CLO Market Refinancings And Lower Default Risk Will Support Future Income Stability

Catalysts

About Eagle Point Income

Eagle Point Income Company focuses on investing in CLO debt and equity to deliver income and total return for shareholders.

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

• Falling benchmark interest rates are easing interest burdens for leveraged loan issuers, which may support lower default rates and healthier loan fundamentals. This can benefit CLO performance and help sustain Eagle Point Income's recurring cash flows and earnings power.
• Robust loan prepayment activity and an extended maturity wall are encouraging active refinancings and resets across CLOs. This allows Eagle Point Income to reinvest returned capital into higher yielding or better structured tranches that may support revenue growth over time.
• Growing institutional participation and ETF driven demand in the CLO market are deepening liquidity and tightening bid ask spreads. This can improve Eagle Point Income's ability to tactically rotate between CLO debt and equity to manage net interest margins and long term returns.
• Continued strength in below investment grade corporate revenue and EBITDA growth is supporting credit quality in the loan universe, which may contribute to stable or improving collateral performance for Eagle Point Income's CLO holdings and can translate into more resilient distributions.
• Ongoing resets and refinancings of existing CLO positions are lowering certain underlying funding costs and extending reinvestment periods. This may increase excess spread to equity and debt tranches held by Eagle Point Income and support earnings and NAV accretion potential.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Eagle Point Income's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 48.0% today to 63.4% in 3 years time.
• Analysts expect earnings to reach $47.2 million (and earnings per share of $1.86) by about December 2028, up from $28.4 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 12.0x on those 2028 earnings, up from 9.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.4x.
• 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 9.75%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged or deeper cuts to benchmark interest rates would further compress coupons on Eagle Point Income's predominantly floating rate CLO debt holdings, which could pressure net investment income and constrain dividend growth or lead to additional distribution reductions, ultimately weighing on earnings.
• If leveraged loan defaults rise from current muted levels toward or above the long-term average due to macroeconomic weakness or sector specific shocks, CLO collateral losses would increase, particularly impacting equity tranches, which could erode NAV and narrow net margins.
• A downturn in CLO issuance and refinancing activity after the current elevated cycle would reduce opportunities to recycle capital into attractive new deals or resets, limiting the company's ability to sustain high effective yields on new investments and slowing revenue growth.
• Operating at the top end of the targeted leverage range leaves less flexibility if market conditions deteriorate or credit spreads widen meaningfully, which could amplify downside moves in asset values and magnify any adverse impact on earnings and NAV.
• Increased competition from institutional investors and ETFs in the CLO market may continue to compress spreads over time, tightening the risk reward trade off for new CLO debt and equity purchases and potentially reducing future net interest margins and long-term return potential.

Valuation

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

• The analysts have a consensus price target of $14.0 for Eagle Point Income based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $74.5 million, earnings will come to $47.2 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $11.13, the analyst price target of $14.0 is 20.5% 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.