Eagle Point Credit Co LLC (NYSE:ECC) showed impressive financial prowess in Q3 2023, attributed to its shrewd moves and savvy investments. The company’s financial highlights included a boosted Net Asset Value (NAV) per common share and a sturdy financial performance with a noteworthy Net Investment Income (NII). During this period, ECC concentrated on a targeted investment approach in Collateralized Loan Obligations (CLO) equity and debt sectors, smart capital raising strategies, and emphasized portfolio diversification and risk management. This article delves into the firm’s financial health by probing the Q3 2023 financial outcomes and offers a technical analysis of the stock price to identify upcoming trends and investment prospects. The analysis indicates that the stock price is thriving.
Financial Performance and Strategic Investments
ECC showcased significant financial achievements in Q3 2023, powered by its strategic actions and prudent investment decisions, key contributors to this success. A notable feat for the quarter was the substantial increase in NAV per common share, rising by 7%, from $8.72 in Q2 2023 to $9.33 in Q3 2023. This increase reflects the company’s efficient asset allocation and robust portfolio management.
Furthermore, the firm’s earnings narrative was notably robust. It recorded NII and realized capital gains at $0.35 per weighted average common share, including a one-time excise tax refund contributing $0.01 per share. This performance is a marked improvement from the $0.05 per share in Q2 2023 (after accounting for realized capital losses), although slightly lower than the $0.47 per share in Q3 2022. Eagle Point’s profitability is further underscored by a GAAP net income of $63.2 million, translating to $0.93 per weighted average common share.
During the quarter, Eagle Point adopted a bold and focused investment approach, funneling $119 million into fresh ventures, predominantly in CLO equity and debt sectors. These investments were meticulously chosen for their potential for high returns, demonstrated by a weighted average effective yield of 20.3% on the newly acquired CLO equity. Moreover, the average effective yield on the existing CLO equity portfolio saw an uptick, rising to 16.29% from 15.23% in Q2 2023. The impressive high dividend yield of 24.67% indicates potential for further improvement based on the chart’s growth, potentially attracting more investors.
The company also showcased its financial acumen with efficient capital-raising strategies. It adeptly issued approximately 8.8 million shares of common stock and 18 thousand shares of Series D Preferred Stock, generating net proceeds of nearly $88.5 million. This strategic move contributed to a $0.14 per share increase in the company’s NAV for Q3 2023.
Eagle Point’s investment strategy prominently featured portfolio diversification and effective risk management. The firm had diversified its investments across about 1,789 unique corporate debtors through indirect stakes in CLO equity. This strategy was highlighted because the most significant single debtor accounted for a mere 0.8% of the total underlying loans in their CLO equity holdings, emphasizing their dedication to minimizing risk and spreading investments. Additionally, the average weighted spread of these loans had risen to 3.78% as of September 2023, marking an increase from the figures recorded in Q2 2023.
Moreover, the company projected its NAV per common share to range from $8.98 to $9.08 in the initial phase of Q4 2023, indicating a minor decline from the close of Q3 2023, but maintaining a strong financial foundation.
In summary, Eagle Point Credit Company’s remarkable financial performance in Q3 2023 is a testament to its strategic investment decisions, astute capital raising, and prudent risk management. The company demonstrated a substantial increase in NAV per common share, impressive earnings, and excelled in diversifying its portfolio and maintaining robust yields, positioning itself well for future growth. Despite a projected slight dip in NAV per common share at the start of Q4 2023, Eagle Point’s financial trajectory and operational strategies indicate a strong foundation for continued success and investor confidence.
Deciphering Technical Structures
The technical analysis for ECC also presents a distinctly bullish perspective, as seen in the monthly chart below. Its stock has been on an upward trend amidst significant market fluctuations. Notably, the largest decline occurred in the first quarter of 2023, swiftly countered by an equally sharp rise, forming a V-shaped recovery. This pattern not only signals bullishness but also suggests a positive long-term trajectory. Additionally, the RSI indicated oversold conditions during the steep decline in 2020.
ECC witnessed a remarkable surge in its stock price in 2020, influenced by multiple factors. The company skillfully navigated the unpredictable market terrain amid the COVID-19 crisis, bolstering investor trust. The heightened appeal of the firm’s focus on CLOs in a low-interest-rate context played a significant role. Furthermore, ECC’s sustained distributions to shareholders when other income-oriented investments reduced or halted dividends added to its allure. The gradual recovery of the broader market from the pandemic’s initial impacts and a turn towards higher-yield, riskier assets further favored ECC. The company also benefited from an overall uplift in market sentiment and the credit market’s revival.
Despite each rally facing resistance at the red trend line in the monthly chart, the stock’s repeated approaches to this line have fostered a bullish pattern akin to an inverted head and shoulders. This pattern is anchored with a low at $2.162 (the “head”), a left shoulder at $5.772, and a right shoulder at $8.10. The “neckline” of this pattern is around $11, and surpassing this level could spark a more substantial rally in the future. The October 2023 monthly candlestick appears strongly bullish, as seen by the sharp shadow in the candle, suggesting potential short-term volatility. However, this is a prime buying opportunity for long-term investors, with solid support around the $8 mark indicated by the blue trendline.
The weekly chart of ECC shows consolidation between $8 and $10. The recent sharp decline in October 2023, targeting the support, was quickly reversed and left behind the solid weekly reversal. This strong reversal from the oversold conditions indicates the buying interest in the market.
The second weekly chart below demonstrates a robust price reversal from the lows of $7.965 and $8.456, showing a turnaround from the bottom that emphasizes the strength of the price movement. The critical level on this weekly chart is indicated by a blue line, representing the neckline. Breaching this key level is essential to kick-start a significant rally towards higher prices.
ECC’s stock price exhibits robustness and shows potential for upward momentum. Investors may consider buying ECC at the current price or during any dips, aiming to capitalize on the anticipated price increase.
Market risks
ECC’s significant exposure to CLOs brings notable credit risk. High yields from CLO investments are alluring but are accompanied by the risk of default. From a technical analysis standpoint, ECC’s stock presents a bullish long-term trajectory despite the potential short-term volatility. This pattern, characterized by a V-shaped recovery and supported by indicators like the RSI, suggests an optimistic future but with caution against near-term market fluctuations. Additionally, liquidity risk remains a concern. At the same time, recent common stock issuances have been successful. Still, there is always the risk of liquidity challenges, especially during periods of market stress where asset liquidation at favorable prices might be complex.
Moreover, macroeconomic factors and operational decisions significantly impact ECC’s performance. Changes in financial regulations, economic downturns, and shifts in the credit market can influence their portfolio’s profitability. ECC’s strategy to expand into new CLO investments and depend on secondary market ventures adds an operational risk layer. These risks underscore the need for investors to closely monitor ECC’s strategic choices and market movements, balancing the company’s strong financial results and strategic plans against the unpredictability of the broader economic and market environment.
Bottom Line
ECC displayed an impressive financial performance in Q3 2023, driven by astute strategic actions and investment decisions. The significant increase in NAV per common share and a robust NII are testaments to the company’s effective asset allocation and portfolio management. ECC’s focus on targeted investments in CLO equity and debt sectors, effective capital raising strategies, and portfolio diversification have solidified its financial health.
Technical analysis of ECC’s stock indicates a bullish trend, suggesting a positive long-term trajectory despite potential short-term volatility. The company’s ability to navigate market fluctuations, particularly during the COVID-19 crisis, has boosted investor confidence. The patterns observed in its stock price, such as the V-shaped recovery and the inverted head and shoulders pattern, further reinforce the potential for future growth. Investors can consider buying the ECC stocks and adding more positions if the price drops to $8.
