Investing in the American Economy: The Beauty of Income Method and CLOsGeneral Discussion 5 replies 0 likes 0 votes 1221 views
Have you ever wondered where all the money comes from that keeps our country running smoothly? It's something that not many people think about. When we walk into our favorite stores, stay at hotels, or buy insurance, we often don't consider where the funds come from that help these companies operate and provide their services.
While banks do play a role in underwriting and creating loans, they don't typically hold massive loan portfolios that support the American economy. Instead, private investors or even retail investors bundle these loans together and create portfolios that anyone can own a piece of. It's as simple as owning a portion of one of these portfolios that contain thousands of loans to large U.S. companies that drive our everyday economy.
Now, you might think that investing in these loan portfolios is risky, especially during a recession. However, history has shown us that betting against the American people and the American economy is often a mistake. Even during challenging times, the U.S. economy has proven resilient and continues to provide for its citizens.
Let's take a closer look at one such investment opportunity. Eagle Point Credit Co LLC (NYSE: ECC) is a Closed-End Fund that invests in Collateralized Loan Obligations (CLOs) and offers an impressive 17% yield. CLOs are vehicles that "securitize" corporate loans, meaning they sell pieces of loans to different investors. These securitizations are sold in different tranches based on seniority, which allows investors to choose their desired risk and reward.
The benefits of this structure are manifold. Firstly, it provides diversification, spreading the risk across numerous loans instead of relying on a single one. Secondly, it ensures that banks and other originators have ready buyers for their loans, enabling them to maintain liquidity and continue lending. Lastly, it attracts a broader range of investors, increasing the amount of capital available for lending.
You might recall the Great Financial Crisis, where securitization received a bad reputation. However, the lesson learned was that the quality of underlying loans matters. ECC invests in senior secured loans to B-rated companies, which historically have shown higher recovery rates in case of bankruptcy compared to corporate bonds.
ECC primarily focuses on the equity tranche, which offers higher risk and reward within the CLO structure. Their strategy has paid off, as they have been paying out supplemental dividends and outperforming their regular dividend.
The current credit environment is favorable for ECC and CLOs. They benefit from low loan prices, as they can buy new loans at a discount when existing ones pay off. Moreover, borrowers have enjoyed historically low-interest rates, resulting in high EBITDA interest coverage. While interest coverage is expected to decline, it remains at a comfortable level, far from the risky levels observed during the GFC.
By investing in ECC's portfolio of CLOs, we gain exposure to thousands of loans issued to large U.S. companies. It's like making a leveraged bet on the ongoing success of the American people and the American economy.
If you believe in the strength and resilience of the American economy, owning a portfolio that supports and provides liquidity to U.S. businesses is a smart move. The beauty of the Income Method is that this aims for a retirement funded by dividends.