Ellington Credit Q1 Earnings Call Highlights

Ellington Credit (NYSE:EARN) reported a GAAP net loss of $0.86 per share for the quarter ended March 31, 2026, as volatility in the collateralized loan obligation market weighed on asset valuations, particularly CLO equity holdings.

Chief Executive Officer Larry Penn said the first calendar quarter was marked by “continued volatility in the CLO market,” with broader market conditions pressuring valuations and driving a decline in net asset value. However, Penn said the company’s active trading strategy and bias toward higher positions in the capital stack helped it outperform 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,” Penn said.

CLO Equity Marks Drive Quarterly Loss

Chief Financial Officer Chris Smernoff said the quarterly loss was primarily driven by mark-to-market losses in CLO equity, while CLO mezzanine debt was comparatively more resilient. Adjusted Net Investment Income declined by $0.02 from the prior quarter to $0.19 per share, reflecting lower asset yields on CLO equity positions. The weighted average cost yield on the CLO portfolio was 12.5%, down from 13.7% in the prior quarter, primarily due to lower projected cash flows.

Penn said CLO equity faced several headwinds during the quarter, including compressed excess spread following a loan repricing wave in January, wider market clearing yields and concerns about lower-quality loan borrowers. He cited Nomura Research estimating a median CLO equity return of negative 13% for the quarter.

The quarter began constructively, with credit spreads tightening and leveraged loan prices rising early in the year. But Penn said that momentum faded in late February amid concerns about AI-driven disruption in the software sector, which he described as “a small but meaningful component of most CLO collateral pools.” Broader risk-off sentiment was amplified by geopolitical tensions, putting additional pressure on lower-rated CLO tranches.

Portfolio Manager Greg Borenstein said February and March saw sell-offs in both credit and broader markets, with software-sector concerns, private credit and direct lending worries, and geopolitical conflict contributing to declines. He said CLO repricings “plummeted,” which provided some relief to excess spread.

Company Raises Debt Capital and Deploys Proceeds

Ellington Credit issued $54 million of 8.5% five-year senior unsecured notes on March 30, which trade on the New York Stock Exchange under the ticker ELLA. Smernoff said the company incurred approximately $2.3 million of issuance costs, which were fully expensed during the quarter.

Penn said the offering strengthened the company’s balance sheet by extending its liability profile, adding non-mark-to-market financing and providing capital to invest during a dislocated market. At March 31, the company’s CLO portfolio totaled $308 million, and cash equivalents stood at $57.7 million.

Smernoff said the deployment of the note proceeds was substantially complete by the end of April, with most proceeds invested in new CLO positions and the balance used to repay short-term secured borrowings. As of April 30, the CLO portfolio had grown by more than 6% to approximately $328 million.

During the quarter, the company executed 44 distinct trades, purchasing $30.7 million of investments and selling $34.2 million. Purchases were concentrated in CLO debt, which represented 93% of purchases, while CLO equity accounted for 7%. At March 31, CLO equity represented 53% of total CLO holdings, up from 52% at year-end. European CLO investments accounted for 10%, down from 12% at Dec. 31.

NAV Rebounds in April as Markets Improve

Ellington Credit’s net asset value was $4.09 per share at March 31. Smernoff said the estimated NAV range as of April 30 was $4.26 to $4.32 per share, with a midpoint of $4.29.

Penn said market conditions improved materially in April and into May as real money buyers returned to the market, liquidity improved and CLO yield spreads tightened. He said the sell-off had “reinvigorated the opportunity set,” adding that prepayments and repricings slowed, which partially relieved excess spread compression seen in 2025.

The company reported a monthly economic return of nearly 7% in April. Penn attributed the performance to portfolio repositioning, including investments in CLO mezzanine debt and equity with what management viewed as more attractive risk-adjusted characteristics.

In mezzanine debt, Penn said the company rotated out of many lower-coupon investments priced near par and into higher-coupon, wider-spread opportunities with stronger underlying credit fundamentals. In equity, the company added longer-duration, high-cash-flow structures with solid covenant cushions while reducing exposure to shorter-duration, more highly leveraged positions that were more sensitive to loan price volatility.

Underlying Loan Portfolio Remains Diversified

Smernoff said the corporate loans underlying Ellington Credit’s CLO investments remain predominantly first-lien floating rate leveraged loans, representing roughly 95% of the underlying assets. Industry exposure was diversified, led by technology, financial services and healthcare, with no single sector exceeding 11%.

Loan maturities were spread across several years, with the largest concentrations in 2028 and 2031 and minimal near-term maturities. The weighted average loan maturity was 4.3 years. Smernoff said facility sizes skew toward larger borrowers, with a weighted average size of $1.7 billion, supporting secondary market liquidity.

Management also emphasized the company’s hedging program. Smernoff said Ellington Credit increased its corporate credit hedges during the quarter to $187 million in high-yield CDX notional equivalents at March 31, up from $175 million at Dec. 31. The company also maintained foreign currency hedges for European CLO investments.

Management Sees Earnings Capacity Rebuilding

During the question-and-answer session, J.R. Herlihy, chief operating officer and treasurer, said proceeds from the unsecured note offering were “mostly deployed” by the end of April. He said the company may have limited room to add secured borrowings at the margin but characterized the note proceeds as invested.

Asked about dividend coverage, Penn said the timing of the debt deal means the momentum in Adjusted Net Investment Income should become more visible after the current quarter. He said the company’s next goal is to move quarterly Adjusted Net Investment Income “into the low 20s” cents per share.

“We’ll be where we want to be, which is we’ll be paying a high dividend, and hopefully with minimal or no book value erosion,” Penn said.

For the full fiscal year, Penn said Ellington Credit declared total distributions of $0.96 per common share. He said unrealized mark-to-market losses led to an overall net loss, but management believes the underlying portfolio remains fundamentally sound and that many markdowns were technical in nature.

Penn also pointed to ongoing risks, including AI-driven disruption, tariffs, geopolitical uncertainty and recession concerns. He said the company’s diversification, hedging and active trading are designed to mitigate those risks while allowing it to capitalize on market dislocations.

About Ellington Credit (NYSE:EARN)

Ellington Credit Income Fund (NYSE: EARN) is a closed-end management investment company that seeks to generate current Income through a diversified portfolio of mortgage- and asset-backed securities. The fund primarily invests in residential mortgage-backed securities (RMBS) and asset-backed securities (ABS), with additional exposure to commercial mortgage-backed securities (CMBS) and related structured credit instruments. To enhance Income and manage risk, the fund employs leverage and derivative strategies such as interest rate swaps and credit default swaps, allowing it to adjust duration and credit exposure dynamically.

The fund is externally managed and advised by Ellington Management Group, LLC, an established investment firm specializing in mortgage credit and structured products.

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