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Eagle Point Credit Company - Initiation Note

Eagle Point Credit Company

BUY (ECC, $19.10*)

A CLO Investor with Good Growth Prospects and the Ability to Thrive on Volatility - Initiating With a BUY Rating And $24 Price Target.

September 30, 2015

Christopher R. Testa


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Investment Conclusion. We are initiating coverage of Eagle Point Credit Company (ECC) with a BUY rating and $24 price target. ECC is unique because it invests in senior secured loans and is not a BDC (Business Development Company) but rather a registered investment company (RIC) which puts its asset coverage requirement at 300% as opposed to 200% for BDCs. Eagle Point invests in CLOs (collateralized loan obligations) as opposed to BDCs which invest in leveraged loans. However, a CLO is essentially just a large, diversified amount of senior secured loans within a single structure. Thus the underlying investments of a CLO are essentially the same as a BDC. The advantage of a CLO structure is that the CLO thrives on volatility as spreads widen (due to their ability to reinvest the first four years of the CLO) and should spreads compress the CLO manager has, at its discretion, the ability to refinance the debt tranches funding the CLO. ECC has had no cash flow impairments on its CLO investments and has consistently traded at a premium to NAV. The company has the ability to grow the portfolio significantly through 2016 from drawing on more debt before a modest common equity raise that we model in 2016. As ECC continues to earn better yields on CLOs as they do more negotiated deals as opposed to purchases, we expect effective yields and thus NIM (net investment margin) to continue to improve which should also drive a regular dividend increase in 2016. Our $24 price target implies an estimated 2016 Price/Net Investment Income (P/ NII) of 9.4x, dividend yield of 10.0%, and Price/Net Asset Value (P/NAV) of 1.26x. ECC’s only public comparable is Oxford Lane Capital Corp. (OXLC – NR - $11.46) which trades at P/NII of 4.5x, P/NAV of 0.83x, and dividend yield of 20.1%.


* Price = closing price on 9/29/15

Source: S&P Capital IQ, National Securities Corporation Estimates

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