Q1 2023 Eagle Point Credit Company Inc Earnings Call

Participants

Garrett Edson; SVP; ICR, LLC

Kenneth Paul Onorio; CFO & COO; Eagle Point Credit Company Inc.

Thomas Philip Majewski; CEO & Interested Director; Eagle Point Credit Company Inc.

Mickey Max Schleien; MD of Equity Research & Supervisory Analyst; Ladenburg Thalmann & Co. Inc., Research Division

Paul Conrad Johnson; VP; Keefe, Bruyette, & Woods, Inc., Research Division

Presentation

Operator

Greetings. Welcome to Eagle Point Credit Company Inc. First Quarter 2023 Financial Results Call. (Operator Instructions) Please note, this conference is being recorded.
I will now turn the conference over to Garrett Edson of ICR. Thank you. You may begin.

Garrett Edson

Thank you, Sherry, and good morning. By now, everyone should have access to our earnings announcement and investor presentation, which was released prior to this call, which may also be found on our website at eaglepointcreditcompany.com. Before we begin our formal remarks, we need to remind everyone that the matters discussed on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company's actual results to differ materially from those projected in such forward-looking statements and projected financial information. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call. We disclaim any obligation to update our forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company's website, eaglepointcreditcompany.com.
Earlier today, we filed our first quarter 2023 financial statements and our first quarter investor presentation with the Securities and Exchange Commission. Financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company's website. Financial statements can be found by following the Financial Statements and Reports link, and the investor presentation can be found by following the Presentations and Events link.
I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company.

Thomas Philip Majewski

Thank you, Garrett, and welcome everyone to Eagle Point Credit Company's first quarter earnings call. If you haven't done so already, we invite you to download our investor presentation from our website, which provides additional information about the company and our portfolio. The company had a very strong start to 2023. Our portfolio generated solid cash flows while we maintained a stable NAV. Despite the financial doom and gloom prognosticated by many over the past year, think of all the headlines you've read even in the last quarter, our portfolio of CLO equity has done exactly what it was designed to do, generate solid recurring cash flows for the benefit of our investors. Indeed, for the 12 months ended March 31st, our portfolio generated $3.40 per share of recurring cash flow. Even better, our recurring cash flow in April 2023 exceeded the total of our first quarter recurring cash flow by 22%.
While we continue to live in uncertain economic times, our portfolio of CLO equity was designed for periods like these. As of quarter end, our CLO equity portfolio had a weighted average remaining reinvestment period of 2.9 years. With roughly 4% of the loan market prepaying at par during the quarter, and an average loan price of 93.38 during the quarter, many of our CLOs were able to capture upside, reinvesting prepayments or minimize risks as they chose in their underlying portfolios. For the first quarter, our net investment income totaled $0.34 per common share before $0.02 per share of realized losses. We continue to actively manage our portfolio, and we deployed $55.3 million of net capital into new portfolio investments during the quarter. We received recurring cash flows from our portfolio in the first quarter of $42.3 million, or $0.74 per common share, exceeding our regular distribution, regular common distribution, and total expenses by $0.10 per share.
As in the fourth quarter, first quarter cash flows were somewhat impacted by the mismatch between 1-month and 3-month LIBOR and SOFR. However, given the compression between 1-month and 3-month rates over the past few months, we saw a significant increase in recurring cash flows in April to over $51 million in total. We also paid a special distribution of $0.50 per common share in January of 2023. Inclusive of that special distribution, prior special distributions, and other distributions we've paid through April 30th, we've now delivered $18.71 per share in cash distributions to our common stockholders since our IPO.
NAV per share ended the first quarter at $9.10. Since the end of the quarter, we estimate our NAV at April month end to be between $8.83 and $8.93, a modest decline from where it stood on March 31st. We also continue to prudently raise capital through our at-the-market program and issued over 2.6 million common shares at a premium to NAV, generating NAV accretion of about $0.05 per common share. These sales generated net proceeds of over $27 million during the first quarter. All of our financing remains fixed rate and is unsecured, and this gives us protection in a rising rate environment. Importantly, we have no financing maturities prior to April 2028
In addition to our solid first quarter performance, on May 11th, we declared regular monthly common distributions for the third quarter of $0.14 per share and an additional variable supplemental distribution of $0.02 per common share per month, which is related to our 2022 spillover income. Management currently expects to continue monthly variable (inaudible) supplemental distributions through the end of 2023, though the actual timing and amounts of distributions are subject to a number of factors, including the company's results of operations. As of March 31st, the weighted average effective yield on our CLO equity portfolio was 15.83%, and that is a slight reduction from 16.23% where it stood at the end of December. However, the new equity we purchased during the first quarter had a weighted average effective yield of 18.6%, which will help bolster the portfolio's strong weighted average effective yield prospectively.
As I mentioned, during the quarter, we deployed $55.3 million of net capital primarily into secondary CLO equity as well as some CLO debt, some loan accumulation facilities, and other investments. During the quarter, the secondary market continued to maintain a significant amount of -- significant number of attractive investment opportunities for us with the number of investments we made during the quarter having loss adjusted effective yields in excess of 20%. As a result, we took advantage and deployed a material amount of capital and dry powder that we had into new portfolio investments. As of March 31st, our CLO equity portfolio's weighted average remaining reinvestment period stood at 2.9 years, which is a modest reduction from the 3.0 years at the end of 2022. So despite the passage of 3 months through our proactive portfolio management, the reinvestment period on our CLO equity positions was modestly reduced by just about 1 month. We believe this continues to drive the portfolio's outperformance relative to the broader CLO equity market. We remain focused on finding opportunities to invest in CLO equity with generally longer reinvestment periods, which we believe will give us better ability to further navigate through the current volatility.
I would also like to take a moment to highlight Eagle Point Income Company, which trades under the symbol EIC. EIC invests principally in junior CLO debt with a particular focus on CLO BBs. For the first quarter, EIC generated net investment income of $0.49 per share, once again exceeding its regular common distributions. EIC has performed very well through the rising rate environment and remains very well positioned to generate strong net investment income over time, given the long-term performance of CLO junior debt. We invite you to join EIC's investor call at 11:30 a.m. today and also to visit the company's website, eaglepointincomecompany.com to learn more. Overall, we remain quite active in managing our portfolio and continue to keep a close eye on the broader economy. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets and share our outlook for the remainder of 2023.
I'll now turn the call over to Ken.

Kenneth Paul Onorio

Thanks, Tom. For the first quarter of 2023, the company recorded net investment income, net of realized losses, of approximately $18 million, or $0.32 per share. This compares favorably to NII and realized losses of $0.29 per share in the fourth quarter of 2022 and NII and realized losses of $0.30 per share for the first quarter of 2022. When unrealized portfolio appreciation is included, the company recorded GAAP net income for the first quarter of approximately $20.1 million, or $0.35 per share. This compares to GAAP net income of $0.17 per share in the fourth quarter of 2022 and a GAAP net loss of $0.53 per share in the first quarter of 2022.
The company's first quarter GAAP net income was comprised of total investment income of $31.9 million and total net unrealized appreciation on investments of $7 million, offset by net unrealized appreciation on certain liabilities recorded at fair value of $5.2 million, realized capital losses of $1.1 million, financing costs and operating expenses of $12.1 million, and distributions on the Series D Preferred Stock of $0.4 million. The company's asset coverage ratios at March 31st for preferred stock and debt calculated pursuant to Investment Company Act requirements were 299% and 443%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 33% of the company's total assets, less current liabilities. This is within our target range of generally operating the company with leverage between 25% to 35% of total assets under normal market conditions.
Moving on to our portfolio activity in the second quarter through April 30th. The company received recurring cash flows on its investment portfolio of $51.4 million. This is significantly above the $42.3 million received during the full first quarter. Note that some of our investments are expected to make payments later in the quarter. As of April 30th, we had $45.2 million of cash available for investment. Management's estimated range of the company's NAV as of April 30th was $8.83 to $8.93 per share, reflecting a 2% decrease from March 31st. During the first quarter, we paid 3 monthly common distributions of $0.14 per share. Subsequently, we have declared monthly regular distributions of $0.14 per share, along with a monthly variable supplemental distribution of $0.02 per share on our common stock for an aggregate common monthly distribution of $0.16 per share through September 2023. In addition, the company paid a special distribution of $0.50 per share in January, which represented a portion of the 2022 tax year spillover income.
I will now hand the call back over to Tom.

Thomas Philip Majewski

Great. Thank you, Ken. Let me take everyone through some thoughts on the loan and CLO markets as well. The Credit Suisse Leverage Loan Index generated a total return of 3.11% during the first quarter, which was a strong start to 2023 despite the challenging environment in March. The index continued its positive momentum through April, showing the resiliency of the asset class in the midst of volatility. Notably, while the regional banking crisis in March did impact overall liquidity in the market related to CLOs and securities broadly, and we have not seen much of an impact with regard to actual credit expense. Indeed, loans and CLOs continue to have very little to no exposure to the most of the regional banks in the news.
However, given the banking challenged environment and the broader economic environment, we did see 10 leveraged loans default during the first quarter. Indeed, ECC has exposure to well over 1,000 loans, so just to frame the materiality of that count. But as a result, as of quarter end, the trailing 12-month default rate stood at 1.32%, up from the end of 2022, but still well below historical averages. Most bank research desks are expecting the default rate to end up around 3% by the end of the year. Despite the increase in defaults, during the quarter, approximately 4% of leveraged loans paid off at par. This provides our CLOs, which are in the reinvestment period, with valuable par dollars to reinvest in today's discounted loan market to offset the losses from defaults and other distressed credits. With a significant share of high-quality issuers trading their loans at discounted prices, CLO collateral managers were well positioned to improve their underlying loan portfolios during the quarter through relative value credit selection in the secondary market, as I noted previously, as well as to capitalize on high-quality market loan issuances, nearly always coming at discounted prices in today's market.
Given the market conditions, the percentage of loans trading over par continues to be essentially 0, with the Credit Suisse Leveraged Loan Index at a price of 92.67 recently. As a result, repricing in the loan market remains essentially 0. Instead, in fact, we are observing refinancing activity as loan issuers tackle their 2024 and 2025 maturities. Despite having lower financing spreads in place, loan issuers are extending their maturities by offering lenders higher spreads and new OID on the refinanced loans. This has been accretive to our portfolio's weighted average spread, which in turn increases the yields we receive on our CLO equity portfolio.
On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios increased 4 basis points at the end of March compared to where it stood at the end of December. And this measure has now increased by 9 basis points over the last 12 months. CCC concentrations within our CLO stood at 4.4% as of March 31, and the percentage of loans trading below 80 within our CLOs is about 6.3%. Our portfolio's weighted average junior OC cushion was 4.85% as of March 31st, which gives us significant headroom to withstand downgrades and potential credit losses. Indeed, our junior OC cushion is significantly above the 3.9% seen more broadly in the CLO market. This is not by accident, it's by design.
In the CLO market, we actually saw $34 billion of new issuance during the first quarter. We believe a significant majority of this volume was backed by captive CLO funds, which are generally far less return sensitive than an economic actor like ECC. Reset and refinancing activity also remains at essentially 0 due to most current CLO debt pricings being in the money. While the market gives the in-the-money nature of our CLOs financing some credit, we believe the market doesn't give it full credit and that it represents hidden value embedded in our portfolio. We believe our weighted average CLO AAA spread of 119 basis points is roughly 74 basis points in the money today.
As we have noted, it is in an environment of loan price volatility where we believe CLO structures, and CLO equity in particular, are set up well to buy loans at discounts to par with a very stable long-term financing structure using par paydowns from other loans and have the ability to outperform the broader corporate debt markets over the medium term, as they have done multiple times in the past.
To sum up, we generated net investment income for the first quarter of $0.34 per weighted average common share. Our portfolio saw a modest increase in NAV during the quarter. We saw a significant increase in cash flows in April, which bodes well moving forward for our portfolio. We also remain very active in the quarter in terms of sourcing and deploying investments at attractive yields, particularly in the secondary market where most of our focus is today. We continued our existing regular monthly common distributions and variable supplemental common distributions through April 2023. We strengthened our liquidity position during the quarter, generating an additional $0.05 of NAV accretion through our ATM program, and we continue to remain 100% fixed rate financing completely unsecured with no maturities prior to April 2028, which gives us protection from any further rising rates and attractive cost of capital for many, many years to come. We believe the company's investment portfolio is in really good shape. And the weighted average remaining period's strong OC cushion and increasing cash flows are all evidence of that. We remain pleased to return extra cash to our investors in the form of special or supplemental distributions, and we'll remain opportunistic and proactive as we manage our portfolio with a long-term mindset as we always have.
We thank you for your time and interest in Eagle Point. Ken will now open the call to your questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question is from Mickey Schleien with Ladenburg Thalmann.

Mickey Max Schleien

Tom and Ken, hope you're well. Tom, about 1/4 of your CLO equity portfolio is beyond its reinvestment period, and I think about another 15% has less than 0.5 year left. And as you mentioned, since AAA spreads are very wide, the CLO primary market is very slow. So the opportunity to refinance and reset these is very limited. So with that in mind, how do you see the fund's cash flows developing as these CLOs exit the reinvestment period and start to unwind and pay off their AAAs which are their cheapest debt?

Thomas Philip Majewski

A good question. You cited a number 25%?

Mickey Max Schleien

This is based off of the last SOI. We haven't seen this quarter's, but about 1/4 of the previous SOI was beyond the reinvestment period and around 15% had less than 0.5 year left.

Thomas Philip Majewski

Yes. And are you basing that on the par value or the market value, just so I can understand?

Mickey Max Schleien

I just counted the number of positions.

Thomas Philip Majewski

Got it. Okay. I haven't done the math, and we can do that as a follow-up here. I would have a strong suspicion, the dollar amount of CLOs outside the reinvestment period is lower than 25%. That could very well be on the counts basis but not the dollar basis. Just thinking about other investments going into the portfolio, because once we're outside the reinvestment period we counted as 0 in that weighted average, so if we're at 2.9, it's going to be a smaller portion based on market value. And typically securities with lower market values are generating less cash flow. So while any CLO outside of its reinvestment period, as a general rule, you'd expect its cash flows to decay from being outside the reinvestment period, my expectation is that it's relatively light in terms of the percentage.
In our investor deck, and we did publish 1 this morning, but I know it's tough to get through everything before the call, we actually show the cash received on -- this is on Page 26 of the deck. Let's see, looks like 25 and 26 shows the cash received position by position. Maybe as a follow-up to look into those numbers and look at the cash we received and look how much of it comes from CLOs that are outside the reinvestment period versus those that are in, and my expectation is you'd see it's a very different ratio of those that are in versus out.

Mickey Max Schleien

Okay, I'll follow up with Ken on that. Couple more questions, Tom. In the 2015 mini-credit cycle, the CLO equity portfolio's mark declined to about 75% of cost and then it rebounded almost to par in about 1 year. And same sort of thing happened during the COVID cycle, except it fell to around 50% of cost and then rebounded to par in mid-2021. In the current cycle, it's down to around 75% of cost, which I think may reflect the outlook for cash flows or the uncertainty about the outlook for cash flows. And so when you think about the Fed potentially ending its monetary tightening, how do you see the market valuing CLO equity going forward?

Thomas Philip Majewski

Yes, that's a good question. There's any number of possibilities. On 1 hand if let's say the Fed were to start cutting rates aggressively, and that's not a prediction, just a theoretic, that might suggest the economy is in a lot of trouble and maybe that portends for additional defaults. At the same time, if they keep increasing rates, maybe that portends for companies have a hard time paying their debt service. So I could -- talking negatively both ways there on 1 hand. The flipside, assuming we're maybe closer to the top but not going down too far, maybe we go up or down a little bit from here. What we see is by and large, out of thousands of issuers -- let me just flip back here. We have exposure to 1,872 obligors, and in the U.S., 10 companies defaulted in the loan market. So teeny percent of the count of our obligors. That's a count base, not a percentage basis. But to frame the actual credit expense occurring, not too bad in the overall scheme of things. Obviously, I'd like zero defaults, but that's improbable.
So where we look, the best news out there is by and large the top line and bottom line of below investment grade companies that report publicly, and this is per S&P or LCD data, top line and bottom line are still growing as of the latest data that I've seen. And while we always like revenue to grow at 20%, in many cases it's growing in the high-single digits to low-to-mid teens on a year-over-year basis. And that gives companies at least some degree of -- we can debate why that is, it's some inflation, it's this, it's that, companies are growing in general, these are in many cases levered buyouts oriented towards growth. My expectation is companies will, even if 3% default, that means 97% keep paying, first off, an increase in defaults would push prices down, which could in the near term hurt CLO equity values, in that when the market values a piece of CLO equity, it's a combination of looking at the future cash flows and looking at the net asset value or what's the liquidation value if we were to just unwind a CLO.
When you create a new CLO that's much more an NPV analysis, when you're at the end of the reinvestment period, it's much more of a liquidation analysis and the right answer is somewhere in between. Our expectation is over time, CLO values will go back up and in my opinion they're depressed more than the risks warrant, but the market is the market. It's hard to predict what will happen definitively in the coming months. Prices may move up or down. I think a lot of the pain is behind us, but that's my best estimate at this point. I can't say that definitively. But what I do know is, just as we saw during COVID, our portfolio had a much lower payment interruption rate than the broader market, and our portfolio was set up with more OC cushion than the broader market and a much longer weighted average reinvestment period than many CLOs on average, which we think will give us the perseverance to continue generating strong cash flows even if we see defaults pick up.

Mickey Max Schleien

That's really helpful, Tom. And I agree with those sentiments. And you mentioned defaults and I do see that the portfolio's CCC bucket actually declined, which is a very good trend. And how do you view the ratings agencies' outlook on leveraged loan defaults today versus maybe a couple of quarters ago? It just feels like things are not as dire as we were maybe thinking in the middle of last year, going into this year. And I'm just curious whether you think the pressure from downgrades is easing.

Thomas Philip Majewski

No one's ever got into a credit cycle saying, you know, it's not going to be that bad this time. So every cycle, oh, it's going to be terrible. It's going to be doom and gloom. There's no bottom. And at the heart here, most of the folks we do business with our credit folks. I agree with your broad sentiment that it's, in my expectation, not going to be as bad as many of the naysayers say. The biggest thing or a big thing out there, the percent of loans trading below 80 in our portfolio, I gave you that stat. Let me go back and look at it. That is up a little bit. I forgot what it was, but we mentioned it earlier. Let's see, here we go. We have 6.3% of our loans trading below 80. CCCs at 4.4. That means assuming all the -- there's a 1.9% difference between those 2 measures, assuming all the CCCs are trading below 80, that's not necessarily accurate, but let's make that the assumption, there's another 1.9% of loans that are below 80 that are not yet trading at rated CCC. Why that is? Who knows? Usually the market's ahead of the agencies on these things. So the combination of the collage of those 2 things is really what to look at when trying to measure the potential risk in the portfolio.
The offset to that is what's payment rate and what's the price of loans. And what we saw last year in general was significant par build across many of our CLOs. If anything, they're maybe giving back a little par so far this year, but I'm happy to see them do that as they're trimming tails and trying to minimize risk. Hence you saw the CCC bucket come down on aggregate. But, again, to talk about that, if our CCC basket's 4.4% and our junior OC cushion is 4.85%, typically, in a CLO, there's some haircuts on the numerator of the OC test once CCCs get above 7.5%. Even if we saw -- in our average CLO, even if we saw CCC double, that wouldn't interrupt -- that wouldn't fail the OC test on our on a typical CLO, probably even if we saw them triple, I'm holding all else constant, it likely wouldn't trip that junior OC test on the representative average CLO. So we've got a ton of cushion in this space. We have, again, the broader -- we're 4.85% on the junior OC cushion. The broader market's at 3.9%, and this is by design, how we structure our portfolios to give us more stability during choppy markets.
At the extreme, if the tests were to fail, the consequence isn't great, but it's not catastrophic. The consequence is suspending equity distributions at a CLO and redeploying that money to either buy new loans or delever your AAAs. Importantly, OC tests only matter 4 minutes per year. I used to say 4 days a year, but it's really just 4 minutes. It's 5:00 PM on the quarterly determination date. It's interesting at all times, in my opinion, but the only time it has any economic substance is at 5:00 PM -- the proverbial 5:00 PM on the day of determination. So even if you went offsides on that CLO collateral managers, then have some runway to get some time typically from when downgrades were to get back on [side]. So I agree with your sentiment. The headline are typically always worse than the news in credit. Credit people are, by definition, pessimists, which is what we're supposed to be. I think when you see companies growing top line revenue on average the way we're seeing, that's usually not a big harbinger of default.

Mickey Max Schleien

That's really insightful and very helpful, Tom. I appreciate your time this morning.

Operator

(Operator Instructions) Our next question is from Paul Johnson with KBW.

Paul Conrad Johnson

I know we discuss this fairly frequently, but I'm just curious in terms of how the dynamic played out this quarter between asset repricing on the loans -- the underlying loans in the portfolio versus the liabilities and whether that was at play here this quarter, just obviously looking at the income quarter over quarter relatively flat versus the fairly significant growth you guys had and strong cash flows this quarter that you mentioned that came in. So any color I guess on that relationship and how that generally works for you and maybe how you'd expect that to play out for the year if possible.

Thomas Philip Majewski

Sure. Let's see, let's hit on a few things there. So changes in CLO debt spreads and loan spreads, we'll start there. On loan spreads, if it's coming up right now, which is good, if you were to go back and find transcripts from our 2018 calls, we would have been lamenting that while defaults were low, loan spreads were getting tighter and tighter and in many cases loans are trading above par, companies could come back and refinance at a tighter spread. Today, it's the opposite. Companies are refinancing their 2023 maturities, which might have a -- hypothetical here -- might have a 300 spread, but they want to get rid of the '23 or -- certainly '23 or even '24 or '25 maturity, and they're refinancing at a wider spread. And this is not -- and if you're a Treasurer or a CFO at a levered borrower, you're sitting there saying, well, I don't want those debt -- long-term debt to be in the current portion of my balance sheet. The window is open. [Things] to have to pay a higher rate and offer some OID as well to these investors, but I'd rather do that than have investors ask me why the long-term debt is due within a year.
So on 1 hand no one would rationally refinance wider. And if you're facing a medium-term debt maturity, it makes sense to refinance wider just to get yourself some runway. So we love that. This is the opposite of what we used to call spread compression. This is spread expansion. So we're thrilled to see that. I suspect that trend will continue as companies keep tackling their '24, '25, and soon their '26 maturities. The window is open. It's been a choppy couple of years in the credit markets. If you can print and extend the marginal -- I'm spending someone else's money here, but the marginal 100 basis points on part of your debt financing when you're trying to grow your business 20% top line versus taking the risk off the table, of can't refinance later, makes a ton of sense. So that's great. We hope that trend continues. It feels like it will.
Now CLO debt is unchanged in terms of the spreads. One of the advantages, mindful, at EIC, we'll talk the other way about this, and for ECC, we're basically short this CLO debt at a fixed spread. And we have an option typically, as the majority investor in the CLO, a protective right to declare and direct a refinancing of the CLO if it makes sense. But I think I mentioned our weighted average AAA spread was 119 basis points over LIBOR. The generic AAA level right now in the market is 1.95. The tights are 1.75. So our debt is very, very much in the money. And as an equity investor, you see a low debt, it's heads I win, tails you lose. If spreads tighten, we'll refinance you tighter. And if spreads widen, we won't. So whereas maybe 18 months ago, it was refi and reset mania here at Eagle Point, I couldn't tell you the last time we did 1 of those because right now our debt is so in the money. So we're fortunate. And our maturities are longer than our loans, so we don't have any refinancing need in our CLO portfolio. So the good news, loans are shorter and they're refinancing wider right now, our spreads are set in stone. So that much is good.
In terms of earnings power for the company, obviously, it's very difficult to forecast earnings. We like to make things as high as possible. That much I can assure you. The pickup in cash flow in April versus the prior quarter or 2 was driven by just a natural correction of a basis between 1-month and 3-month LIBOR or 1-month and 3-month SOFR, while CLO debt all pays off of 3-month rates, LIBOR or SOFR, loans can pay 1 month, 3 months, 6 months or even off of prime, prime minus typically. But it's an oddity in the loan market that the borrower can choose their rate. And when rates were moving up very, very quickly and the short end of the yield curve was steep, what folks did was focus on if you were a Corporate Treasurer and it was a 25 basis points difference in 1-month versus 3-month rates, you'd pay the 1-month rate. CLO guys had to keep paying 3-month to our lenders. And that caused a little bit of mismatch.
As the short end of the yield curve, and again, this is the 1- to 3-month yield curve, there's nothing to do with 5 years, 10 years, 30-year treasuries. This is the 1- to 3-month portion of the yield curve. As that has normalized and flattened, we're seeing the difference, so you can go to 1-month LIBOR, being very modest, and more companies, in many cases, going back to 3-month LIBOR. So that's good. We like more income, not less. And then how does that translate to earnings? Broadly when we forecast effective yields, it's based on the cash flows on the loans versus the cost of the debt. If we get more cash in than we modeled, which is what happened on many investments in April, that has the effect of pushing down the amortized cost. Let's say we have an investment with a 15% loss adjusted effective yield, and we expected to get a certain amount of cash, if we got a greater amount of cash, that excess is treated as a return of capital in our accounting system, and it was very standard accounting. From there, when we reforecast expected yield for the next quarter, all else equal, and obviously that's a big statement, we have a lower basis from which we're forecasting those cash flows. So if the cash flow stays just as we predicted them, but now we have a lower basis, all else equal, the effective yield goes up because we get that same cash off a lower basis. So if everything else stays the same and we got that (inaudible) that normalized -- more normalized long term distribution in April, that would suggest that effective yields could go up prospectively. Obviously, there's a multitude of other things that could impact it, but holding all else constant, that would drive effective yield up, which would, therefore, likely drive earnings higher. So a lot of factors go into that, but that's the broad piece. It's always a good scenario when we're getting more cash flow from our portfolio.

Paul Conrad Johnson

Appreciate that. There's a lot in there, but very helpful answer, helpful insight as always. Basically just 1 or 2 more questions. On that same topic, and what would you say, in terms of the CLO investor asset class. And I guess it's this relationship with rates, in general, as the risk-free rate has gone higher last year, I understand a lot of the decline in CLO activity this year may be somewhat supply constraint driven. But what would you say about the future demand of the CLO asset class just with higher rates in general and just the ability obviously? Maybe this answer is a little bit different between the CLO debt versus equity investors, but does that have any impact on CLO formation and obviously has an impact on CLO spreads, just any sort of insight there would also be helpful.

Thomas Philip Majewski

Let me address. There's a couple of pieces in there. In my opinion, CLO equity investors don't really give 2 hoots about rates. We've been working with this asset class when LIBOR was 6%, LIBOR was 0 and everywhere in between. And the base case, the bankers always show is 14%, give or give or take. It's not a LIBOR-plus type market, and in general people think of -- in my opinion, people think of CLO equity relative to equity-like returns. And just as people investing in venture capital today demand a higher return than they did a year ago, people investing in CLO equity in the secondary market are demanding a higher return today. So whereas we might have been putting money in the ground at a 15% loss-adjusted yield a year ago, theoretically, today we're putting money at an 18.5% rate -- loss-adjusted yield, give or take, maybe even higher. And certainly some are over 20%, in fact. We could focus even higher and higher, but we're focused on moving up in quality, in general, in these markets. So in CLO equity, the nice thing is the floating rates, asset and liabilities, other than that slight mismatch on 1-month or 3-month largely cancels itself out and it's just simply what sort of rate do folks care on. So for CLO equity, it's more about just general risk tolerance than base rates. Very few people think of it as LIBOR plus.
Then moving over to CLO debt, that becomes more interesting. CLO BBs were as little as 500 over (inaudible) 5 years ago, give or take. When base rates were close to 0, all of a sudden CLO BBs might have been a 5.5% investment and get treasuries nearly at 5.5% today. So that's, obviously, changed. When you look at CLO BBs on a spot rate of 5%, often trading at 8.5% with a spread of 850 or DM of 850, all of a sudden you're looking at 13% to 14% current yield on those, and many of those bonds are trading in the 80s. And so when we quote these DMs or discount margins, that's on a yield or DM to worst basis, assuming the CLOs never get called. And when we look at CLO BB today, we view the -- assuming the bonds pay off and you underwrite them well, your downside to maturity is in the 13%, 14% range. But if you've got 10 to 20 points of convexity on your bond, if spreads normalize and spreads tighten or that CLO gets called sooner, all of a sudden you could be looking at a 20% return opportunity as well. So that's a pretty interesting investment as well even at CLO AAAs broadly they're at SOFR plus 200 today, give or take, 195. That's about a 7% return on investment. That's, in my opinion, a very attractive investment unto itself or an asset that's never had a credit loss in the history -- the nearly 30-year history of the asset class. So that's pretty attractive.
In terms of CLO formation, the real challenge in my opinion, is the gap between CLO AAA spreads and loan spreads is out of whack right now. And CLO, you have AAA guys that they're demanding 195 over on average and then the rest of the stack commensurately wider, that just pencils to a typically too low yield for CLO equity, in my opinion. If we're able to buy high-quality paper at 18 and change in the secondary market, in many cases, new issue CLOs pencil out to around 10% today, and there's about an 800 basis point difference or greater secondary versus primary. So the big challenge in the market is that there's not enough CLO AAA investors in my opinion. It's a great investment. Now you could have a different view on rates. Maybe you think rates are coming down. In which case, you'd be better off buying fixed rate than floating rate, but here you're just able -- with CLO debt, you're able to take rate duration off the table.
The largest constraint to CLO formation, in my opinion, is the availability of AAA capital. And indeed, of the CLOs that were issued, there were $34 billion in the first quarter, in our opinion, based on a review of the issuances, the vast majority of those were taken by captive CLO funds where the collateral manager is the 1 who decides on when the equity invests, not a profit-motivated third-party investor like ourselves. Why in the world you would buy a new investment from a collateral manager at 10 when you can get the same thing in the secondary market at 18% yields is beyond me. But those exist, and indeed a fair number of -- we believe the majority of the volume in the first quarter was driven by those captive funds.
We get a couple more AAA investors on, we get some more normalization, I think we'd see a pickup in issuance. But for ECC, what we see is there's a ton of opportunity in the secondary market, April over $500 million of notional -- maybe even close to $1 billion, I forget the number, it was so big of CLO equity available on BWIC in the secondary market. Not all of that traded and obviously it trades at less than par, but still measured in the hundreds of millions of dollars of investment opportunity. So we like that and 90% of our focus right now is in that market.

Operator

And that concludes our question-and-answer session. I would like to turn the call back over to Tom for closing comments.

Thomas Philip Majewski

Thanks so much, everyone, for joining our call today. Ken and I appreciate your time and interest in Eagle Point Credit Company. If you have any follow-up questions, we'll be available later today to speak. Thank you very much.

Operator

Thank you. This does conclude today's conference. You may disconnect at this time and thank you for your participation.