Prepared remarks
Greetings and welcome to the Eagle Point Credit Company Inc. Second Quarter 2025 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darren Dougherty from Prosek Partners. Thank you. You may begin.
Thank you, Operator, and good morning. Welcome to Eagle Point Credit Company's Earnings Conference Call for the second quarter of 2025. Speaking on the call today are Thomas Majewski, Chief Executive Officer; and Ken Onorio, Chief Financial Officer and Chief Operating Officer. Before we begin, I would like 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 such projections. 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 or projection of financial information made during this call is based on the 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. Earlier today, we filed our second quarter 2025 financial statements and investor presentation with the Securities and Exchange Commission. These are also available on the Investor Relations section of the company's website, eaglepointcreditcompany.com. A replay of this call will also be made available later today. I will now turn the call over to Thomas Majewski, Chief Executive Officer of Eagle Point Credit Company. Tom?
Thank you, Darren. Good morning, everyone, and thank you for joining us on the call today. I'd like to start off by sharing the company's earnings for the second quarter. The company generated net investment income less realized losses from investments of $0.16 per share. This consisted of $0.23 of net investment income and was offset by $0.07 of realized losses from investments. The realized losses from investments were principally driven by a reclassification of certain unrealized losses and essentially had no NAV impact. In fact, our NAV as of June 30 was $7.31 a share, which was up 1.1% from the $7.23 NAV as of March 31. For the second quarter, the company generated a non-annualized GAAP total return on equity of 6.3%. Recurring cash flows from our portfolio remained strong. Second quarter recurring cash flows were $85 million or $0.69 per share, and this exceeded our quarterly aggregate common distributions and total expenses by $0.08 per share.
Q2 cash flows were higher than the $80 million or $0.69 per share in the first quarter. The higher recurring cash flows were driven by our proactive refinancing and reset program, outsized first-time CLO equity payments through our opportunistic new issue opportunities, but were slightly hurt by a few basis points of loan spread compression during the quarter. We remained active in portfolio management during the quarter, deploying $86 million into new investments. Importantly, we were able to take advantage of the market dislocation in April and May to acquire CLO equity positions at attractive discounted levels. We expect these investments to contribute to our portfolio's earning power in future quarters. During the quarter, we completed 4 resets and 1 refinancing. The reset and refinancing market, which was quiet during the peak of volatility in April, has since picked up. We have a strong pipeline of additional opportunities that we expect to execute on throughout the remainder of '25.
We believe our continued refinancing and reset activity will reduce CLO financing costs and ultimately lead to higher CLO equity distributions, resulting in higher net investment income for the company. Our portfolio's weighted average reinvestment period, or WARP, stood at 3.3 years as of June 30, and this was roughly 44% above the market average of 2.3 years. If the dislocation had been more prolonged, the company's portfolio was well positioned to capitalize on the market disruption by purchasing loans at discounted levels within our CLOs. From a new issuance perspective, the arbitrage for new CLO equity investments was less attractive today than it was before the volatility began in April. AAA spreads currently stand around 130 basis points over SOFR, and this is roughly 20 basis points wider than the volatility in March and April. However, we have a few loan accumulation facilities in different stages of formation, and we'll continue to opportunistically invest in new issue CLO equity when the math is attractive.
During the quarter, we utilized our at-the-market program to issue $41 million of common stock at a premium to NAV, and this resulted in accretion of NAV by $0.02 per share during the quarter. We also issued approximately $38 million of our 7% Series AA and AB convertible perpetual preferred stock as part of our continuous offering program. We believe the 7% distribution rate on this perpetual preferred stock represents a very attractive cost of capital for the company, and it provides us with a material advantage over our competitors. Indeed, we are unaware of any other publicly traded entity focused principally on investing in CLO equity that has such an attractive financing program. During the quarter, we also entered into our second strategic CLO collateral manager partnership, establishing a new CLO collateral manager within a long-standing established credit management platform. As with our other strategic relationship, we received a meaningful perpetual top-line revenue share in the CLO business.
We believe the potential value creation through these strategic partnerships will meaningfully enhance shareholder returns over time. Indeed, ECC's share of our first partnership is now valued at over $2 million, and I believe there is room to grow much more. During the second quarter, we paid $0.42 per share in cash distributions to our common stockholders across 3 monthly distributions of $0.14 per share. Earlier today, we declared regular monthly distributions of $0.14 per share for the fourth quarter of 2025. The company's Board of Directors considers numerous factors when setting the monthly distribution level, including cash flow generated from the company's investment portfolio, GAAP earnings, and the company's requirement to distribute substantially all of its taxable income, among other considerations. And finally, I'd like to highlight Eagle Point Income Company, which trades on the New York Stock Exchange under the symbol EIC.
EIC principally invests in junior CLO debt securities. We'll be hosting an investor call for EIC today at 11:30 a.m., and we invite you to join us. Ken will now provide some more details on our financial results. And after his remarks, I'll share some insights on the loan and CLO markets.
Thank you, Tom, and thanks, everyone, for joining our call today. For the second quarter of 2025, the company recorded net investment income less realized losses on investments of $20 million or $0.16 per share. Net investment income for the second quarter was $0.23 per share. Included in the second quarter realized losses from investments was $0.05 per share of realized losses from the reclassification of unrealized losses for 3 CLO equity positions outside of their reinvestment period that have been written down to fair value. Since the fair value of these investments had already been reflected in the company's NAV, this was an accounting reclassification from an unrealized loss with little to no impact to NAV. Excluding the reclassification, second-quarter NII less realized losses on investments would have been $0.21 per share. This compares to NII and realized gains of $0.33 per share in the first quarter of 2025 and NII less realized losses of $0.16 per share in the second quarter of 2024.
Additionally, for the second quarter of 2025, the company recorded losses from forward currency contracts of $0.08 per share, which were substantially offset by unrealized gains on non-U.S. dollar-denominated investments, resulting in little to no impact to NAV. When unrealized gains are included for the second quarter, the company recorded GAAP net income of $58 million or $0.47 per share. This compares to GAAP net losses of $0.84 per share in the first quarter of 2025 and $0.04 per share in the second quarter of 2024. The company's second quarter GAAP net income was comprised of investment income of $48 million and unrealized gains on investments of $55 million, offset by financing costs and operating expenses of $20 million, realized losses from forward currency contracts of $10 million, realized losses on investments of $8 million, distributions and amortization costs on temporary equity of $4 million and unrealized losses on certain liabilities held at fair value of $3 million.
As a reminder, temporary equity refers to our multiple series of perpetual preferred stock. Additionally, the company recorded other comprehensive income of $2 million for the second quarter. The company's asset coverage ratios as of June 30 for preferred stock and debt, calculated pursuant to Investment Company Act requirements, were 243% and 525%, respectively. These measures are above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled 41% of the company's total assets less current liabilities, above our target range of 27.5% to 37.5% when operating the company under normal market conditions. As of July 31, our pro forma leverage was 40%, but we expect the leverage ratio to revert back to our target range over time. Consistent with our long-range financing strategy for the company, all of our financing remains fixed-rate, and we have no maturities prior to April 2028.
In addition, a significant portion of our preferred stock financing is perpetual with no set maturity date. During the second quarter, we deployed $86 million in gross capital into new investments. As Tom noted, we were particularly active in April and May, taking advantage of market dislocation to acquire CLO equity at attractive levels. So far, in the current quarter through July 31, the company has received recurring cash flows on its investment portfolio of $66 million. We expect additional collections throughout the balance of the quarter. Additionally, management's unaudited estimate of the company's NAV as of July 31 was between $7.44 and $7.54 per share, an increase of 2% from quarter end. I will now hand the call back over to Tom for his market insights and updates.
Thank you, Ken. Let me share some updates on what we're seeing in the loan and CLO markets. The S&P UBS Leveraged Loan Index experienced a relatively brief period of volatility during the second quarter, declining sharply in April following the pullback that we saw in March amid tariff-related pressures. The index recovered in May and June and ended up with a total return of 2.3% for the second quarter. The loan index ended up almost 3% during the first half of the year and continued performing well through July, ending the month up 3.8% for the full year. The recovery in loan prices has been encouraging, but we note that CLO equity has not yet fully participated in this recovery. We view this as a potential tailwind for our portfolio as we move through the second half. During the second quarter, there were 4 leveraged loan defaults. And as of June 30, the trailing 12-month default rate for loans stood at 1.1%.
This is well below the long-term average of 2.6% and certainly below most dealer forecasts. We did see one notable default in June with Altice representing approximately 38 basis points of the CLO market defaulting, although the event was largely anticipated by market participants and priced in well before the action. Our portfolio's look-through default exposure as of June 30 stood at 32 basis points, which remains well below the broader market levels. We've also seen an increase in liability management exercises by leveraged loan borrowers. These are essentially out-of-court restructurings where CLOs can be the beneficiaries when working with top-tier collateral managers and with Eagle Point's CLO document expertise. Our portfolio has generally been well-positioned in these situations, and we've actually seen net par build in our holdings of CLO equity over the past year despite the out-of-court restructuring activity.
In many cases, our CLOs have been able to be on the winning side of the restructurings. In terms of new CLO issuance, we saw $51 billion of volume during the second quarter, with most of the activity concentrated in the latter part of the quarter as markets stabilized. This was down slightly from $53 billion in the second quarter of 2024. Reset and refinancing activity for the second quarter was $44 billion and $9 billion, respectively. While the new issue arbitrage appears less attractive today due to AAAs being around 130 basis points over SOFR, there have been a number of attractive opportunities for new issue CLOs that have come our way, and we will continue to evaluate opportunities highly selectively. Our portfolio metrics reflect the strength and resilience of our positioning. As of quarter end, CCC-rated exposures within our CLO equity portfolio were 4.9%, and this is notably lower than the broader market average of 6.5% Similarly, only 2.7% of our CLOs were trading below 80, and this compares to 5.1% for the broader market.
Finally, our weighted average junior OC cushion stood at around 4.6% at quarter end, again, well better than the market average of about 3.5%. These are important measures that underscore the quality of our CLO equity portfolio. Looking ahead, we have a very positive outlook for our portfolio. The tariff concerns that drove April's volatility have largely subsided. CLO equity still appears to offer upside as it catches up to the broader market recovery, and our extensive pipeline of resets and refinancing should continue to enhance the earnings power of our portfolio. And our long weighted average remaining reinvestment period provides continued optionality to capitalize on future periods of market volatility. We continue to believe that periods like what we experienced in April, while challenging from a short-term mark-to-market perspective, ultimately present opportunities for CLO equity investors with the right positioning and patience.
Indeed, despite the volatility in April, our NAV was up for the quarter, and we also paid substantial cash to our shareholders. Our portfolio's defensive characteristics and long WR position us well to benefit from these market disruptions in the long term. To summarize the quarter, while net investment income was at the lower end of our expectations due to the factors Ken and I previously discussed, NAV was up nicely, and we see clear catalysts for improvement ahead. We successfully deployed capital at attractive levels during the market dislocation and believe our portfolio continues to maintain superior metrics compared to the broader market. We have significant optionality through our reset and refinancing pipeline to continue enhancing returns as well. We believe our portfolio is well-positioned for continued strong performance as we move through the second half of 2025. We thank you for your time and interest in Eagle Point Credit Company. Ken and I will now open the call to your questions.
Questions and answers
Our first question comes from Mickey Schleien with Clear Street.
Nice to speak to you today. Tom, you mentioned that CLO AAA spreads still remain above pre-liberation day levels. And it seems CLO equity prices are being driven more by a risk aversion mentality than by actual deterioration in cash flows. Do you think the market is correct in terms of the risks to cash flows that it seems to be seeing? And what's it going to take to turn this mentality around?
Congratulations on your new role. Looking at our NAV, as of July, we’ve seen an increase based on the estimate of $7.49, which is an improvement from the March figure. After accounting for our distributions, the portfolio has performed better than the distribution rate, which is positive. We aim for high distributions and an increasing NAV, and we have navigated through several factors influencing this. The demand for AAAs is one such factor. In the CLO AAA market, there are relatively few major players compared to the syndicated loan market, where numerous investors can easily purchase large loans. This smaller pool of CLO investors means that decisions made by just a handful of individuals can significantly impact demand. Additionally, we must consider loan spread compression; with over a thousand loans, their movements can differ from those in the CLO market. When loan spreads tighten but CLO debt spreads do not, it can create complexities.
Another aspect to consider is the yield or discount rate that CLO equity investors are applying. All these factors combined influence the valuation of CLOs and their creation. Historically, these elements shift in and out of favor, and it's uncommon for all three to align positively. However, they rarely stay misaligned for long, as we've observed over the past nine to twelve months. Currently, in July, our NAV increased by 2.5%, after distributions, suggesting a return on equity around 5% for the month, which indicates positive movement. CLO equity and debt tend to lag behind the stock and corporate markets, respectively. While many assets rebounded in May and June, the significant recovery happened in July compared to March. We appreciate rising NAV but maintain a balanced perspective when it fluctuates. Our primary focus is on the cash generation from our portfolio, which has steadily improved on a per-share basis, even if not every quarter shows increases.
The overall cash generation has been robust, covering all distributions and expenses. We're satisfied with our current position; consistent recurring cash flows are essential, and we would, of course, welcome an increase in marks, but our main goal remains cash flow generation. Our portfolio has demonstrated reliable cash flow over the long term.
It sounds to me like you're of the view that perhaps we've turned the corner and this risk-off mentality may revert, which would be great. Just one sort of housekeeping question, maybe for Ken. What drove the realized losses this quarter?
Sure. So a couple of components. There were $0.02 from trading realized losses. There were $0.05 in writing off 3 CLO equity positions that were past their reinvestment period and no longer generating any cash flow or income. That was a reclassification that we mentioned in our prepared remarks. And then reported separately was $0.08 on currency hedges on forward contracts, which were, again, offset by unrealized gains in the investment portfolio. So net-net, there were effectively $0.02 that was driven by trading, and the rest were portfolio dynamics.
The trades were primarily relative value trades; we sold something that we liked less to buy something we preferred. We don't typically incur large losses for such trades, and a $0.02 loss isn't something we worry about much. We also separated our currency-related figures this quarter because we have some European investments. Those investments have 90-day rolling currency hedges that can create realized gains and losses. If managed properly, these gains and losses should be balanced out by unrealized gains or losses in the underlying investments. We believe it’s prudent to display those figures separately. Overall, the main figure to note was $0.02 in realized losses, which were incurred to transition into more favorable investments.
Our next question comes from the line of Randy Binner with B. Riley Securities.
I have a few questions. It was a good quarter. Following up on what you mentioned about the European investments, I noticed that the foreign exchange impact was more significant this quarter than in previous ones. Is there a better relative value in that market? Additionally, how much of your activity is attributed to that region? I'm interested in those two points.
There has been some opportunity in the European market over the last couple of quarters. Over time, the percentage of European CLO equity has increased slightly. While it’s not a significant factor for our program, we are seeing some appealing opportunities that have led us to enter this market to some extent. We aim to neutralize the foreign exchange impacts, which is a standard practice for us across several funds. I don't anticipate the portfolio becoming predominantly European, but it could increase a couple of percent based on available opportunities. In our view, the earlier CLOs may not have performed as well there, but many of the newer CLOs have performed quite favorably, and we will selectively add those to our portfolio.
Okay. But is it less than 5% of the portfolio, just the total size was?
I'm going to say between 5% and 10% without having the number right off the top of my head.
Yes, that's fine. I'm just seeking a general understanding there. Regarding the other question, while I appreciate the insights on Mickey's question about spreads, I'm thinking about the overall yield. It appears to be declining compared to the levels we observed in the latter half of last year and the first quarter. From an overall yield standpoint, especially if the Fed decreases rates, should we anticipate it to remain at the current level or potentially decline? Is that the appropriate way to approach it for modeling top-line net interest income?
Yes. If you were to chart the weighted average expected yield of the portfolio, we are not satisfied with it. Over the last eight quarters, it has decreased more than it should. Although most of our operations are floating rate, interest rates have minimal impact on us because the majority of the cash we gather is due to the spread difference between loans and CLO debt. Historically, as rates increased from 0% to 5%, the overall effect was minor – it doesn’t hurt, but it doesn’t significantly help either. If rates go back down, we don’t foresee a notable decline in cash flows assuming other factors remain constant. The part of our portfolio that is more affected by changes in the base rate is EIC, primarily because a significant portion of its return hinges on that rate. For ECC, rates are not a key driver. The effective yield has decreased mainly due to significant spread compression, especially in the past six to nine months.
In our investor presentations, we offer detailed transparency, showing every CLO, AAA spreads, loan spreads, and everything in between. The weighted average spread on CLO loans has dropped directionally by about 50 basis points. Defaults continue to remain low, which is positive, and many of our CLOs have actually built par. However, recurring cash flows have been impacted due to decreasing loan spreads. We have addressed this with an active strategy of resetting and refinancing CLOs, aiming to reduce costs. If you review our portfolio, particularly the AAAs on a CLO-by-CLO basis, many remain above 130, indicating potential for further improvement. We face a rapid influx of repricing loans on one side while needing time to address the cost on the other. We likely execute more refinancing and resetting than anyone else, but we’re also careful with AAAs below 130. We are focused on minimizing costs and maximizing our runway.
The pressure on the weighted average effective yield has arisen from spread compression over the years. While it feels like we may be nearing a bottom, the loan market is a powerful force that can shift trends quickly. We’re not calling a bottom yet, but this is what has worked against us. Our aim is to select the best CLOs while proactively reducing costs and extending our capabilities.
Our next question comes from Erik Zwick with Lucid Capital Markets.
I wanted to first just start on an announcement in the press release and your prepared remarks about forming the second CLO collateral manager partnership, and just if this is something that was in the works for a while and kind of how that came about, and maybe you could just expand on the opportunity and potential financial benefit.
This is the second CLO collateral manager partnership we've established. At Eagle Point, we are committing between $100 million and $200 million in total across our various CLO equity portfolios to support the initial CLOs of a firm. We previously did this successfully, so we are now looking to replicate that success. Importantly, we are not incurring any operational costs; the firm hires all necessary personnel and handles expenses like salaries and office space. Our role includes providing CLO equity capital to start and overseeing the issuance process, and I believe we are among the best in the market at facilitating this process. In our first collaboration, the firm managed to issue six CLOs and has already reset two of them. We invested all our committed capital, and they are now capable of raising funds from external sources, which is encouraging. Our funds, including ECC, are benefiting from fee revenue generated by other CLO investors.
While we may have to accept some less-than-ideal CLOs initially, this is a long-term strategy. Looking back at our first CLO venture, initial AAA prices were quite high, and timing the market is challenging. However, once the first CLO reached its reset or non-call date, we managed to reset it, resulting in a significant decline in AAA spreads. Though we faced some challenges during the first two years, the current state and performance of that platform are excellent, having earned several awards, including CLO Debt Manager of the Year. Now, as we launch this second opportunity, the market conditions are different. The pricing for AAA bonds has tightened significantly compared to our first investment, which gives us a more favorable outlook this time. Although our first timing might not have been ideal, we feel optimistic about this new venture. Furthermore, I’ve examined a few externally managed and internally managed public BDCs that have successfully grown their assets.
While we don't own a registered investment advisor, we do benefit from a revenue-sharing model in the business, which may actually minimize our operating risks. Our current valuation is a few million dollars, and I anticipate that it could increase significantly. We are also exploring additional opportunities, staying selective as we seek to create exceptional CLO collateral managers that manage substantial portfolios. If we can invest a little and capture a significant portion of the upside, we aim to repeat this successful model.
And just the second and kind of last question for me. You mentioned the attractiveness of the preferred issuance that you've been doing kind of around 7% or so. And another way to fund new investments is just as existing portfolio repays, and I'm looking at Slide 20 in your deck now and year-to-date, annual repayment rate has been down a little bit relative to last year and still kind of below that longer-term average you showed there. I guess, how sensitive are those repayments to lower rates? And if we assume that the forward SOFR curve is correct, would you expect to see that repayment rate particularly potentially tick up over the next kind of 6 to 12 months if we see some reductions in SOFR?
It's important to remember that the loans are all floating rate. If rates decrease, the interest rates on these loans will automatically decline. Therefore, rates themselves do not drive repayments; it's the bullish and bearish sentiment on spreads that plays a significant role. Historically, high repayment periods occurred in 2013, 2017, and 2021, with 2024 also showing slightly below average but still considered bullish. Most repayments or prepayments are influenced by two key factors: companies repricing their loans tighter, which is linked to spreads rather than interest rates, and the overall strength of debt markets leading to increased mergers and acquisitions activity. Many companies need to settle their loans, particularly when M&A activity is high. The repayment numbers for 2022 and 2023 suggest minimal loan spread compression during that time, with a noticeable increase in 2024 reflected in a 27.9% figure. Thus, it's primarily the sentiment surrounding loans that will drive repayment rates, with higher bullish sentiment correlating with increased prepayments, not changes in rates.
And so kind of maybe switching gears a little bit, but similar thought process. So if SOFR comes down, the assets reprice automatically. You still have some existing opportunity for resets and refis. That typically lags, right, because the assets are going to reprice automatically, but it takes a little while for you in the kind of controlling equity portion to work through the liability side. So is that correct that there's like a lag there?
The assets and liabilities of a CLO are primarily floating rates, with a few exceptions for fixed-rate bonds. As interest rates fluctuate, there is an automatic adjustment between these two. Loans reset at irregular intervals, while CLOs reset quarterly, resulting in some variability, but it is not significant. Generally, rate movements offset each other. However, if there is significant spread compression, we would expect CLO AAAs to be affected, although it takes time to process all of them. Our dedicated team focuses on this. Prepayments are the main factor that will drive loan spread compression, which will then necessitate more refinancing resets.
Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.
As a follow-up to the reply that you gave to Mickey's question, talking about how, following Liberation Day, the sentiment seems to be eased off in terms of the risk. Going forward, should we expect, given energy cost seems to be coming down that cash coverage of loans will go up, and possibly what would this mean for the effective yields for CLO equity?
Good question. Cash coverage on loans does not directly affect CLO equity cash flows. Let's consider that if oil prices are at $50 a barrel, that would be favorable for companies with fuel costs. Lower energy costs, all else being equal, could improve free cash flow for many businesses. However, this would not necessarily result in increased cash for our CLO, as companies only need to pay the stated interest rate on their loans, which is tied to LIBOR. While it may reduce default risk due to lower expenses for companies, this alone won't lead to a direct increase in CLO cash flow. The main drivers for increasing recurring cash flow in our portfolio are limited spread compression, which has significantly slowed, and our ability to reset and refinance to reduce costs. Selective new issue investments, which can be very beneficial, are also crucial, though current conditions make it challenging to pursue them. Ultimately, improving the cash flow capabilities of the CLOs through minimal spread compression and cost management will be the key factors driving an increase in recurring cash flow for us.
Our next question comes from Shalabh Barish with Vincent Cap Advisors.
I had a couple of questions. First, can you provide any insights on what caused the notable sell-off in the CLO equity closing funds recently?
The primary reason is that there are more sellers than buyers. I believe the point Shalabh was making relates to ECC, and numerous CLO equity-oriented funds have experienced a notable decline in their share prices over the past few months, which I think is unwarranted, though there could be various factors contributing to this. One potential reason could be concerns about an increase in defaults related to tariffs. I pay attention to the inquiries that come into the Investor Relations mailbox. Some inquiries concern defaults, others are about geopolitical issues; there’s a wide range of topics. However, I don’t recall anyone asking about spread compression. While I don’t read every single inquiry, if I could change one thing, it would be to restore loan spreads to their levels from nine months ago. If that happened, Ken and I would be quite pleased, everything else being equal. We don’t often celebrate here.
We understand the various global issues, like tensions in Iran and economic uncertainty due to changing tariff policies. If we were part of the capital allocation board at a large industrial company, we might decide to delay building a new plant. If a project is halfway through, it makes sense to finish it, but starting a new project might be reconsidered. The concerns about increased uncertainty in economic outcomes and regulations are legitimate. However, considering past events like COVID and financial crises, the pattern of underestimating lower investment-grade companies, typically backed by reputable sponsors in America, has generally proven to be a poor strategy over a long period. For example, the S&P/ UBS loan Index shows that below investment-grade assets have largely yielded positive returns over the last 33 years, except for a couple of years, one being 2008. This sector tends to perform well because it includes growth-oriented companies with solid backing.
To illustrate, owning a Class B office building in Manhattan with a low debt service coverage ratio leaves you with limited options; unlike a company, which can take several measures to overcome financial challenges, such as selling parts of the business or laying off staff. While there may be defaults in this sector, historically, betting against these American companies has often been a misjudgment. Are investors currently cautious? Yes. Does reduced capital expenditure affect the economy? Certainly. But I don't see any companies outright giving up; they may be scaling back, but it's not a complete withdrawal. This creates a perception that could lead some to exit positions, particularly those highly leveraged to loans, fearing poor performance. Although there's some short interest in this market, I see it moving in the opposite direction today.
Yes. What was interesting over the recent sell-off is that CLO ETFs, even the ones investing in mezzanine debt, didn't see much of a drawdown, whereas closed-end funds investing in equity or debt saw a significant drawdown. So I wonder if there is some concerns about underlying capital structure.
Yes, several closed-end funds, including ours, have been at a 10% premium to NAV for quite some time, particularly over the last decade. Currently, we are at a slight discount to NAV, but that is changing rapidly. We closely monitor this. NAVs decreased during the second quarter, which is not unique to our fund. All CLO equity vehicles I observe experienced NAV declines. When you see a decline in NAV alongside a shift from premium to discount, it creates a challenging situation. Nevertheless, the key message we receive from shareholders is the importance of high current income from these portfolios, ensuring cash flows cover distributions and expenses. That formula is what investors are looking for, and they typically reward it. While every CEO believes their stock is undervalued, I genuinely feel that when considering the cash our portfolio generates and how promptly we can return cash to investors, that formula, combined with the solid asset class that loans represent, will prevail over time, though not necessarily every single day.
I had a second question about loan spread compression. So you mentioned that you feel that it could be like a bottoming-out loan spreads. And if you look at the metrics that you guys publish every month, stated loan spread on the underlying portfolio declined by about 13 basis points in the first quarter, but only by about 3 basis points in the second quarter. Is that the right metric to look at when we're trying to estimate how much spread compression has been in the portfolio?
Yes, that's right. To illustrate further, if you look back just two quarters, it felt like we were navigating a particularly challenging situation. However, comparing the first quarter to the second quarter, it seems we've reached a low point. That said, there may still be challenges lurking ahead that we aren't aware of yet. Currently, we are in a steady state, but the spread compression observed in the second quarter was largely due to repricings that were announced in the first quarter. For example, if a loan reprices on February 28, the effects may not be felt until around April 15, indicating limited loan repricing activity in the second quarter. Most of the 3 basis points of spread compression was a result of the previous quarter’s activity. A key indicator of spread compression is the percentage of the loan market trading above par. When this surpasses 40% to 50%, it tends to trigger more aggressive repricing by bankers. While there have been a few repricings as the market has improved recently, many have been retracted. As a general observation, the market appears to be in a stable position currently, although this could shift suddenly. I don't anticipate significant changes in August as people typically refrain from being too active during this month. Let's wait and see how capital availability evolves for investors.
What was interesting was that the sell side was indicating that July was a significant month for repricing. The stated loan spread in your portfolio only decreased by 1 basis point.
Yes. It was primarily the loans with the lowest spreads. I want to say one loan decreased from 175 to 150. Most of the loans I observed were the tightest, with the BBs continuing to tighten a bit more, but there was significantly less activity in the single Bs, which make up a large portion of the CLO portfolios.
Okay. And then one final question on the collateral manager tie-ins that you have. Are they European collateral managers or U.S. or a combination?
I'm sorry, what about the collateral managers?
The partnerships that you have.
The joint ventures. One is U.S., the original one is U.S., and the new one is European.
And I guess you can't disclose who they are, right?
Do we disclose who they are? Let me check something in the financial statement. Please hold on for one moment. How do we list the information? Ken and I are going to look for it. It should be in the schedule of investments, right?
I think the U.S. one is well known, right, because you guys have talked about that before. I think it's Marblepoint, right?
No, that's not Marblepoint. That was a former affiliated CLO collateral manager owned by our adviser, which has been sold and is now part of Investcorp. If you look at the schedule of investments on Page 21 of the June 30 financials, you'll see Muzinich & Co. is the U.S. collateral manager, currently valued at $2.40 million with a cost basis of zero. I believe that figure should continue to rise, but that's just my opinion. They already released the press statement, so that's fine. The European entity is actually Muzinich Europe. Yes, same structure and same people involved. The partnership is progressing very well. Let's do it again.
Ladies and gentlemen, we've come to the end of our time allowed for questions. I'll now turn the floor back to Mr. Majewski for any final comments.
Great. Thank you very much. We appreciate everyone's time and questions today, and appreciate your continued support for Eagle Point Credit Company. Thank you very much.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.