Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Eagle Point Credit Company Inc. (NYSE:ECC)
Q2 2019 Earnings Call
Aug 15, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Eagle Point Credit Company Incorporated Second Quarter 2019 Financial Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Garrett Edson, Senior Vice President at ICR. Please go ahead.

Garrett Edson -- Senior Vice President

Thank you, Keith, and good morning. By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call, 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 in this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the Company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. For further information on factors that could impact the Company in statements and projections contained herein, please refer to the Company's filings 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 Form N-CSR, half year 2019 financial statements and second quarter investor presentation with the Securities and Exchange Commission. Financial statements and our second quarter investor presentation are also available within 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 link.

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

Thomas P. Majewski -- Chief Executive Officer and Director

Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's Second 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, including information about our portfolio and the underlying corporate loan obligors.

As we've done previously, I'll provide some high level commentary on the second quarter, then we will turn the call over to Ken, who will take us through the second quarter financials in more detail. And I'll then return to talk a little bit more about the macro environment, our strategy and provide updates on our recent activity, and of course, we'll open the call to questions.

During the quarter, our portfolio continued to generate strong recurring cash flows; our recurring cash flows totaled $1.05 per weighted average common share, and that's an excess of our common distribution, as well as interest and other expenses that the Company faces. While retail loan mutual fund outflows continued in the quarter with approximately $9 billion of outflows, we believe pressure from those forced sellers was offset by demand for loans from other institutional investors, both in the form of CLOs and through separately managed accounts. Indeed, despite the retail outflows for the first half of 2019, the Credit Suisse Leveraged Loan Index delivered a positive return of 5.4%; through August 8th, the total return on that index is now over 6%.

During the quarter, we issued $35.5 million of new common stock via our ATM program, capturing approximately $0.23 of NAV per common share and this NAV accretion obviously benefits all shareholders. At the end of the quarter, we redeemed half of our Series A term preferred stock. These are our ECCAs, which brought us back into the range where we generally expect to operate the Company from a leverage perspective over the long term. The As were our shortest maturity and represented the highest cost of financing on our balance sheet. Corporate credit expense within our portfolios remains low, while the lagging 12-month default rate ticked up a bit quarter-over-quarter to 1.34% as of June 30th; that's up from 93 basis points as of March 31st. The default rates in corporate credit certainly remain near historic low levels.

Overall, during the quarter, our NAV fell slightly, approximately $0.25 per share from first quarter 2019 levels. We highlight, however, that short-term changes in our NAV typically don't necessarily imply a change in the portfolio of cash flow the way such moves could with a BDC. Rather, we expect short-term drops in NAV may actually auger for a higher future cash flows in our CLOs as they are able to reinvest principal proceeds from repayments and sales in what can be a buyer's market for loans.

During the second quarter, we continue to remain proactive with respect to managing our portfolio. We deployed approximately $60.9 million of gross capital into new investments. The new CLO equity securities added to our portfolio continues to have a higher weighted average effective yield than the weighted average of our overall portfolio of CLO equity securities. And during the quarter, three of our loan accumulation facilities were converted into CLOs.

For the second quarter, we generated net investment income and realized capital losses of $0.07 per common share. This included an unusually high realized loss driven principally by the accounting treatment of a CLO that undertook a call and roll transaction. Beyond this call and roll, which I'll explain in more detail shortly, other realized losses were related to the repayment of the ECCA preferred stock and certain sold and called investments. Importantly, the vast majority of the GAAP realized losses were already reflected in the Company's NAV as unrealized losses. On an NII only basis, we generated NII of $0.36 per common share, modestly higher than the first quarter's total NII per share. To expand upon this call and roll transaction, which drove the majority of the Company's realized loss, a CLO where the company was invested had contemplated a reset transaction. Unfortunately, certain other investors in the equity class of that same transaction were uncooperative with the planned approach. Those investors did not benefit from the Company's preferential economics in the transaction, which we believe may have impacted their view.

As a result of this non-cooperation from other investors, the collateral manager was forced to unwind the old CLO vehicle and move the loan portfolio into a new legal entity. While the underlying portfolio was substantially the same before and after, the new vehicle was a new legal entity with a new [Indecipherable] and the Company had to treat the exit from the old vehicle as a realized loss. Economically, the reset done in the form of a call and roll made tremendous sense in our view, and the resulting accounting treatment of a realized loss is something that simply falls out of the right economic decision. Indeed, after giving effect to this call and roll, the effective yield on the transaction has increased from 9.6% to 15.6% as a result of these actions. So we're very pleased with that outcome, the accounting kind of falls out of it.

And while for several quarters we have generated GAAP net investment income below our distribution level, principally driven by lower GAAP portfolio yields on our sale of equity when determining our common distributions, we also evaluate the recurring cash flows that we receive from our investments and our estimates of taxable income for each fiscal year. I want to highlight again that it is taxable income that sets a floor on our common distribution; further, recurring cash flows from our investment portfolio exceeded our expenses and common distributions once again during the second quarter, just as they did in the first quarter and have historically. Based on current market conditions and our current portfolio, the Company expects to continue its monthly distribution of $0.20 per common share for the foreseeable future.

As I mentioned earlier, during the quarter, we deployed approximately $60 million of capital on a gross basis, both in the primary and secondary markets, and we received $36.8 million in proceeds from the sale of investments. We added four primary CLO equity positions for the quarter, which includes the conversion of three loan accumulation facilities. The new CLO equity investments that we acquired had a weighted average effective yield of 15.36% at the time of investment. This level is well above the June 30th weighted average of our overall portfolio of 13.49%; that weighted average, of course, excludes called CLOs that are being liquidated. This continues to demonstrate our ability to source accretive investments through our advisors investment process.

During the quarter, we made a decision to begin recasting all of our CLO equity positions effective yields on a quarterly basis. Previously, each position was recast either annually or upon a specific event such as a reset, add-on purchase or partial sale. Now, moving forward, we'll be recalibrating the entire portfolio's effective yield each quarter. We believe this evolution to a more frequent effective yield recasting will provide investors with even greater information about our portfolio. Whereas a static CLO -- a static portfolio of CLO equities weighted average remaining reinvestment period would decay one quarter each calendar quarter, across our entire CLO equity portfolio, the weighted average remaining reinvestment period remained flat versus the prior quarter end. The weighted average remaining reinvestment period flat at 3.2 years is due to our continued reset or call and roll activity and proactive portfolio management, which is a meaningful value add provided by our advisors overall investment process. Minimizing decay in the weighted average remaining reinvestment period is an important part of our risk mitigation strategies.

As of June 30th, the weighted average effective yield on our CLO equity portfolio excluding called investments was 13.49% and that compares to a 13.58% in the prior quarter and 14.14% as of June 30th of the prior year. The relatively stable weighted average effective yield quarter-over-quarter reflects the recalibration of the effective yield of our entire CLO equity portfolio and was aided by the increase in the weighted average loan spread on the loans held within our CLOs. The weighted average loan spread moved from 3.53% up to 3.57% during the quarter. As we've noted on previous calls, the weighted average effective yield includes an allowance for future credit losses. A summary of the investment by investment changes and expected yield are included in our quarterly investor presentation.

In July, and so far through August, I guess, measured through August 8th, we've deployed $9 million of gross new capital into investments. Overall, we believe the economy is holding relatively steady despite the recent macro volatility and given the low number of defaults we continue to see in the corporate loan market, we remain favorable on the overall market and our portfolio. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets in more detail and share some of our outlook for the remainder of 2019.

I'll now turn the call over to Ken.

Kenneth P. Onorio -- Chief Financial Officer & Chief Operating Officer

Thanks, Tom. Let's review the second quarter in a bit more detail. For the second quarter of 2019, the Company recorded net investment income and realized capital losses of approximately $1.7 million or $0.07 per weighted average common share. This compares the net investment income and net realized capital gains of $0.36 per common share in the first quarter of 2019 and net investment income and net realized capital losses of $0.34 per common share in the second quarter of 2018. The Company's NII net of realized capital losses for the quarter ending June 30th consisted of NII of $0.36 per weighted average common share offset by realized capital losses of $0.29 per weighted average common share. Realized capital losses for the quarter reflected $0.15 per share, resulting from the accounting treatment of a CLO that undertook a call and roll transaction versus a traditional reset. $0.02 per share of a non-recurring loss related to the acceleration of unamortized issuance cost associated with a partial redemption of the Series A preferred stock and $0.12 per share related to losses from the disposition of investments and a write-off of residual amortized costs of called CLOs.

While the majority of the realized loss was due to the accounting treatment specific to investment action, we highlight that the bulk of the realized losses are already reflected in our NAV as an unrealized loss. Further, even after taking into account the $0.29 per share net realized loss in the second quarter of 2019, the Company has recorded realized net capital gains of $0.09 per share since we went public in 2014. When unrealized portfolio depreciation is included, the Company recorded GAAP net income of approximately $1.6 million or $0.06 per weighted average common share for the second quarter of 2019. This compares to net income of $1.93 per common share in the first quarter of 2019 and net income of $0.44 per common share in the second quarter of 2018. Just a reminder that our short-term cash flow generation is largely unaffected by the unrealized appreciation or depreciation that we record at the end of each quarter.

The Company's second quarter net income was comprised of total investment income of $17.3 million, partially offset by total expenses of $8.4 million, net realized capital losses on investments and extinguishment of debt of $7.2 million and net unrealized depreciation or unrealized mark-to-market losses on investments and liabilities at fair value of $0.1 million. At the beginning of the second quarter, the Company held $1.3 million of cash net of pending investment transactions. As of June 30th, that amount was $13.4 million. As a result of deploying $60.9 million in gross capital during the second quarter, there was an additional amount of capital that only generated income for portion of the quarter, which we expect to generate full income going forward. As of June 30th, the Company's net asset value was approximately $347 million or $13.45 per common share. Each month, we publish on our website an unaudited management estimate of the Company's monthly NAV, as well as quarterly NII and realized capital gains or losses. Management's unaudited estimate of the Company's NAV as of July 31st was between a range of $13.02 and $13.12 per share of common stock. Non-annualized net GAAP return on common equity in the second quarter was approximately 1%. The Company's asset coverage ratios at June 30th for preferred stock and debt as calculated pursuant to Investment Company Act requirements were 304% and 519%, respectively. These measures are above the statutory minimum requirements of 200% and 300%, respectively.

As of June 30th, the Company had debt and preferred securities outstanding totaling approximately 32.9% of the Company's total assets less current liabilities. This is within our target of generally operating the Company with leverage in the form of debt and/or preferred stock within a range of 25% to 35% of total assets. This is down from 37.4% as of March 31st and was driven by raising accretive equity capital at a premium to NAV and redeeming half of our existing Series A preferred stocks at par at the end of June.

Beyond proactively managing the Company's investment portfolio, we are also very focused on the right hand side of our balance sheet. We seek to optimize our cost of capital, maximize flexibility and maturity profile afforded to us by our preferred stock and unsecured bonds. With the redemption of half the Series A preferred stock, the weighted average maturity of the Company's debt and preferred stock now stands at 7.5 years. While the Company is not a BDC, it is often compared against BDCs and we believe the maturity of our financing compares very favorably to the weighted average financing maturity of most BDCs.

Moving on to our portfolio activity in the second quarter through August 8th, investments that have reached their first payment date are generating cash flows in line with our expectations. In the third quarter of 2019, as of August 8th, the Company received recurrent cash flows on its investment portfolio of $26 million or $0.98 per common share. This compares to $26 million for $1.05 per common share received during the full second quarter of 2019. Consistent with prior periods, we want to highlight some of our investments are expected to make payments later in the quarter.

During the second quarter, we paid three monthly distributions of $0.20 per share of common stock as scheduled. On July 1st, we declared monthly distributions of $0.20 per share of common stock for each of July, August and September. Based on current market conditions and the Company's investment portfolio, the Company currently expects to continue its monthly distribution at $0.20 per common share for the foreseeable future. We note that the ability of the Company to declare and pay distributions is subject to a number of factors including the Company's results of operations.

In terms of our at-the-market offering programs, in the second quarter, the Company issued approximately 2.1 million shares of its common stock at a premium to NAV for total net proceeds to the Company of approximately $35.5 million. The second quarter issuance resulted in NAV accretion of approximately $0.23 per common share.

I will now hand a call back to Tom.

Thomas P. Majewski -- Chief Executive Officer and Director

Great. Thank you, Ken. Let me first take everyone through some of the macro loan and CLO market observations that we've gotten and how they might impact our Company. And then I'll touch a little more on our recent portfolio activity. As I mentioned earlier, through June 30th, the Credit Suisse Leveraged Loan Index generated a total return of about 5.4%, tracking ahead of where the index was at the same time last year. Loan retail fund outflows continued during the quarter. JP Morgan data shows outflows totaling about $9 billion although that was offset by demand from other institutional investors we believe. Given that most loans are trading at or below par, there continues to be minimal refinancing or repricing activity in the loan market at present. This has led to a nearly complete and certainly very welcome halt to the market wide loan spread compression trend that we had experienced over the past few years. I mean, as I mentioned earlier, on a look through basis, the weighted average spread in our loan portfolio increased 4 basis points from March.

The total amount of institutional corporate loans outstanding was about $1.2 trillion as of June 30th, and that's about a 1% increase from the end of the first quarter, according to data from S&P Capital IQ. As you're certainly aware, in July, the Fed cut rates by 25 basis points as was widely expected in the market. Lower rates all else equal is a credit positive event for corporate borrowers as they're all -- all of our borrowers are floating rate borrowers and their interest expense falls as a result of lower interest rates. Loan defaults continue to remain well below historic averages; the 12-month lagging default rate was 1.34% according to S&P, and even with the ups and downs in loan prices that we've seen since October 2018, importantly, the percentage of loans that traded stressed or distressed prices have not meaningfully increased, which indicates that the market is not foreseeing broad-based credit issues at this time.

We continue to expect default rates to remain below long-term averages over the near to medium term. I mean, this is due to a minimal impending maturities before 2022, a growing US economy and a large majority of the market consisting of covenant-light loans. We were mindful of the short-term uncertainty brought about by rapidly shifting positions on trade tariffs, but do not expect those to be long-term factors. When greater loan price volatility presents itself, we believe the Company and its investments are well-positioned to go on the offense and take advantage of those lower loan prices, given the benefit of our long-term locked in place non-mark-to-market financing inherent in our CLOs and the Company's long-term balance sheet.

From our perspective, as long term CLO equity investors, an environment of technically driven loan price volatility without an increase in defaults can be extremely attractive. In the CLO market through June 30th, we saw $65 billion of new CLO issuance along with $11 billion of resets and $13 billion of refinancings. For the full year of 2019, our advisor continues to expect about $100 billion of new issue volume, but now has lowered outlooks for resets and refinancings to $20 billion and $30 billion, respectively. We continue to selectively direct additional resets and refinancings in our portfolio, though at a slower pace than prior quarters, principally due to the fact that we've already reset or refinance the vast majority of the CLO equity in our portfolio. In our investor presentation, you can see specifically which investments have been refied, reset or in some cases both.

As a result, we expect our overall CLO equity cash flows to increase over time with less of an impact of the one-time reductions associated with resets and refis. The benefits of our prior refied-reset activity can also be seen in our weighted average AAA spreads on our CLOs. As of June 30, the weighted average AAA costs within our CLO equity portfolio was approximately 122 basis points. This compares to a market level of about 135 basis points at quarter end, and our weighted average AAA cost continues to be meaningfully in the money today.

As always, our advisors' deep CLO investing experience provides us with a notable advantage as we seek to generate additional value for our portfolio and our stockholders. I mentioned earlier we've deployed about $9 million in gross capital across CLO equity so far in the third quarter and we have dry powder available as we see opportunities in both the primary and secondary markets. Beyond seeking to maximize the value of our investments and looking to be opportunistic with respect to the loan price dislocation that we've seen, we continue to maintain solid visibility on our new investment pipeline for the next few quarters.

To sum up, we believe we had a solid quarter for the second quarter of 2019. We received recurring cash flows on our portfolio in excess of our common distributions, interest and other expenses; deployed approximately $61 million of capital into new investments; and new CLO equity positions that we purchased at effective yields are well above the portfolio's weighted average effective yield; and finally, we continue to raise new equity capital at highly accretive terms, delevered and increased the weighted average maturity of the Company's financing.

Given the low loan default rates that we're experiencing, we remain comfortable with the overall environment from a longer-term perspective. As a result, we have the strong opportunity to use our advisors' strength to create additional value for our portfolio over the longer term. We also continue to utilize our advisors' strength and selectively direct additional resets and refis, which we would expect to increase future cash flows to our CLO equity securities. And as loan spreads hopefully continue to widen, we believe the effective yield on our CLO equity portfolio will begin to rise as well. We'll continue to be proactive and management of both the assets and liabilities of the Company to create additional long-term value for our shareholders.

With that, we thank you for your time and interest in Eagle Point. Ken and I will now open the call for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Chris Kotowski with Oppenheimer. Please go ahead.

Chris Kotowski -- Oppenheimer -- Analyst

Yes. Two things; one is, you said on the call that you expect to continue the $0.20 distribution in the past. You had also said that you expect to cover it out of taxable income, and you kind of provided a reconciliation between the taxable and the GAAP income. And I wonder if you could do that again. Do you still expect to cover the distribution for 2019 out of taxable income and can you kind of somehow reconcile taxable income with a GAAP income that we see for us?

Thomas P. Majewski -- Chief Executive Officer and Director

Sure. Good morning. A spot on question. There are -- we're going to get a -- bear with us, a little deep into the weeds here with the answer. The short answer is, no, based on our current expectations that could still change. However, the reason for that is as an unusual kind of a non-recurring event that's happening within the portfolio. CLO equity -- and I'm going to get into a little bit of weeds here, but bear with me. CLO equity can be created in partnership format or a PFIC format. We've determined that the Company, the ECC is better off holding its equity in PFIC format, which gives it the ability to deduct certain capital losses against ordinary income within that same CLO, very unusual provision in the tax code to be able to take capital against ordinary.

We have been slowly -- not slowly, it has been slower than we'd like although we have been vigorously converting and it's been certainly several -- well over a dozen, probably two to three dozen, a significant number of partnership to PFIC conversions within our portfolio. The economics of the securities are identical, but there is -- we bake in when we create CLOs the ability to have a one-time conversion from partnership to PFIC, which the Company has been undertaken. As a result of that conversion, a significant number of CLOs will now have or significant number of our holdings will have a tax year that ends on December 31st. You'll recall the Company's tax year ends November 30th, and what this is going to have the effect of doing on a one-time or I guess on a permanent shift basis is move a portion of taxable income to the following year, and then in the next tax year that money will continue to be shifted forward, it's kind of a permanent shift by virtue of changing these investments from partnership to PFIC.

We went and studied and when we looked at the portfolio without giving rise to these, ignoring the impact of these conversions, frankly, taxable income was in line with our expectations, which was in the, I don't know if we put a specific number but in the 240 [Phonetic] zip code. As a result of this partial deferral of taxable income at present we expect to be below 240 [Phonetic] but we would expect that that additional income would just be picked up next year and closer to 240 run rate in the following year. So a little bit of a long story. A one-time change in the portfolio, which makes sense for us to do is causing a deferral of income. Had we not made that change, we believe taxable income would have been right around 240 [Phonetic].

Chris Kotowski -- Oppenheimer -- Analyst

Okay. And PFIC -- P-F-I-C or what is that stands for?

Thomas P. Majewski -- Chief Executive Officer and Director

Yeah. Passive foreign investment corporation. And if you look at our schedule of investments, you'll see some investments are called sub-notes and others are called income notes. In general, although not exclusively sub-notes are partnership pieces and income notes are PFIC pieces. That's not a 100% rule, but it's a good guideline.

Chris Kotowski -- Oppenheimer -- Analyst

Okay. And then I guess talk a little bit about the NAV volatility. I mean, if you look quarter-end to quarter-end, you started at $13.70 in the equity share issuance added 23 and then you ended $13.45. So that's kind of like a $0.48 erosion. And I guess and it's even odder if you look at April. In April, I think you said $14.33 to $14.43 and in July, you're down and NAV to $13.02 to $13.12 that's kind of a 9% decline in a three-month period where the visible loan price index is that we can see kind of didn't move that much. So what accounted for that decline in that?

Thomas P. Majewski -- Chief Executive Officer and Director

If anything, but certainly loans were up broadly, they weren't down meaningfully during that period. On a broad level and this is a macro statement about the overall portfolio, any individual position can vary widely and can vary and have different things going on. Broadly, the market -- CLO equity market shifted to a bit of a wider discount rate toward really the last three months if you look at May, June and July, where the marks on the positions were reduced in line with what the current market value is for CLO equity, broadly that the yield has that investors are demanding, including ourselves, has moved a little bit wider. So unlike quite a few BDCs, which just in many cases just leave things at par unless there's a big shock downward, as you know, we vigorously mark the portfolio to market every single month. The principal change was due to increase in discount rates.

Chris Kotowski -- Oppenheimer -- Analyst

Okay. That's it for me. Thank you.

Thomas P. Majewski -- Chief Executive Officer and Director

Thanks, Chris.

Operator

We'll take our next question from Mickey Schleien with Ladenburg. Please go ahead.

Thomas P. Majewski -- Chief Executive Officer and Director

Good morning, Mickey.

Mickey Schleien -- Ladenburg -- Analyst

Hi, good morning. So, I'm going to apologize for a long-winded question, it sort of follows up on the last question. Tom, we've seen that CLO equity cash flows have remained very good at 20% or even more from doing the numbers right for this quarter, and as you pointed out that's probably due mostly to defaults remaining low. And I do see that your cash flows are more than covering your distribution and expenses, but those cash yields are a lot higher than the average estimated yield of, let's call it, 13.5% and we know that takes into account a lot of assumptions, but I suspect the one that's been moving around the most lately is the forward LIBOR curve. So like you said, CLO equity investors are taking all of that into account and applying a higher discount rate to the projected cash flows and we're getting these more depressed prices, which looks like it continued into July. And again, I'm sorry for the long-winded question, but something's got to give, right? Because over a CLO's life, the cash yield and the estimated yield would converge, everything else remaining equal and you alluded to this possibility, I think in your prepared remarks. So based on your experience, when we're late in the cycle, which we appear to be now, how do CLO equity cash yields and estimated yields track in relation to one another?

Thomas P. Majewski -- Chief Executive Officer and Director

Let's see. Good question. The way that -- let me just start with this for a minute and then; you have long-winded question, I have long-winded answer. The way CLO equity is valued in the market today when it's lately seasoned and relatively new, it's much more of an NPV or present value of cash flows at a discount rate assessment. And the discount rate that the markets demanded has gone up.

Mickey Schleien -- Ladenburg -- Analyst

You mean, the CLOs that are terminal value, right?

Thomas P. Majewski -- Chief Executive Officer and Director

Correct. Versus -- where I'm going is as CLOs are more seasoned than, let's say, a CLOs at the end of its reinvestment period or even past it, in general there the market is going to value CLO equity much more on a liquidation value basis, not an NPV basis.

Mickey Schleien -- Ladenburg -- Analyst

I got it.

Thomas P. Majewski -- Chief Executive Officer and Director

What can happen as you get to those later stages, you can see distorted effects of yield, sometimes much higher, sometimes much lower, depending on -- because you're dealing with such a short period of time, if it's marked a few points above or a few points of below NAV, you can see some pretty wacky distortions. To part of your question on cash flow and late in the cycle, one of the things that's important to appreciate is, let's say, one loan defaults in a CLO. As long as it doesn't trip any OC tests or things like that in the CLO, the actual impact on the ongoing or recurring CLO equity cash flows is quite modest. Let's say, that loan -- it was a $100 loan, it defaults, maybe you get $0.60 or $0.70 back as a recovery. That $0.30 or $0.40 realized loss is something that comes out of the terminal value well in the future, the recovery on that loan is reinvested and that recovery -- that new investment amount continues to generate cash flow. So when you stress a CLO with higher or lower default rates, what you'll see is the cash flows -- the recurring cash flows don't move around that much. it's much more a change in the terminal value reduction if we had a high amount of defaults.

Of course, if we had a high amount of defaults, our expectation is the price of loans would fall and the reinvestment opportunity presented to CLOs would be that much better. Although you wouldn't see that in the ultimate manifest itself, in the ultimate liquidation value of this CLOs until such later time as loan prices recovered. So long story short, you could see yields move around more than cash flows in general for light to medium season deals.

Mickey Schleien -- Ladenburg -- Analyst

And directionally, it sounds like you're saying there's a chance that we'll actually see your effective yields -- your weighted average effective yield on the portfolio increase further?

Thomas P. Majewski -- Chief Executive Officer and Director

We did drop a little bit quarter-over-quarter, but where we're looking right now to the extent loan spreads -- we're not popping the champagne over 4 basis point increase in weighted average loan spreads. But maybe we should pop the champagne just for the lack of reduction in weighted average loan spread, which is something, if you look back to probably eight of our last 10 calls, you would have heard us lament about spread compression. Right now, at least, that does not seem to be a factor in the market and the repricing activity on loans is as close to zero as I recall seeing it in some time. So to the extent, the market continues with loans trading in this kind of 98 to 100 band, that augurs for the opportunity for the CLOs to actually increase their loan spreads, which is good news for us.

Mickey Schleien -- Ladenburg -- Analyst

Okay. Tom, you've obviously and your team have been investing in this segment for a long time. When you look at past cycles, where do CLO -- when do CLO equity investors typically become more optimistic about the outlook? In other words, right now, they're pessimistic, it looks like we're in the early stages of a down cycle; we've had down cycles before. When do they get more optimistic, has that process [Indecipherable]?

Thomas P. Majewski -- Chief Executive Officer and Director

That's a good question.

Mickey Schleien -- Ladenburg -- Analyst

Well, I'm trying.

Thomas P. Majewski -- Chief Executive Officer and Director

Yeah. No, I'll say it's different this time in that if you compare -- and this is some broad generalizations, the investor base in CLO equity today versus the investor base in CLO equity, 12 to 14 years ago, kind of from 2005 to 2007, there are certainly many more longer-term stickier vehicles like ourselves in the market, and obviously, you can see in our Form ADV beyond ECC, we manage CLO equity through other private vehicles with that are, we believe, well equipped to handle not short-term -- not half money in that complex. So at this point, I think broadly we have a different type of investor holding a lot of the CLO equity market. When do people get more optimistic? It's hard to say for sure. There can be both economic factors, frankly, and technical factors that drive market discount rates. There's not one particular thing that I can say, boy, if this happened, you'd see discount rates tighten and prices go up.

In different classes of securities, earlier this year -- this was talking about CLO debt, we saw AAAs widening while BBBs were tightening for a period of time, and frankly, that was due to some technical factors of some new money came into the BB market, which seemed to push things wider and the AAA market, had a few people go to the sidelines for a little while, which pushed things wider there and while BBs closer to credit risk were actually tightening. So there can be idiosyncratic things that affect as well. Supply -- I guess, the demand in that case can move around a bit. I don't have a silver bullet though, as to what would be the -- that the change.

The NAV, and I know this confuses people who are -- many people and you've done a lot of work trying to get your head around this, Mickey, you compare a NAV of a vehicle like ours or other CLO equity vehicles versus the stability -- potential stability of a NAV and a BDC, it really just as an apples to oranges thing. And this is why we provide investment by investment cash flow and income recognition. But at the end of the day, you can see exactly what's happening on each position and I don't think you'll see a material decay in cash flow really across any of our position. So if discount rates widen or tighten by 100 basis points in the next quarter, absent some other news, that unto itself wouldn't cause me alarm or excitement.

Mickey Schleien -- Ladenburg -- Analyst

Okay, understand. Tom, one of the idiosyncratic things that I've heard about and read about a little bit is, after the change in the risk retention rules, there have been some CLO managers who apparently price their deals with lower implied returns for their equity tranches basically to get their deals done because they wanted to price the deal. So how prevalent has that trend been, and what's been the impact on CLO equity market from that?

Thomas P. Majewski -- Chief Executive Officer and Director

Yes. So what you're getting at there, there are some CLO collateral managers who raised captive pools of capital that allowed them to direct -- to basically take the equity in their own CLOs into those vehicles that they controlled. To be 100% clear, there is no affiliated collateral manager in any ECC investment, and frankly, that's a key tenant of our overall advisor's platform, is that from time to time and invariably it comes up, there can be a conflict between ownership, meaning equity and management.

Mickey Schleien -- Ladenburg -- Analyst

Exactly.

Thomas P. Majewski -- Chief Executive Officer and Director

Both -- that can come up at the creation. But should we do the deal or not, and then should we call the deal or not? So everything in ECC has a third-party collateral manager. That said, a number of those funds in printed transact -- a number of those third-party funds where there is a captive to a particular collateral manager have printed CLOs that in our opinion are at off-market levels. We can't control what those folks do with their money. Certainly, those are not the type of CLOs we're investing in. It doesn't have that big of a distortion on the equity market and that equity typically just gets buried away in some other fund so that much is OK. Against that some of those firms might -- this is kind of a consequential thing, might just print to print even if they have to push AAA market or AA market wider and CLOs, which could have an adverse effect if our deal has been excellent going. We obviously track the spreads and we make the decision when to convert a loan accumulation facility to a CLO when we think is best, not by virtue of not focused on the management side of things.

Mickey Schleien -- Ladenburg -- Analyst

I see and appreciate your time, but I do have a couple more questions even how volatile everything is. I see that the weighted average CCC bucket in your portfolio. It increased a little bit at 5.2%. It's still quite a bit below the 7.5% sort of typical limit. How concerned are you that managers are filling their single B allocations either proactively or through some of the downgrades that we've seen, which eventually could cause them to breach the CCC limit? And is that a meaningful factor that CLO equity guys are thinking about?

Thomas P. Majewski -- Chief Executive Officer and Director

Yeah. So just to kind of recap the way the CCC buckets were typically in a CLO and every terms and every -- any CLO can vary, but, broadly you should think of it. Once there are more than 7.5% CCCs in a portfolio, there's a haircut to the numerator of the OC test related to a portion of the loans -- that's CCC rated loans in excess of 7.5%. So if a CLO is at 7.49% that doesn't even matter. CLO all of a sudden goes to 7.51% and you're going to take a haircut on that 0.1% and obviously it goes up and up and up from there. Invariably, as CLOs season, you do see a little bit of CCC a little downward migration, very few of those -- some CLOs will start with 1% or 2% CCCs, maybe a little higher in one or two cases, but that's kind of a bucket more contemplated for migration, and indeed a non-trivial amount of loans are rated B3, which all else equal could suggest they could get the CCC sooner than later.

Let me look at our portfolio distribution just to be -- on a point here. Bear with me one sec, I'm just looking through this quarterly deck. I'm just looking for three of our ratings distribution. Here we go. Sorry, I found that on a different thing. This is on -- if you look at our monthly tear sheets, you'll see the bulk of the portfolio and these come up on the website -- have July month end tear sheet up on the website later today. You'll see the bulk of the portfolio is single B rated if you use the S&P ratings, they would be B2 equivalent on a Moody's scale. If you were to have looked at a similar chart broadly and a CLO 10 or 12 years or 12 or 14 years ago, you'd probably see it a little more evenly mixed between B plus and B versus where we are right now. So that's certainly one thing that is a shift. But what I'll say is good collateral managers are pretty proactive in saying what I call managing or foreshadowing, downgrade risk. One collateral manager in particular that I know actually has a feature in their system where the analysts escribe a probability of falling to CCC three months out, six months out or a year out, and with that one issuer has said as well they often don't get it right on a name by name basis, their outlook in aggregate across their portfolio turns out to be pretty darn accurate.

So a good CLO manager is going to keep their eye on that in a pretty big way, A, B, even if we breach the test, though, let's say we went over 7.5% in any CLO, we have on our overall junior OC cushion right now, 4.37 points on a weighted average basis of cushion before the OC tests would have tripped. So we could take a lot of CCC migration before there would be any risk of impacting cash flows. Ultimately, we have CCCs do portend for higher credit risk against the collateral managers in our portfolio, we believe are some of the best in the market. And we're going to make the right -- we believe they're in aggregate making the right decision should they sell or liquidate a name, crystallising a loss potentially or is it better to hold.

Mickey Schleien -- Ladenburg -- Analyst

I appreciate that. That's good to understand. One last sort of housekeeping question. What were the factors the external manager considered in deciding to waive some of the incentive fees? And can that waiver be recaptured?

Thomas P. Majewski -- Chief Executive Officer and Director

So -- no, it can't be. What we did in this kind of just falls in the right thing to do bucket. When we called the half of the As, the half of the unamortized original issuance expense becomes a realized capital loss.

Mickey Schleien -- Ladenburg -- Analyst

All right.

Thomas P. Majewski -- Chief Executive Officer and Director

Had we just let the -- had we let the As run out, that would have been above the line and would have reduced our incentive fee because it would have been treated as interest expense, but then when you prepay it, it goes below the line. So the spirit of the deal is that, it's not what the letters say, but the spirit of the deal is that should be interest expense. So we took a voluntary waiver and related to 20%.

Mickey Schleien -- Ladenburg -- Analyst

I remember, you've done that in the past, I think...

Thomas P. Majewski -- Chief Executive Officer and Director

We did that last time in Q2 of last year. That's just the right thing to do.

Mickey Schleien -- Ladenburg -- Analyst

Yes, I agree. So listen, again, I appreciate your patience today. Those were all my questions for this call. Thank you.

Thomas P. Majewski -- Chief Executive Officer and Director

Thanks, Mickey.

Operator

[Operator Instructions] We'll take our next question from Ryan Lynch with KBW.

Thomas P. Majewski -- Chief Executive Officer and Director

Hey, good morning, Ryan.

Ryan Lynch -- KBW -- Anlayst

Hey, good morning, Tom. Hey, just a couple of questions I had today. It sounded like in your prepared remarks you're pretty favorable on the overall market in your portfolio. It sounded like low default rates currently has you with that opinion. Just wanted to know, how do you square that with -- I look at Slide 34 from your presentation where it shows annual revenue and EBITDA growth from below investment grade companies and there's pretty meaningful deceleration in growth over the last several quarters. So how do you square being kind of pretty positive on the outlook versus this slowdown that's clearly being showed in some of these portfolio companies?

Thomas P. Majewski -- Chief Executive Officer and Director

Yes, very good question. This chart used to be up, up in a way and now it's kind of fizzling. And what does that mean? Obviously, this is an average, and some companies are doing much better, some doing worse than the average. We attribute a non-trivial amount of the increase -- the super strong performance of a year or so ago due to kind of a one-time acceleration of earnings and corporate activity due to the tax changes. We're kind of more normalized now and then overlay a little bit of the trade tariff uncertainty that I talked about, if anything is probably slowing some degree of capital spending by companies at this point. You certainly don't want to build a factory predicated on getting some raw material from a faraway place and now all of a sudden there's a 25% duty on it. The overall impact of the tariffs even if it's one of the things that's been a popular headline, $300 billion of goods subject to 25% tariff, that's -- we did the math sorry, it was $75 billion against that $20 trillion economy. It's a rounding error, but it certainly gets a lot of attention. You can move the equity markets significantly and if you're one of the people whose raw material is subject to such a tariff that's going to change how you behave. So I think we had a little acceleration last year due to the tax changes and I think we're kind of in a more normalized level and then hurt a little bit by some of the tariff uncertainty. We don't think that's a prolonged situation. That's our opinion. Obviously, we could be right or wrong on that. But we think those are kind of the two factors driving into the trend that you see on that chart.

Ryan Lynch -- KBW -- Anlayst

Okay.

Thomas P. Majewski -- Chief Executive Officer and Director

And then maybe party of that overlay, the maturity wall, which is pretty far out, an overlay covenant light and a Fed that has certainly -- this time last year, we might have been talking -- last October, the market was talking about 4 rate increases. We certainly, have a much more dovish Fed. So overlay, not a lot of near-term maturities overlay covenant light, which smallest companies keep paying their interest, there is not going to be a lot of technical defaults and overlay of Fed would certainly over the last 10 months has a more dovish feel to it, kind of all factor into our outlook.

Ryan Lynch -- KBW -- Anlayst

Okay. That makes sense. And then I had a question want to kind of follow up on some of the earlier discussion regarding the dividend. So kind of forgetting about GAAP versus taxable income with the dividend at the moment. If I just look at your current NAV today and I look at what is that dividend yield in your current NAV, it's about 18%. So if you run the math on that, you're going to be required -- at least the way that I run it, you're going to need about 18% to 19% portfolio yield to earn that at least from I'm just looking at the GAAP standpoint. Your effective yield today is 13.5%. I know your taxable yield is likely much higher than that, but going back and looking at that math to earn an 18% dividend yield on that NAV, you need to have about 18% to 19% yield in your portfolio. So do you expect this effective yield from a GAAP standpoint to rise significantly higher in the future to kind of maybe more match that taxable yield? And then just kind of from a higher level, broader standpoint -- maybe [Indecipherable] standpoint, is it reasonable to expect Eagle Point to pay and earn an 18% ROV and dividend yield on NAV given the current environment and given the 30-year Treasury rate at 2%?

Thomas P. Majewski -- Chief Executive Officer and Director

Another very good question. One thing to factor in mind first off is the price of the securities can move around a fair bit without a significant change in fundamental underlying cash flows just as markets ebb and flow and people demand wider or tighter discount rates. So could the NAV move $1 up or down in the next quarter due to changes in discount rates, yes. So that's the market discount rate. So first kind of take that as a -- just as a factor in your mind. I know -- what I don't think is even if our weighted average effective yield in the mid-13%s right now, I don't see it moving up 500 basis points in the very near term. If you look back over history, you'll see probably the peak was in the mid to high 17%s, maybe two-and-a-half, three years ago, something like that. So that's a factor that's out there.

And then I haven't done the math recently to get to the numbers you're talking about. Mindful, though, that I agree with the direction you're looking at, although I don't know that specific quantum. Where we look right now, our expectation is, frankly, for a lower corporate defaults that our models contemplate, so that should be a mitigating factor to the extent the price of securities moves up due to simply discount rate tightening, you'd expect the price of a net bogey that you're calculating would just by definition fall frankly in that you're working off a higher denominator.

So I don't have a perfect answer for you because I don't have a crystal ball as to where the price of securities will be. The things we look at, we talked about taxable income, we gave you the -- when we answered the earlier question about the shift to due to the PFIC conversions, which makes all the sense in the world, but it has there I guess the benefit of deferring some taxable income a year but we don't see the yields on the books going up 500 basis points in the very near term, against that cash flow from the portfolio has been well in excess of the yield of the distributions that we've been paying. So it's a montage of all of those. I don't have a definitive answer as to -- are we going to see that happen, like I said, we're not going to see that happen in the near-term, although what we -- a little different than a typical BDC, here I think you have to kind of look at all the different factors going on within our portfolio of [Indecipherable]. I was going to say GASH [Phonetic] -- GAAP, cash and tax and put the three of those together, which is ultimately really the medley of all those is what's driving our distribution policy with an overriding for taxable income.

Ryan Lynch -- KBW -- Anlayst

Okay. Yes, I can appreciate the complexity of the issue. I appreciate your answers. That's all for me today.

Thomas P. Majewski -- Chief Executive Officer and Director

Right. Thanks, Ryan.

Operator

And ladies and gentlemen, we have no further questions in the queue at this time. I would like to turn the conference back to Tom Majewski for any additional or closing remarks.

Thomas P. Majewski -- Chief Executive Officer and Director

Great. Thank you very much. We appreciate all the questions and thorough Q&A from call participants and everyone's continued interest in the Company. To the extent, people have further conversations or questions you like, feel free to reach out to either Ken or myself and I'll look forward to speaking to everyone again in the next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Garrett Edson -- Senior Vice President

Thomas P. Majewski -- Chief Executive Officer and Director

Kenneth P. Onorio -- Chief Financial Officer & Chief Operating Officer

Chris Kotowski -- Oppenheimer -- Analyst

Mickey Schleien -- Ladenburg -- Analyst

Ryan Lynch -- KBW -- Anlayst

More ECC analysis

All earnings call transcripts

AlphaStreet Logo