Ellington Credit Company Q3 FY2025 earnings call

• Larry mentioned the fourth quarter was a challenging market for CLO equity since mid-2022, but Ellington Credit limited losses to ~9% of NAV by active and disciplined portfolio management, with relative up in credit bias and active trading strategy. They increased allocation to CLO mezzanine debt tranches, which were more resilient, and had opportunistic trading. Executed 47 unique CLO trades during the quarter, actively managed credit hedges, redeployed payments into higher quality positions, and took advantage of spread concessions. - Chris discussed the financial results: gap net loss of 56 cents per share in Q4, significant mark-to-market losses on CLO equity drove the net loss, CLO mezzanine debt held up better. Net interest income declined due to lower asset yields and portfolio turnover. - Greg talked about the CLO market environment: Q4 was challenging for junior CLO tranches, especially equity, but mezzanine tranches outperformed equity. Ellington stayed away from new issue equity. Entering 2026, over 40% of EARN's USCLO portfolio is set to exit non-call periods, which could help mitigate drag from coupon spread compression. There are more attractive opportunities in secondary trading. In Europe, spreads widened less than in the US, and they reduced European exposure. - Larry reflected on 2025: completed conversion to CLO closed-end fund on April 1st, liquidated mortgage-related assets smoothly, built out CLO portfolio by nearly 50% to $370 million by year end, executed 218 CLO trades, delivered stronger and less volatile earnings stream. In 2026, January and February had difficult market dynamics, but they added mezzanine debt positions, exercised CLO call options, collapsed certain CLOs, selectively increased CLO equity holdings where value exists, maintained substantial credit hedges, and are focused on rebuilding net investment income and NAV, exploring issuance of long-term unsecured debt

For the fourth calendar quarter, the CLO equity market was challenging with a median return of negative 9% for the quarter and negative 14% for the full year. Ellington Credit's CLO equity fund losses were approximately 9% of NAV. CLO mezzanine debt tranches were more resilient. In the fourth quarter, 70% of CLO purchases were mezzanine debt tranches. CLO equity represented 52% of total CLO holdings at December 31st. Net interest income declined due to lower asset yields and portfolio turnover. The weighted average gap yield for the quarter on the CLO portfolio was 13.7%, down from 15.5% in the prior quarter. European CLO investments accounted for 12% at December 31st, down from 14% at September 30th. The collateral of CLO investments is predominantly first lien floating rate leverage loans, well diversified by industry with no single sector exceeding 11%, and loan maturities are spread over several years with a weighted average loan maturity of 4.3 years, and facility sizes skew towards larger borrowers with a weighted average size of $1.6 billion

• Larry mentioned they are focused on rebuilding net investment income and net asset value as they deploy capital into a distressed market. They believe a substantial portion of recent price declines are reversible as they reflect yield spread widening rather than fundamental credit impairment. They are exploring the potential issuance of long-term unsecured debt in the coming weeks

• The CLO equity market is impacted by factors like elevated credit dispersion, ongoing coupon spread compression, weaker credits underperforming, stronger borrowers refinancing at tighter spreads, which pressure leveraged loan prices and reduce excess interest, leading to lower projected cash flows and weaker mark-to-market valuations. - Credit markets have various headlines like collapses of Tricolor and First Brands, growing concern over software sector borrowers facing AI-driven disruption, which pose risks. - There are risks related to default and loss rates, which were elevated last year above historical averages, and sector-specific concerns can impact CLO performance. - Basis risk exists with credit hedges, as using liquid indices may not perfectly match the specific risk exposure of the CLO portfolio

Q: Ben Graham from Crispin Love asked about stance on software sector sentiment and other sectors.

A: Greg said CLOs are diversified by sector and name, so they feel comfortable with overall risk management. There was damage in software, but they don't have a strong view on individual names within the sector, just need to keep exposures in line.

Q: Jason Weaver from Jones Trading asked about proportion of CCC rated or lower loans and negative carry from credit hedges.

A: Greg said typical CCC bucket in CLO is around 7.5%, and negative carry from credit hedges is around 1% to 2% of fund NAV per annum, with hedges focused on out-of-the-money options to reduce cost.

Q: Eric Hagen from BTIG asked about knock-on effect of redemptions on CLO market and mechanics of working through defaults.

A: Greg said redemptions create opportunities for active trading. Regarding defaults, recoveries vary, with historical average par burn or loss rate of about 75 basis points annually, and CLOs have seen less defaults than private credit, but they are mindful of default risks and are tepid on increasing equity exposure due to first loss exposure