Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Eagle Point Credit Company Inc. (NYSE:ECC)
Q4 2019 Earnings Call
Feb 27, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to Eagle Point Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Mr. Garrett Edson of ICR. Please begin sir.

Garrett Edson -- Investor Relations

Thank you Jane 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 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 NCSR our full year 2019 audited financial statements and our fourth quarter investor presentation with Securities and Exchange Commission. The financial statements in our fourth quarter investor presentation are also available on 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 Presentations and Events link. I would now like to introduce Tom Majewski Chief Executive Officer of Eagle Point Credit Company. Thank you Garrett. And welcome everyone to Eagle Point Credit Company's fourth 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 in our portfolio and its underlying corporate loan obligors. As we've done previously I'll provide some high-level commentary on the quarter. Then we'll turn the call over to Ken who will walk us through the fourth quarter financials. I'll then return to talk a little more about the macro environment our strategy and provide some updates on recent activities and of course we'll open the call to questions at the end The Fourth quarter overall saw a continuation of ups and downs in corporate loan prices and the loan market hit recent lows in October and November. Actual instances of defaults in the loan market remain well below historic averages and the cash flows from our investment portfolio continue to remain robust during the quarter. During the fourth quarter the company received recurring cash flows of $1.08 per weighted average common share which is in excess of our distribution and all expenses. Despite the recent movements in loans and the securities we hold we continue to believe that the corporate loan market remains robust and that the Company's portfolio will continue to generate strong cash flows. Indeed the lagging 12-month default rate increased modestly on a quarter-over-quarter basis but going to 1.39% for the trailing 12 months up from 1.29% as reported by S&P. Many in the market including us have expectations that the corporate default rate will remain well below the historic average through 2020. As a reminder periods of loan price dislocation keenly underscore the key advantage offered by CLOs in such an environment locked in long-term non market-to-market financing. The locked-in financing of a CLO provides us with stability and gives many CLOs the opportunity to profit by reinvesting principal repayments from loans and proceeds of sales of loans in their portfolios into new loans typically at lower prices and or wider spreads during periods of dislocation. In other words we view the long-term debt of the CLOs in our portfolio to be more in the money in choppier markets like those of late 2014 or 2015 and certainly somewhat today. While the price movements in loans may impact the value of our portfolio in any given quarter and could cause NAV fluctuations in our view those changes in the value of our portfolio don't necessarily foreshadow any meaningful changes in recurring cash flows from our portfolio. Overall during the fourth quarter our NAV fell $0.86 per share versus the end of the third quarter of 2019. To highlight again the short-term changes in NAV do not necessarily imply a change in our portfolio cash flow the way such moves could with the BDC. Rather we expect short-term changes in NAV or drops in NAV could actually augur well for higher future cash flows over the coming months as our CLOs are able to reinvest principal proceeds into what is a buyer's market for loans. While retail loan mutual fund outflows continued in the quarter with approximately $7.8 billion of additional add flows according to JP Morgan Research we believe pressure from sellers continues to be offset somewhat by demand from other institutional investors. Despite the retail outflows the Credit Suisse Leveraged Loan Index delivered a positive total return for the year of 88.17%. I believe that's the 26th out of 28 positive year of total returns for the Credit Suisse Leveraged Loan Index over 90% of the time. During the quarter we issued $20.6 million of new common stock via our ATM program capturing approximately $0.23 per common share of NAV accretion. This NAV accretion benefits all shareholders. Although we note there can be some short-term cash drag effect on the NII and so the cash is deployed. For the fourth quarter we generated net investment income and realized capital losses of $0.23 per common share. Our GAAP NII was impacted during the quarter by the effects of the ongoing loan price volatility particularly in October which I'll explain more fully. Based on the company's effective yield policy effective yields for each piece of CLO equity is recalibrated for each position once a quarter in the payment month utilizing projected cash flows redetermined in that month. As a result the fourth quarter effective yields for the majority of the CLOs our company's CLO equity positions we're recashed with month-end October 2019 cash flows and this reflected the lowest month end point of loan prices during 2019. We look to current loan prices when we estimate the future liquidation values of our CLOs loan portfolios and the low prices we saw in October particularly impacted the recalibration of effective yields last quarter. While we've generated GAAP net investment income below our distribution level principally driven again by lower GAAP portfolio yields on our CLO equity when determining our common distribution level we also evaluate the cash flow we receive from our investments our estimates for taxable and our estimates for taxable income during each tax year. I again want to highlight that it's taxable income that sets a functional floor on our common distribution and at present the company has no plans to change its current distribution policy. Further recurring cash flows from our investment portfolio exceeded our expenses and common distributions once again during the fourth quarter just as they did during each quarter of 2019 and have done historically. During the fourth quarter we remained proactive in managing our portfolio and deployed about $22.8 million of capital on a gross basis into new investments and received $1.2 million in proceeds from the sale of investments. We added one on a secondary CLO equity position for the quarter and deployed capital into two loan accumulation facilities and also made two small CLO debt purchases. We took advantage of selective opportunities resetting one CLO and refinancing two CLOs during the fourth quarter. The new CLO equity investment that we required had an average effective yield of 14.7% measured at the time of investment. This is above the December quarter end weighted average effective yield of 10.36% of our overall equity portfolio excluding called CLOs. This continues to demonstrate our ability to source accretive investments through our advisors' investment process. Whereas a static CLO equity portfolio's weighted average remaining investment reinvestment period would decay one quarter each calendar quarter across our entire CLO equity portfolio the weighted average remaining reinvestment period ticked down just slightly versus the prior quarter to end at 2.9 years down from 3.1 years. This is due to our selective reset activity and proactive portfolio management which we believe is a meaningful value add provided by our advisor and their overall investment process. As of December 31 2019 as I mentioned the weighted average effective yields on our CLO equity portfolio excluding called investments was 10.36% and that compares to 13.38% in the third quarter and 13.4% as of December 2018. As we previously noted we recalibrate the effective yields on our portfolio on a quarterly basis and for the fourth quarter the weighted average effective yield was based largely on an October 2019 recalibration when there was a non-trivial decline in loan prices across the market and in many of our CLOs' underlying portfolios and this resulted in a higher haircut than usual assumed in the cash flows for lower-priced loans. Of course in many cases the company is part of a group that owns the majority of an equity tranche of a given CLO and that majority decides when a CLO is actually called and the portfolio is liquidated. While there are periods of time where we are more active in calling CLOs particularly when loan prices are strong when they are softer which they were in the fourth quarter and much of 2019 we are far less likely to call a CLO. The value of our CLO portfolio can be impacted by short-term changes in loan price. Well that's certainly true. It is the majority equity holder or group of equity holders that typically decides when to wind up a CLO and liquidate its loans and in general we're typically likely only to do that when loan prices are high. Indeed during the fourth quarter we did not call any CLOs. When evaluating our portfolio at current market levels however we also highlight the weighted average expected yield of our CLO portfolio based on market prices actually increased to 25.25% as of December 31 versus 24.07% as the prior quarter. This is taking the same cash flows we used for effective yield but discounting those cash flows back to the current market value for the positions instead of the positions' amortized cost amounts. This increase was principally due to the unrealized mark-to-market writedowns on the portfolio during the quarter and reflects 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 value this is a very important metric to understand. Broadly in our view cash generating securities typically do not trade at 20% plus yields for an extended period of time. In our view the yields will either tighten which would be good or cash flows would be reduced or suspended which would certainly be bad. Based on the robust OC cushion of our portfolio we believe our portfolio cash flows will remain strong and that the market has overreacted to the fear of cash flow suspension. As noted on previous calls the weighted average effective yield includes an allowance for future credit losses and a summary by summary of changes in the expected yield for each position are included in our quarterly investor presentation. Overall despite the recent loan price movements we believe the U.S. economy is holding steady and given the continued minimal defaults we're seeing in the market and in our portfolio we remain favorable on the overall market and like the portfolio that we have very much. After Ken's remarks I'll take you through the current state of the corporate loan markets and share a little more on our outlook for 2020. I'll now hand the call over to Ken.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

Thanks Tom. Let's discuss the fourth quarter in a bit more detail. For the fourth quarter of 2019 the company recorded net investment income and realized capital losses of approximately $6.4 million or $0.23 per weighted average common share. This compares to net investment income and realized capital gains of $0.37 per common share in the third quarter of 2019 and net investment income and realized capital losses of $0.38 per common share in the fourth quarter of 2018. The company's NII net of realized capital losses for the fourth quarter consisted of NII of $0.27 per common share offset by $0.04 of realized losses. When unrealized portfolio depreciation is included the company recorded a GAAP net loss of approximately $13.1 million or $0.47 per common share for the fourth quarter. This compares to a GAAP net loss of $1.59 per common share in the third quarter of 2019 and a GAAP net loss of $3.62 per common share in the fourth quarter of 2018.

Just a reminder that our short-term cash flow generation is largely unaffected by the unrealized appreciation or depreciation we record at the end of each quarter. The company's fourth quarter GAAP net loss was comprised of total investment income of $14.7 million which was more than offset by net realized capital losses of $1 million net unrealized appreciation or unrealized mark-to-market losses of $19.5 million and total expenses of $70.3million. At the beginning of the fourth quarter the company held $27.4 million of cash net of pending investment transactions. As of December 31 that amount was $10 million inclusive of the amount required to fund the ECCA redemption. As a result of deploying of $22.8 million in gross capital during the fourth quarter there was an additional amount of capital that only generated income for a portion of the quarter which we expect to generate full income going forward. In the first quarter of 2020 through February 18 we have deployed an additional $6 million of gross capital into new investments. As of December 31 the company's net asset value was approximately $303 million or $10.59 per common share.

Each month we publish on our website an unaudited management estimate of the company's monthly NAV as well as quarterly net investment income and realized capital gains or losses. The management's unaudited estimate of the range of the company's NAV as of January 31 was between $11.16 and $11.26 per common share. Non-annualized net GAAP return on common equity in the fourth quarter was a loss of approximately 4%. The company's asset coverage ratios as of December 31 for preferred stock and debt as calculated pursuant to Investment Company Act requirements were 279% and 476% respectively. These amounts do not reflect the repayment of the ECCA preferred stock in January 2020. These measures are above the statutory minimum requirements of 200% and 300% respectively. As of December 31 the company had debt and preferred securities outstanding totaling approximately 35.9% of the company's total assets less current liabilities slightly outside our range of generally operating the company with leverage between 25% to 35% of total assets.

However after giving effect to the redemption of the Series A term preferred stock and the issuance of common stock pursuant to the company's at the market orphan program to date in 2020 the company's pro forma leverage based on the company's total assets as of December 31 is approximately 31.5% which is within our normally intended range. Moving onto our portfolio activity in the first quarter through February 18 investments that have reached their first payment date are generating cash flows in line with our expectations. In the first quarter of 2020 as of February 18th the Company received recurring cash flows on its investment portfolio of $25.7 million or $0.87 per common share. This compares to $30.1 million or $1.08 per common share received during the full 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 fourth quarter we paid three monthly distributions of $0.20 per share of common stock as scheduled. On January secoud we declared monthly distributions of $0.20 per share of common stock for each of January February and March. In terms of our at-the-market offering program in the fourth quarter the Company issued approximately 1.4 million shares of its common stock at a premium to NAV for total net proceeds to the company of approximately $20.6 million which resulted in NAV accretion of approximately $0.23 per common share. Furthermore on January 31st the Company redeemed all of the outstanding shares of its ECCAs seven and three quarter preferred stock due 2022. As a result the company will accelerate $400000 of unamortized debt issuance costs into net realized loss on extinguishment of debt in the first quarter of 2020.

At this point I will now hand the call back over to Tom.

Thomas Philip Majewski -- Chief Executive Officer

Great thank you Ken. Let me first take everyone through some macro loan and CLO market observations talk about how they might impact the company and then such a bit further on our current portfolio activity. Again for 2019 the Credit Suisse Leveraged Loan Index delivered a total return of 8.17% which is well above the indexes 2018 performance. Retail large our loan fund outflows continued in the fourth quarter and we've now seen outflows for 15 consecutive months. According to JP Morgan retail loan outclosed totaled $7.8 billion during the quarter so that demand was from loans from other institutional investors remained quite solid. As of year-end 54% of loans were trading above par although other loans were trading at prices below 80 as well as of quarter end. We experienced the third straight quarter of slowly rising spreads in our portfolio during the fourth quarter.

On a look-through basis the weighted average spread in our portfolio increased from 3.59% in September to 3.61% at the end of December. And that reflects our CLO slowly capturing the value of some market. The total amount of corporate institutional level corporate loans essentially unchanged during the quarter at about $1.2 trillion according to S&P Capital IQ. There are plenty of loans issued but plenty of loans repaid. As we talked about earlier loan defaults remain well below historic averages with the lagging 12 month default rate at year-end as of 1.39% according to S&P. The percentage of loans trading at stressed or distressed prices remains elevated with approximately 10% of the market trading below 90. Yet we don't see the market from foreseeing or foreshadowing an impending recession with most dealer research desks forecasting 2% to 2.5% default rates in 2020 and frankly most loan portfolio managers not expecting the default rate to rise even to historical averages until 2021 at the earliest.

We continue to expect default rates to remain below long-term averages to the near to medium-term due to minimal impending maturities prior to 2023 a growing U.S. economy and frankly the fact that a large majority of loans what are commonly referred to as covenant light not having ongoing financial maintenance covenants. When significant 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 using the benefit of our long-term locked in place non-mark to market financing which is inherent in our CLOs and the company's long-term balance sheet. From our perspective as long-term CLO equity investors in environments of technically driven loan price volatility without defaults over the near to medium term is ultimately extremely attractive. In the CLO market in 2019 we saw $118 billion of new CLO issuance which was about 8% below 2018 record level performance.

We also saw $18 billion of resets and $25 billion of revised during 2019. For 2020 our advisor expects approximately $100 billion of new issuance volume approximately $20 billion of resets and perhaps $30 billion of refinancings. We continue to selectively direct additional resets and refinancings although at a slower pace principally due to the fact that we've already reset or refinanced the majority of our CLO equity portfolio at this point. So far this year last year during the fourth quarter we directed two refinancings and one reset and we continue to be active with both of those approaches in 2020. The benefits of our prior refine and reset activity can be seen in our weighted average AAA levels. You'll recall in our schedule of investments in the investor presentation we showed deal by deal AAA level so you can get a sense of exactly where each deals principal debt cost is. As of December 31st the weighted average AAA cost of our CLO portfolio was about 121 basis points.

This compares quite favorably to a market level of 134 basis points at year-end and shows thatoverall our CLO AAA cost are nicely in the money. As 2020 began we did see CLO spreads AAA spreads tighten for some new issue CLOs and equally importantly a term curve reappeared and what that means is CLO investors will buy CLO tranches with shorter remaining reinvestment periods at tighter levels than those with longer reinvestment periods. That doesn't always happen in the market but it does seem to be happening right now. This tightening has helped make refinancing or resetting of several of our CLO as possible in the first quarter which wouldn't have been economic to undertake last year. Indeed so far this year we've already reset one CLO and also refinanced two different CLOs in our portfolio. A fair bit of media attention was given to the news that one of the larger investors in CLO AAAs a large Asian bank have stepped back from the CLO market in 2019.

While many expected the exit of the prominent Asian bank to have an adverse effect on CLO liability spreads meaning that would widen the event instead resulted in a tightening of CLO AAA spreads as U.S. investors largely banks and insurers stepped in size and in competition with each other. We would also note there's never been a default on any AAA-rated CLO tranche and we do not expect that rate to increase. During 2019 the risk of credit migration in the US broadly syndicated loan market was also given an increasing amount of attention in the markets and by the media for CLOs but threat of potential rating downgrades and defaults on loans highlights and important CLO metric the weighted average junior OC cushion. Our CLO's have a specific threshold typically 7.5% where triple C-rated loans that they can hold before the over-collateralization test is adversely impacted through haircuts on Triple C assets that exceed that specified threshold. If the OC numerator drops too much which it could do if it had too many CLOs distributions to the equity and junior debt tranches of a CLO could be temporarily suspended until the OC test is cured. In our opinion this is one of the reasons why CLO equity is trading at such a wide yields today.

Our portfolios OC cushion as of year-end was 3.86%. To put it in better perspective with approximately 4% OC cushion roughly 7% of the underlying loan portfolios could default with a 50% recovery in cash flows to the equity would not be cut off on the average Eagle Point CLO. We are unaware of any one predicting a 7% default rate this year. Perhaps more relevant in the backdrop of the credit migration concerns with the current weighted average triple-C concentration of just over 5% our portfolio could sustain another 11% of additional ratings downgrades to triple C before cash flows to the equity could be discontinued. This does not take into account however other potential techniques that CLO collateral managers can use to minimize the risk of an OC test failure. And indeed quite a number of the CLO collateral managers in our portfolio have historically not ever miss payments to the equity on any transaction that originated and manage. Some have however I do highlight. As always our investor's deep CLO investing experience provides us with notable advantage as we continue generating value for our shareholders and our value in our portfolio and importantly for our stockholders. We have ample dry powder to utilize as attractive opportunities arise in the primary and secondary markets.

Beyond seeking to maximize the value of our existing investments and looking to be opportunistic in the secondary market we continue to maintain a solid visibility on our new issue investment pipeline as well for the next few quarters. To sum up we had another quarter of strong recurring cash flows on our portfolio meaningfully in excess of our common distributions interest and other expenses. We deployed $23 million of capital into new investments during the quarter and selectively raised highly accretive equity capital during the quarter. Given the continued low default rates being experienced we remain constructive on the overall macro environment from a longer-term perspective. As such we believe our portfolio will continue to generate robust cash flows which will allow us to continue to create long-term value for our shareholders. We also continue to use our advisors' strength and selectively direct additional resets and refinancings which we would expect to increase future cash flows to our CLO equity securities.

We thank you very much for your time and interest in Eagle Point. Ken and I will now open your call to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg. Please proceed with your question.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

Hey Mickey, good morning.

Mickey Schleien -- Ladenburg -- Analyst

Good morning. Can you hear me OK?

Thomas Philip Majewski -- Chief Executive Officer

We can yes. Thank you.

Mickey Schleien -- Ladenburg -- Analyst

Perfect. I want to make sure I understand the effective yield recast for the fourth quarter am I correct in interpreting that the decline from the previous quarter mainly reflects the impact of low loan prices in October on your terminal value assumptions?

Thomas Philip Majewski -- Chief Executive Officer

Exactly. Let me just expand upon that we don't know where loan prices will be in the future if they may be higher or lower having no crystal ball on what that's going to be we use the current loan prices as a proxy. However as I mentioned our behavior likely will be a little different in that we seek to liquidate things when prices are high not low but we have no better information to work off of then just but today's loan prices are. Overlay further we take some punitive haircuts for low-priced loans. So not only do we just take those lower prices we actually assume many of those loans defaults in addition to our normal default assumptions and as loans fell below certain key thresholds. And frankly more and more loans fell into the default bucket for the fourth quarter. So it was a little we applied our methodology consistently the loan sell off particularly in single B rated loans in October and November really probably got magnified perhaps even a little too much in our projections.

Mickey Schleien -- Ladenburg -- Analyst

Okay I understand. Tom. And considering that you've made incremental investments in the fourth quarter at effective yields of almost 15% and how much loan prices have rebounded since October notwithstanding what's gone on in the last couple of days. Is it reasonable to say that the portfolio's effective yield is now more in line with the 12% to 13% that you reported in the first nine months of 2019?

Thomas Philip Majewski -- Chief Executive Officer

We haven't put out official guidance on that. So I can't answer that specific question as to the level if you wanted to make a directional estimate indeed the percent of loans trading below 80 and trading below 70 declined from the October levels. So all else equal those are going to be the kind of loans that are going to be subject to haircuts or additional stresses. And to the extent they fall which they did fall broadly in the market directionally you're quite accurate in what would likely play out in the portfolio but we haven't put specific numbers on it.

Mickey Schleien -- Ladenburg -- Analyst

Okay. And in addition the terminal value assumption should be better everything else equal?

Thomas Philip Majewski -- Chief Executive Officer

Based on that change in loan prices yes that's a fair assumption.

Mickey Schleien -- Ladenburg -- Analyst

Okay. Tom I think I've asked this question before. But this quarter is even more glaring. Cash yields have remained very good and around 20% due to the historically low default rates and they're now give or take twice the estimated yield which is pretty startling. We know that estimated yields take a lot of factors into account and I imagine a lot of folks are looking at the shape of the forward LIBOR curve and we've talked about terminal value assumptions but as we've talked about before over the life of a CLO those cash yields and estimated yields should converge all else equal. So you've been in this market a long time I'm referring to the CLO market specifically. Based on that experience and looking at where we are in the credit cycle how do you see those cash yields and estimated yields progressing this year?

Thomas Philip Majewski -- Chief Executive Officer

Yes. So I'll draw your reference to the 25.25% effective yield based on current prices of the portfolio. In my opinion when stuff is traded and quoted at 25% effective yield loss adjusted that's the market saying the cash flows aren't likely to continue. Cash flows and yields as you point out absolutely need to converge they can't or they are unlikely and historically have not persisted at meaningfully wider levels from each other meaningfully divergent levels for an extended period of time. We think the reason the market is pricing CLO equity where it is and hence the discounted prices in our portfolio which we believe to be achieved to long-term intrinsic value is because of this fear of cash flow interruption.

It's a commonly heard phrase in the market which is completely inaccurate when people say everyone knows CLOs have to sell triple Cs over 7.5%. Certainly no CLOs in our portfolio has such a provision and I can't point to any CLO in the market that I'm aware of that has such a provision. That said doom and gloom some of it was in many many single B rated loans will be downgraded and it's kind of trip all these OC tests. You'll recall and we've talked about this in the past these OC tests which are the only thing that can cut off the cash flows to the equity get adversely impacted by defaults realized losses or excess triple Cs over that 7.5% bucket. As of I guess quarter end we had about 3.8% cushion on our junior OC tests on average. That's down a little bit quarter-over-quarter but not a lot and could sustain a significant amount of defaults or significant amount of downgrades or some of each before it ran into trouble holding all else constant. Importantly I woven into the call earlier that many of the collateral managers in our portfolio have never missed a payment to the equity across any of the CLOs they've managed as where they were the originating manager ever.

Certainly that's going through the difficult financial crisis of and one of the important things to remember is that in many CLOs loans purchased at other $0.80 or $0.85 on the dollar or higher count as a 100 in the numerator. So it's a test that is easy to manage the OC tests only matter four days of the year. They don't matter of the other 361 days and it gives collateral manages if you sense a downgrade coming or you get hit with downgrades you've got some time before the next or I guess unless it happened the day before the determination date you've got some time to manage your portfolio and reposition yourself so your OC test stays passing. When we evaluate collateral managers frankly their ability to manage within the complicated CLO structures and apply techniques like I just talked about are very very important parts of our diligence process and ongoing monitoring and surveillance process. So while we talked about with 7% defaulted or how much triple Cs we could take that's on our holding everything else constant basis.

Certainly to the day we're seeing 7% corporate loan default rates there will be plenty of in our opinion plenty of good loans to buy with an eight handle price which go a long way to help collateral managers manage that OC test to keep the equity cash flows coming. So to sum up we think the market is mispricing the risk of cash flow interruption. Anything is certainly possible no question about it but I think some fear has overwhelmed looking back at history and thoughtful analysis the way the structure has actually worked.

Mickey Schleien -- Ladenburg -- Analyst

That's very helpful common and there was a lot of information there. Did I hear you say then that there are no CLO equity investments that you hold that are currently diverting cash flows?

Thomas Philip Majewski -- Chief Executive Officer

No I did not say that.

Mickey Schleien -- Ladenburg -- Analyst

Okay. Well then I'll ask the question are there any?

Thomas Philip Majewski -- Chief Executive Officer

Yes there are but I believe they are all if you look on the quarterly investor presentation this is going to be on pages 25 and 26 there are very small number but greater than zero of CLOs that have either no or very little OC cushion. If you look on and I'm just looking at Page 25. We have the column junior OC cushion down at the very bottom the Halcyon 14 threes. These are deals if memory serves is outside the reinvestment period at this point. Same with Marathon seven both of those two are failing their OC tests. Looking through I believe those are the only two that show negative on here. Those two CLOs are outside if memory serves are outside the end of their reinvestment period and frankly we're from the you can see the vintage which is over on the left-hand side 2014 which has proved to be really the toughest vintage.

I'm just getting a confirmation from the desk turns out both of those deals are outside the reinvestment period and those deals were deals that in general had higher energy exposure and broadly 2014 will prove to be one of the toughest vintages in the near term for CLO equity in our opinion. Those you can see are on non-accrual. We're not recognizing any income from them. Broadly you look across the portfolio you see plenty of CLOs with 3% 4% or 5% junior OC cushion.

Mickey Schleien -- Ladenburg -- Analyst

I understand. My last question I can't help but ask about the Coronavirus. Are there CLO managers in which you can invest that has structured their portfolios to be more insulated from global economic risks such as the supply chain issues that are feared from the Coronavirus? Or have we gotten to a point where the loan market is now so large that this risk is systemic and we're just going to have to deal with it as it progresses?

Thomas Philip Majewski -- Chief Executive Officer

I'm certainly the latter. That's a very novel idea. I guess we have to be in an all services business but even there probably companies providing services need to travel to go provide those services. So I think that would I wish we could crack something like that. I don't think we can. Broadly as we look at some high-level things in general the companies we deal with I think there is exceptions to this but many of the companies in the CLOs they're nearly all American companies providing goods and services here in America. In general I don't think of many of our companies is having lots of customers shall we say in China per se or Northern Italy or wherever else it may be. Against that we definitely many of our companies definitely source products from all around the world and any sort of supply chain interruption issues production slowdowns could adversely impact companies.

We're saying like United Airlines someone like that just suspended guidance saying we're not sure what's going to happen with all of this. One of the other in our portfolio Dell Computers. I don't know what their segment revenue was into the Pacific Rim but clearly they're selling computers in the Pacific Rim. That can't be good. Probably fewer people are buying new computers today in that part of the world. So invariably we will feel some degree of business slowdown from this but unfortunately we are not going to be immune from it. Thankfully we are not at least we don't have many large customer exposures broadly into that part of the world.

Mickey Schleien -- Ladenburg -- Analyst

That's interesting and helpful. Those are all my questions Tom. I appreciate your time. Thank you.

Thomas Philip Majewski -- Chief Executive Officer

Great thanks very much. If you have any follow-up please feel to reach out.

Mickey Schleien -- Ladenburg -- Analyst

I will.

Operator

Thank you. Our next question comes from the line of Paul Johnson with KBW. Please proceed with your question.

Paul Johnson -- KBW -- Analyst

Hi, good morning, guys.

Thomas Philip Majewski -- Chief Executive Officer

Good morning, Paul.

Paul Johnson -- KBW -- Analyst

Good morning thanks for taking my question. Most of mine have been asked but I was wondering you provided some pretty good color on how the effective yield essentially is calculated and what impacts that. I'm curious kind of as I look at On slide 27 where you showed the delta in effective yield for all of the investments in your portfolio. Most of them obviously have a negative mark but I was wondering if you could speak a little more specifically to the investments with a little bit of a wider delta kind of more specifically like Harbour view or any of the Zeiss notes as I believe. Is that kind of what you were alluding to in the previous question as far as may be large energy exposure or something else that would drive a wider decline in yield there.

Thomas Philip Majewski -- Chief Executive Officer

Sure. Let's use Zeiss because that's a good example. It's a large exposure for us. So before we begin on Page 27 however let me draw your attention back to Page 26 and if you look in the third to right column. You can see the weighted average portfolio spread. If you look at all there Zeiss three five six seven eight nine. You can see those are all four handle weighted average portfolio spreads and compare that to 3.62 as the average some broadly these are 40 to 50 basis points wider. This is the wide end of our portfolio in terms of broadly. How the underlying Zeiss portfolios look compared to our aggregate portfolio. It's going to be a little more on the exotic side I think would be a fair way to put it. When you're in that kind of territory of portfolio all else equal you should expect in a stress market there's going to be disproportionate amount of single B and B3 rated loans in those CLOs and those are the ones that were pushed down the hardest during the fourth quarter.

So of the deals where we take additional stress haircut on loans below 74 for default we assume many of those defaults fairly quickly in excess of our normal run rate default assumptions. While we actually think the default rate will be lower. We have a rule-based system that we use so those were punitively impacted because they had a higher portion of loans that trickled down below 70. If I could double our position in every one of those investments mindful that's impossible because functionally we own majority of blocks and many of them I would gladly do so at these marks.

Paul Johnson -- KBW -- Analyst

Sure great thanks for that. And my next question I wanted to ask I think you may have had sort of answered this already in your commentary and answers to previous questions. But the drop in the weighted average junior OC cushion quarter-over-quarter fairly significant drop from the fourth quarter to the third. Was that driven mainly by kind of the two investments that you were talking about earlier or can you just kind of maybe even remind us how that works and what impacts that?

Thomas Philip Majewski -- Chief Executive Officer

Sure so the junior OC cushion indeed certainly those two investments the Halcyon on the HLA and Marathon seven certainly did impact things on a negative way my recollection quarter-over-quarter. Broadly there was shall we say a little bit of portfolio movement within each of the within many of the CLOs in a few cases collateral manager selling things that they saw more downside in versus upside. And what we ultimately saw was a bit of a bifurcated market. I also mentioned during the prepared remarks that over 50% of the loan portfolio loan market was trading at a premium and it really for much of the fourth quarter was almost a tale of two markets. If you were a double B rated company you were trading probably at a premium. You might have even tried to reprice your debt. Something we don't like.

If you were a single B rated company particularly a B3 rated company there was an increasing amount of fear of downgrades to triple-C and indeed there were some that were downgraded to triple-C. We encourage our collateral managers and part of our selection process is finding collateral managers are very proactive on trading and relative value and to the extent they sold one loan at 82 and bought a replacement loan at 86 that onto itself would have a little bit of OC erosion. So we see it in times of chop of a little bit of decay there is fine. The amount of aggregate portfolio decay we saw is not it's something we focus on but the numbers we saw did not alarm us.

Paul Johnson -- KBW -- Analyst

Okay great. That's very helpful commentary. My last question just kind of has to do with the market today. I'm just curious. High yield spreads obviously winded down over the last few weeks as the concerns over the virus have increased. Have you seen any impact of that flow through to the loan market perhaps wider spreads or anything along those lines that's created in a sort of interesting opportunities within your CLOs?

Thomas Philip Majewski -- Chief Executive Officer

Sure sure. So a couple of things to highlight. So January just to focus on some positive numbers not that this means our cash flow is going to get better if you look at the midpoint of our NAV estimate for January that is a 5.8% NAV increase month-over-month. It doesn't meet our cash flows are going up 5.8% but people we seem to get quite focused on the downside. As loan prices rallied in January kind of pre-corona or pre-everyone really focused on corona at a minimum we saw yields begin to tighten and loans trading below 70 Phoenix above 70 and some loans did and we saw a meaningful increase in our NAV. Not a lot of other things moved up that sort of percent in fixed income world during the month. As we look prospectively and reading the last couple of days of loan market commentary the market was slowed down on Monday and Tuesday to some degree. There was both the ABS West Conference out in Las Vegas as well as JP Morgan had their Leveraged Finance Conference down in Miami. So volumes on Monday and Tuesday in the loan market where generally muted.

However Wednesday and Thursday we've seen a pickup in activity just looking at one major major loan dealer. They said broadly they're reracking loans down on a quarter to a half point today and many of them were down an eighth to a quarter yesterday. So the ability to make relative value trades selling 99 buying 98 those kind of opportunities are certainly greater today than they were a week ago. We're all looking at a situation. No one knows exactly how all of these fears around the virus will play out for people. We are definitely seeing loans softer right now. Our AAAs as of year-end were meaningfully in the money and to the extent CLO debt spreads widen and loans fall things will be even more in the money potentially for our portfolio. We won't necessarily see spreads increased materially in that there's not a lot of new loans getting issued and indeed relatively few corporate bonds have been issued in the last few days. That market has slowed down significantly. What we would expect to see is either par building or par neutral trading and increasing the quality and portfolios in that there won't be many new loans coming out right now so there wouldn't be an ability to radically increase the spread in today's market. But we would expect a slight continued increase.

Paul Johnson -- KBW -- Analyst

Okay. Thank you very much. Those are all my questions.

Thomas Philip Majewski -- Chief Executive Officer

Great. Thank you, Paul.

Operator

Thank you. Our next question comes from the line of Chris Kotowski. Please proceed with your question.

Chris -- Kotowski -- Analyst

Yes, good morning.

Thomas Philip Majewski -- Chief Executive Officer

Hey Chris.

Chris -- Kotowski -- Analyst

Hi. So maybe this is of the answer to Mickey's question but I'm looking at Page 24 of the quarterly presentation and we see the total cash received go up roughly $2 million from $28 to $30 million and then a couple of lines down the amount treated as return of capital went up by $1 million from $11 million to $12 million. And so just thinking about those two numbers you would think that then the growth investment income would be up $1 million but instead it's down $3 million. So can you square that circle for me?

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

I'm following what you're saying. Let me look at these numbers for a minute. Bear with me.

Chris -- Kotowski -- Analyst

This Page 24.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

Yes I see what you're talking about. Give us about 15 or 20 seconds here Chris. I understand exactly the question you're raising. We want to put these pieces together. Hey Chris sorry about that. So we understand the question. We're looking here. Page 24 you will see our cash flows up $2 million amount of cash flow treated as return of capital is up $1 million. So all else equal that would suggest investment income should be up $1 million from what in fact you're pointing out is investment income is down $3 million and from just looking through the investor presentation. I don't have an immediate number to point to on reconciliation. Would it be OK if we got back to you later in the day with the answer on that one. We agree with what saying there should be a number and if anyone else has that same question. We're happy to please call us later today. We'll be back to you with that reconciliation.

Chris -- Kotowski -- Analyst

Okay great. And then the other question I had is maybe David it or did what was the total taxable income for the year. And is there a way to reconcile the gap to the taxable?

Thomas Philip Majewski -- Chief Executive Officer

Sure. So Texas it's Ken here so taxable income that we just reported on our 10.99 this was a $1.40 per share. So there is really no precise way to reconcile that to GAAP because of a lot of the main reason is the timing of GAAP as recorded on a calendar basis versus on a tax basis being different periods.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

And then overall GAAP is accrual taxes cash basis for all intents and purposes. So a realized loss is blended in our accrual but hits us and tax or not whatever the case may be.

Chris -- Kotowski -- Analyst

Yes. And in the past you had kind of said you targeted the distribution taxable income. And so here obviously there is dollar difference. So but you indicated that you plan to keep the distribution. So can you reconcile that?

Thomas Philip Majewski -- Chief Executive Officer

Well we had a couple of extraordinary items or items that we don't believe will be recurring that popped up during 2000 that the tax year ended 2019. A couple of them were the extinguishment the partial extinguishment of the AAAs created an accelerated tax laws.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

The call and roll we did in the third quarter.

Thomas Philip Majewski -- Chief Executive Officer

The bearings Babson call and roll transaction.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

The conversion of PFS warehouse from cost to mark to market generated a realized loss and then a good example of why GAAP and tax reconcile to answer your question is our new positions that we put in the ground in 2019 we recorded income on those positions in the current year on an accrual basis but on a tax basis almost all of that income it's going to be deferred to pickup based on our tax structure. So that's one example of income being deferred into the subsequent year taxable income.

Thomas Philip Majewski -- Chief Executive Officer

So in fairness the taxable income came in lower than we were expecting the tax treatment on that we did a bearings call and roll instead of a typical reset there was a recalcitrant minority investor that we ultimately had to force out of the transaction basically we had to do it in a slight and a typical way which accelerated several million dollars of tax loss. And then as Ken points out of nearly everything that went in the ground recall we're November 30 tax year end and that was intentional. Many of those CLOs will have December year ends and as at November 30 corporate taxpayer. We don't have to pick up any of that income until next tax year. So we're able to defer a meaningful portion of income into next year.

Chris -- Kotowski -- Analyst

Okay that's it for me. Then thank you.

Thomas Philip Majewski -- Chief Executive Officer

Yes very good. And we'll back to you later today on your other question.

Chris -- Kotowski -- Analyst

Okay thanks. Perfect thank you everyone.

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

Thank you. As it doesn't look like we have any other calls. If anyone else wants to opinion obviously you're more than welcome to less bit to highlight for Eagle Point Income Company another externally managed vehicle advised by an affiliate of our advisor and we do have the earnings call for that at 11:30 today dial-in information is available for that on the company's website which is Eagle Point Income.com to the extent people would like to talk about CLO double Bs we'll be able to do that. I guess starting in 31 minutes if anyone would like. We appreciate everyone's interest in the company. Obviously some new and different complications pops up this quarter with the resets of all the recalibration of the CLO effective yields which we're pleased to do on a real-time quarterly basis obviously a little bit of surprise impact based on some of the things that played out in the timing of that. We continue to draw your attention to the strong and robust cash flows of the portfolio and if you look maybe just last bit people look at page 23 of the slide deck you can kind of look and see the consistency of the cash flows.

They move up and down a little bit but if you were to chart this versus NAV movement in our view you'd see little to no correlation and at the end of the day we seek to first and first and foremost maximize cash flow from our portfolio and then wherever possible seek to minimize tax or deferred tax as much as possible. So lots of moving pieces. Cash flow continues quite consistently and we based on the strong OC cushion in our portfolio. We believe the cash flows will continue quite strong. So and we appreciate your time and interest in the company and hope some of you will join us for the next call it in about a half an hour. Thank you.

Operator

[Operator Closing Remarks].

Duration: 59 minutes

Call participants:

Garrett Edson -- Investor Relations

Kenneth Paul Onorio -- Chief Financial and Chief Operating Officer

Thomas Philip Majewski -- Chief Executive Officer

Mickey Schleien -- Ladenburg -- Analyst

Paul Johnson -- KBW -- Analyst

Chris -- Kotowski -- Analyst

More ECC analysis

All earnings call transcripts

AlphaStreet Logo