EICA - EIC: Get Your High Yield Income From The Eagle Point Income Fund

Summary

• EIC invests in the BB-rated debt tranches of CLOs and offers investors a high-yield income from a relatively safe asset class.
• After raising the dividend 3 times in 2022, the fund's NAV and NII are both rising and firmly support the current 13.45% annual distribution yield.
• Despite the potential for rising loan defaults in 2023, CLO issuances are on the rise while the origination costs of CLOs are decreasing.

When I first became interested in opportunities to invest in high yield income securities for long-term investing, it was around 2016 when I first joined Seeking Alpha and I had a lot to learn. Back then, I was still relatively new to investing in stocks, bonds, and funds like ETFs and CEFs. I had started managing a self-directed IRA that I was trying to build up to supplement my future retirement income stream. That retirement income will be largely based on a pension that I will receive from my employer when I retire later this year, along with whatever Social Security that I may be entitled to when I decide to start taking it, along with the income generated from my now more substantial IRA portfolio .

I had a relatively small portfolio balance at the time, and I made my share of mistakes in trying to capture total return from a combination of growth stocks and high yield investments such as REITs, BDCs, MLPs, and a few ETFs that I had read about. I knew that I was taking some risks to achieve the higher yields from some of those investments, but I was not as well educated as I probably should have been.

Now, nearly 7 years later I have learned a lot from my investment choices, both from my winners and my "learners" (not losers, because I always learn from my losses). One thing that I have learned is that not all high yield investments carry a high degree of risk. Frequently, I read comments or articles from other SA contributors that say to avoid or sell anything that yields more than xx%. Everyone has different risk tolerances and investment objectives though, so judging an investment vehicle based on the yield alone is unwise, in my experience. There is always a tradeoff between risk and reward, and it is helpful to understand what the level of risk is that one is willing to accept to achieve the high rewards.

With that introduction in mind, I would like to review one of my most rewarding high yield investment choices over the past several years, and that is one that includes investments in CEFs that hold CLOs (Collateralized Loan Obligations). One relatively new fund that invests primarily in the BB-rated debt tranches of CLOs is Eagle Point Income fund ( EIC ), which I last wrote about in November.

Why CLOs and Why Now?

If you are new to CLOs and would like to understand them in more detail, there is an excellent white paper available from LSTA that discusses the US CLO market in detail and I would suggest that you read as much as you can if you are interested in investing in them.

Collateralized Loan Obligations ("CLOs") are widely misunderstood investment vehicles, often thought to be opaque, risky and under policed. In fact, CLOs are one of the most transparent investment vehicles available to institutional and sophisticated investors today. They are governed by a clear and intersecting set of performance rules and disclosure requirements. Thanks in large part to these requirements- and the transparency and performance of the underlying leveraged loan assets-CLO securities have outperformed nearly every other equivalently-rated product for nearly 30 years.

Another good resource that I found is this discussion from Guggenheim , which goes into additional detail about the structure of CLOs, and why they represent a scalable, high yielding, floating rate investment alternative with a history of stable credit performance.

The market outlook for CLOs in 2023 looks positive despite concerns regarding the potential for rising loan default rates. Some are predicting default rates to rise to as high as 3 to 4% in 2023, however, CLO performance is expected to hold up in this environment due to the protections that are in place. In fact, the CLO market is picking up steam in 2023 according to a February 15 report from Pitchbook .

And while CLO issuance has been on the rise, the costs for originating CLOs are decreasing. This is good news for CLO managers and investors like EIC, who are able to take advantage of newer issues at lower cost to build out their CLO holdings.

EIC Update

When I last wrote about EIC in November, the fund's estimated NAV was in the range of $12.81 to $12.91 per share with about $90 million in total assets. As of January 31, 2023, the NAV is estimated to be in the range of $13.67 to $13.77 per share with $114M in total net asset value. You can view the NAV history of the fund on the website where you will see that the NAV rises and falls with the market and based on estimated values of the underlying loans within the CLOs.

The last time that the fund's NAV was roughly equivalent to what it is now was back in June 2022. The quarterly NII of the fund is estimated at between $0.48 to $0.52 for Q422, which is substantially higher than the $0.40 reported in Q322 and the $0.41 reported in Q222. Therefore, while the market price of the fund still trades at a slight premium to NAV, the NAV is increasing along with NII, which indicates that the fund is performing well despite the declining market price and offers a relatively safe high yield source of income that is well covered.

The current market price as of February 17 market close was $14.19 and since I last wrote about EIC in November, the fund has paid out 2 distributions of $0.14 in December and $0.16 in January. The current annual yield based on the regular monthly distribution of $0.16 for 2023 (which has been declared through March) works out to about 13.45%.

Institutional Buyers and Stock Offering

According to two recent SEC filings, there has been substantial institutional buying of EIC over the past few months. This 13G filing from 12/31/22 shows an ownership interest in EIC of more than 53% by Enstar Group ( ESGR ), a Bermuda based insurance company, who own 3,764,580 shares as of the end of 2022. In a separate 13G filing , Karpus Management, an Investment Advisory firm, owns 183,386 shares as of 12/31/22.

In December, the company filed an N-2 form to offer a sale of up to 1,398,973 shares of EIC common stock. The company expects to receive up to $20M from proceeds of the stock offering.

We are not selling any shares of common stock being offered by this prospectus and will not receive any of the proceeds from the sale of such shares by B. Riley Principal Capital II, LLC, or BRPC II. This prospectus relates to the offer and resale of up to 1,398,973 shares of our common stock, par value $0.001 per share, by BRPC II. The shares included in this prospectus consist of shares of common stock that we may, in our discretion, issue and sell to BRPC II, from time to time after the date of this prospectus, pursuant to a Common Stock Purchase Agreement we entered into with BRPC II on August 16, 2022, or as amended on December 15, 2022, the "Purchase Agreement." in which BRPC II has committed to purchase from us, at our direction, up to $20,000,000 aggregate gross purchase price of our common stock, subject to terms and conditions specified in the Purchase Agreement.

It is not clear to me from the timing of the filings whether the shares purchased by Karpus and/or Enstar were from the stock offering, but it would seem to make sense that could have been what transpired.

Summary and Recommendations

Back in November after EIC had announced the third distribution increase in less than a year, I wrote an article that suggested it was a Buy at the current price at the time of $14.56. Since then and as discussed above, the NAV of the fund has increased, the NII has increased, and the fund has paid 2 distributions amounting to $0.30, yet the fund trades at a price that is nearly $0.40 lower than it did back in November.

The potential for increasing income from ongoing and additional CLO investments at even lower prices looks promising for 2023 based on performance so far, and with the additional institutional investments in EIC in 2022, the future looks promising. I now rate EIC a Strong Buy at the current price of $14.19 and would suggest that investors consider adding shares prior to the Q422 earnings report, which is planned for February 22. I consider it likely that the price will rise substantially after the report based on what I am reading in the tea leaves for this fund.

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