Eagle Point Credit Company (ECC) Earnings Call Transcript & Summary

Greetings, and welcome to the Eagle Point Credit Company Third Quarter 2022 Financial Results Conference. [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. Please go ahead.

Thank you, Donna, and good morning. By now, everyone should have access to our earnings announcing an 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 discussed 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. Further information on factors that could impact the company and the statements 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 third quarter 2022 financial statements in our third quarter investor presentation with the Securities and Exchange Commission. Financial statements and our third quarter investor presentation are also available in the Investor Relations section of the company's website. 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. I would now like to introduce Thomas Majewski, Chief Executive Officer of Eagle Point Credit Company.

Great. Thank you, Garrett, and welcome, everyone, to Eagle Point Credit Company's third 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. The company's portfolio performed well again in the third quarter despite the challenging macroeconomic environment. During the quarter, we generated net investment income and realized gains above our regular common distributions and modestly increased our NAV. CLO equity continues to improve its overall resilience compared to many other risk assets. With a meaningful percentage of the loan market trading in the low to mid-90s, it has been a great time to opportunistically deploy capital into both the secondary and primary CLO markets. We believe our diverse CLO equity portfolio with a 3.2-year weighted average remaining reinvestment period would be very difficult to recreate and remains well positioned to thrive in the current environment. For the third quarter, our net investment income and realized gains totaled $0.47 per share, exceeding our regular common stock distributions of $0.42 per share for the quarter. We actively manage our portfolio, deploying over $60 million in net new capital into new portfolio investments during the quarter. We had strong recurring cash flows on our portfolio in the third quarter of $40.8 million or $0.89 per share, which was $0.21 above our total expenses and regular common distributions paid during the quarter. NAV per share ended the third quarter at $10.23. Since the end of the quarter, we estimate our NAV at the end of October to be between $9.66 and $9.76. We also continue to raise capital through our at the market program and issued over 4 million common shares at a premium to NAV, generating an accretion of $0.06 per share for all shareholders. We also used the ATM to issue approximately 2,600 Series C preferred shares. Together, these sales generated net proceeds of approximately $47.5 million during the third quarter. Importantly, all of our financing remains fixed rate and unsecured. This gives us a strong measure of protection in a rising rate environment, and we have no financing maturities prior to April 2028. We paid a special distribution of $0.25 per common share in October. And just yesterday, we declared an additional special distribution of $0.50 per common share, our second special distribution declared this year to be paid in January of 2023. We were able to do this because of the strong cash flow from our portfolio and it reflects our proactive portfolio management in a challenging market. We believe there may be more spillover income in 2023 as well. As of September 30, the weighted average effective yield of our overall portfolio was 16.29%, down slightly from 16.71% at the end of June. Our portfolio's weighted average effective yield was aided by our ability to put new investments in the ground at attractive levels, few borrowers defaulting and very muted levels of loan repricing. As I mentioned, during the quarter, we deployed over $60 million of net capital into a broad number of CLO and other investments. Across the 8 CLO equity purchases we made during the third quarter; the weighted average effective yield was approximately 17%. We continue to find attractive opportunities in both the primary market and selectively in the primary market. And in October, we deployed an additional $16 million of net capital into CLOs and other investments. As of the end of the third quarter of 2022, our CLO equities weighted average remaining reinvestment period stood at 3.2 years, and this is just a small reduction from the 3.3 years this measure stood as of June 30. Our current weighted average remaining reinvestment period is well above the 2.4 years that it stood at the beginning of 2021. And what that means is despite the passage of 21 months through our proactive portfolio management, the reinvestment period on our CLO equity positions actually increased meaningfully, and we believe this strategy helps our portfolio during times of market volatility like today. Even in the secondary market, when we're looking to buy secondary CLO positions, we remain very focused on finding opportunities to invest in CLO equity with generally longer reinvestment periods, which enable us to definitely navigate through today's and the inevitable future bouts of market volatility. I would also like to take a moment to highlight Eagle Point Income Company, which trades under the symbol EIC. EIC invests primarily in CLO junior debt, specifically the BB tranche of CLOs. For the third quarter, EIC generated net investment income of $0.47 per share, excluding nonrecurring items. Last week, EIC announced that it was raising its monthly common distribution by 14% to $0.16 per share for the first quarter of 2023. And since the first quarter of 2021, EIC has now doubled its monthly common distributions. And with the rising rate environment, EIC remains very well to continue increasing NII given that the performance of CLO junior debt, which plays a floating rate coupon linked to either LIBOR or SOFR is heavily correlated with rising rates. We invite you to join EIC's investor call at 11:30 a.m. today and also to visit the company's website at www.eaglepointincome.com to learn more. Overall, we continue to 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 I'll share our outlook as we wrap up 2022. I'll now turn the call over to Ken.

Thanks, Tom. For the third quarter of 2022, the company recorded net investment income and realized gains of approximately $22 million or $0.47 per share, which is above our third quarter regulated common distribution level. This compares to NII and realized gains of $0.43 per share in the second quarter of 2022 and NII and realized gains of $0.39 per share for the quarter -- for the second -- sorry, the third quarter of 2021. For the third quarter, when unrealized portfolio depreciation is included, the company recorded net income of approximately $9.7 million or $0.21 per share. This compares to a net loss of $2.35 per share in the second quarter of 2022 and net income of $1.35 per share in the third quarter of 2021. The company's third quarter net income was comprised of total investment income of $30.2 million and realized capital gains of $3.4 million, partially offset by total net unrealized depreciation of $11.9 million, expenses of $11.5 million and distributions on the Series D preferred stock of $0.5 million. The company's asset coverage ratios at September 30 for preferred stock and debt calculated pursuant to Investment Company Act requirements were 285% and 421%, respectively. These measures are comfortably evolved its statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 35% of the company's total assets less current liabilities, which is at the high end of our target 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 fourth quarter through October 31, the company received recurring cash flows on its investment portfolio of $31.2 million. This compares to $40.8 million received during the full third quarter of 2022. Please note that some of our investments are expected to make payments later in the fourth quarter. The reduced October amount is largely attributable to our CLO equity portfolio due to the continued divergence between one-month and 3-month reference rates, which was brought on by the rapid acceleration of interest rates throughout the past several months. As of October 31, we had $23.4 million of cash available for investment. Management's estimate of the range of the company's NAV as of October 31 was $9.66 to $9.76 per share, with the midpoint of that range, reflecting a decrease of approximately 5% from September 30. During the third quarter, we paid 3 monthly common distributions of $0.14 per share. We also declared monthly common distributions of $0.14 per share through March 2023. In addition, the company paid a special distribution of $0.25 per share in October. And yesterday, we declared an additional special distribution of $0.50 per share to be paid in January 2023, as we estimate our taxable income for the tax year ending November 30, we'll exceed the aggregate distributions paid to stockholders with respect to such tax year. I will now hand the call back over to Tom.

Great. Thank you, Ken. Let me take the call participants through some of our thoughts on the loan and CLO markets. The Credit Suisse Leveraged Loan Index, which is a broad representation of the corporate loan market, generated a total return of 1.19% during the third quarter, and that's well in excess of investment-grade bonds or the return on high-yield bonds as well. The index was down 3.31% for the year as of September 30. But through October and parts of November here is now down only 1.67% for the year as of the 10th of November. As we have foreshadowed on several calls, leveraged loan defaults have begun to slowly rise with a total of 6 loans defaulting in the third quarter of 2022. Notably, there were no loan defaults in October. Headquarter end, the trailing 12-month default rate stood at 90 basis points, still well below the historic average. During the third quarter, 2.6% of loans outstanding repaid at par. To frame it, this is over a 10% annualized pace and provides our CLOs with par dollars to reinvest in today's discounted loan market. Given the market conditions, the percentage of loans trading over par continues to be essentially 0. And as a result, repricing activity in the loan market is also essentially 0. In fact, some borrowers are addressing 2023 maturities and are refinancing those loans at wider spreads. On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios increased by 3 basis points from the end of June. This measure of our portfolio has now increased for 4 consecutive quarters. In addition, many banks holding hung buyout debt on their balance sheet have begun to capitulate and are selling loans that they underwrote earlier in this year at discounted prices in the 80s and low 90s. In my experience, bankers often like to take all their pain in one year, and our CLOs are well positioned to capitalize on these highly motivated sellers going into the end of the year. Our portfolio's weighted average junior overcollateralization cushion was 4.24% at the end of September, a slight increase from the 4.20% that measure stood at the end of June. In the CLO market, we saw about $33 billion of new issuance during the third quarter, and new issuance in total eclipsed the $100 billion mark through the end of the third quarter. Reset and refinancing activity has essentially stopped. And at today's wider debt levels, they simply don't make economic sense. At today's spread levels, frankly, the current CLO financing of nearly any CLO is in the money. And indeed, looking at our portfolio, while the broad market for AAAs today is about 230 basis points over the base rate, the weighted average AAA embedded in our CLO equity portfolio is 115 basis points, roughly half the market spread. While the market gives credit to the in-the-money nature of our CLOs financing partially, we believe the market doesn't give full credit and that this reflects embedded hidden value within our CLO equity portfolio. Our CLO security valuations did face mark-to-market drawdowns during the first half of 2022 and through those -- some challenges in the third quarter. However, it is an environment of loan price volatility, where we believe CLO structures and CLO equity in particular, are set up well to buy loans at discounts to par with a very stable financing structure using par paydowns from other loans and gives the CLOs the ability to outperform the broader corporate debt markets over the medium term as they have done so in the past. To sum up, NII and realized gains once again exceeded our common distributions. We paid a special distribution in October and just yesterday declared an additional $0.50 special common distribution, which will be paid in January. The new CLO equity investments that went into the ground during the third quarter had a weighted average effective yield of 17% as we continue to deploy capital into investments with attractive yields. The weighted average effective yields on CLO equity, of course, include a reserve for future credit losses. We continue to maintain 100% fixed rate financing with no financing maturities before 2028. All of our financing is unsecured, and this gives us a measure of protection from rising rates and frankly, has locked in attractive cost of capital for the benefit of our shareholders for many years to come. The third quarter was a strong one for the company. We're happy to keep returning extra cash to our investors in the form of special distributions. And as we close out the year, we'll remain opportunistic and proactive as we manage our investment portfolio with a long-term mindset. We thank you for your time and your interest in Eagle Point Credit Company. Ken and I will now open the call to your questions.

[Operator Instructions] The first question today is coming from Mickey Schleien of Ladenburg.

Tom, I see that the portfolio's junior OC cushion climbed, but so did the CCC bucket on average. And when we think about those trends, how would you see CLO managers are behaving in terms of managing portfolio risk? And how do you see the ratings agencies actions trending in this cycle and going into next year?

Sure. All very good questions. So, the agencies are certainly picking up on downgrades to some degree. I'm looking at our CCC is about -- zoom in here, so I can see the number, looks like what are we up to 6.45%. Yes, in the junior secretion is 4.24%. And as you look through the portfolio, you can obviously a dispersion of a wide variety of CCC levels across different CLOs. Obviously, the weighted average of 6.45%. Downgrades upgrades have picked up. It's not a massive downgrade wave but -- and there are still some companies getting upgraded, but downgrades right now are outpacing upgrades. Just as you see, and not that we have a lot of big tech companies in our portfolio, but you see big tech companies doing layoffs and things like that. With the inflation environment, the likely slowdown in economy, we are seeing some companies getting downgraded at a faster pace than loans are getting upgraded. Against that 6.45% is obviously a weighted average. If you just assume that was a representative CLO, you'd need to get to roughly 7.5% before you started taking any sort of haircut on the excess above that in the OC test. Frankly, the 4.25% OC cushion we have is great. It's exactly where we'd like to be. If anything, I wish it was higher, but it's as high as one could reasonably hope in our opinion, going into a period of some continued choppiness. What we're seeing from CLO collateral managers is they're behaving rapid rationally just because the loan as CCC doesn't mean it's going to default early indicate a higher risk of default, but skilled collateral managers are hopefully more often than not to get those right versus wrong. And while we obviously all sequel prefer clean portfolios versus those with CCCs, what we don't want to see happen is anything with the CCC inherently is going to trade at a discount to fair value compared to a B3 loan simply because of the adverse potential adverse treatment within the CLO. So, we want them to sell, if they think there's risk of further loss. At the same time, if they think it's a temporary thing, we have no problem with them holding. And by and large, we've seen CLO collateral managers behave quite rationally around this behavior. The last time we saw a big uptick in downgrades was kind of into the March, April, May of 2020 period. And there, we saw the rating agencies taking downgrading broad swaths of the market before earnings based on educated guesses or maybe even uneducated guesses depending on your opinion of what company earnings would be. Here we're seeing the agencies. While we don't like the actions. In general, I described them as pretty rational and pretty measured as well. Looking forward, while we can't predict these things perfectly, it does feel like the agency actions are taking place at a measured pace. It's not wholesale action, frankly, but company-specific review. And to the extent there's slow moves in ratings up or down, that gives -- that certainly gives some CLO collateral managers plenty of time to manage their portfolios. What's most important with that OC test is how it is on the determination date; OC tests matter 4 minutes of the year, proverbial 5:00 p.m. on 4 days a year when the waterfall is run on the CLO to the extent rating actions are moving slowly, which they are right now, that gives CLO collateral managers plenty of time if they were to get some surprise downgrades and if they needed to make a change to get the portfolio on site typically would give them enough time to be able to make such a change.

That's quite helpful. Just one follow-up question from me. When we look at the debt-to-EBITDA ratio on the leverage -- in the leveraged loan market, it climbed a high of 5.5x in the third quarter. And when we think about that ratio and consider the impact of higher interest rates and existing pressure on borrower margins, I'd like to understand what's your view on how you think CLO equity cash flows will trend next year given the underlying borrower performance?

Sure. So, if you look at our investor deck, probably the relevant numbers to look at are on Pages 32 and 33. And just grapple with one or 2 data points here. There's leverage multiples and of outstanding loans and new loans and the interest coverage multiples of outstanding loans and new loans. The one thing we'll say is because there's so much -- so many private companies look at the data on Page 32, the outstandings, which because really what's -- in theory, should be the most relevant, is just of those that are public reporters, which in my opinion, probably show a positive bias towards larger, more established companies. So, it's nice to look at the outstandings as a broad market measure, but this is just a subset of the loan market. The newly issued loans are also interesting. This is what's clearing the market today, but just represents a point in time snapshot of what the market is accepting not long-term trends. I'd like to look at interest coverage, more than leverage. At the end of the day, interest coverage is really the measure that you can pay your interest, that's a good fact. You can see for outstanding loans; interest coverage is actually at highs going back to 2024. So that's very, very good. Interest multiples of interest coverage for newly issued loans in the second quarter, which is the latest data we have available, 3.8x. That's probably -- both of those numbers probably trending down just as base rates have continued to go up. [indiscernible] to frame it, if you just take the average of those 2 numbers and kind of say companies have about 5x coverage, just picking the average of the outstanding and newly issued, you could see a significant -- a further significant increase in interest rates before many companies struggle to pay their debt. While these are averages, so you could have higher and lower, obviously, not every company is at the average. There is some pretty good cushion for most borrowers to be able to continue servicing their debt. And then if you flip ahead to Page 33, this shows one other interesting piece. I always look at this bottom chart as well. And this is the annual year-over-year EBITDA change for below investment-grade companies. Again, this is just public issuers, but it gives you the flavor. We're still seeing some decent growth in EBITDA of these companies. We're not seeing -- well, there's a dispersion, obviously, and some are shrinking or some are not growing to plan is often what causes downgrades. We are still seeing double-digit top line growth and double-digit EBITDA growth on average for below investment grade companies. As long as that continues, that's probably the best fact we can point to. Companies growing at double-digit percentages, typically don't get into too much trouble.

The next question is coming from Paul Johnson of KBW.

So, I have 2 questions sort of in one, but I was wondering if you could just talk to us kind of what it means for your portfolio with the refi and the reset market essentially at a standstill or in pause mode at the moment. What does that mean for you guys in terms of just deployment as that's always been a fairly big part of your strategy? And are you still able to buy loans in the secondary market? Or are you still able to reset CLOs in any way? And then the second part of that question is just with repayments being lower this quarter, or year-to-date, I should say. What does that mean for just new issuance in the CLO market? I imagine it's potentially increasingly difficult to get a CLO to market just with rates, but I was wondering if that's true. And what are your expectations around CLO issue and deployment in your portfolio?

Sure. A couple of different questions there. I'll evidence, let me try to address each of the points. Indeed, the refi and reset market is essentially shut at this point. The market spreads for CLO debt are so wide right now. In our case, just on the AAA as you heard, where our weighted average AAA is roughly half the level of the broader market. So, we're thrilled and savoring the financing we locked in yesterday. If you look back over our history, ECC has been public for over 8 years now, refi and reset waves are episodic. So, 2021 was reset Mania. We certainly did over 30 corporate actions during the course of the year. I don't remember the exact tally, but it was a loss, be it refis and resets but extremely busy last year. Today, what we're doing is we're buying in the secondary market. Refis and resets typically are not actually a big capital in or capital out transaction for us. Once in a while, there were some exceptions some exceptions both ways where we can either take a dividend out. We were doing that in summer of '21, doing what we call like dividend recaps of some of our summer of 2020 CLOs, where we actually took a reset the deal, lowered our cost of debt and took a checkout. That's obviously great. I wish we could do that every day. We haven't done that in a little while. And other times, you reset, you actually put a little money in. But by and large, you should think of refi and reset is more portfolio management rather than a deployment matter. And that, by and large, there's not a lot of cash coming in or out. Where we're deploying sometimes is in the primary market. And right now, the vast majority by count of our trades has been into the secondary market. And we've been able to buy majority blocks from motivated sellers, why they're selling varying reasons? Might the securities go down further? Sure. Are they good long-term fundamental investments? We certainly believe so. So, the vast majority of our focus right now is on the secondary market. Interest rates certainly are up a ton. 3-month rates are over 4%, seemingly usurious we were at 20 basis points at the beginning of the year. So, the movement in rates is radical. And when the CLO on both the asset and liability side, it's up. The bigger challenge is, frankly, the movement in spreads. And that while loan spreads are creeping up a little, CLO debt spreads have moved up a ton. And that's probably the biggest hindrance to getting new issue CLOs over the finish line. So, where we sit in the current market today, I'd expect to see more activity or continued activity buying secondary. Even there, we still look for CLOs with longer remaining reinvestment periods versus shorter. The number one thing I don't like about buying secondary and not having to reset and new issue market readily available is our weighted average remaining reinvestment period, which fell 0.1-year quarter-over-quarter is probably -- it's not crazy to expect to see that to continue to go down over time over the next few quarters, simply because our ability to reset the -- lengthen that out is muted with the market not open. That said, we were very low 2 years at the beginning of 2021. So, when the market's open, we take advantage of it and lengthen out as much as possible when we have to be a little more quiet on that side. We're going to have a little bit of decay very likely, but we let the portfolio run itself out. In terms of and still able to reinvest and capture. And to your point, so loan index, probably 0.92, 0.93 on the dollar right now, depending on which index you look at. The 10% prepayment rate that we're seeing on loans is about the low that we've seen over the history of the loan market and my recollection. That said, if you're getting 10% of your money back and you can reinvest at 92%, that still helps -- that helps you build 80 basis points of par through the course of the year. If you just assume $0.50 recoveries on loans to be conservative, that's 1.6% default is offset through that discounted buying. So even though that 10% is much slower than the long-term average of 30% per annum on prepayments even at that low rate, it still gives you plenty of optionality to keep reinvesting within the CLOs. And then there's also discretionary trading within CLOs. And beyond just reinvesting paydowns, you could also sell a CLO collateral manager could also sell a loan at 94 and buy a different one at 90. And in that case, build 4 points apart on that trade. So obviously, prepayments, that's the easiest because that's just the opening the mail school of portfolio management to reinvest that cheap, but more proactive CLO collateral managers and many that we choose to do business with are those that will sell and rotate within the portfolio, building par. Sometimes, it's to avoid a further loss and sometimes it could be offensive and actually build par. So, we still see, in many CLOs turnover in the portfolios between 20% and 40%. There's a wide dispersion there. But in general, we like to see continued portfolio turnover. And by and large, we're seeing that across our portfolio.

Got it. That's a very helpful answer. A lot of detail in there, but very helpful. My last question was just on the -- more on the balance sheet. In terms of the ATM, the amount of capital raised through the ATM this year in this quarter, most recently, you guys had obviously one of your more aggressive quarters in terms of the number of shares that were sold and a fairly high number of shares that were raised through the ATM year-to-date. I'm just curious, you're raising so much capital at these prices. How do you, I guess, evaluate the current environment, I guess, the set of returns that are available to you, obviously, against where shares are trading in the market? Just curious what you're seeing that obviously makes it so attractive to raise capital at that pace?

Yes. So, let's look at the asset side of the balance sheet for a minute. And the weighted average effective yield of the new CLO equity investments that we made was about 17%, give or take. And that includes a reserve for future credit losses, and we think it includes some fairly punitive assumptions. So, then we look at what our distribution rate is, the ongoing common distribution, obviously, the cost of expenses of the fees and expenses of running ECC and then the benefit of the leverage as well. Of all of our financing, I think our highest at 6.75% at this point. So that certainly helps matters. So, when we look at the combination of issuing equity, that the highly in the money financing that we have baked in at ECC that we're able to put money in the ground that a loss adjusted 17% yield. We think the new investments that we're buying today, we believe, will be accretive to earnings over time for the company. When we look at the calculus of what we can earn on it, minus the cost of running the company plus the benefit of leverage, the math in our opinion, is pretty damn clear. And when we make the decision to issue on the ATM, it's based on cash balance to the extent cash is lower, we're going to issue more to the extent we've just received payments, maybe we're going to issue a little less and also a function of the investment opportunity. The marginal -- while we don't like to have much cash on the balance sheet and indeed, we typically run things fairly lean. We do want to be able to -- with 700-plus million of assets. We want to have 8 digits of cash on the balance sheet whenever possible to be able to pick up an opportunity when we see it. But at the same time, we're mindful of cash as an NII drag. So, we seek to minimize it, but it's a balance of having being able to have our catches been open to capitalize on things. So, I'd say we're very -- the ATM is a really a very elegant solution for companies like ECC and that allows us to have kind of a nice slow trickle of capital, doing those overnight deals. There's any number of concern challenges with those. The ATM, we find to be a really elegant solution. And I think we're very disciplined around it, vis-a-vis the deployment pace and the anticipated NAV accretion from issuing at a premium and hopefully, earnings accretion from being able to invest at today's very attractive levels. That's a long answer. How about the short answer, we try and do it carefully. So, when we think it makes the [indiscernible] but those are all -- there's no science to it. It's an art. And I think we've done it very responsibly since we've been public.

[Operator Instructions] The next question is coming from Matthew Howlett of B. Riley Securities.

Just first bigger picture, Tom, when you look at -- you guys are still staying fairly aggressive, and it's great to see. But I mean, you talked about in the past about technical factors impacting leverage one market we hear -- we pick up the newspaper here about U.K. pension funds outflows from a lot of the major fixed income interest. Is that still the case to still feel like even though defaults could rise at technically speaking, that sort of added pressure on the market today?

So, the articles you might have read about the U.K. pensions, that was actually principally driven around them selling CLO debt securities, not CLO entity security. In our opinion, there's not enough for sellers in the world. That was a point in time as they had some extreme movements in gilts unprecedented or not seen in many decades, less statement about fundamentals of CLOs, in my opinion, on their part. But we're -- Eagle Point as a firm is very happy to step up and help ourselves in those situations. Broadly, we've defaults had been close to 0, generation 10-year type lows at 15, 20 basis points, not too long ago. We're still only at 90 basis points right now, not a single loan defaulted in October. We talked about debt service coverage and in a covenant light world whereas a lot of companies can keep paying their earning and keep paying their interest, the risk of default remains relatively low. One of the things that's essential, and it's important that you have to be in your reinvestment period to capitalize on this, in our view, price volatility in loans will be greater than the actual credit expense in the loan market. But in another way, the rumor is worse than the news. And what I'd say is if loans trade off 10 points, maybe there's going to be 5 points in defaults. It's hard to see a scenario where loans trade off 5 points, and there's 10 points of defaults, and the market ignores that greater piece. So, a broad thesis that we have, obviously, history is on our side on this, the future could be different, of course, is that price volatility in loans will nearly certainly be greater than the actual credit expense. And as long as your CLOs in the reinvestment period and you have a halfway decent collateral manager running the ship, and I think we do a pretty good job of picking those you're going to win over the medium term. In the short term, you could have your marks go down, and we saw that with our October NAV, frankly, CLO marks fell. It doesn't mean there are bad things happening. No company is defaulted. But the broad view that price volatility in loans will be greater than ultimate credit expense. As long as you're in the reinvestment period, your CLOs can capture that. And one of the things I look at is if you look at like ECC's change in NAV from pre-COVID from December 31, 2019, through December 31, 2021. So, if you invested the proverbially the day before COVID and just let the portfolio go, our NAV went up significantly over that time. It wasn't a straight line. It was obviously a dip the wrong way, but that's evidence of the price volatility was greater than the ultimate credit expense and our NAV came out better on the other side of that. To the extent the faults get meaningfully worse, we certainly have an expectation it's no assurance, but an expectation that our portfolio would do the same thing.

I do think there is a misunderstanding what the CLO reinvestment period and now those words. I'm glad you went over that again. I did notice the CLO equity percentage came down a little bit in October. Is there -- is that -- I think it was 81.7%. I mean, is that down from 85% would -- is that going to be a moving target still above want to keep it above 80%? Or is there anything? Is it just a month over month just change...

As just the price of CLO equity securities sales, it was not a conscious decision on our part. Mark [indiscernible] probably net have more par be more notional of CLO equity at the end of the month and the beginning if I had to guess, but that was not a conscious decision just to price of stuff out.

That's [indiscernible]. And then the dynamic between 3 months and one month [ SOFR ]. Could you just go over that again, the CLO liabilities for 3 months? And how much is that going to impact [indiscernible]

Yes. So, forget about LIBOR versus SOFR, let's actually use LIBOR because most loans and CLOs are still on LIBOR. So, CLOs pay off 3-month LIBOR as a general rule. We have one or 2 CLOs in our portfolio, which in certain unusual circumstances can pay one month, but the vast fast essentially CLO is pay 3-month LIBOR. And those rates are set 4 times a year on the quarterly determination date in January, April, July and October. Straightforward, simple, the trustee looks at the screen on Bloomberg, here is the rate, they type it in and that's that. They do it 4 times a year. Now loans can reset their rates randomly throughout the year. They're all short-term rates, but loans can pay off a one-month LIBOR, 3-month LIBOR 6-month LIBOR or even prime. And the borrower gets to choose and they can change what rate issue, what base rate they want to pay off of. But even if they were just on 3-month LIBOR, won't set their coupons randomly throughout the quarter. So, at a broad level, these things cancel each other out. But with this rapid movement in rates, what we've been seeing, and I'm just looking at the screen right now, one-month LIBOR is 3.87 and 3-month LIBOR is 4.6%. So, if you're the CFO of one of these levered borrowers, let me take a step back. Typically, in my experience, the difference between one-month and 3-month LIBOR is measured in a single-digit number of basis points, kind of 5 to 7 basis points, judgmentally is my opinion. Now you're looking at over 70 basis points. If you're a borrower on one of these loans, if you're the CFO of the borrower, you have to fill out a whole compliance certificate, it's a royalty in the nowhere to get those things done. If you're going to save 5 bps a year, you're not going to do it. But if you're going to say 70 bps a year, you're damn well going to do it. So, in this rising rate environment, borrowers are being very smart and trying to lower their debt cost as much as possible. They don't want to be paying 4%, frankly, I get it. So, when we're seeing rates move very rapidly, which is what we're seeing right now, I don't remember the last time LIBOR moved up 400 basis points in a year, maybe it has, but not into my recollection, what that's done is it's caused some timing mismatches. So, that's why we saw cash flows come down in October because the base rates, which were set back in July, there was a big enough spread back then as well. As rates start to slow down, I think a few people in the market are predicting base rates or 3-month LIBOR is going to be 8% at the end of next year. We're certainly not. To the extent that pace slows down, we expect that mismatch to close out and potentially even move in our favor if rates start moving down for a period of time. By and large, it's a frictional thing. You'll never get it perfectly right. It's more pronounced than I recall it, but it's, in my opinion, principally due to the rapid movement in rates, and we would expect as we would expect as rate movements slow, those 2 numbers would start to converge again.

Makes complete sense. Just the timing, and it will be maybe [indiscernible] stopping at some point. And with the special dividends, I mean these are just obviously bonuses for shareholders. And I think you said in your comments that there could be some spillover in next year. I mean how do you think -- how should investors think about special dividends sort of next year? I mean cash flows are running well above the operating EPS and the dividend.

Yes. So, there's 3 things, 3 masters we live by: cash, GAAP and tax. Obviously, the #1 answer is just make the cash flow the highest as possible and probably everything else will work itself out if we're successful there. Over the life of every CLO equity investment cash and GAAP and tax [indiscernible] each other. However, in any given year, in my experience, they've never been equal. So, if you look back in ECC's history, there's been years where we've had 75% of the distribution plus be a return of capital right 80% even in one year a few years ago. And in other years, we've had taxable income well in excess of our GAAP income. And so, what drives that? One of the biggest -- a couple of things. Let's say CLOs keep paying their payments nicely, but there's a bunch of defaults, you could actually get a lot of cash out of a CLO, but have no taxable income in that year. So that's kind of cool. Obviously, cash without current tax is great. At the same time, in an extreme case, a CLO could pick and you fail a CCC with massive CCCs but no defaults and keep getting taxable income without cash. That's obviously bad. That doesn't happen too often though. The other thing that goes on in CLOs is when we do a reset or refinancing, we get to take a write-off, a tax deduction for the previously unamortized issuance costs related to the CLO debt we're retiring in the refi reset. So last year, in fiscal '21, when it was reset refi mania here, and we did again over 30 corporate actions if my memory serves, that created a lot of, what I'll call, noncash tax deductions in that, like the original rating agency costs and the banking fees and all the other [indiscernible] that it takes to get a CLO issued, we could take a deduction on. This year, that activity has been highly muted, so we've lost that deduction, and we expect taxable income to comfortably exceed our common distributions. So, we're happy to -- we're shareholders as well. Everyone likes to get a special distribution. We have to pay out substantially all of our taxable income within roughly 10 months of the end of the tax here by redone. So, there is a small excise tax you have to pay. And again, there's not an art, if you defer it. There's not an art or a science, it's much more an art than a science. As we've looked at this, we -- the rationale for declaring the 50 is that we think taxable income we have even more spillover income. So, let's pay some out now. We can avoid the excise tax because that will be paid quickly enough to the extent our final tax returns look like we'll have even more, we'll pay that out. We'll have to take a reserve for it in the fourth quarter for that excise tax. And then we'd expect to pay out one or more specials during 2023 related to 2022 taxable income to the extent our projections are correct. That said, we're very good at predicting cash flows, pretty good at predicting GAAP income. There's so many behind-the-scenes variables and tax that it moves around a lot, and it's hard to put an exact number on it. But where we are today, we think it's quite comfortable and we certainly hope to issue more specials in the future.

Great job managing, and I'm sure no complaints from investors of those specialists. I drop on what is our [indiscernible]. And I followed and not asking the last question. You mentioned the hung on leverage loans that are going to be out there on big balance sheet, but Twitter, I mean, what's your just sort of thought or are you talking referring to those type of trade deals?

Well, now I'm mindful of the CEO also publicly talking about bankruptcy already. That may be -- but that's one that probably comes out. I think the banks have about 13 billion of debt. Some of the interesting ones that have come out have been Citrix, which I think was issued around 0.91 on the dollar. There's another one out right now, Tenneco, which is an auto parts manufacturer, net loans in the mid-80s, Nielsen, like the TV rating and all that, you hear the Nielsen ratings and whatever that is. They're out with a loan between 89 and -- that's offered 89 to 90 right now, 50 bps SOFR floor at SOFR plus 500. And these are, in many cases, loans that were committed to pre and Ukraine invasion. And for whatever reason, banks continue to provide underwriting at set levels where they sell the sponsor will take the loan down if we can't sell it looks something happens. And we're -- we, the loan market and our CLOs in particular, love those opportunities. And the market -- while the market doesn't do everything well, I think when there's -- when they know there's a bank with a hung LBO, I'd say the market is pretty disciplined at holding up for a pretty damn good price on things like that. So hopefully, we'll have some more of those bankers. If you're a banker, you might have it take all your pain this year, so you don't have overhang your bonus may be down this year. But hopefully, if you clear the decks, you can start making money again next year. So, bankers are usually heavily motivated to get all their problems off the books by year-end. So, we like that and hope there's more to come. And then at the same time, companies continue to refinance their debt, CITCO, the fund administrator. They have a number of different maturities, but they refinanced, I think, 150 basis points wider for part of their 2023 debt just to get that maturity done 4 Seasons Hotels is that with a loan today. It's, I think, 100 basis points wider than the old loan they're replacing, but that loan is coming due. So, they're a fine business, and they're making lots of money, just bad luck. They have to refinance at a choppy time. But for CLOs like ours, we'll take it. In 2019, I was crying about the -- 2018 about loan spread compression and loans were repricing down on us. So, we certainly -- we didn't like those days, but basically all go in cycles. And today, that's very much in our favor, and we hope it continues that way for some time.

I'm showing no additional questions in queue at this time. I would like to turn the floor back over to management for any additional or closing comments.

Great. Thanks so much, Donna. We appreciate everyone's time and attention today. We're quite pleased with how the company is positioned. These risks and uncertainties ahead, but we believe our portfolio is set up very well to capitalize on those opportunities as they play out. We appreciate your time and interest today. Ken and I are available later today, should anyone have any follow-up questions. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines to back off the webcast at this time, and enjoy the rest of your day.