Eagle Point Income Company (EIC) just released its Q1 2024 earnings transcript, and while the surface paints a picture of continued strength, a deeper dive reveals a potentially alarming trend. Amidst celebratory pronouncements of an 11% distribution increase, robust NAV growth, and a gleaming new "Best Public Closed-End CLO Fund" award, lurks a shadow: a steep decline in EIC's cash position.

The company's cash and cash equivalents plummeted from $944,060 at the end of 2023 to a meager $114,936 by March 31, 2024. This represents a staggering 98.8% decrease in just three months. While Lena Umnova, EIC's Chief Accounting Officer, attributes this to capital deployment from recent offerings and ATM activity, the magnitude of the drop warrants closer scrutiny.

Here's the unsettling part: this cash depletion comes at a time when EIC boasts of having ample "dry powder" for investment. The company highlights over $38 million in cash and revolver borrowing capacity available as of April 30. However, this figure seems to rely heavily on the net proceeds from the Series C preferred stock offering, which closed in April, after the period reflected in the cash and cash equivalents line of the balance sheet.

Essentially, EIC's claim of having substantial investment capital available hinges on newly raised funds, masking the reality of a near-empty cash reserve at the end of Q1. This raises a critical question: is EIC's investment strategy sustainable without continuous capital raising?

The company's reliance on the ATM program for both common and preferred stock issuance throughout the past year suggests a potential dependence on external funding to maintain its investment pace and cover distributions. While this strategy has worked well so far, the long-term viability hinges on investor appetite for EIC's offerings. Any weakening in demand could put pressure on EIC's ability to maintain its current distribution level and invest in new opportunities.

Furthermore, the transcript emphasizes the benefits of a "higher for longer" interest rate environment for EIC's floating-rate CLO portfolio. While this undoubtedly contributes to the company's impressive NII figures, it also begs the question: what happens when interest rates inevitably fall?

The transcript acknowledges that refinancings, resets, and calls could lead to early redemption of discounted CLO BBs, potentially accelerating returns. However, it remains unclear how EIC will maintain its robust yield and distribution levels when interest rates decline and the refinancing wave subsides.

Cash Flow Analysis

To understand the dynamics of EIC's cash flow, let's analyze the cash flow statements from the past two quarters. The data is extracted from the provided financial data.

As you can see, while EIC's cash flow from operations has been positive, it's not sufficient to cover the increasing dividend payments. This gap is being filled by significant cash inflow from financing activities, primarily through stock issuances via the ATM program.

Cash and Revolver Capacity vs. Dividends Paid

The following chart illustrates the relationship between EIC's available capital (cash and revolver capacity) and the dividends paid over the past two quarters. The chart highlights the company's reliance on external financing to cover its dividend distributions.

EIC's success hinges on its ability to navigate the cyclical nature of interest rates and the leveraged loan market. The current environment has certainly been favorable, but the company's near-total depletion of cash reserves and reliance on external funding raise concerns about its long-term sustainability. This begs the question: is EIC a stellar performer riding a favorable wave, or is it a canary silently warning of potential trouble ahead?

"Hypothesis: EIC's heavy reliance on external funding through ATM offerings and a favorable interest rate environment raises concerns about the sustainability of its investment strategy and distribution levels in the long term."

"Numbers:"

"98.8% decrease in cash and cash equivalents from December 31, 2023, to March 31, 2024."

"Over $38 million in available capital as of April 30, 2024, heavily dependent on proceeds from the Series C preferred stock offering, which closed after the end of Q1."

"Fun Fact: Eagle Point Credit Management, EIC's investment adviser, is named after a pivotal battle in the War of 1812, where American forces repelled a British invasion. Just like its namesake, EIC is currently repelling market challenges, but its future success depends on its ability to adapt to ever-changing conditions."