Kenneth Paul Onorio

For the third quarter of 2023, the company recorded net investment income and realized gains of approximately $23 million or $0.35 per common share, which is inclusive of a nonrecurring excise tax refund of $0.01 per share. This compares to NII and realized losses of $0.05 per share in the second quarter of 2023 and NII and realized gains of $0.47 per share for the quarter ending September 30th, 2022.

On unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $63.2 million or $0.93 per share for the third quarter. This compares to GAAP net income of $0.11 per share in the second quarter of 2023 and GAAP net income of $0.21 per share in the third quarter of 2022.

The company's third quarter GAAP net income was comprised of total investment income of $36 million, net unrealized appreciation on investments of $34.8 million, net unrealized appreciation on certain liabilities held at fair value of $4.9 million and realized capital gains of $0.6 million, partially offset by expenses of $12.6 million and distributions on the Series D preferred stock of $0.5 million.

Additionally, for the quarter, the company recorded other comprehensive income of $0.6 million. The company's asset coverage ratios at September 30th for preferred stock and debt calculated pursuant to Investment Company Act requirements were 354% and 524%, respectively.


These measures are comfortably above the statutory requirements of 200% and 300%. Our debt and preferred securities outstanding at quarter end totaled approximately 28% 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 fourth quarter through October 31st, the company received recurring cash flows on its investment portfolio of $55.3 million. Note that some of our investments are expected to make payments later in the quarter.

As of October 31st, we had $59.3 million of cash available for investment. Management's estimated range of the company's NAV as of October 31st was $8.98 to $9.08 per share, reflecting a 3.2% decrease at the midpoint from September 30th as spreads widened.

During the quarter, we paid three monthly common distributions of $0.14 per share and three monthly variable supplemental common distributions of $0.02 per share for aggregate common monthly distributions of $0.16 per share. We have also declared aggregate common monthly distributions of $0.16 per share through the end of March 2024. I will now hand the call back over to Tom.

Thomas Philip Majewski

Let me provide a quick update on the loan and CLO markets. On the Credit Suisse Leveraged Loan Index generated a total return of 3.37% in the quarter and is at 9.91% year-to-date through September 30th as loans continue to perform strongly. It's far better than many other fixed income indices.

The index had another solid month in October and remains on pace to have its best full year return in nearly 15 years. During the quarter, we actually saw only five leveraged loan defaults, down from 15 in the second quarter. In fact, there was not a single corporate loan default in the month of September, again, evidence of the resilience of senior secured loans.

As a result, CLOs, despite the various macro concerns that people write about in headlines. While some recent market reports have expressed concern over loans facing rising interest rates, the actual data, the default rate and the number of defaults paints a very different picture than the headlines in our view.


As a result, at quarter end, the trailing 12-month default rate declined to 1.3% remaining well below historical averages. Barring a shock in the next few weeks, we expect 2023 to be a far better than average year for defaults. The company's exposure to defaulted loans as of September 30th stood at only 40 basis points, further proof of the strength of our active portfolio management and construction.

Approximately 5% of all leveraged loans are roughly 19% annualized repaid at par during the quarter. This represents a quarter-over-quarter increase and provides our CLOs with valuable par dollars to reinvest in today's discounted loan market and to offset losses from the few defaults that are occurring.


With a large number of high-quality issuers continuing to trade at discounted prices, CLO collateral managers remain well positioned to improve underlying loan portfolios through relative value credit selection in the secondary market. Most loan issuers have become proactive in tackling their near-term maturities in an effort to further extend the maturity of their debt, and they continue to offer lenders higher spreads and OID on their newly refinanced loans.

As a result, our portfolios continue to have numerous opportunities to build par and increase their weighted average spread, which in turn increases the excess spread we receive on our CLO equity portfolio. On a look-through basis, the weighted average spread of our CLO's underlying loan portfolios was 3.78% at the end of September.

Notably, that's an 11 basis point increase compared to the end of June. This measure has actually increased by 20 basis points in the last 18 months. Meanwhile, spreads on the debt tranches issued by our CLOs that were locked in 18 months ago remain unchanged.

CCC concentrations within our CLO stood at 6.7% as of September 30th, and the percentage of loans trading below 80 within CLOs is at about 4.4%. Our portfolio's weighted average junior OC cushion was 4.41% as of September 30th, which gives us ample room, in our opinion, to withstand potential downgrades or future losses.

Our portfolio's OC cushion remains much higher than the market average, which stands at 3.44%. One of the trends that we are seeing increasingly in the loan market is having private credit funds and BDCs refinance CCC-rated loans out of the syndicated loan market.

A recent example of this would be Misys, which is a large software company. For our CLOs, this represents a par repayment and a reduction in CCC exposure. This is great. We hope more of this happens. We wish Misys, frankly, and their new lenders well in the future.

As a private credit funds and BDCs continue to expand, we expect this favorable trend to continue. In the CLO market, we saw $28 billion of new CLO issuance in the third quarter of 2023 and $84 billion year-to-date through September 30th, remaining on pace to eclipse $100 billion once again, while tracking a little below 2022's pace.

We continue to believe that a fair bit of this volume was backed by captive CLO equity funds, which, in our view, are far less return sensitive than we are. reset and refinancing activity related to CLOs issued during the second half of 2022 which was a small period of CLOs where quite a few were issued with 1-year noncall periods have picked up, but otherwise, there's essentially no ReFi reset activity in the market.

Indeed, the AAA weighted average level on our CLO equity portfolio is well tied to where CLOs could be issued today. While the market does give the in-the-money nature of our CLOs financing some credit, we believe the market doesn't give it full credit and that this represents hidden value embedded in our portfolio.

Our weighted average AAA spread is about 144 basis points, and this is roughly 39 basis points in the money today. As we have consistently noted, it's an environment of loan price volatility where we believe CLO equity or CLO structures and CLO equity in particular, are set up well to buy loans at discounts to par with a very stable financing structure using par paydowns from other loans and outperformed the broader corporate debt markets over the medium term as they have done in the past.

We're seeing that happen right now and expect that to continue. To sum up, we grew our NAV by 7% during the quarter. We generated net investment income and realized capital gains for the quarter of $0.35 per weighted average common share. We continue to receive robust cash flows during the third quarter and have already collected more cash flow from our portfolio in the fourth quarter than we did in the third quarter.

We remain very active in terms of sourcing and deploying investments at attractive yields, investing about $119 million of net new capital, and we continue our non-existing regular monthly distribution and variable supplemental distributions through March of 2024.

We further strengthened our liquidity position, generating NAV accretion of $0.14 per share through our ATM programme. At the end of October, we have about $59 million of cash to deploy into new investments. We continue to maintain 100% fixed rate financing, entirely unsecured, and we have no maturities prior to 2028.

This gives us protection from any further increase in interest rates and locks in a very attractive cost of funding for many years to come. We believe the company's investment portfolio continues to be well positioned, given our proactive management the portfolio's long weighted average remaining reinvestment period at strong OC cushion and consistent recurring cash flows.


We also remain pleased to return extra cash to our investors in the form of special or variable distributions and remain opportunistic and proactive as we manage the investment portfolio with a long-term mindset. We thank you for your time and interest in Eagle Point. Ken and I will now open the call to your questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann.

Mickey Max Schleien

Tom, I wanted to follow up on your comments about the primary market. You noted that it's been spotty and with captive funds holding the majority of the new issue volume that we're seeing. That's clearly a function of the high or, I should say, wide AAA spreads.

That process or that lack of primary market puts pressure on your financial performance in that it makes it more difficult for existing CLOs to refinance or reset as you noted. What's it going to take for that primary market to finally start to operate on a more normal basis, which is something you would expect given that the overall fundamentals, as you mentioned, in the data are pretty good.

Thomas Philip Majewski

AAA is ebb and flow, I guess, over the years. If you think back to our performance, again, we've been public for nine years now. There are periods of time where the market's ripe and we're resetting and refinancing absolutely everything. The bad news during those times is if you look at our weighted average loan spread, it's typically going down.

If you look at 2017 and 2018, you'll see we had -- I think of it as reset mania here. At the same time, if you look at the portfolio decks, and these are all on our website going back ages ago, you'll see in many quarters, the loan spread is trickling downward. The bad news today, we didn't do any ReFis or resets.


The good news today is we picked up 11 basis points in spread in the quarter as loans keep getting reset and loans themselves get refinanced wider. It's a little bit of -- while I wish we were resetting stuff as well. I'm also very happy that our weighted average loan spread went up 11 bps, multiplied by the leverage of CLOs, that's obviously very impactful to our portfolio and certainly one of the drivers of NAV going up 7% during the quarter.

Some of the things going on in the world broadly of AAA investing. Obviously, there's always currency fluctuation, certain of the regulators in Japan. We continue to ask questions, although we do note that there are quite a number of Japanese banks that are active.

Some of the new Basel rules as proposed, we believe, will make holding CLO AAAs more attractive for banks all around the world. Also some of the NAIC considerations underway, last we've heard also suggests AAAs will become even more attractive to hold. There's some good news there. Probably the one segment of the market that's missing that might be the most impactful are some of the large U.S. money center banks.

Indeed, if you look in their filings, you can see many of the largest banks in the country have in some cases, 1%, perhaps even more of their portfolio and CLO securities. That's the one market participant. Frankly, that would be nice to see more of. While we're obviously disappointed, we're not resetting and refinancing. At the end of the day, what we care about is the difference between the spread on our assets and the spread of our liabilities.


This quarter, we made it through the spread of our assets going up. We like to win both ways, but we typically have a good habit of having one of them going in our direction, which we're seeing on loan spreads right now.

Operator

Our next question comes from the line of Ryan Lynch with KBW.

Ryan Lynch

My first question just has to do with some combination of you guys raised quite a bit of equity this quarter in combination with you talking about most of that was deployed in the secondary market.

Can you just talk about what sort of secondary opportunities you guys are seeing that drove the decision to raise quite a bit of equity this quarter? Do you see those trends continuing thus far into the fourth quarter?

Thomas Philip Majewski

Yes is the answer to the last question in terms of attractive secondary opportunities. The pickup in the difference in the spread that I was just talking about with Mickey, of loan spreads versus CLO debt spreads in general, is moving in our favor. Typically, when someone models the CLO, they model spread tightening over time, we're actually getting spread widening, which is great.

They're a pretty robust supply of secondary CLO equity opportunities, both majority positions and, in some cases, minority positions or minority where we see a path to build to majority, where, frankly, the yield opportunities there, loss adjusted applying punitive portfolio stresses for the tails and portfolios typically pencil out, frankly, to stuff well into the 20s on a loss-adjusted basis.

There was one investment that came in at a, new investment that came in at a lower yield where there's other strategic reasons for the company to be participating. if you look by and large, at the secondary new ads into the portfolio, you're going to see those in the mid-20s.

The types of sellers of those investments -- and those are all privately negotiated transactions. Some are done via a BWIC process or bids wanted in comp. Quite a few are done off sheet where it's just over the phone and negotiating a price. Some of our edge there is our ability, our knowledge of nearly all CLOs, our ability to analyze any transaction and be current on it very quickly using our own proprietary technology and our knowledge of the transaction documents and CLO collateral managers.

The types of sellers varied widely from, in some cases, maybe even one or two funds winding down, maybe other investors who didn't know was, appreciate what they were signing up for. Maybe people who bought new issue and got their model wrong and just want to punch out.

The stuff we buy, we typically focus on less seasoned, so newer CLOs, but not brand new with as much reinvestment period as possible. We probably pay up for that a little bit, but I will give up some degree of yield on our portfolio to keep the weighted average remaining reinvestment period as long as possible.

We value that greatly. We saw through COVID, we saw through the 2008-2009 cycle ages ago that the #1 defense to have is reinvestment period. While it's very, very expensive to get that in the new issue market, we can get it pretty nicely in the secondary market, picking up a lot of 21 vintage CLOs, maybe some early '22.

Ryan Lynch

The other question I had was a high-level question about some trends that are occurring in the CLO market and the private credit market. You mentioned the one loan that was ReFi-ed from the broad Syndicate loan market to the private credit market. That's certainly a trend that is likely going to continue, if not accelerate going forward.


I'm just curious, I've seen some recent projections from different banks on the level of CLO formation that they expect in 2024. Again, these are just estimates that in subject to change very much so. A couple of trends from those was that they expect CLO issuance to be down for the third consecutive year in 2024.


Additionally, this is Bank of America, who recently proud report he's talking about, there's going to be a big increase in middle market CLO formation in 2024, and there's already been a big increase in 2023 as those trends of loans, more and more loans going to private credit providers that are either holding them on their balance sheet or actually then funding them through middle-market CLOs.


I'm just curious from where you sit, if these trends continue, both lower CLO formation or an increase in middle market CLO formation, what does that mean for your business?

Thomas Philip Majewski

We're working in a plus or minus $1 trillion market. Is it going to get bigger or the new issue, the newly formed component is one part of it. The called component is another part. You got to look at the two of those combined. Certainly, to date, we have not seen a situation where we've had even in years where issuance is way down where we've had a shortage of investment opportunities.

Typically, when issuance is down, the secondary opportunities are more robust, frankly. At the same time, when folks are talking about down, it might be going from $100 billion. I don't remember BofA specific numbers, but it could be going from $105 billion to $90 billion or something like that, while it's still down.

All we need to deploy is a couple of hundred million in a given year and be more than fine. Our ability to source investments in the short to medium term is not something, frankly, I lose a lot of sleep over. Importantly, ECC actually also has a strategic interest in one CLO collateral manager.


You can see in our portfolio and is disclosed in the footnotes but where the ECC actually owns as a revenue interest and a piece of the collateral manager that is independent of further -- beyond meeting a certain investment requirement that continues one way or the other.

It's a permanent revenue share. One of the things we've done in that case is it's an opportunity to continue to get access to CLOs if we want, while we certainly expect that platform to raise capital elsewhere. It's something that we obviously have a very deep tie with and we'll have continued access.

Then finally, when you look across our portfolio, there's two things you'll see, we have deep relationships with a small number of select issuers. These are issuers that, by and large, for us, have performed very, very well and where we have a special place with them.

As long as they keep performing, they have a special place with us. Our access to the market, I think, is different and more durable than a transient coming into the market. Across all of our different investment vehicles, including ECC, we believe we're the largest holder of CLO equity in the world, which gives us a meaningful advantage.

That said, we do have to keep investing to keep the portfolios fully deployed. Then to the point you've raised of the increase in private credit CLOs formerly called middle-market CLOs, whatever just put a different label on it. It's like junior debt or senior equity kind of the same thing.

By and large, what we saw during the financial crisis going back to '08 and '09 is that middle market CLOs, as they were called back then, while they had better credit experience in terms of fewer defaults and better recoveries than syndicated loans, in general, the CLO equity frequently underperformed broadly syndicated CLOs.

That was frankly because many of the collateral managers didn't have the DNA to reinvest cheap rather they make a new loan, 200 basis points wider. We have a small amount of middle market or private credit exposure in our portfolio right now. It's very small, but it's greater than zero.


Some of that -- intentionally, that's with folks who we believe can pivot to the extent new secondary syndicated loans are at $0.80 on the dollar go by the really good ones at $0.85 and just be done with it and capture value that way. We have firsthand personal relationships with all or many at a minimum of the middle market/private credit CLO issuers.

As we look at the market, we believe it's an even smaller set of folks who will know how to deliver superior returns when things get choppy. Frankly, if they're taking out CCC loans from us, we're very, very happy about that. I suspect we'll see an increase in private credit CLOs in our portfolio over the coming year or two. No assurance, but that would be my best estimate.

With that, it's going to be focused on an even smaller number of issuers who actually have experience in managing CLOs through cycles, not just folks that might have run a BDC for a long time but are just getting dipping their toe in the CLO world. Running a BDC is very different than running a CLO for better or worse.

Ryan Lynch

You hit on my next question was going to be what is your middle market CLO exposure just because looking at some of these statistics as 10% to 12% has been kind of the historical market share of middle-market CLOs historically, and it's up to 22% in 2023, and it's projected and again, we noticed that the projection is going to be right or not, but I expect it to be 32% of the CLO market.

Thomas Philip Majewski

That strikes me as, the 32% strikes me as a big nut. Stranger things have happened. I suspect it will be a, the day where we, well, I know what would happen the day where we have cash where we can invest, we'll stop raising capital. We raised capital. I think a few in the CLO, we raise capital when we see opportunities.


When it's accretive to shareholders, both on what we can put the money in the ground at and can we raise capital at an accretive to NAV type price? There's a few in the market who would say the summer was not a good time to be deploying capital. You can see that our NAV was up 7%, while a little bit of that was from the premium issuance.

The vast majority of it was from other than premium issuance. What we saw were -- was paper was cheap. We push the pedal to the medal a little bit. There's times when offers are scarcer and frankly, we're less active on the ATM programme. It's a very effective tool for the company in that -- well, it's not -- it never is quite as simple as the trade or see something attractive in the morning.

We call the bank, we issued the capital and we can do it on a same-day basis. I wish it was that easy, but it's something that works really well on a just-in-time basis to when we're seeing -- when the phone is lighting up more than often, we push the gas a little harder.

The one challenge in managing a portfolio like ECC, we make this our worst problem, we get a ton of cash four times a year. Again, make that, I will never actually complain about that, but all the CLOs kind of pay on our January 15th, April 15th cycle. That's why we have a little more cash than average as of October 30th, is simply it's Christmas here, per really four times a year. We're getting that money in the ground very, very quickly.

Operator

(Operator Instructions) Our next question comes from the line of Matthew Howlett with B. Riley Securities.

Matthew Philip Howlett

The question, look, I think it's the elephant in the room is your balance sheet is just keeps on improving and deleveraging with the growth and net worth. My question -- and I think I asked the last time is, I mean, you got to be looking at putting -- your ratios are putting some either preferred or term preferred or term debt on the balance sheet.

I mean, given with the moving rates for the last few weeks, just given where you're talking where yields are to should we be thinking about getting leverage back up to that 35% and taking advantage of these great spreads before been less?

Thomas Philip Majewski

We certainly are very proactive in managing the right side of the balance sheet. We're blessed. I love our balance sheet. I'm looking at my Bloomberg screen, the nearest maturity is April of 28th on the Xs. Everything is unsecured, everything is fixed rate.

We have some perpetuals out there even. That's all good, and that's by design. We've intentionally run the company with a 25% to 35% target band of leverage, including both preferred and unsecured debt. That served us well in Covid,for example, where we were on size in on our ACR at all times, which that's an art as much of a science kind of judging these things.


As we look at capital raising opportunities, ideally, we'd raise some comments, some preferred and some debt every single day, the OID rules on preferreds and debt sometimes make that not so easy to do. I can assure you, we're continually looking at our balance sheet and looking at creative ways to prudently stay within that band.


We're comfortably -- I think we're around 28% as of the last numbers. Yes, around 28% right now. We try and keep it within there. Sometimes we've gone a little above, maybe we've gone a little below once in a while. Ideally, we're close to the midpoint of that, band.


I can assure you, we're always thinking of of trying to come up with creative things that may be accretive to the company over time. The flip side, when the stock is at a handsome premium at a double-digit premium, sometimes it makes sense to capture a little more common equity at that point, but it's a balance of both, and we'll continue to look at opportunities on the right side of our balance sheet.

Matthew Philip Howlett

No look, it's a high-class problem, debt or equity, but I tell you, do you think you could issue, are the markets open today, I mean, could you issue -- we've seen deals in the 8%... 5 years?

Thomas Philip Majewski

The thing I don't like right now, just to be really candid, I hope your banker colleagues are listening. You can get a 5-year done one or two other 40 Act have been out -- CLO-oriented have done some stuff in that space.

Five years from today, puts us like right in 2028, right in '29. I got a 28 maturity and a '29 maturity. I say what about us, we used to do 10 years, our perpetuals. I said, "What about a 10-year click. I'm joking when I say that.


The middle, we'd be open to stuff like that. I haven't seen much get done in the $25 format. I can't point to anything. We have an active business that invests in these securities from other vehicles and obviously sadly not our own. I don't think I've seen any public deals come across in $25 market, north of five years.

Perhaps with the recent -- some of the maybe people more stability in rates going forward. Perhaps there's some paths there. We probably -- we always have things in the laboratory here as well, and maybe we'll come up with some other ideas to be able to get closer to the midpoint of our range.


I am sensitive to not crowding up our maturity wall into '28, '29 which, if I had to do a 5-year today, that's where I'd have to put it.

Matthew Philip Howlett

I mean, you have a terrific balance sheet, the lowest leverage in the space. Obviously, it's worth pointing out. I mean, obviously, we can do the math on how accretive that would be, leveraging back up modestly and it just looks very attractive to us, particularly if the yields keep on coming down here.


I wanted to delve into the question. You talked about defaults going down next year. I know it's a big picture thing. I mean, what are you seeing differently that the credit -- the leverage loan market may actually see, defaults have retraced.

Thomas Philip Majewski

Just to clarify, I don't believe I predicted defaults going down next year. I did say that trailing 12-month default rate declined a little bit versus the last quarter versus some other recent data measure, but that was not a -- sadly not a prediction for all of 2024.


What the market is missing to the specific way, most banks predicted around 3% defaults. I think one bank predicted 5% or plus percent. That might have been for 2024, if memory serves. We get questions from investors. CLO, BB index last I saw us up, I think, 16% year-to-date.

During the EIC call, their return on equity is even higher than 16% this year. Compare that to the AG, give or take, as of the last time I looked at it, is roughly flat for the year. All this floating rate is great. All the rate problems are just not ours. Companies and defaults remain well below historic averages.

The flip side, all these companies have to pay this higher interest to pay our higher cash flows. What a lot of people have said, is my goodness, debt service coverage ratios of companies are going to get really constrained. It's true that company's debt service is getting tighter.


If your interest rate went from 1% base rate plus a spread to now 5% base rate plus a spread, you got to pay more. Against that, what I think research analysts didn't give enough kind of figured consideration to, CFOs are pretty smart. Private equity sponsors are pretty smart.

I don't remember the time where a company was $1 short on its debt service and the equity handed the keys over to the lenders. I can't say it's never happened, but it kind of sounds silly to even think about. People have run reports that said, "Well, if rates move to this, my goodness, X percent of the loan market won't be able to pay its interest anymore."


That's holding everything constant. If things are a little tight, you slow pay your payables for a few weeks. You sell the overseas division. You call some sort of aggressive lender for a 15% mezzanine loan. As long as your revenue and EBITDA are growing and according to the market data that we see, the average below investment-grade company, and you can see this in our investor deck, it's way in the back, but it's in there.

I think it's LCD, pitchbook data, so we have all third-party data that shows revenue and EBITDA for the average below investment-grade company is going up. If you own a business and the top line is growing and the bottom line is growing, you're going to hand over the keys because things get a little tight on payments for a couple of months.

For two. I guess you borrow from Uncle Charlie to pay your bill that month. companies find ways. I think too much of the analysis was keeping things in a steady state level without realizing there's two behind the scenes doing this stuff. Frankly, covenant lite. If you had a debt service covenant, you might be selling it.



Then you're going to have some mercenary lenders who got in there and they're going to be pushing for a default. CLO guys probably got it a little early. We don't want it to default. Covenant lite is our friend. Against that only 4%, give or take of the loan market is below 80.


That's a good indication of things below 80. Certainly, the market is saying there's some hair on the name or more. A lot of hair in some of the names. That means 96% of the market is not trading at distressed levels. Either the research is one thing, but the reality I think is different.

Matthew Philip Howlett

My last question is the cash flows, we always go to the -- between the recurring cash flows, the GAAP and why I get the disconnect. Cash flows were back up big in October. I mean what's driving it? Then when we -- we still have this -- I didn't expect it to last this long.

This huge recurring cash flow still way above the GAAP reported NII. How long do you see it? Why were the cash flows way up in October? This is a gift that keeps on giving. I mean assuming there's project to be special dividends going forward, just to manage that taxable basis. I mean all these good stuff.

Thomas Philip Majewski

We're so close to getting to $20 in distribution since the IPO, which that's within shooting distance to get that done, which will be great. Just ringing the bell type of that. What happens, loan spreads are up a we're up 11 bps on our spread. CLOs are 10-plus times leverage.

That just generates more cash right there because our CLO debt spreads are fixed. B, there was a period of time when there was a big basis between 1-month and 3-month LIBOR 1 month and 3-month SOFR it was kind of memory serves 40-50 basis points, which every time you make a payment on one of these loans, you got to send in a certificate and all kind of the CFO has got a science on papers, you got to call legal.


If you're saving 50 basis points, you're going to do it, if you're saving 5 basis points, pay the 3-month rate. Unfortunately, essentially, all CLOs pay only off of three months so that differential has closed. We are probably -- if you look back, and it was one second, 1 July, not this year, maybe last year where it was really out of work, and maybe it was two years ago, 1-month, 3-month LIBOR was out of work.


That's now largely behind us. That's also helped. The 3-month rates have been pretty stable over the last couple of months, which then helps the ARB just work even better in CLOs. As you saw, third quarter cash flow -- our fourth quarter cash flow is collected better than all of the third quarter, and we still have a few more payments that we're expecting.


A combination of the portfolio growing and the spreads on the loans underlying the CLOs continuing to go up. We obviously hope that continues as much as possible. Stuff can happen that moves it around to some degree. It's sadly it's not a trend you can predict forever. Some of the things that kind of put us off side a little bit, I think, are behind us at this point.

Operator

Our next question comes from the line of Steven Bavaria with Inside the Income Factory.

Steven Bavaria

My specific question, most closed-end funds focus a lot on NII coverage of their -- for distribution coverage, you folks focus primarily on recurring cash distributions, which, of course, is much higher. Could you just outline for us what's the primary difference between, what additional items are in recurring cash distribution that are not part of standard net investment income.


Specifically, does it include recurring principal amortization that's made on, your typical loans not just a bullet loan. It's got recurring principal amortization. Is that recurring amortization slow down as part of recurring cash distribution?

Thomas Philip Majewski

The recurring cash flows are equity distributions from CLOs and if we have CLO debt and other things that pay interest, but excludes distributions from called CLOs period. It's basically the NII getting generated out paid in cash from our underlying CLOs. If a CLO, unless all the CLO debt has been paid off, which I don't -- we might have one or two of those, but that's not really our portfolio.

Any principle that comes in on a loan, if the CLOs in the reinvestment period is going to be reinvested into new loans or secondary loans. That doesn't come to us. If it's after the reinvestment period, it's going to be used to pay down the AAAs and the AAs and so on and so forth. All of the recurring cash flows with one exception, I'll come to our -- is really just all NII or coupon income coming out of our investments.

The one slight exception, we don't really have much of it now. Sometimes it's called a flush payment on a CLO when it's newly created on the first payment date. Sometimes you get a little extra from that, which can actually be like a special principal dividend, but we don't really -- we don't really have any new CLOs right now. That's not a big part of our cash flow.


The short answer to the first part of your question, what is principal included in recurring cash flows? By and large, the answer is no, because the principal payments on loans are generally trapped in a CLO, then B, let me think through this, you have the -- what's the difference between cash and NII, GAAP NII?


Cash is what pays the bills, cash is what we distribute to shareholders. That's the most important tax gap. Cash money in the bank is always the statement of cash flows is the most important of the three financials on a company, in my opinion. The principal difference between cash and GAAP is a reserve for credit losses, a handful of other smaller things.


When we predict NII, one of the things we say when we talk about these effective yields or we often say, these include a reserve for future credit expense. Old banks speak, if you worked at say, Bank of New York a few years ago, you'd call that a loan loss reserve.

For variable interest entity accounting, VIE accounting, we take a reserve for losses. We disclosed a lot of this in our financial statements, but you can see we typically get default rates up to 2%, 2-plus percent. Right now, we have 40 basis points of default exposure.

We are taking reserves for future losses. Very rarely due defaults haven't exactly as modeled. Sometimes they're higher, sometimes they're lower. Right now, we're seeing lower defaults than we'd expect. If we did have a default on a loan in a CLO, it doesn't come dollar for dollar out of the cash flow of a CLO in that it reduces our interest income a little bit, but the recovery on that loan is invested in a new loan, which generates new cash flow.

Default principally reduces the terminal value of a CLO, but that could be 5-7 years from now, and we're mainly interested in money today. The big difference is a reserve for credit losses and by and large, credit losses are lower than the models today. They could go back up tomorrow, but that's the big driver.

Steven Bavaria

The NII actually is net of a loan loss reserve?

Thomas Philip Majewski

That's a fair way to think of it, yes.

Steven Bavaria

That answers a big question, and it also answers the question, I believe, that your recurring cash distributions to the extent you use those to pay dividends, distributions, does not include an eroding factor like as it would if it included principal payments?

Thomas Philip Majewski

We're not taking loan principal payments and distributing those.

Steven Bavaria

It answers the question, a lot of retail investors have been asking me, frankly. I'm glad I have the forum now.

Thomas Philip Majewski

The number one thing we look at recurring, any business you underwrite, what's the recurring cash flow?

If you could have only one measure would you have GAAP tax or cash? In my opinion, I will go with cash over the other two all day long and maybe keep tax as low as possible.

At the end of the day, the cash flow is what we want to pay out to shareholders every single quarter, and we do everything we can to keep that as high as possible. Hopefully bankers will call us back about a 10-year deal.

Operator

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Majewski, for any final comments.

Thomas Philip Majewski

Thank you very much, everyone, for joining, both Ken and I. Appreciate your interest in Eagle Point Credit Company. Obviously, very pleased with our third quarter results, and we shared cash flows in the fourth quarter trending very favorably. Ken and I will be available if anyone has any follow-up questions later today, and we appreciate your time and attention. Thank you.

Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.