Ellington Credit Q2 Earnings Call Highlights

Ellington Credit (NYSE:EARN) reported an 8.1% economic return for the quarter ended June 30, 2026, as the company expanded and repositioned its collateralized loan obligation portfolio following market volatility earlier in the year.

Chief Executive Officer Larry Penn said the second quarter represented an “important inflection point” for the portfolio. The company issued unsecured debt in late March and deployed the proceeds during April, while actively trading and rotating investments as credit spreads widened and then tightened during the quarter.

“The second quarter was about building earnings capacity,” Penn said. “The upcoming quarters are about converting that capacity into higher net investment income and earnings while maintaining our discipline around credit quality, liquidity, and NAV preservation.”

Quarterly Results and Balance Sheet

Chief Financial Officer Chris Smernoff said Ellington Credit generated GAAP net income of $0.33 per share and net investment income, or NII, of $0.16 per share during the quarter. Adjusted NII was $0.15 per share.

Net asset value rose to $4.18 per share as of June 30, from $4.09 at March 31. Combined with $0.24 per share of distributions paid during the quarter, the NAV gain resulted in the company’s 8.1% economic return.

Total NAV increased to $159.7 million from $153.8 million in the prior quarter. Cash and cash equivalents were $23.5 million at quarter-end.

Ellington Credit reduced reverse-repurchase borrowings by nearly 9% to $151.9 million from $166.3 million, while unsecured notes outstanding remained at $54 million. Its debt-to-equity ratio declined to 1.29 times from 1.43 times, which management said provided greater balance-sheet flexibility and borrowing capacity.

Smernoff said the quarter’s NII did not yet fully reflect the earnings capacity of investments acquired and repositioned during the period. The weighted-average GAAP yield on the overall CLO portfolio was 11.9%, while the weighted-average yield on investments purchased during the quarter was about 14.9%.

Using fair value rather than cost, the portfolio’s projected weighted-average yield was approximately 16.6% as of June 30. The company’s weighted-average purchase yield in the third quarter to date was approximately 16.8%, according to Smernoff.

CLO Portfolio Expansion and Rotation

Ellington Credit purchased $64.8 million of CLO investments and sold $35.1 million during the quarter, increasing the CLO portfolio to $334.1 million at June 30 from $307.9 million at March 31. Smernoff said cash distributions, calls and paydowns generated additional capital for reinvestment beyond the reported purchase and sale activity.

The portfolio remained concentrated in CLO investments, with CLO equity representing about 54% of the portfolio at quarter-end, compared with 53% at the end of March. European investments remained about 10% of the total CLO portfolio.

The underlying CLO collateral was approximately 95% first-lien, floating-rate leveraged loans. Technology, financial services and healthcare were the largest industry exposures, though no individual sector represented more than 11% of underlying assets, according to the company.

Portfolio Manager Greg Borenstein said market disruptions tied initially to weakness in software loans and later to tariff-related uncertainty created opportunities in CLO securities. The company executed 64 CLO trades during the quarter, excluding hedges and deal calls.

Borenstein said Ellington Credit favored U.S. secondary-market CLO equity, where NAVs had been depressed even as defaults were not meaningfully elevated. The company shifted toward longer-tenor, higher-cash-flow equity structures and reduced exposure to shorter-tenor positions that were more sensitive to loan-price changes.

It did not purchase new-issue CLO equity during the quarter, with Borenstein saying that market remained unattractive. In CLO mezzanine debt, the company rotated out of lower-coupon and shorter-spread-duration positions into higher-coupon, wider-spread investments with stronger credit fundamentals.

“Higher quality, higher coupon BBs at discounts to par have been one of our favorite areas for incremental investments,” Borenstein said.

Hedging, July Update and Outlook

Ellington Credit reduced its credit hedge portfolio to roughly $132 million of high-yield CDX notional equivalents at June 30, from approximately $188 million at March 31. Borenstein said the smaller hedge position was primarily related to the company’s effort to deploy proceeds from its March debt issuance while limiting the earnings drag from hedges.

The company reported that corporate credit hedges created losses during the second quarter as broader credit spreads tightened, though those losses were partly offset by gains across its CLO debt and equity holdings.

Penn said the company’s momentum continued in July. Ellington Credit generated an economic return of approximately 3.1%, or $0.13 per share, for the month, according to the company’s July portfolio update. That result exceeded its $0.08 monthly distribution and increased NAV per share by about $0.05 using the midpoint of the company’s reported NAV range.

Adjusted NII for July was approximately $0.06 per share, a monthly run rate about 20% higher than the second-quarter level, Penn said. He also said management was comfortable with the current dividend and expected adjusted NII to reach the low-$0.20 range over the next couple of quarters.

During the first six weeks of the third quarter, the company completed 38 CLO trades. Its overall portfolio size was roughly unchanged as new investments were offset by deal calls, return of capital from CLO equity and opportunistic sales.

Chief Operating Officer and Treasurer JR Herlihy said the company could grow its portfolio by another 5% to 10% from June 30 levels and that leverage could move closer to the March 31 ratio, depending in part on the level of credit hedging.

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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