ECC & OXLC too cheap to ignore.

CLO equity funds were one of the most hated investments in 2025 and into 2026 — even more than private credit. While almost every asset class enjoyed tremendous returns in 2025, CLO equity funds (CCIF, ECC, PDCC, OCCI, OXLC, SPMC and XFLT) were down between 15% (XFLT) and 57% (ECC), while the S&P 500, NASDAQ, and Russell 2000 were up 18%, 20%, and 13%, respectively. And 2026 isn't getting any better — stocks are down an additional 10% (ECC) to 29% (XFLT). 

I am going to focus this article on ECC, OXLC, and XFLT (“CLO Equity Funds”) because (x) ECC and OXLC are the two largest and oldest pure play CLO equity funds and (x) the market is unfairly grouping XFLT with the other pure play CLO equity fund.  XFLT’s investment portfolio is roughly 50% broadly syndicated loans, 35% CLO equity, and 15% CLO debt.  

I should note that all XFLT figures are based on the pre-5x reverse stock split price that occurred in the middle of February.

CLO equity prices started the year under pressure as loan spreads tightened, compressing CLO net interest margins ("NIM") and distributions to equity.  Through October, the decline in CLO valuations was a rational and proportional response to reduced NII. But in November, CLO equity pricing fell off a cliff — fund NAVs dropped roughly 13% that month alone, with another 25% through February 2026. This large drop in valuations can't be blamed solely on tightening loan spreads since ECC’s and OXLC’s CLO portfolios NIMs were only down 11% in 2025.

CLO equity pricing is now in a period of market dislocation where prices are no longer tied to CLO’s underlying performance but by fear.  CLO underlying leverage loan credit metrics have never been better. Due to illiquid nature of CLO equity, during period of market dislocation, valuations overreact and create tremendous buying opportunities.  The investment opportunity only becomes more attractive when CLO equity funds valuations also detach from their funds’ underlying values.  This double-reaction phenomenon has occurred several times over the last ten years, and each time CLO equity and CLO Equity Funds valuations dropped they rebounded the next year. 

Leverage Loan Credit Performance

Prior to 2025, the last time CLO equity valuation significantly dropped was in 2020, the year of Covid. This makes sense due to the economic havoc Covid caused across the entire economy. As a result, underlying CLO loan portfolios were under extreme stress.  ECC’s CCC+ basket was at a historic high of over 12% and its Jr. OC test was at a historic low of just under 2%.  Numerous CLOs Jr. OC tests failed and cash that would have gone to equity was trapped and used to pay down AAA notes or to invest in new loans.  CLO managers were able to dramatically improve the credit profile of their portfolios and build par during 2021 as the economy started to improve. 

Unlike 2020, CLOs’ credit profiles are in excellent shape. ECC's and OXLC's underlying loan portfolios have never been healthier. ECC's Jr. OC Cushion of 4.3% is near a record high, and its CCC+ bucket is at a historical low. The CCC+ bucket matters because it predicts future defaults and, if breached above 7.5%, forces haircuts to the Jr. OC Tests.  The balance of excess CCC+ loans is held at their fair values rather than par.

The Jr. OC Test is the single most important metric for CLO equity investors: if it fails, cash flows are diverted from equity to pay down the AAA tranche or to invest in new loans. With record-high Jr. OC cushions and low CCC+ baskets, there is virtually zero risk of OC test failures in 2026 or even into 2027. Even reduced cash flows from lower NIM are preferable to no cash flows.

ECC's and OXLC's annual total returns swing wildly. 

CLO Equity Funds and NAV Destruction:

One reason that ECC’s and OXLC’s stock fell so much after ECC and OXLC announced the sharp drop in November’s NAVs is because of their long history of NAV deterioration.  Many investors, including myself, ran for the hills once the drop in NAV was announced because we have all seen this movie before.   

ECC’s NAV is down 55% from the end of 2019 ($12.40) to 2025 ($5.70).  OXLC’s NAV at the end 2025 is down 63% since March 31, 2020.  When people on Seeking Alpha talk about these funds’ NAV deterioration they usually focus on distributions of ROC.  However, the largest contributor to NAV loss for OXLC (50%) and XFLT (29%) is realized credit losses. ECC’s credit losses were significantly lower, just 15%.  Credit losses spiked in 2020 during Covid (5-7% as measured by cost basis) and again in 2025 (XFLT 1.0% - ECC 5.5%). Not surprisingly since CLO equity is a risky and highly levered credit investment, credit losses are the most important factor in these funds’ long-term performance.

CLO Equity Funds control when they exit investments — they can sell, terminate, after the non-call period (if they hold a control position), or write off. Managers can also reduce CLO equity’s effective yield to increase its amortization and thus reduce its cost over time. CLO doesn’t have a stated coupon or par balance, so there is no concept of default.  CLO Equity Funds cannot be forced to sell at distressed prices. Given that almost all the CLO Equity Funds’ investment are performing well and receiving distributions, even if they are a bit lower.  I was a bit surprised that ECC incurred significant credit losses (5%) in 2025.  My guess is that they sold some underperforming CLO equity investments to purchase equity tranches in other structured finance vehicles.  Given that CLO’s underlying credit profiles are extremely strong, I don't expect outsized realized losses in 2026, though some portfolio fine-tuning may continue.

Potential Intrinsic Value

To value a distressed credit fund, I start with current NAV and add unrealized losses to get a potential Intrinsic NAV (“PINAV”) — what the fund would be worth if everything recovered perfectly. I then reduce PINAV by expected credit losses to get an Adjusted PINAV (APINAV), which is a more realistic potential recovery amount of the NAV.

My best investment ever was buying ACAS, a BDC, at the height of the GFC — when I could effectively buy its senior secured loan portfolio at ~$0.10 on the dollar. As fear subsided, valuations recovered and the discount to NAV closed. The key was that ACAS funded its leverage via CLOs and couldn't be forced to sell at distressed prices. The same structural protection applies here.

ECC's current stock price lets an investor buy CLO equity at $0.46 on the dollar (PINAV) or $0.58 on the dollar (APINAV, assuming 10% losses).  Assuming ECC's stock price trades back to its NAV, it could have a potential upside of 72% based upon PINAV or 58% based upon APINAV — while collecting a well-covered 17% dividend yield. OXLC's and XFLT's potential upsides are 120% and 39%, with dividend yields of 27% and 22%, respectively. OXLC's unrealized losses of $10.40 exceeds its current stock price.

Valuation & Profitability

ECC’s and OXLC’s valuations are trading at similar levels to 2020, the year of Covid.  The figures below use each fund’s fiscal year – ECC December 31, 20XX – OXLC March 31, 20XX.  As we have discussed, unlike Covid, these funds’ underlying credit quality have never been better.  Given their strong underlying portfolios, ECC and OXLC represent an almost unique value with tremendous long-term value. 

ECC trades with a record NII yield of 27% compared to its 15% six-year average yield. In addition, it trades at 32% discount to NAV.  OXLC value is even deeper with NII yield of 33% and trades at roughly 31% discount to NAV.

ECC and OXLC reported disappointing Q4 2025 results — NII down 15%-27% year-over-year (XFLT 29%), with dividends cut 57%-50% (XFLT 14%). The new dividend levels are now more properly aligned with NII rather than CNII (taxable net income), which had previously caused market confusion and NAV erosion. ECC’s and OXLC’s dividends have never been more secure – their NII coverage rate of roughly 125% are significantly higher than their 6-year average coverage rate of 68% and 89%, respectively.  I can’t think of a realistic scenario that would cause these funds to cut their dividends any time soon. In fact, ECC and OXLC will eventually need to declare a large special dividend to comply with the 90% taxable income distribution rule.

By any measure, these stocks have never been cheaper. OXLC's NII/Stock $ yield of 32% is extraordinary — even stress-testing the portfolio effective yield down from 13.5% to 10% still implies ~25% NII yield, nearly 50% above its 5-year average of 17%. ECC's 27% NII yield is over double its 5-year average of 13%. ECC's stock would need to reach $6.78 — an 89% gain from $3.60 — just to return to its average yield.

Risks

●       Malaise in the CLO equity market – This risk factor bothers me the most.  Steve Majewski, Mr. CLO himself and CEO of ECC, was sanguine about CLO equity performance in the coming year.  In fact, he discussed ECC’s plan to diversify its investment portfolio by investing in the equity of other types of structured finance vehicles.   I get the same feeling from other CLO professionals, I don’t think anyone is predict doom and gloom for CLO equity performance in 2026, but I don’t think many professionals see loans spreads significantly widening any time soon.

○       I do think there are some green shoots with loan supply

●       The cause of the CLO equity pricing decline remains unclear beyond tightening loan spreads. Without knowing what triggered the severe drop, it's hard to predict what will reverse it. Stabilization in CLO equity pricing is a prerequisite for stock recovery.

●       Macro uncertainty from the war with Iran and elevated oil prices will weigh on all risk assets until there is resolution.

●       The leveraged loan market faces a structural supply/demand imbalance — too much capital chasing too few new loans — manifesting in:

○       Lower loan spreads;

○       Looser covenants and lower default recoveries;

○       Lower credit standards; and

○       Liability Management Transactions weighing on recoveries.

●       Captive CLO Funds are crowding out CLO Equity Funds. Many top managers now allocate all their CLO equity via captive vehicles, reducing deal flow and dampening the supply/demand self-regulation that historically benefited the market.

Conclusion

By almost any valuation metric, CLO Equity Funds have never been cheaper especially given the benign credit environment — NII yields, discounts to NAV, or implied purchase price of the underlying CLO equity. The underlying loan credit quality is strong, OC tests are healthy, and managers can't be forced to sell at distressed prices.

However, CLO equity pricing has not stabilized, and significant macro uncertainty remains. I believe these funds represent a compelling long-term opportunity, but patience is warranted. I am watching the March NAV prints closely — my expectation is a modest decline, nothing like the double-digit drops of November or February. Once NAVs stabilize, the setup for a strong recovery year is in place.

OXLC is the riskiest of the CLO equity funds due to its history of evelavated credit losses (50%) but also has the highest potential upside and dividend yield of 25%. Of the CLO equity funds, its stock is the first to start to recover - its stock is up 16% in the last month.

ECC is probably my favorite due its strong management team and low credit losses (15% of NAV) and still has substantial upside and trades with 17% dividend. However, its stock is just starting to recover - up.

I think XFLT is the safest bet right now for two reasons.  First, only 35% of its portfolio is invested in CLO equity so its risk profile is substantially lower than the pure play CLO equity funds. While it has significant upside given that it trades at a 23% discount to its reduced NAV. Historically, the stock has traded at or near to its NAV. In addition, the stock trades with a 21% dividend yield. The yield is extremely generous for a fund that has 50% of its portfolio is invested in liquid BSL.  Second, XFLT publishes its independent 3^rd party-based NAV daily, so its stock is not subject to month-end NAV surprises like the other CLO equity funds.