Animal Spirits Podcast - Talk Your Book: CLOs – The Providers of Leverage

Episode Date: May 1, 2023

On today's show, we are joined by Thomas Majewski, Managing Partner of Eagle Point Credit Management to discuss what a CLO is, differences between a CLO and a CDO, how Eagle Point Credit is able to pay these yields, the 2023 banking crisis, and much more!   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Eagle Point Credit Management. Go to Eagle Pointcredit.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 Batnik 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 Ridthold's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's 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 we went deep and this is good and I think you'll enjoy learning about CLOs. So here is our conversation with Tom Majorski. Welcome to Animal Spirits with Michael and Ben. We are excited today to be joined by Tomajuski.

Tom is a managing partner at Eagle Point Credit Company. Tom, 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 CLOs 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 is 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 purchase, 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 CLO equity. There's a small amount of CLO debt and a few other small securities in there, but the vast majority of its portfolio is CLO equity. We believe it's one of the largest and most diverse portfolios of CLO equity in the world, and it's something that's available to investors.

They can buy the stock at trades on the New York Stock Exchange under ticker ECC, obviously intraday liquidity, whatever folks want to get in and or out. It's as easy as hitting buyer selling. 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 are happy to oblige a bunch of years ago. Before we get into the CLO 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, this is, the ECC is actually not a BDC. It's a 40-act investment company that has not made the BDC election. Oh, okay. It's basically a closed-end 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, like 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. Many BDCs often lend. more in the middle market space and on our 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 or 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 U.S. 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 CLO 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 it collateralized? Yes. I was saying it's a collateral or collateralized? Okay, it's the I. 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 who 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 leveraged loan indexes had positive returns in 28 of the last 31 years. And I'm unaware of any other risk asset class that, 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 sort of credit rating. What is the sort of 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 repaying.

that. 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 percent, 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 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 get a recovery, or to the extent the collateral manager or servicer of the CLO sells a loan, for the first five years, the principle 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 percent 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, in choppier times like these, the prepayment rate slows for sure. And right now we're running between 12 and 15 percent 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 it down quicker? What is the reason for that? So the L in CLO is the L and 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 a handful and maybe 10 or 20 percent of the market is actually public, quite a few companies in CLOs that we lend money to are levered 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,

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 CLO, you can go take those par dollars and reinvest at 93. Roll the clock back to April of 2020, you know, 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 over. 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. Yeah, if 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. Right. That would be great. And every loan that doesn't pay off, doesn't default, continues to make par pay downs. 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. You know, it's not a standardized market in those days. And the ability to sell a loan at 70 and buy a loan you like more at 60 within a CLO, as long as you're in the reinvestment period is very, very valuable. Tom, sorry to jump in with a tangent question because I have so many more things to ask you on the matter at hand. But, What are the differences between a CLO and a boogeyman acronym, the CDO, that we heard about in 08?

Because that, I'm sure you get invested. They're 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 until I 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 dock loans and 90 LTV. Not a lot of margin for error in that case. Overlay a recession, overlay some fraud in the mortgage market with people who get a W-2 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, 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 is said and done, even with 11% of corporate America defaulting, you ended up with more money than you started with. And that's just in loans and CLOs, you did exceptionally well because CLOs could keep reinvesting their paydowns in deeply distressed loan, in good loans trading at distressed prices. Those loans paid off at par. All right. So getting back to to ECC, I'm looking at a chart and we'll put it in the show notes. You've got a great quarterly update with a lot of information that shows accumulative

distributions per share by year. And 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, Like, tell me what I'm missing. How is this going up until the right in such a steady fashion? How are you doing this? So, and that's a chart you're looking at in our investor deck is a cumulative distribution. Oh. I wish it was an annual distribution.

Oh, my dad. No such luck there. No such luck there. Oh, boy. All right. If it was, if it was annual, I think our stock would be trading at a higher price. See, I knew it's too good to be true. There you go.

But, 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. And 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. And 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.

And that's the chart that shows. Had you invested it, our IPO was $20 a share. You've gotten 18 and change back in distributions. you know, we're on pace to get to $20 a share really soon, and you still own the company. But wait, this is, I'm glad you mentioned this because the stock price is not the thing, right? 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. And I would imagine, since you gave that anecdote about if there's a 10% default rate in loans trade at 60 or 70 cents of 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. So 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 the credit standards in 2006 and seven 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 percent, 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 to go through hell 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 had you owned banks over that same period. And that's really what we think of a 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. And we have a positive net investment margin, the difference between what we lend debt 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 is 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. First Republic is down 43% today. I saw that, yes. It's selling $100 billion of fixed rate assets.

you know, that's a, that's a toughie. Frankly, had these banks own CLO, AAAs, which are floating rate, instead of fixed rate mortgages, they'd probably have a, they might be in better shape today. All right, so you borrow long to lend short. That's the opposite of what I've heard. 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 mark-to-market triggers. And that financing is locked in place. So if loans are 65 cents on the dollar, it'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 we our CLOs issue tranches of CLO debt. There's AAA, double A 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-call 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 all float off of LIBOR, converting to SOFER, and everything resets. And what are those changes looked like in the last, I don't know, 18 or 24 months as rates have changed considerably in the rest of the economy? So radically, rates, you know, 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, you know, 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 SOFER to our COLO 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 underwater when rates are going up, which fixed rate investments would be. So, Tom, 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 were, I mean, corporations were fine. Yeah, there was no stress really in 2022. So how did that, how did that impact your performance in 2022? So, so, so, so, 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 percent, something like that. One of the only large asset classes to be positive last year, other than cash, frankly, was CLA AAA'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 like the investor point of view. This might be ridiculous, but just so maybe levels set or give people like this versus that. What's the difference between investing in something like ECC versus like a floating rate, ETF, bank loan or senior loan or whatever, something like that? Sure. So the underlying investments, kind of the raw,

most underlying investment in those funds is actually the same thing as in CLOs. So if we were to look at BKLN 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 in the materials you see, and you can see we have well over a thousand different companies. So one difference is our portfolios, underlying portfolios, are going to be much more granular. It's just impossible to have a thousand different loans in 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. It's not, they don't trade on an exchange or something like that. So if there's big flows in or out of a 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. a 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 in 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 that 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, while 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 AAAs.

issue new AAAs 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 ECC's, 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 us, view ECC, is 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, so 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 Holder's 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. No, it's way better than the alternative, obviously. Exactly. 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. is why do you think investors in this asset class are so fickle? Because it is, there is 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. If the loan market's somewhere around $1.4 trillion, give or take a little bit,

depending on where you draw the line on loan size, CLOs own the majority of the syndicated loan market at this point. of 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 places as you hit on Michael. It's a big number on one hand, but it's a small number when you consider a part of a trillion

dollar plus market. All right. So 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'm looking at a, 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 super volatile, 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. Sure. So over the life of E.C. We've paid, 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 cents 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 the 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 cent 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 cent monthly common distribution, an additional running two cent 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 CLOs typically generate a lot of taxable incomes, so 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 8 cents a month, got it up to 10, 12, 14, a couple of specials

along the way. I'm adding up here. I think we had a $1.50 in 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 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 kind of bring it forward a little bit further. CLOs are like a bank, but without retained earnings. So we have J.P. Morgan or Citibank, you know, they pay some degree of dividend and they keep the rest of the money in the bank and, you know, 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 a month? They must have. We did have a, we did reduce the distribution in the depths of

COVID as, you know, blue chip companies did. Many, many, many companies did. I'm not aware of too many that increased. And that was just the Fed. The Fed actually increased that distribution. Fair we go. That's very fair. That is true. That's the one guy on the other side. But, you know, 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's no free lunch. This is a ludicrously high distribution. I shouldn't say ludicrous.

It's a very high distribution. There have to be material of risk above and beyond what you can get from a treasury, obviously. Aside from the large price fluctuations, what are the, what are like some fundamental risk where it's not just price fluctuations, but like something seriously goes wrong? So what are the risks 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 CLO 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 a 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, lay 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, and certainly in my opinion, when the price of, when defaults 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 eaglepointcredit.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. 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 to Tom again for coming on. Remember, learn more at Eaglepointcredit.com and then send us in the email, animal spirits pod at chemo.com. Thank you.