Ellington Credit Company Q1 FY2027 earnings call

• Overall Quarterly Financial Results

  • GAAP net income of $0.33 per share; net investment income (NII) of $0.16 per share; adjusted NII of $0.15 per share
  • NAV per share increased to $4.18 from $4.09 at March 31, and total net asset value grew to $159.7 million from $153.8 million
  • Non-annualized economic return for the quarter was 8.1%, which includes the $0.24 per share distribution during the quarter
  • Leverage was reduced, with debt-to-equity declining to 1.29x from 1.43x, strengthening the balance sheet and leaving additional borrowing capacity
  • Full quarter NII did not fully reflect the earnings power of the newly expanded and repositioned portfolio as of quarter-end

• Portfolio Repositioning Activity

  • Early 2026 market sell-off widened credit spreads and expanded the CLO opportunity set; the firm issued unsecured debt in late March and rapidly deployed proceeds in April, completing timely repositioning
  • 64 CLO trades completed during Q2 (excluding hedges and deal calls); $64.8 million in CLO investments purchased and $35.1 million sold, with additional turnover from distributions, calls and paydowns
  • Shifted toward longer-tenor, higher cash flow U.S. secondary CLO equity, which was oversold entering the quarter without meaningfully elevated default risk; reduced exposure to shorter-tenor positions more sensitive to loan price volatility
  • Rotated out of lower-coupon, shorter spread duration CLO mezzanine debt trading near/above par into higher-coupon, wider-spread mezzanine with stronger credit fundamentals, focusing on discounted high-quality BB tranches that offer compelling relative value versus high-yield corporate bonds
  • Reduced credit hedge notional to $132 million (high-yield CDX equivalents) from $188 million at March 31, as the firm prioritized deploying new debt proceeds at favorable spread levels before potential market tightening
  • Underlying CLO collateral is 95% first lien floating rate leveraged loans, well-diversified across sectors (no sector over 11% exposure), with a weighted average maturity of 4.4 years and good secondary market liquidity

• Third Quarter Early Operational Update

  • Positive momentum continued into July: 3.1% economic return for the month, NAV per share increased ~$0.05, and adjusted NII run rate of $0.06 per share (20% higher than Q2's average monthly run rate), confirming that Q2-built earnings capacity is beginning to translate into higher NII
  • 38 CLO trades executed in the first six weeks of Q3, maintaining the same discipline of exiting positions where most upside has been realized and redeploying capital into higher-yielding, better risk-adjusted opportunities

Ellington Credit Company’s investment portfolio is segmented by CLO type: 1) CLO Equity: Represented 54% of the total CLO portfolio at quarter-end (up 1 percentage point from March 31). U.S. CLO equity generated substantial net unrealized gains as credit spreads tightened and underlying loan performance improved, with multiple positions delivering enhanced cash flow from successful liability refinancings/resets. European CLO equity makes up less than 1% of the total portfolio. 2) CLO Mezzanine Debt: Represented ~36% of the total CLO portfolio, generated strong net interest margins and trading gains, with upside from calls on discounted shorter-dated positions. 3) European CLO Investments: Remained 10% of the total CLO portfolio, with the firm maintaining an underweight position, especially in European equity. The entire CLO portfolio grew 8.5% net to $334.1 million at quarter-end, from $307.9 million at March 31. The weighted average GAAP yield for the full CLO portfolio was 11.9% in the quarter, while incremental purchases during the quarter had a higher weighted average yield of 14.9%. As of June 30, the projected weighted average yield (measured at fair value) for the portfolio was 16.6%, and the weighted average purchase yield for third quarter investments so far is 16.8%.

• Management expects to grow NII over the coming quarters, driven by three controllable factors: deploying excess liquidity, prudently adding leverage, and continuing portfolio rotation into higher-yielding investments, including through CLO refinancings and resets
  • The firm projects adjusted NII will reach the low 20 cents per share range over the next couple of quarters, with the July run rate of $0.06 per share already trending toward this target
• Management expects leverage to increase back toward the prior 1.43x debt-to-equity level seen at March 31, which would support 5% to 10% portfolio growth from the June 30 size
  • The firm retains capacity to issue common stock above net asset value for accretive growth when market conditions permit
• Management confirms the current dividend level is fully comfortable and sustainable

• Forward-looking statements about future earnings, portfolio performance and growth are subject to material risks and uncertainties, with actual results potentially differing materially from projections, as detailed in the company's Form N-2 registration statement
  • CLO portfolio returns are sensitive to credit spread movements: when credit spreads tightened during Q2, the firm's corporate credit hedges generated losses that partially offset gains from the long CLO portfolio
  • New issue CLO equity remains unattractive to management due to valuation concerns, while tight current credit spreads after the Q2 market rebound have made management more cautious about near-term opportunity sets
  • European CLO markets carry elevated risk of net interest margin compression from increased CLO issuance and tightening loan market conditions, leading the firm to maintain an underweight position in European CLO equity

Q: After noting Q2 NII did not reflect the full earnings power of the repositioned portfolio and July’s adjusted NII run rate of $0.06 per share, how does the NII trajectory look, and is the current dividend level comfortable? / A: Management confirmed it is fully comfortable with the current dividend level, and reaffirmed the prior target of adjusted NII reaching the low 20 cents per share range over the next couple of quarters, which matches the current upward trajectory from July’s higher run rate. The target will be achieved by deploying excess liquidity, selectively adding leverage, and continuing portfolio rotation into higher-yielding assets.

Q: What drove the slight Q3 July shift in portfolio composition (CLO debt down, CLO equity up slightly), and how close is the firm to being fully invested? / A: Some of the shift stems from normal timing of distributions and purchase/sale settlement slippage. The firm is rotating out of shorter-term total return positions that have already realized price upside, and redeploying capital into longer-dated, higher cash flow CLO equity and clean longer-dated BB mezzanine tranches, aligned with the Q2 repositioning strategy. Active total return trading remains a core contributor to overall portfolio returns.

Q: Management noted potential selective leverage increases after recent quarters in the 1.3x-1.4x debt-to-equity range; what level of leverage is management comfortable with? / A: Leverage is managed alongside credit hedge positioning, with the debt-to-equity ratio falling from 1.43x at March 31 to 1.29x at June 30. Management is comfortable with leverage moving back near the 1.43x March 31 level, which would support 5% to 10% portfolio growth from June 30 levels. Excess liquidity is the first source for growing portfolio size and leverage, with natural lumpy variation from deal calls and spread movements expected.