EIC - Eagle Point Income: I'm A Buyer Of The 7.75% Preferred Shares

2023-09-25 10:30:00 ET

Summary

• Eagle Point Income focuses on CLO debt and has two series of preferred shares outstanding.
• The newly issued term preferred stock has an attractive fixed preferred dividend and the standard 200% minimum asset coverage level.
• The company's asset coverage ratio decreased after the preferred stock offering, but the use of an ATM program helps maintain a safe asset base.

Introduction

Eagle Point Income ( EIC ) is an investment company focusing on CLO debt. For a good primer on CLO and CLO equities, I think Steven Bavaria can be considered Seeking Alpha's specialist, and I would strongly recommend you to read some of his earlier articles . The company has two series of preferred shares outstanding, and that will be the focus of this article.

Eagle Point Credit focuses on CLO Debt

This article will focus on a newly issued term preferred stock, so I won't go into too much detail on the business model of Eagle Point. Simply explained, the company invests in CLO debt and CLO equity .

As of the end of June, the company's assets were predominantly invested in CLO debt, which represented almost three-quarters of the asset base.

Looking at the income statement for the second quarter, Eagle Point reported a total investment income of almost $5.8M while the total operating expenses came in at just $1.5M, resulting in a net investment income of $4.23M. This already includes the interest expenses (the preferred shares are classified as a liability because they have a maturity date, and this means the preferred dividends qualify as an interest payment for the purpose of the income statement).

The total net investment income in the first half of the year was approximately $8.3M. The Q2 Net Investment Income represented $0.49 per share while the monthly distribution on the common shares will increase from $0.16 to $0.18 .

A recent preferred stock issue appears quite attractive

A few months ago, Eagle Point launched a new Term Preferred stock with ( EICB ) as ticker symbol. This new preferred share has a fixed preferred dividend of $1.9375 per year, payable in twelve equal monthly payments of just under $0.1615 per month.

This preferred share also enjoys the 200% minimum asset coverage level, which adds an interesting layer of protection (as I will explain below). The preferred shares are maturing in July 2028 but can be called from July 2025 on. As the Series B preferred shares are trading just marginally below the principal value of $25 per share, the yield to maturity is just marginally higher than the 7.75%.

I like the 200% asset coverage rule for the preferred shares as this makes the prefs safer. The moment the total coverage ratio drops below 200%, the investment company has to either raise common equity and/or repurchase some of the preferred shares to restore the limits.

Looking at the balance sheet as of the end of June, we see the balance sheet contained almost $153.5M in assets. The only long-term liabilities were related to the Series A preferred shares.

The asset coverage ratio is pretty easy to calculate: the net assets (total assets minus the 'normal' liabilities related to the normal course of business) were $152.5M and with $38.04M in preferred stock outstanding, the asset coverage ratio exceeded 401%.

But this decreased in July. Subsequent to the Series B stock offering. The investment company issued 1.13 million Series B preferred shares for a total of $28.3M and net proceeds of $27.1M. This was later increased to 1.3M shares and $31.2M in net proceeds.

This means the total relevant asset base will increase to approximately $183.7M while the total amount of preferred securities increases to $69.4M. This results in a pro forma coverage ratio of 265%. While that's sharply lower than the situation as of the end of the second quarter, but still handsomely above the 200% requirement.

I'm also not too worried as Eagle Point Income has a powerful weapon: its ATM program. As the stock tends to trade at a premium to its NAV, Eagle Point does issue new (common) shares and this further boosts the current asset base. In the period between July 1 and August 9, Eagle Point sold just under 240,000 shares for net proceeds of $3.1M. Applying this to the calculation above, the coverage ratio increased to 269% again. Issuing new common shares at a premium to NAV is a smart decision, and I hope the management continues to grow its asset base that way as it makes the preferred shares per definition safer as well.

Investment thesis

I recently purchased the Series A preferred shares, which are trading with ( EICA ) as ticker symbol. Those preferred shares have a mandatory repayment date in October 2026 and can be called from October 30th this year on. Those preferred shares are trading at a discount of approximately 8% to the principal value and combined with the 5% preferred dividend, the yield to maturity is approximately 7.9% there (rounded). As these are maturing in 2026 (the latest) I am contemplating also initiating a long position in the Series B preferred shares.

Sure, the common equity has a higher yield, but I would like to have exposure to safer (but lower) income.

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