Investing-CLO Equity CEF FAQ, Part II / A Conversation with ECC's PM.
Today’s piece is Part II of my ECC Spotlight, which summarizes a recent call I had with Dan Ko, Eagle Point’s CLO Equity and Debt Portfolio Manager.
Given the huge amount of social media misinformation around CLO Equities and CLO Equity CEFs, I decided to distill a FAQ from the many daily private chat threads I write about this topic. I will use ECC as my primary example, since it is the company and management team I am most familiar with in the space.
In case you missed it, here is Part I:
Today’s piece is Part II of my ECC Spotlight, which summarizes a recent call I had with Dan Ko, Eagle Point’s CLO Equity and Debt Portfolio Manager.
I’ll structure this piece as a paraphrased Q&A.
Disclaimer: This is a compilation of my publicly shared views and commentary. It is not investment advice. Do your own homework.
Part II: A Conversation with Dan Ko
Q: Let’s talk about Software exposure. Your January 2026 tear sheet says 11.2% “Software and Services.” What % do you consider SAAS?
A: First, the BSL universe is roughly 12% Software, so ECC’s exposure is slightly lower than market. It’s pretty hard to be materially different than that, but traditional SAAS is more like 5% although it’s somewhat of a semantic difference.
One example of “other software” is “mission critical hospital records software” — is that SAAS? Regardless of what we call it, we think that most of these businesses have very sticky revenues.
I think most of our collateral managers had already been reducing names more vulnerable to AI disruption risks during 2025, but with most software loans now in the 90’s down from premiums to par, many are now taking advantage of these discounts. There was a similar period in 2015-2016 where people were similarly panicked over Oil & Gas and yet the CLO asset class came out fine.
[MK Note: I’ve mentioned before that there was an infamous blowup of Halcyon’s CLO Equity during this period that was due to a portfolio that was out of Reinvestment Period and hence a Static Pool that was over-exposed (like 15-16%) to Oil & Gas. When ECC’s Weighted Average Reinvestment Period (WARP) is ~3.5 years, that is just not a risk in my opinion.]
Q: Are there any signs of accelerating Default Rates in Software?
A: Equity Multiples are compressing but we are not seeing imminent Default Risks in the short-term. If anything, software Default Rates have been slowly ticking DOWN. So far, these declines have been almost purely sentiment driven by RETAIL PUKING FROM BSL ETFs.
[MK Note 1: I have opined many times that there is a big difference between Equity Multiple compression vs. imminent Default Risk. I believe the market has erroneously conflated the two.]
[MK Note 2: Not only does ECC’s underlying obligor Maturity Distribution look extremely benign over the next 2 years, it’s not like underlying obligors just sit still and wait until the last minute to refinance. Take a look at the difference between Jan’26 and Q4’24 Maturity Distributions below. In just over a year, the 2028 “Maturity Cliff” became the 2028 “Maturity Ledge” and 2027 Maturities all but disappeared!]
Jan’26 Maturity Distribution:
Q4’24 Maturity Distribution:
Q: Have Spread Compression headwinds abated?
A: In the short-term, definitely. Now (3/3/26) only 12.5% of BSLs trade >par vs. 65% in 1H25 and BOY’26.
[MK Note 1: See this Price Distribution from Jan’26. The Citrini doom-porn hit in February, so Dan’s update is not surprising.]
[MK Note 2: My caveat to this is that unless BSL growth continues to materially lag CLO growth, Spread Compression could return. My caveat to this caveat is that markets generally self-correct, and last year’s abysmal CLO Equity performance could very well slow CLO growth if the Equity Arbitrage continues to suffer.]
Q: Your CFO Ken Onorio has said that since November, 70-80% of NAV declines were from underlying CLO Equity markdowns vs. Spread Compression. Agree?
A: Yes. Spread Compression-led overdistribution is harder to deal with, because we have limited levers like Resets/Refis, and whatever we overdistribute we can’t get back. Sentiment-driven CLO Equity markdowns can easily reverse.
Q: Talk to me about the part of the book that’s in non-CLO Equity. Specifically, how do you think of the look-through Obligor Concentration there given that the largest look-through Obligor Concentration in CLO equity is only 0.60%?
A: The diversification away from CLO Equity throughout 2025 was net accretive to ECC, and I wish we’d sold more CLO Equity earlier in the year. That said, with the recent decline in CLO Equities, we are seeing relative value come back. Where we made swaps, it was because we saw better risk/reward and convexity.
With respect to Obligor Concentration, most of the Non-CLO Equity positions are also in diversified pools like the ABS and CFO (Collateralized Fund Obligation) paper, so underlying Obligor Concentrations are similarly low. On average, the largest non-CLO single Obligor Concentration should be slightly higher (~1% on average but individual names could be higher) since there are some bigger Infrastructure Loan originations with bigger single Obligor Concentration. We’ve hired a dedicated team with over 20 years of experience in this space to explore this opportunity.
[MK Note: Here is ECC’s breakdown from the Jan’26 tear sheet. Note that Loan Accumulation Facilities and Cash don’t typically count as strategic moves away from CLO Equity.]
Q: How do you weigh the tension of being a distribution vehicle vs. growing NAV?
A: In an ideal world, ECC will pay distributions perpetually while NAV stays the same. The reason why NAV has declined over time is due to long periods of overdistribution. If we underdistribute, we have 9 months in which to decide how to disgorge the excess profit, subject to a modest excise tax, which can be thought of as a low-interest rate loan for flexibility. Historically, the true-up has been through Supplemental and/or Special Dividends.
[MK Note: I remember the CEO mentioning his dislike of paying that excise tax leakage, which might explain why they’ve historically erred on overdistribution. Perhaps Dan’s reframing of it as a low-interest rate loan suggests a shift in stance.]
Q: Can you comment on quality differences between BSL Obligors and Middle-Market/Private Credit Obligors?
A: We think BSL Obligors are generally bigger and better-capitalized than many of their MM/PC peers.
Q: Anything else we haven’t covered?
A: This was a pretty comprehensive discussion. I’m excited about the opportunity set here.
Past Posts on CLO Equities and other Credit topics:
