Ellington Credit (NYSE:EARN) reported fourth-quarter financial results on Wednesday. The transcript from the company’s fourth-quarter earnings call has been provided below.
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View the webcast at https://edge.media-server.com/mmc/p/8wm3cryv/
Summary
Ellington Credit experienced a decline in NAV during the first quarter due to volatility in the CLO market, particularly impacting CLO equity assets.
The company issued $54 million of 8.5% five-year senior unsecured notes in March to capitalize on market dislocations and has substantially deployed these funds into new opportunities.
Management remains optimistic about future performance, citing improved market conditions in the second quarter and a strong monthly economic return of nearly 7% in April.
Ellington Credit’s portfolio repositioning focuses on CLO mezzanine debt for stability and CLO equity for upside potential, supported by active trading and strategic hedging.
The company aims to enhance its net investment income and dividend coverage by rotating investments and maintaining a disciplined approach to risk management.
Full Transcript
Aladdin Chalet (Associate General Counsel)
Thank you. Before we begin, I’d like to remind everyone that this conference call may include forward-looking statements within the meaning of the safe harbor provisions of the Private Security Litigation Reform act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our registration statement on Form N-2. Actual results may differ materially from these statements so they should not be considered to be predictions of future events. The Fund undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Credit Co. Greg Borenstein, Portfolio Manager and Chris Mernoff, Chief Financial Officer. Our earnings conference call presentation is available on our website ellingtoncredit.com today’s call will track that presentation and all statements and references are qualified by the important notice and endnotes at the back of the presentation. With that, I’ll turn it over to Larry.
Larry Penn (Chief Executive Officer)
Thanks, Aladdin and good morning everyone. We appreciate your time and interest in Ellington Credit Co. Which we often refer to by its New York stock exchange ticker Ellington Credit for short. Please turn to slide 3. The first calendar quarter of 2026 was marked by continued volatility in the CLO market. As we previously communicated in our monthly portfolio updates. The broader market environment exerted significant pressure on asset valuations and led to a decline in our nav. But our active trading and up in the capital stack bias once again drove our outperformance versus Peers we believe that the first quarter largely represented a technical dislocation that reset valuations and expanded the opportunity set rather than a fundamental deterioration in underlying credit quality. Much of the asset valuation declines in the sector stemmed from yield spread widening and heavy selling pressure in clo, mezzanine and equity tranches as well amid thin liquidity and concerns around software sector exposure as opposed to any broad based weakening in borrower fundamentals. Importantly, we were able to issue debt capital at the end of March which enabled us to move quickly to capitalize in this opportunity rich environment by deploying those proceeds promptly and opportunistically. Market conditions have subsequently improved so far in the second quarter and this has been a tailwind for what is shaping up to be a strong quarter. I will cover the details of that debt capital raise and deployment as well as our performance in April shortly. Let’s start by reviewing our results for the first quarter. The quarter began on a constructive note with credit spreads tightening and leveraged loan prices rising early in the new year. But that initial momentum faded in late February as concerned over AI driven disruption in the software sector, which is a small but meaningful component of most CLO collateral pools, triggered a sharp decline in those credits. By quarter end, U.S. and European leveraged loan prices had fallen by more than 2% from their January peaks. This weakness, amplified by geopolitical tensions, fueled a broader risk off sentiment that widened spreads on CLO debt tranches as shown on slide three. While the senior AAA through single A rated CLO tranches held up relatively well, CLO mezzanine debt came under significant selling pressure in February and March with lower rated tranches, particularly double B rated tranches experiencing sharp yield spread. Widening CLO equity faced multiple headwinds including compressed excess spread from a loan repricing wave in January, wider market clearing yields and concerns surrounding those lower quality loan borrowers. As estimated by Nomura Research,, the median CLO equity return for the quarter was negative 13%. That said, many valuation declines, particularly in CLO equity, occurred on light trading volume and in our view reflected technical market dislocations and liquidity driven price weakness rather than deterioration in underlying fundamentals or broad based credit impairment for Ellington Credit. Unrealized losses on CLO equity assets were the primary driver of the NAV decline in the first quarter, more than offsetting net investment income, trading gains and gains from mezzanine tranche redemptions. Turning to our capital structure in late March the fund issued $54 million of 8.5% five year senior unsecured notes. This transaction strengthened our balance sheet by extending our liability profile, adding non mark to market financing and providing dry powder to capitalize on a dislocated market. At March 31, our CLO portfolio totaled $308 million and we held a sizable $58 million in cash. Consistent with our positioning throughout the volatility, we prioritized CLO mezzanine debt over equity during the quarter, favoring the subordination levels and structural protections afforded by debt tranches while staying disciplined in our hedging strategy. As illustrated on slide 10, we increased our credit hedge portfolio to approximately $187 million of high yield CDX notional equivalents at March 31, up from $175 million at year end. With overall corporate credit spreads remaining tight relative to CLO spreads, we were able to add this protection at compelling levels on both a relative value basis and an absolute value basis. Following the significant spread widening in the latter part of the first quarter, market conditions improved materially in April and into May. Real money buyers have come back into the market, improving liquidity and driving CLO yield spreads tighter. From our standpoint, the sell off has reinvigorated the opportunity set. Prepayments and repricings have slowed, partially relieving the excess spread compression experienced in 2025. Investment yields have moved higher and CLO managers can again build par and preserve excess spread by acquiring performing loans at discounted prices, a dynamic that enhances the long term return potential for CLO equity investors. In addition, as a meaningful portion of our CLO equity portfolio exits, its non call period refinancing and reset opportunities should enhance underlying cash flows, further improving our asset yields and supporting future growth in in our net investment income. These factors created an attractive market environment for deployment. We responded to this favorable environment by rapidly investing the majority of our dry powder into new opportunities with deployment substantially complete by the end of April. Improved secondary market liquidity has also allowed …
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