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Eagle Point Credit Company Inc. (NYSE:ECC)
Q3 2019 Earnings Call
Nov 19, 2019, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings and welcome to the Eagle Point Credit Company Inc., Third Quarter 2019 Financial Results Call. [Operator Instructions]. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Mr. Garrett Edson, Senior Vice President, ICR. Thank you. You may begin.

Garrett Edson -- Senior Vice President, ICR

Thank you, Michelle 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 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.

For further information on factors that could impact the Company and the statements and 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 Form N-Q, third quarter 2019 financial statements and third quarter investor presentation with the Securities and Exchange Commission. Financial statements in our third quarter investor presentation are also available within the Investor Relations section of the Company's website. The financial statements can be found by following the Financial Statements and Reports link and the investor presentation can be found by following the Presentations 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

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, 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 third quarter, then turn the call over to Ken who will take us through the third quarter financials. I'll then return to talk about the macro environment, our strategy and provide updates on our recent activity and of course, we'll open the call to your questions.

The third quarter overall saw an increase in yields demanded by investors to invest in CLO equity. This was coupled with downward price movement in corporate loans, particularly those rated single B. Against that, recurring cash flows from our investment portfolio remained robust during the quarter. The Company received recurring cash flows of $1.02 per weighted average common share, which is in excess of our distributions and expenses.

Our NAV moved lower during the quarter as CLO equity valuations were pressured by those wider yield demands and lower loan prices. During the quarter, our NAV fell by $2 a share.

As we've noted previously, however, short-term changes in NAV typically don't imply a change in our portfolio cash flow, the way such moves could with the BDC. As Ken will elaborate on later, recurring cash flows received from our portfolio so far in the fourth quarter have actually exceeded the total recurring cash flows received during the third quarter.

Despite the recent price movements, we continue to believe that there is no fundamental issue with the corporate loan market or the Company's portfolio. Frankly, we believe the drawdown during the quarter was principally driven by a market wide repricing of risk, not an increase in risk. Indeed, to that end, corporate loan default rates remain near historic lows and few are predicting significant increases in defaults in the near term. The lagging 12 month default rate actually decreased on a quarter-over-quarter basis, down to 1.29% from 1.34% as of June 30th, as reported by S&P.

As a reminder, periods of loan price dislocation keenly underscore a key advantage offered by CLOs in such an environment, that we have locked in long-term non-mark to market financing. The locked-in financing of CLO provides us with stability and allows many CLOs to profit by reinvesting principal paydowns from loans in their portfolios into new additional loans typically at lower prices and/or with wider spreads. In other words, we view the long-term debt of the CLOs in our portfolio to be more in the money in volatile markets like these, and like those of 2008.

To put some numbers on this, the weighted average spread of the AAAs issued by our CLOs in our equity portfolio is 121 basis points. Today, many new CLOs are issued with AAAs in the mid 130s, so the debt in our CLOs is in the money, which is a beneficial for the Company. While retail loan mutual funds continued during the quarter with approximately $8.5 billion of outflows for JP Morgan, we believe the pressure from those four sellers continues to be partially offset by demand from loans -- for loans from institutional investors.

Indeed, despite the retail outflows through September 30th, the Credit Suisse Leveraged Loan Index has delivered a total return of 6.39%. During the quarter we issued $22.3 million of new common stock via our ATM program capturing approximately $0.19 per common share of NAV accretion, that NAV accretion of course benefits all shareholders. In the third quarter, we continue to remain proactive with respect to our portfolio. We deployed approximately $24.6 million in gross capital and to new investments.

The new CLO equity added to our portfolio continues to have a higher weighted average effective yield than the weighted average for our overall portfolio of CLO equity securities. During the two -- during the quarter, two of our loan accumulation facilities were converted into CLOs.

For the third quarter, we generated net investment income of $0.37 per common share, modestly higher than last quarter's NII per share. While for several quarters we have generated GAAP net investment income below our distribution level, principally driven by lower GAAP portfolio yields on our CLO equity, when determining our common distribution, we also evaluate the cash flow we receive from the investments and our estimates for taxable income during each fiscal year.

I again want to highlight that it is taxable income that sets the floor on our common distribution. Further, recurring cash flows from our investment portfolio have exceeded our expenses and common distributions once again during the third quarter, just as they did in the prior quarter and have historically.

As mentioned earlier during the quarter we deployed approximately $24.6 million of capital on a gross basis and received a $11.8 million in proceeds from the sale of investments. We added two primary CLO equity positions for the quarter through the conversion of loan accumulation facilities. We also took advantage of selective opportunities in the market and refinanced two CLOs during the quarter. The new CLO equity investments that we acquired had a weighted average effective yield of 16.38% at the time of investment.

This level is well above the September quarter end weighted average yield of 13.38% of our overall CLO equity portfolio based on amortized cost and excluding called CLOs. This continues to demonstrate our ability to source accretive investments through our advisors' investment process. Whereas a static portfolio of CLO equities weighted average remaining reinvestment period would decay one quarter during each quarter of the year across our entire CLO equity portfolio, the weighted average remaining reinvestment period ticked down just slightly versus the prior quarter to be 3.1 years as of September 30th versus 3.2 years at the end of second quarter.

This is due to our proactive portfolio management, which is a meaningful value add provided by our advisor. As of September 30th, the weighted average effective yield on our CLO equity portfolio based on amortized cost and including -- excluding called investments was 13.38% which compares to 13.49% in the prior quarter and 14.07% as of a year ago. The relatively stable weighted average effective yield over the quarter reflects the recalibration of the effective yield on our portfolio for each investment and was aided by an increase in the weighted average spread in the loans held by our CLOs from 3.57% to 3.59% during the quarter.

When evaluating our portfolio at current market levels, however -- this is interesting, I believe, the weighted average expected yield on our CLO equity portfolio actually increased to 24.07% as of September 30th, versus, 18.85% as of the prior quarter.

This is taking those same cash flows but discounting them back to the current market level for the positions, not the amortized cost. This increase was principally due to the unrealized mark-to-market loss during the quarter and reflects the wider yields demanded by investors during the quarter that I referred to earlier.

For investors evaluating the Company's portfolio yield based on the fair market value of our portfolio this is a very important metric to understand. As noted on previous calls, the weighted average effective yield includes an allowance for future credit losses as well. A summary of the investment by investment changes in expected yields are included in our quarterly investor presentation.

In October and through November 12th, we've deployed $9.5 million of gross capital into new investments. Overall, despite the price movement in our portfolio, the economy remains reasonably robust and given the very low number of corporate defaults that we've seen, we remained 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 and share our outlook for the remainder of 2019.

I'll now turn the call over to Ken.

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

Thanks, Tom. Let's review the third quarter. For the third quarter of 2019, the Company recorded NII and realized capital gains of approximately $9.9 million or $0.37 per common share. This compares to the NII and realized capital losses of $0.07 per common share in the second quarter of 2019, and NII and realized capital gains of $0.41 per common share in the third quarter of 2018.

The Company's NII and realized capital gains for the quarter ending September 30th, consisted mostly of NII of $0.37 per weighted average common share as realized capital gains were nominal for the quarter. When unrealized portfolio depreciation is included, the Company recorded a GAAP net loss of approximately $42 million or $1.59 per weighted average common share for the third quarter. This compares to net income of $0.06 per common share in the second quarter of 2019 and net income of $0.50 per common share in the third quarter of 2018.

Just a reminder that our short-term cash flow generation is largely unaffected by unrealized appreciation or depreciation in our portfolio. The Company's third quarter GAAP net loss was comprised of total investment income of $17.8 million, and net realized capital gains of $0.1 million which was more than offset by net unrealized depreciation or unrealized mark-to-market losses of $52.1 million and total expenses of $8 million.

At the beginning of the third quarter, the Company held $13.4 million of cash net of pending investment transactions. As of September 30th, that amount was $27.4 million, providing the Company with dry powder as our advisors seek investment opportunities. As of September 30th, the Company's net asset value was approximately $311 million or $11.45 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 range of the Company's NAV as of October 31st was between $10.06 and $10.16 per common share. Non-annualized net GAAP return on common equity in the third quarter was an approximate loss of 12%.

The Company's asset coverage ratios at September 30th for preferred stock and debt as calculated pursuant to Investment Company Act requirements was 283% and 483% respectively. These measures are above the statutory minimum requirements of 200% and 300% respectively.

As of September 30th, the Company had debt and preferred securities outstanding totaling approximately 35.3% of the Company's total assets, less current liabilities, slightly outside of 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 number has increased from 32.9% as of June 30th primarily driven by the recent unrealized portfolio mark downs which were partially offset by raising accretive equity capital at a premium to NAV. Moving on to our portfolio activity in the fourth quarter, through November 12th, investments that have reached their first payment date are generating cash flows in line with our expectations. In the fourth quarter of 2019, as of November 12th, the Company received recurring cash flows on its investment portfolio of $29 million or $1.05 per common share.

This compares to $27.1 million or $1.02 per common share received during the full third 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 third quarter, we paid three monthly distributions of $0.20 per share of common stock as scheduled. On October 1st, we declared monthly distributions of $0.20 per share of common stock for each of October, November and December.

In terms of our, after market offering program in the third quarter, the Company issued approximately 1.3 million shares of its common stock at a premium to NAV for total net proceeds to the Company of approximately $22 million. This third quarter issuance resulted in NAV accretion of approximately $0.19 per common share. I'll now hand the call back over to Tom.

Thomas P. Majewski -- Chief Executive Officer

Great. Thank you, Ken. Let me take everyone through some of the macro loan and CLO market observations, and talk about how they might impact our Company and then I'll also give you a bit more color on recent portfolio activity. As I mentioned earlier through September 30th, the Credit Suisse Leveraged Loan Index has generated a total return of 6.39% tracking ahead of where it was at that time last year. Loan retail outflows continued during the quarter with the outflows totaling approximately $8.5 billion, though that demand was made up for what we believe with -- that selling was made up for with demand from other institutional investors.

A bit of a trend change in the market and we're now seeing about 33% of loans trading at or above par, and we have seen a small amount of loan refinancing or repricing activity. Despite that, as I mentioned earlier, we experienced the second straight quarter of slowly rising loan spreads in our portfolio. On a look through basis, the weighted average spread of the loan portfolio increased 2 basis points from 357 in June to 359 at the end of September.

The Fed has now cut rates by 25 basis points, three times in the last four months. As we've noted before, lower rates is a credit positive event for corporate borrowers with floating rate debt as their interest expense then fall. Loan defaults continue to remain well below historic averages. The lagging 12 month default rate as of the end of September was 1.29%, according to S&P. Against that, the percentage of loans trading at lower prices has also increased a bit with approximately 11% of the market trading below 90.

I've said the market overall doesn't appear to be foreseeing an impending recession. Certainly many dealer research desks are forecasting default rates for 2020 of between 1.5% and 2.5%. We continue to expect default rates to remain below long term averages over the near to medium term due to minimal impending maturities before 2022, a growing US economy and the large majority of the loan market consisting of covenant light loans.

We remain mindful of the short-term uncertainty brought about by ongoing trade tariff negotiation, but do not expect those to be long-term factors and remain hopeful that our Phase 1 deal will be signed soon. With the 2020 being an election year, that could also bring some surprises. When greater loan price volatility presents itself, we believe the Company and its investments are well positioned to go on the offense to 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 loan price volatility without a meaningful increase in defaults over the near to medium term is extremely attractive. In the CLO market through September 30th, we saw $90 billion of new issuance this year along with $15 billion of resets and $21 billion of refinancings.

For the full year of 2019, our advisor continues to expect at least $100 billion of new issuance volume, approximately $20 billion of resets and $30 billion of refinancings. We are continuing to selectively direct additional resets and refinancings of CLOs in our portfolio, though at a slower pace than prior quarters, principally due to the fact that we've already reset or refinanced the vast majority of our CLO equity portfolio at this point.

We did direct two refinancings during the third quarter and expect to be selective with additional refinancings and resets in the near term. As a result, we expect our overall CLO equity cash flows to increase over time without the consistent impact of the one time reductions associated with resets or refinancings that we saw over the past few quarters.

The benefits of our prior refi and activity can be seen in our weighted average AAA levels. As of September 30th, as I mentioned earlier, the weighted average AAA costs within our CLO equity portfolios was 121 basis point. This compares to a market level of 134 basis points at quarter end. 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. We have dry powder available as we see attractive opportunities in the primary and secondary markets.

Beyond seeking to maximize the value of our CLO -- existing CLO investments and looking to be opportunistic with respect to the CLO price dislocation that we've seen lately, we continue to maintain solid visibility on our new investment pipeline for the next few quarters as well. To sum up, we continued in the third quarter to receive recurring cash flows on our portfolio in excess of our common distributions, interest and other expenses.

Recurring cash flows in the fourth quarter were greater than they -- so far in the fourth quarter were greater than received during all of the third quarter. Loss adjusted weighted average effective yield on our CLO equity portfolio implied by the current fair value, current marks on our portfolio is 24.07% as of September 30th, and we continue to raise accretive equity capital during the quarter.

Given the low continued default rates being experienced, we remain very constructive on the overall macro environment from a longer-term perspective. As such, we maintain a strong opportunity to utilize our advisors' strength and create additional value for our portfolio.

We will also continue to selectively direct resets and refinancings, which would -- we would expect to increase future cash flows to our CLO equity securities. And of course, we'll be very proactive in our management of the Company, creating value for our shareholders. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions.

Questions and Answers:


Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Yes, good morning, Tom and Ken. I'm going to ask you to indulge me a little, because my first question is a little long-winded. But I'd like to start off by asking about the quality of the collateral. Your presentation shows that revenues and EBITDA growth have slowed sharply for borrowers in general and we now have almost 30% of leveraged loans rated B minus or B3. So there is this persistent concern in the market that these ratings on these loans could decline even without a recession because a lot of that trend has been due to aggressive acquisition strategies or perhaps poor deal terms or maybe business models that aren't working very well. Since CLOs own over half of all leveraged loans, obviously that trend could put the typical 7.5% triple C test at risk, and I do see that your portfolios are already at 6% in Triple C as of October. That compares to 4.9% at the beginning of the year.

So I'd like to ask you what is the sensitivity of the portfolios, cash flows and your NAV to this test being broken.

Thomas P. Majewski -- Chief Executive Officer

Good question. So you hit on a couple of points there. Probably the first number, let me draw everyone's attention to is on page 26 of the investor presentation which lays out a number of metrics, but among them, the weighted average overcollateralization ratio, junior OC cushion, the fifth column from the right, you'll see that's 4.33%. So as we look at CLOs, and obviously that's an average, some are higher, some are lower, but most of -- the vast majority are clustered right around the average.

What happens in a CLO if there were to be an increase in triple Cs over 7.5% is, there would be a reduction in the numerator of the OC test, such that, and while every transaction varies slightly, broadly, how I would encourage you to think of it is, the lowest price Triple Cs get a reduced carrying value in the numerator of the OC test.

So if you have, let's take some examples, if you had 10% Triple Cs and they were all trading at $0.60 on the dollar, let's say, you would take a 40% haircut on 2.5% of your triple Cs. So to do my math, that would be 1%, I guess reduction in the numerator side of the OC tests, which would reduce that 4.33% if that happen uniformly across all CLOs to 3.33%. So we could sustain a non-trivial increase in triple Cs, holding all else constant without necessarily impacting the current cash flows on the weighted average of our portfolio.

Now what I -- when I said though and there is one thing that's holding all things constant and that's obviously highly simplifying assumption. There is two things to highlight around those. The OC tests are interesting all the time, but they only matter on four days of the year on the payment determination date.

So even if a CLO were to fail its OC tests on an interim basis during the period, that's nice. But it doesn't do anything. It's only calculated with any effect on the determination date for the quarterly payments. And one of the things that's very important to remember in the CLO, in typically any CLO is the ability to build par through discounted purchases and relative value trading. And what that means is typically in a CLO, any loan purchased in the 80s is going to get 100 cents [Phonetic] on the dollar credit, in the OC test.

So if you're own a loan at -- that's maybe traded to 95 [Phonetic] you could sell that by a different loan that's trading at 85 [Phonetic], all of a sudden you've built 10 points of par related to that loan. And where I go with all of this is, it's a very manageable test. Not saying we couldn't have downgrades that ultimately tripped some CLOs for a period of time, but what we've seen -- and many of the collateral managers that are in our portfolio, frankly didn't miss payments to be equity during the '08, '09 cycle. Some have track records going back even further in many cases without the same payments.

I'm not saying that none have and some in the portfolio had missed payment, but a very high concentration of them frankly hadn't missed payments through the '08, '09 cycle. There, there were certainly significant amounts of Triple Cs and a greater -- and a great amount of defaults, but through managing the portfolio and other discounted purchasing, they were able to keep those CLOs on size.

So as we look forward, you also pointed to slowing revenue and EBITDA growth, I mean, you kind of talked about that, and that is an interesting one. Indeed, many companies are bought assuming by private equity sponsors with charts that go up into the right. No one ever has a chart that goes down to the right in terms of revenue and -- revenue and EBITDA and we are seeing it slow to some -- the rate of growth slowing versus where it was a year ago.

In our opinion, and this is a broad statement, not specific to any one credit although representative we believe the rates we saw a year, the rates of growth, we saw a year ago were driven frankly by -- maybe a shorter term initial stimulus from some of the tax changes that went into effect at the beginning of 2018 on both changes in tax rates, depreciation, and also, very importantly, changes in code which encouraged off investors who had large amounts of cash the proverbial Microsoft's and Google's large amounts of cash offshore to repatriate that money which ultimately circulated through the economy in the US, be it through share buybacks, increased dividends or any number of measures those companies used.

That provided in our view an increase or kind of a one-time bump up during 2018, which is now slowing, I mean, frankly we see further slowing due to the tariff uncertainties that I talked about, while the aggregate amount of all of the tariffs that are bantered back and forth are while they're -- but [Phonetic] they're big -- dollars in the hundreds of billions when compared to a $20 trillion approximate GDP of the United States is a relatively small sum.

However, the uncertainty that creates our business, very few, it takes a little bit more guts to build a new factory if it's predicated on a raw material coming from overseas could be anywhere in the world, frankly. And we think we have -- so we think that has caused a further slowdown in capex, which has slowed some of the revenue growth of some of our companies that many of our companies provide the services and products that are used for larger companies in their capex initiatives.

So we don't see it as a wholesale slow down as much as just returning to normal and then a little bit of pressure downward from some of the trade uncertainties. Against that, If you look at interest coverage we should have that chart in here as well. And if you look on the prior -- on page 33, if you look on the top right corner, this is of all loans that are publicly reporting which is $210 billion worth of loans, you can see interest coverage EBITDA versus interest as of the second quarter was 4.7% -- 4.7 times. So companies have quite strong, current cash flow or current EBITDA to service their debt, frankly lower and lower interest rates holding all else equal would increase that ratio.

So when we look at a loan universe that's principally covenant light, so taking technical default off the table from many of those companies and you look at this chart on the top right showing high fours interest coverage multiple, we think the likelihood of Company's missing payments on loans remains quite low.

The slower growth that you pointed out could accelerate the rate of downgrades to triple Cs. However, hopefully we illustrated that we have plenty of OC cushion in the deals and to themselves, and then finally, the way the tests work around these OC tests, it's something that can be managed quite well by collateral managers. Long-winded question, long-winded answer. I hope that was helpful.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

I appreciate that. But it's really helpful, and I do want to follow up. And in the sense that at the very end of your answer you're reiterating that all else equal, the cash flows look to be stable, and I know all else equal never is really true, but it's the best we can do at the moment. So if cash flows look to be stable, let's say for the next few quarters, I'm trying to still reconcile that Tom and I keep coming back to this every quarter with where CLO equity is trading. Clearly the market is concerned about something and I understand that the primary markets are not working very well right now because the arb is not very good. I understand that there hasn't been a lot of secondary volume and bid-ask spread have widened. So you're marking to a market that's not working really well and that's a factor, but it's a deep enough market to still raise the question of what is it that these folks that are investing in CLO equity are worried about that is requiring you to mark down your NAV so much?

Thomas P. Majewski -- Chief Executive Officer

That is the best question. Broadly, what we've seen is, within most fixed -- many fixed income markets, the bottom part of the band of investments has traded the worst this year. And an example I'll give you, but even within the loan market, BBs remain quite keenly bid and frankly, now we're seeing a third of the market as of quarter end trading at a premium. That's up from where it was earlier in the year. By year-end, it was probably less than 5% we're trading at a premium. But many of those loans BB rated are now at a premium, versus single B rated loans, the price has fallen by several percent. Similarly within CLOs, double Bs today are wide to where they were at year-end, while Triple Bs are tighter than where they were at year-end.

So you have this dichotomy of products moving in other -- within the same structure moving in opposite directions relative to year-end. CLO equity yields have widened significantly, hundreds and hundreds of basis points. It's -- the fear of -- the investors I would presume have is that there is an interruption in the cash flows pending.

If you believe the cash flows are quite consistent and which in our experience, they have been, the 24% loss adjusted yield based on our current mark to me is attractive, that's obviously predicated on those cash flows continuing.

Some investors see the price of loans moving and the liquidation value of CLOs moving down to the extent prices of loans fall, that I think some people in the market give too much credit to. We're very much cash flow oriented and our objective with essentially every CLO equity investment we put in the ground, is to get all of our money back during the reinvestment period from operating cash flows just from free cash flow and then we'll figure out the optimal strategy for the end of life based on the market conditions at that time.

One of the strategies is do nothing and just let the investment sit there. Every loan will either default or pay off at par during the life of a CLO. So we think there is some greater fear in the market of a significant Triple C downgrade. Not a lot of people are talking about a big pickup in defaults, I'm sure some feel that way, but not many.

So the thing that I think many would presume could hurt the cash flows or impair them would be a big, big spike in triple Cs and I think some investors are unduly drawn to the drop in loan prices. And kind of the embedded NAV decline within each CLO.

In our opinion, those are all interesting to look at. However, the certainty of the continuation of the cash flows that we see, obviously, there is nothing could be certain, we see the cash flows based on the amount of OC cushion and the way the tests actually work with the ability to manage them through discounted purchases being quite high. Divergent views obviously make a market. We have dry powder. I wish I could buy more investments that are weighted average effective yield of where we have the portfolio marked. We're actively scouring the market for them.

Sadly, a lot of people who own the positions don't want to sell them, including us. We wish there were more to buy.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Yeah. That's consistent with what I'm hearing, Tom. And just one last question, sort of housekeeping. When you recast your estimated yields or I should say when you make your estimated yield assumptions, what sort of assumptions do you make for the Triple C bucket degradation? Is that part of the math?

Thomas P. Majewski -- Chief Executive Officer

That's not a specific input actually into our -- into the models. The OC test is captured, the changes in OC tests and potential interruption is captured through our realized losses occurring every single year in our model. One of the things we stressed for investment -- making investment decisions is increases or decreases in triple Cs, but a spike in triple Cs is not included in the base case of our forecast for any given CLO, although it's for the effective yield determination because it's a binary thing ultimately they're on or they're off. It's a judgment on our part of looking at a CLO and its underlying loan portfolio, if that's going to become a problem. So it's something we look at for sensitivities, but it's not reflected in the base case.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Okay, I understand. Those are all my questions. Thank you for your time this morning.

Thomas P. Majewski -- Chief Executive Officer

Great. Thanks, Mickey.


Thank you. [Operator Instructions]. Our next question comes from the line of Ryan Lynch with KBW. Please proceed with your question.

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Hey, good morning. Thanks for taking my questions. First one, just wanted to talk about the environment right now and what we've really seen over the last year in CLO equity. You mentioned default rates are continuing to remain pretty low, but there is some slowdown in leverage loan revenue and EBITDA growth, which could be signaling and could create some worry about, like you said defaults picking up in the future. We saw in the fourth quarter of last year, your guys portfolio get marked down unrealized and realized about $93 million and it only recovered, about $37 million in Q1. So it didn't fully recover from that kind of partial temporary dislocation that we saw in the market. It never really came back and then we've seen some more markdowns in the second and third quarter of this year. And then again in the fourth quarter, quarter-to-date, you guys had some more markdowns in the CLO portfolio.

So do you think that I guess, do you feel that these are more temporary markdowns in the portfolio or is -- and that the CLO equity could potentially recover sometime in the future, or is the market potentially correct and that the appropriate risk in CLOs, widening out those yields is appropriate and going to stay at these big wide discounts and so your guys portfolio value is not really looking for a meaningful recovery anytime soon?

Thomas P. Majewski -- Chief Executive Officer

I certainly wouldn't say it's never going to recover. I can't say it's going to recover tomorrow either. These -- the price of any security or any fixed-income security is a function of the yield that investors demand, the yields -- If you look in our financial statements in the assumptions section for the Level 3 assets, which is the CLO equity we have and this is the first time we've used the weighted average effective yield based on fair value that 24% number in the call, because it's important to -- we should have highlighted it sooner, but if you go back to our prior quarters, you'll see that number in there -- in the footnotes to the financials, here where we talk about the default rate assumptions and things like that.

We've seen -- what it is in our opinion a repricing of risk. We haven't seen a substantial increase in risk in our opinion. I remain quite firm in our belief and expectation that the cash flows on these securities are going to keep coming quite strongly. And frankly, cash on cash quarter over quarter, and we've not even gotten all the way through the quarter is up, which is certainly different than the corporate defaults are down which is certainly different than what we're seeing from the widening of yields, and our mark-to-market is substantially due -- the mark-to-market losses is substantially due to a widening of yields that investors are demanding. Just kind of building on Mickey's question before that means either some people think the cash flows aren't going to continue. It's as simple as that.

I mean that's got to be the reason people are demanding yields in this kind of context. And will some CLOs miss payments? Sure. We don't see that broadly happening across the market however and frankly we view this as an attractive opportunity to deploy capital. We have more cash on the balance sheet all else equal than I'd like, frankly in that we continue to scour the market, these are frankly quite attractive buying opportunities. I wish there were more willing sellers in the market. So we have this oddity of spreads, our yields are wider on little to no volume which I admit is a frustrating thing sometimes as an investor in the market. But we've -- have worked with this asset class 20 years. We've seen this happen any number of times over the last 20 years, where yields widen against that quite a few of the collateral managers in our portfolio never missed a payment to the equity.

I looked at one of the -- our original investment here at Eagle Point was a platform from called OxiCon, they missed one payment I believe in 1999 and hadn't missed a payment on 40 other CLOs in the intervening 20 years through a lot of default cycles, through big CCC's. So, in our opinion, sometimes a baby gets thrown out with the bathwater. And that's what we feel is happening in the market right now. What we would encourage investors to do is form a view on the certainty of the cash flows. We've got 4.3% OC cushion, ramp-up default, if you think defaults are going to go up next year, or ramp-up downgrades, and then also bake-in some provision for discounted purchases and some of the par bills you can recover through buying loans in the 80s and 90s which all count as a 100 in the numerator. You'd have to be -- in our opinion pretty draconian to see these cash flows stop, although divergent views, obviously make a market [Phonetic].

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Okay, that's helpful. Well, on that point, obviously the market could be proved out to be right or wrong, but the market I guess is what it is today and quarter-to-date in the fourth quarter, there's been some additional markdowns in your portfolio which is negatively impacted your NAV. And we estimate that its increased your debt and preferred equity over your current equity to about 0.6 times above your kind of the upper end of your target range. You guys are now running with higher leverage above your target range, at least [Phonetic], quarter holding all else equal.

Thomas P. Majewski -- Chief Executive Officer

Could you explain the 0.6. I don't --

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Yeah, the 0.6 times debt plus preferred equity over your equity which would be above your guys current asset target range?

Thomas P. Majewski -- Chief Executive Officer

We were at 30.

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

So I think on the -- are you referring to this 25% to 35% range?

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Yes, which would it equate to a debt-to-equity of 37% to 55%. Yes, that coverage, I'm just converting your asset coverage to a debt-to-equity?

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

Yes. So we would see 38% on that range build in the October drawdown.

Thomas P. Majewski -- Chief Executive Officer

Yes, so we're a hair over 30 -- calculating it the way we present it, we were a hair over 35% at quarter-end and then as of the management estimate of October month-end NAV, we were 38% and change percent. So about 3%, outside our band 3% and change percent. We have been outside our band once before, frankly due to mark-to-market moves, and it did move back. We're certainly at -- we have not added any leverage of actually we've taken a little off the table with the partial redemption of the As earlier this year. But the leverage has moved around just due to the change in the portfolio value.

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

So are you comfortable then operating outside of the range, if these trends still continue, or what is the plan going forward?

Thomas P. Majewski -- Chief Executive Officer

We certainly -- when we size that range, it's a judgmental range based on where we could see a potential change in value in the portfolio relative to the statutory limits that that we're subjective to, where our goal is to keep the Company within that range in general. We're comfortable where it sits right now, you'd have to have a very further, a very significant further drawdown to see those breach any of the statutory limits, which is why we set it where we do. Other vehicles may use more leverage, frankly than we do. We think we've kind of got the right balance to be able to manage reasonable changes in the market.

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Okay, and I know you guys also have the ability to do equity, longer ATM to obviously help out the leverage range. I'm just curious I know you guys issued some shares this quarter, how are you guys looking at that with a roughly a 16% to 17% dividend yield, 17% today probably closer to 16% prior to today?

How are you guys looking at issuing equity with a 16% required dividend yield with your guys fee structure with the expenses, G&A costs. How do you guys make that math work with a weighted average portfolio yield of 13.8% or even with the new CLOs required at 16.4% given the leverage that you guys have in the cost structure?

Thomas P. Majewski -- Chief Executive Officer

Yeah, you know, it's a very good question. When we look at the weighted average cost of capital within the Company, you can't just include the equity distribution rate, you need to look at the overall capital structure, both including the debt and preferred stock. Obviously, we don't charge a management fee on the roughly $100 million of assets purchased with the debt tranches with the Xs and Ys.

So when I look at our all-in cost of capital, the rough math I use is 15% debt, 15% preferred and 70% equity, just to kind of shake it out there, which puts us at the 30% the midpoint of our range, when you factor in the far lower cost and that the debt doesn't attract any management fee, our all-in cost of capital is lower than just looking at the common equity straight up.

Obviously, we can't issue $0.70 of common, $0.15 of preferred and $0.15 of debt in any given day, it moves around in batch mode. But when we look overall at what our cost of capital is, where we're raising the capital and where we're investing it, it's putting the blended cost of capital together.

If we use just the common equity cost, we'd probably never do anything. All you do is issue debt all day. But obviously, that wouldn't necessarily be a prudent way to run the Company either. I would encourage you to look at our [Indecipherable].

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Okay, those are all my questions. I appreciate the time.

Thomas P. Majewski -- Chief Executive Officer

Great, thanks very much, Ryan.


Thank you. Our next question comes from the line of Steven Bavaria who is a private investor. Please proceed with your question.

Steven Bavaria -- Private Investor -- Analyst

Hi, Tom.

Thomas P. Majewski -- Chief Executive Officer

Hey. Good morning, Steve.

Steven Bavaria -- Private Investor -- Analyst

Hey, at the risk of oversimplifying, I'm curious about what seems to be almost a kind of inverse relationship at times between your mark-to-market value of your NAV and what I call the economic value of the Company. And I guess what I mean by that is if your equity, if your assets, if the market value of your assets drop and your market value -- and your liabilities obviously stay the same, then by definition, the value of your equities, your NAV, your market value will drop as well.

But if, in fact if I understand things correctly, if your -- the repayments of principal you receive that you're able to reinvest during the reinvestment periods, you can actually now reinvest those in healthy assets with cheaper prices where you're locking in a better yield and a capital gain when they repay at par, it would seem that your economic value has actually increased as a result of the underlying loan markets secondary market drop. So there's almost a kind of inverse relationship there and I'm sure that's confusing at least to many investors out there. Am I, is that roughly correct? Even though I may be oversimplifying a bit?

Thomas P. Majewski -- Chief Executive Officer

Yes, that is correct. There's a few things going on. So our CLO debt that we've issued with any CLO is in the money. Our weighted average AAA is 121 basis points versus a 130 basis points something market and we just show the AAA but if you look at all the classes, many of those are in the money versus where we could issue today.

Loans in general are many loans are at cheaper prices, over 11% of the market's trading below 90. The market we don't believe and we don't know anyone who's predicting an 11% default rate even a 5% default rate assuming those which are default over the next two years. So that suggests that indeed there are some cheaper loans out there, now a third of the market is trading at a premium as well.

So it is a bit of a bifurcated market. But when people look at CLO equity, we think an error many investors make, they look at the price of the loans, they don't factor in, in the moneyness of the CLO debt. So that's kind of one mistake, I think some investors make when they look at the market.

And then second, we're seeing for better or worse, the discount rates, the yields on CLO equity are widening. So you have right now with loans at least the B rated loans down, you have a lower terminal value that many people are assuming, including us because we assume the loans either pay-off at par or sold around where they're valued today.

You have a lower terminal value and market using wider and wider yields or discount rates, in spite [Technical Issues] of those cash flows are pushing down the values. And we're literally we use that number that's 24% plus number, which is the weighted average loss adjusted effective yield on our portfolio based on the current market value. I wish I could buy more stuff at that price in our portfolio. That's to me an attractive opportunity.

We -- as we stressed our investment, while it's not impossible for the cash flows to be suspended for a period of time, most of the collateral managers, many of the collateral managers in our portfolio and I believe most have not -- didn't miss a payment through the '08, '09 cycle. And that shows there's many, many ways to manage these structures prudently through times of volatility, even if the payments were to get cut-off, the only consequence is money that would have come to us is used to repay the AAA. That's not what we want to do.

You don't want to pay down your lowest cost debt, which is in the money in our favor on that day. But there even if that were to happen, there's not a requirement to sell any assets, to do so just using operating cash flows as the test cure, the equity cash flows would turn back on. So the consequences is certainly not great, but it is by no means catastrophic. If you were to fail one of those tests on a CLO, but broadly where we look at this, we see the portfolio as very attractively priced. The market in our opinion is exaggerating some of the downgrade risks and the yields that are being that are used for pricing these securities, while their fair market value in our opinion are cheap relative to fundamental value.

Steven Bavaria -- Private Investor -- Analyst



Thank you. There are no further questions. Excuse me, sorry, there are no further questions at this time. I'd like to turn the call back over to Mr. Majewski for any closing remarks.

Thomas P. Majewski -- Chief Executive Officer

Great. Thank you again very much for everyone's participation. May we live in interesting times, these certainly are they. We hope you've gotten a good flavor of kind of how we're looking at the portfolio and the stresses that we run. If you have any further questions, please feel free to follow-up with Ken and me directly, and we appreciate your interest in Eagle Point Credit Company. One last bit, there is a call at 11.30 for Eagle Point Income Company which is a new vehicle also brought by our advisor, who'll be having a third quarter earnings calls later this morning. We'd encourage anyone to attend. Thank you very much.


[Operator Closing Remarks].

Duration: 56 minutes

Call participants:

Garrett Edson -- Senior Vice President, ICR

Thomas P. Majewski -- Chief Executive Officer

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

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Ryan Lynch -- Keefe Bruyette & Woods, Inc. -- Analyst

Steven Bavaria -- Private Investor -- Analyst

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