me today. I appreciate the time.


[Operator Instructions] The next question comes from the line of Steven Bavaria with Seeking Alpha. Please proceed with your question.

Steven Bavaria

You just answered my question, but I'm going to ask it again in a slightly different way. I'm really glad that you're emphasizing more than ever now this kind of nonintuitive thing we've talked about and that I find fascinating, and I try to explain it to my retail readers who find CLOs a little bit mysterious. But let me see if I understand it right, the way I like to put it is, from a static basis, when the secondary loan market prices are down, then on paper, obviously, the equity of the CLO drops because your debt doesn't decrease, of course. But at the same time, you basically own a put of that loan back to the issuer at maturity at par. And by being able to exercise that put and put your loan back at par when it matures, and then reinvest at the lower secondary market rates, your business value actually increases often as your NAV drops. I've got that right, right?

Tom Majewski

I would print out that transcript and publish it right away. You got it perfectly.

Steven Bavaria

I do. I do and I will again. So all right. Yes. I mean that's...

Tom Majewski

I'll show an extreme. If you think about April 1, 2020, loans were down 10 points in the month of March. CLOs are 10 times levered. At a high level, every CLO was wiped out from an equity liquidation value. On the surface, that sounds bad. Well, you've seen what happened to our NAV over that two-year period. It's the other way in that we can see -- you mentioned that put option back to the company, every loan will either default or pay off at par, it's a binary outcome. And our CLOs in every loan and every CLO has to mature before the CLO debt is due. So we've got the runway to see it through to the other side. And that option, in our opinion, is mispriced by the market. Some people get very focused on what's the liquidation value we don't have to liquidate. And we've got the runway to hold these -- every loan will do one or two things, and we can find out which one. And the vast majority of loans have a funny habit of paying off at par.

Steven Bavaria

Exactly. Well, thank you for kind of clarifying that because as you know, my stick as a writer is to try to put complex stuff in plain English for ordinary retail investors to understand. And I think that's the essential thing that people don't fully understand about CLOs and make some surprisingly, the news is so good, even if often when NAVs are lagging. So anyway, thanks very much and keep up the good work.


There are no further questions in the queue. I'd like to hand the call back over to Thomas Majewski for closing remarks.

Tom Majewski

Great. Thanks so much. We appreciate everyone joining. So stay tuned. Markets are going to continue throwing some curves our way, I suspect. Hopefully, a key takeaway for folks. The work we've done over the last two years is positioning for when things get a little wonky in the markets and we've got a lot of dry powder, and we are positioned to be on the offense here to the extent things screens stay read. So we appreciate everyone's time and interest. Ken and I are around today if folks have any follow-up questions. We look forward to speaking with you soon. Thank you.

Ken Onorio

Thank you.


Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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