Ellington Credit Company Q1 FY2026 earnings call

- Overall Quarterly Performance * The fourth fiscal quarter (calendar Q1 2026) saw significant CLO market volatility driven by technical factors, not fundamental credit deterioration. Broader risk-off sentiment triggered by software sector disruption concerns and geopolitical tensions led to sharp spread widening and valuation declines, concentrated in lower-rated CLO tranches. * The firm reported a GAAP net loss of 86 cents per share, driven primarily by mark-to-market losses on CLO equity that offset net investment income, trading gains, and mezzanine tranche redemption gains. Adjusted net investment income was 19 cents per share, down 2 cents sequentially due to lower projected cash flows on CLO equity positions. * NAV per share was $4.09 at March 31, 2026, with an estimated midpoint of $4.29 per share at April 30, 2026, reflecting recovery in Q2 to date. * Outperformed peer CLO funds during the sell-off, driven by active trading and the firm's up-in-the-capital-stack positioning bias.

- Capital Structure and Liquidity Actions * Issued $54 million of 8.5% five-year senior unsecured notes at the end of March 2026, extending the liability profile, adding non-mark-to-market financing, and creating dry powder to capitalize on dislocated market valuations. Proceeds were substantially fully deployed by the end of April 2026. Cash and cash equivalents totaled $57.7 million at quarter end, alongside the new issuance.

- Portfolio Positioning and Activity * Increased the credit hedge portfolio to $187 million in high yield CDX notional equivalents at quarter end (up from $175 million at year end), adding downside protection at attractive relative and absolute valuation levels. At March 31, hedge notional exceeded the firm's total NAV, reflecting a conservative risk posture. * Executed 44 distinct trades during the quarter: purchased $30.7 million of investments (93% CLO debt, 7% CLO equity) and sold $34.2 million. Underlying collateral across the portfolio is 95% first-lien floating rate leveraged loans, well diversified across sectors (no sector exceeds 11% exposure), with a weighted average maturity of 4.3 years and good secondary liquidity. The weighted average junior overcollateralization cushion on CLO equity tranches only declined 6bp quarter-over-quarter to 4.29%, confirming stable underlying fundamentals. * Post-quarter end in April, the firm rotated the portfolio to improve risk-adjusted returns: rotated out of lower-coupon mezzanine positions priced near par into higher-coupon, wider-spread opportunities with stronger credit fundamentals; added long-duration, high cash flow CLO equity with solid covenant cushions while reducing exposure to short-duration, highly leveraged positions sensitive to loan price volatility. This repositioning delivered a nearly 7% economic return in April 2026.

Ellington Credit Company's investment portfolio is split across two core CLO segments, with a smaller allocation to European CLO investments: 1. CLO Equity: Represented 53% of total CLO holdings at quarter end (up slightly from 52% at December 31, 2025). This segment faced severe pressure in Q1 2026, driven by lower excess spread from a January loan repricing wave, wider market clearing yields, and broad risk-off sentiment. Unrealized mark-to-market losses in CLO equity were the primary driver of the quarter's net loss, and the median industry CLO equity return for the quarter was -13%. 2. CLO Mezzanine Debt: Represented 47% of total CLO holdings at quarter end, and was comparatively more resilient to market volatility. While the segment also saw mark-to-market write-downs from yield spread widening and heavy selling pressure, these losses were partially offset by net investment income, trading gains, and positive impacts from deal calls of positions purchased at discounts to par. During the quarter, 93% of new purchases were allocated to CLO mezzanine debt, reflecting management's up-in-the-capital-stack bias during volatility. 3. European CLO: Represented 10% of total CLO holdings at quarter end, down from 12% at year end 2025. The firm maintains a foreign currency hedge portfolio to mitigate exposure from this segment. Overall, the total CLO portfolio was $308 million at March 31, 2026, and grew more than 6% to ~$328 million by April 30, 2026 after deployment of new debt proceeds.

- Management expects the momentum in market conditions seen in April and May 2026 to continue, with a strong second quarter shaped by the recovery from the Q1 technical sell-off. * Adjusted net investment income is expected to resume an upward trend after the current second quarter closes, given the timing of the March 2026 debt issuance. Management's near-term target is to reach low 20s cents per share for quarterly adjusted net investment income. * The firm's goal after reaching the adjusted NII target is to sustain a high dividend with minimal to no book value erosion. * Management believes a meaningful portion of the Q1 valuation markdowns remain reversible, with potential for further recovery as credit spreads normalize, supporting higher long-term returns. * The current market environment is viewed as attractive for CLO investing: higher reinvestment yields, slowing prepayments and repricing activity relieving prior excess spread compression, and discounted loan pricing that improves long-term return potential for CLO equity, position the firm for continued earnings growth.

- AI-driven disruption across sectors, ongoing geopolitical tensions and conflicts, tariffs, and broad recession concerns present ongoing downside risks to credit markets and portfolio valuations. * Software sector exposure, which is a common component of CLO collateral pools, triggered broad risk-off sentiment and heavy selling pressure in Q1 2026, driving sharp valuation declines regardless of underlying borrower health. * High sensitivity of CLO equity valuations to loan repricing and prepayment activity, which historically compressed excess spread and reduced portfolio returns. * Periodic market dislocations can create liquidity shortages for CLO tranches, particularly mezzanine and equity tranches, leading to technical price declines disconnected from fundamental credit quality. * Spreads have already tightened in secondary CLO equity following the Q1 sell-off, reducing the attractiveness of new investments in that sub-sector, and spread compression concerns have reemerged at low levels.

Q: Following the end-of-quarter $54 million debt offering, how much dry powder remains to deploy, and how close is the firm to fully invested? / A: Management confirmed that nearly all proceeds from the debt offering were deployed by the end of April, as the firm moved quickly to capitalize on the attractive dislocated market valuations after the March sell-off. There is only limited incremental capacity to add additional secured borrowings on the margin. Going forward, activity will focus on portfolio rotation rather than large new funded investments, shifting into higher-quality positions to grow adjusted net investment income. The portfolio grew by $20 million month-over-month in April, net of sales, paydowns, and principal returns, reflecting this deployment activity.

Q: Given the challenging Q1 market environment, what is management's confidence in covering the current quarterly dividend with adjusted net investment income over the intermediate term? / A: Management noted that the debt issuance closed at the very end of Q1, so the positive impact on adjusted net investment income will not appear until after the current Q2 closes, when adjusted NII is expected to resume its upward trend. The near-term target is to grow quarterly adjusted NII to the low 20s cents per share. Once that target is reached, active portfolio rotation will allow the firm to sustain its high dividend while achieving the core goal of minimal or no book value erosion.