Eagle Point Credit Management is launching a second closed-end fund that invests in some of the riskier securities issued by collateralized loan obligations, but this one has a slightly different investment mandate.
The original fund, Eagle Point Credit Co (NYSE:ECC), which was launched in 2014, invests primarily in the most subordinate securities issued by CLOs, known as the equity; the new fund, Eagle Point Income Co., will invest higher in the capital stack — but only slightly higher. It will primarily acquire double-B-rated CLO securities, according to a registration statement filed Friday with the Securities and Exchange Commission.
What's the difference?
CLO equity holders are the last in line to get repaid from the proceeds of interest and principal payments on loans in a CLO portfolio. They are entitled to whatever is leftover after other noteholders are repaid. Holders of double-B-rated notes are typically second-to-last in line (though some CLOs issued single-B-rated notes that stand between BB noteholders and equity holders in terms of payment priority). And unlike equity holders, Double-B noteholders are entitled to both earn interest and have their principal repaid.
Eagle Point Income won't invest exclusively in double-B-rated CLO securities, but it “may also invest in other junior debt tranches of CLOs, senior debt tranches of CLOs and other related securities and instruments,” according to a prospectus. “In addition, we intend to invest up to 20% of our total assets (at the time of investment) in CLO equity securities.”
Still, Eagle Point Income’s portfolio allocation would nearly invert that of Eagle Point Credit Co., which held $457 million in CLO equity and only of $20.4 million of subordinate CLO securities as of the first quarter of this year. The original closed-end fund typically acquires the majority of the equity issued by a particular CLO, giving it a controlling stake. This allows the fund to influence management of the CLO to take actions, such as refinancing, in order to boost equity returns.
Nevertheless, the fund's holdings of other kinds of CLO securities nearly tripled in the first quarter, as its investment adviser went on a buying spree, funded by capital raises since last fall.
Tom Majewski, the investment adviser's CEO, described those purchases as “opportunistic,” telling analysts on a May conference call that they were acquired at steep discounts. “Everything we put in the ground we put in the ground for a reason,” he said on the call.
Majewski and other executives at Eagle Point declined comment on plans for the new fun, citing the “quiet period” for its planned public offering. No offering date or proceeds target was included in the filing.
The new publicly traded firm will be advised by Eagle Point Credit portfolio managers, led by Majewski, Daniel W. Ko and Daniel M. Spinner.
Eagle Point Income will share the same six-member board of directors, with Majewski serving as chairman (similar to his role at Eagle Point Credit). The new company’s board of managers will include Eagle directors Majewski and James R. Matthews, joined by Stone Point Capital senior principal James Carey along with Cross Ocean Partners chief executive and co-chief investment officer Graham Goldsmith.