Resets And Refinancings Will Support Stronger Cash Flows And Dividend Sustainability

Catalysts

About Eagle Point Credit

Eagle Point Credit Company is a closed end investment company that focuses on equity investments in collateralized loan obligations backed by broadly syndicated senior secured loans.

What are the underlying business or industry changes driving this perspective?

• Execution of resets and refinancings across more than 20 percent of the CLO portfolio into 2026 is expected to lower AAA funding costs and extend reinvestment periods, which should support higher recurring cash flows and improve net investment income over time.
• Growing LBO and M&A activity is increasing new loan supply, which can counter loan spread compression and create opportunities to deploy capital at attractive yields, driving portfolio level effective yields and supporting revenue growth.
• A still low default environment coupled with resilient corporate fundamentals and below market CCC exposure positions the portfolio to convert a greater share of gross cash flows into distributable earnings, supporting net margins and dividend coverage.
• Access to fixed rate, long dated and perpetual preferred capital, including the 7 percent perpetual preferred program and potential refinancing of higher cost preferreds, should reduce average funding costs and enhance earnings leverage as assets are rotated into higher yielding CLO equity.
• A portfolio WARRP meaningfully above the market creates more time to reinvest in higher spread loans when volatility or credit concerns push spreads wider, which can lift future effective yields, NAV trajectory and long run earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Eagle Point Credit's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.8% today to 98.4% in 3 years time.
• Analysts expect earnings to reach $265.9 million (and earnings per share of $1.39) by about December 2028, up from $44.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.7x on those 2028 earnings, down from 18.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent loan spread compression, with management already highlighting roughly 50 basis points of spread tightening over the past year and recurring cash flows dipping below the combination of distributions and operating expenses, could structurally cap or reduce portfolio level returns and ultimately pressure revenue and net margins over time.
• Rising default rates from their currently low level toward or above the long term average, particularly if more large and idiosyncratic events like the First Brands bankruptcy emerge, would erode CLO equity cash flows, increase realized and unrealized credit losses and depress earnings and net asset value growth.
• Maintaining common distributions at current levels while net investment income has trailed those payouts and leverage has risen above the company’s stated target range increases the risk of a future dividend cut or forced portfolio deleveraging. This could weigh on investor sentiment, constrain reinvestment capacity and reduce earnings and net margins.
• If market conditions shift such that refinancing and reset opportunities on both CLO liabilities and the company’s own higher cost preferred capital become less economical, the strategy of lowering funding costs and extending reinvestment periods may fall short. This could limit the ability to offset spread compression and thereby constrain revenue and earnings growth.
• A sustained period where CLO equity secondary market valuations remain full while attractive new issue opportunities are scarce, combined with the need to rotate out of underperforming positions at realized losses, could reduce effective portfolio yields, slow NAV recovery and weaken long term earnings power and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $9.6 for Eagle Point Credit based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $270.1 million, earnings will come to $265.9 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $6.2, the analyst price target of $9.6 is 35.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.