‘In the money’: Eagle Point giddy on CLO outlook despite 4Q losses
The selloff in the loan market in the fourth quarter of last year may have caused Eagle Point Credit Co. (NYSE:ECC) some short-term pain, but the closed-end investment firm expects to profit from it in the long term.
The value of the company's holdings of debt and equity issued by collateralized loan obligations declined by 25% on the quarter, pushing its net asset value per share down to $12.40 a share from $16.55 a share at the end of the third quarter.
The loan selloff was partly driven by concerns about the leveraged loans, but the even sharper drop in loan prices during the fourth quarter also allowed some collateralized loan obligation managers to pick up some bargains, and this will eventually work to Eagle Point's benefit. “We were excited for the short-term price volatility,” Eagle Point Chief Executive Thomas Majewski said during an analyst call Thursday to discuss fourth-quarter and full-year earnings for the Greenwich, Conn.-based company overseeing $2.4 billion in managed assets.
The company had $17.7 million of investment gains during the quarter, but this was offset by $92.4 million in unrealized losses on the market value of other investments, resulting in the NAV decline.
Still, Majewski said the loan market selloff will allow CLO managers to "profit by reinvesting principal proceeds and sale proceeds in their portfolios into additional loans, typically at lower prices in the secondary market and/or with wider spreads."
That in turn will lead to long-term higher returns and shareholder cash distributions for Eagle Point, Majewski said. “We view our CLO long-term debt to actually be more ‘in the money’ in volatile markets like those at the end of 2018,” he said.
Eagle Point did some bargain hunting of its own in the fourth quarter; it spent more than $58 million in gross capital (or $30.3 million of net deployed capital, subtracting asset sales) in acquiring new CLO equity and mezzanine securities.
For the year, Eagle Capital had a net loss of $54.8 million, including unrealized losses on investments of $90.1 million. Eagle Capital received $11.8 million of cash payments from its portfolio, or $5.11 a share.
Majewski said he is confident that the values of Eagle Point's holdings will rebound, and the the strong fundamental of the loan market will support the performance of the CLO securities it holds. Indeed, the loan market's recovery has already begun. In January, Eagle Point's NAV increased by 10.6% to between $13.66 and $13.76 a share, he noted.
Eagle Point helped to defray the deterioration in NAV by maintaining a reset strategy on existing portfolios it controls through equity ownership. During the fourth quarter, it reset four CLOs to lock in lower costs of debt as well as extend the reinvestment period that permits managers to trade in-and-out of assets to improve the credit quality of the portfolio. Since January 2017, Eagle Point as reset or refinanced 28 CLOs.