EARN Q4 2025 Earnings Transcript

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DATE

Wednesday, May 20, 2026 at 11:00 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Laurence Penn
• Chief Financial Officer — Christopher Smernoff
• Chief Investment Officer — Gregory Borenstein
• Portfolio Manager — Jason Frank

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TAKEAWAYS

• GAAP Net Loss -- $0.86 per share, driven primarily by mark-to-market losses in CLO equity.
• Adjusted Net Investment Income -- $0.19 per share, a $0.02 sequential decline due to lower asset yields on CLO equity positions.
• Net Asset Value (NAV) -- $4.09 per share at March 31, with an estimated April 30 range of $4.26 to $4.32 per share (midpoint $4.29).
• CLO Portfolio Size -- $308 million at March 31, rising to approximately $328 million by April 30, a growth of over 6% month over month.
• Cash and Cash Equivalents -- $57.7 million held at March 31, supported by recently issued debt capital.
• Senior Unsecured Notes Issuance -- $54 million of 8.5% five-year notes issued in late March, with $2.3 million in issuance costs fully expensed.
• CLO Portfolio Composition -- CLO equity made up 53% of portfolio holdings at quarter end, up from 52% at year-end; European CLO exposure decreased to 10% from 12%.
• Trading Activity -- 44 trades executed during the quarter, with $30.7 million in purchases (93% in CLO debt, 7% in CLO equity) and $34.2 million in sales.
• Credit Hedge Portfolio -- Increased to $187 million notional in high-yield CDX equivalents at quarter end, exceeding NAV, up from $175 million at December 31.
• Portfolio Collateral Profile -- Underlying CLO assets are roughly 95% first lien, floating-rate leveraged loans, with a weighted average borrower size of $1.7 billion and weighted average maturity of 4.3 years.
• Weighted Average Cost Yield -- 12.5% for the quarter, down from 13.7% in the prior period, due to lower projected CLO equity cash flows.
• Distributions Declared -- $0.96 per common share for the full fiscal year.
• Credit Cushion -- Weighted average junior overcollateralization cushion on CLO equity tranches declined 6 bps quarter over quarter to 4.29%.
• April 2026 Economic Return -- Nearly 7% economic return achieved during April following active portfolio repositioning.

SUMMARY

Ellington Credit Company (NYSE:EARN) reported its first fiscal year as a CLO-focused fund marked by technical market dislocations, resulting in a GAAP net loss and lower yield metrics, but with rapid deployment of new capital and a shifted portfolio mix. Management emphasized that unrealized losses were driven by market-driven spread widening, not underlying credit weakness, and cited improved conditions in April and May as supporting positive NAV momentum. Recent trading elevated credit hedges above NAV, reflecting a conservative risk posture, while the company targeted continued growth in adjusted net investment income and further deployment of liquidity into secondary CLO opportunities.

• Laurence Penn stated, "Nearly 3/4 of our CLO purchases have been mezzanine debt tranches, underscoring our up in credit bias, particularly during the challenging past 6 months."
• Management noted refinancing and reset opportunities in CLO equity as noncall periods expire, which could "enhance underlying cash flows" and support net investment income growth.
• Penn said, "Since mid-April, our unsecured notes have consistently traded at a premium to their issue price, even at today's higher treasury yields."
• Gregory Borenstein stated, "the Q1 drawdown represents a compelling opportunity that not only has already benefited EARN so far in Q2 as reflected in our improved NAV at April month end, but should also benefit us in the months ahead."

INDUSTRY GLOSSARY

• CLO (Collateralized Loan Obligation): A structured credit product backed by a diversified pool of leveraged loans, divided into tranches by risk and return profile.
• CDX: An index-based tradable credit default swap referencing a basket of corporate bonds or loans, used for credit hedging.
• Mezzanine Debt: Intermediate tranches in the CLO capital structure, typically rated below investment grade and positioned below senior debt but above equity.
• Excess Spread: The difference between interest income earned on CLO loan collateral and interest paid to tranches and expenses, key for CLO equity returns.
• Noncall Period: A contractually defined window during which a CLO cannot be called or refinanced, expiration creates reset/refinance opportunities.

Full Conference Call Transcript

Laurence Penn: Thanks, Alaael-Deen, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company, we often refer to by its New York Stock Exchange ticker, E-A-R-N or EARN for sure. Please turn to Slide 3. The first calendar quarter of 2026 was marked by continued volatility in the CLO market. As we previously communicated in our monthly portfolio updates, the broader market environment exerted significant pressure on asset valuations and led to a decline in our NAV, but our active trading and up in the capital stack bias, once again drove our outperformance versus 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. Much of the asset valuation declines in the sector stem from yield spread widening and heavy selling pressure in CLO mezzanine and equity tranches amid thin liquidity and concerns around software sector exposure as opposed to any broad-based weakening and borrower fundamentals. Importantly, we were able to issue debt capital at the end of March, which enabled us to move quickly to capitalize on this opportunity-rich environment by deploying those proceeds promptly and opportunistically.

Market conditions have subsequently improved so far in the second quarter, and this has been a tailwind for what is shaping up to be a strong quarter. I will cover the details of that debt capital raise and deployment as well as our performance in April shortly. Let's start by reviewing our results for the first quarter. The quarter began on a constructive note, with credit spreads tightening and leveraged loan prices rising early in the new year. But that initial momentum faded in late February as concerned over AI-driven disruption in the software sector which is a small but meaningful component of most CLO collateral pools triggered a sharp decline in those credits.

By quarter end, U.S. and European leveraged loan prices had fallen by more than 2% from their January peaks. This weakness, amplified by geopolitical tensions, fueled a broader risk-off sentiment that widens spreads on CLO debt tranches as shown on Slide 3. While the senior AAA through single A-rated CLO tranches held up relatively well, CLO mezzanine debt came under significant selling pressure in February and March. With lower rated tranches, particularly BB-rated tranches, experiencing sharp yield spread widening. CLO equity faced multiple headwinds, including compressed excess spread from a loan repricing wave in January, wider market clearing yields and concerns surrounding those lower-quality loan borrowers.

As estimated by Nomura Research, the median CLO equity return for the quarter was negative 13%. That said, many valuation declines, particularly in CLO equity, occurred on light trading volume. And, in our view, reflected technical market dislocations and liquidity-driven price weakness rather than deterioration in underlying fundamentals or broad-based credit impairment. For EARN, unrealized losses on CLO equity assets were the primary driver of the NAV decline in the first quarter, more than offsetting net investment income, trading gains and gains from mezzanine tranche redemptions. Turning to our capital structure. In late March, the fund issued $54 million of 8.5% 5-year senior unsecured notes.

This transaction strengthened our balance sheet by extending our liability profile adding non-mark-to-market financing and providing dry powder to capitalize on a dislocated market. At March 31, our CLO portfolio totaled $308 million, and we held a sizable $58 million in cash. Consistent with our positioning throughout the volatility, we prioritized CLO mezzanine debt over equity during the quarter, favoring the subordination levels and structural protections afforded by debt tranches, while staying disciplined in our hedging strategy. As illustrated on Slide 10, we increased our credit hedge portfolio to approximately $187 million of high-yield CDX notional equivalents at March 31, up from $175 million at year-end.

With overall corporate credit spreads remaining tight relative to CLO spreads, we were able to add this protection at compelling levels on both a relative value basis and an absolute value basis. Following the significant spread widening in the latter part of the first quarter, market conditions improved materially in April and into May. Real money buyers have come back into the market, improving liquidity and driving CLO yield spreads tighter. From our standpoint, the sell-off has reinvigorated the opportunity set.

Prepayments and repricings have slowed, partially relieving the excess spread compression experienced in 2025, investment yields have moved higher, and CLO managers can again build par and preserve excess spread by acquiring performing loans at discounted prices, a dynamic that enhances the long-term return potential for CLO equity investors. In addition, as a meaningful portion of our CLO equity portfolio exits its noncall period, refinancing and reset opportunities should enhance underlying cash flows, further improving our asset yields and supporting future growth in our net investment income. These factors created an attractive market environment for deployment.

We responded to this favorable environment by rapidly investing the majority of our dry powder into new opportunities with deployment substantially complete by the end of April. Improved secondary market liquidity has also allowed us to be highly active in portfolio construction. In mezzanine debt, we have rotated out of many lower coupon investments priced near par, where we believe the market is overstating the probability of a near-term call, and we have moved into higher coupon, wider spread opportunities with stronger underlying credit fundamentals. In equity, we have added longer duration, high cash flow structures with solid covenant cushions while reducing exposure to shorter duration, more highly leveraged positions with greater sensitivity to low price volatility.

These recent maneuvers contributed to our strong monthly economic return of nearly 7% in April and position us for improved earnings capacity as we rebuild net investment income and as we continue rotating out of investments with limited upside into more attractive risk-adjusted opportunities. I'll now turn it over to Chris to discuss the financial results in more detail. Chris?

Christopher Smernoff: Thanks, Larry, and good morning, everyone. Please turn to Slide 4. For the quarter ended March 31, 2026, which concluded our inaugural fiscal year as a CLO closed-end fund, we reported a GAAP net loss of $0.86 per share. As detailed on Slide 6, the primary driver was mark-to-market losses in CLO equity, while CLO mezzanine debt proved comparatively more resilient. As Larry discussed, the first quarter was characterized by a sharp risk-off move that disproportionately impacted lower rated CLO securities. CLO mezzanine debt, particularly BB-rated tranches experienced significant yield spread widening and selling pressure, while CLO equity was pressured even more severely by lower excess spread, wider market clearing yields and heightened concerns around more vulnerable borrowers.

These dynamics drove a meaningful mark-to-market volatility across the sector despite relatively stable underlying credit fundamentals. Within our CLO mezzanine debt portfolio, net investment income and trading gains, together with the positive impact of deal calls of positions owned at discounts to par offset a portion of the mark-to-market write-downs. Credit hedges were also a moderate drag on results. Adjusted net investment income declined by $0.02 sequentially to $0.19 per share for the quarter, driven by lower asset yields on our CLO equity positions. The weighted average cost yield for the quarter on our CLO portfolio was 12.5%, down from 13.7% in the prior quarter, primarily driven by lower projected cash flows.

As illustrated on Slide 7, the size of our overall CLO portfolio declined during the quarter, driven by net sales, paydowns and mark-to-market reductions. Consistent with our active trading approach, we executed 44 distinct trades during the period, purchasing $30.7 million of investments, 93% in CLO debt and 7% in CLO equity and selling $34.2 million. At March 31, CLO equity represented 53% of total CLO holdings, up slightly from 52% at year-end while CLO -- while European CLO investments accounted for 10% down to 12% at December 31. These figures do not capture the impact of deploying the proceeds from the unsecured note transaction, which closed at quarter end and was substantially deployed by the end of April.

During April, we continued actively repositioning the portfolio. And as of April 30, our CLO portfolio has grown by more than 6% to approximately $328 million overall. Slide 8 provides an overview of the corporate loans underlying our CLO investments. The collateral remains predominantly first lien floating rate leverage loans representing roughly 95% of the underlying assets. Our industry exposure is well diversified led by technology, financial services and health care, with no single sector exceeding 11%. Loan maturities are spread over several years with the largest concentrations in 2028 and 2031, and minimal near-term maturities and resulting in an average -- weighted average loan maturity of 4.3 years.

Facility sizes skewed towards larger borrowers with a weighted average size of $1.7 billion which supports secondary market liquidity. Slide 9 provides further detail on the underlying loan collateral. Notably, the weighted average junior overcollateralization cushion on our CLO equity tranches only declined by 6 basis points quarter-over-quarter to 4.29%, further evidence that the Q1 selloff was more technical than fundamental in nature. Slide 10 presents a snapshot of our credit hedges as of March 31. As noted earlier, we further increased our corporate credit hedges during the quarter with that portfolio reaching $187 million in high-yield CDX notional equivalents at quarter end, up from $175 million at December 31.

We also continue to maintain a foreign currency hedge portfolio to manage exposure from our European CLO investments. Turning to Slide 11. Our NAV at March 31 was $4.09 per share and cash and cash equivalents totaled $57.7 million. On March 30, we issued $54 million of 8.5% 5-year senior unsecured notes, which trade on the New York Stock Exchange under the ticker ELLA and incurred approximately $2.3 million of issuance costs, which were fully expensed during the quarter. As noted earlier, the deployment of the proceeds was substantially complete by the end of April with most of the proceeds deployed into new CLO investments and the balance used to repay short-term secured borrowings.

As of April 30, the estimated range on our NAV per share was $4.26 to $4.32 with a midpoint of $4.29. With that, I'll turn it over to Greg to discuss the CLO market environment, our portfolio positioning and our outlook. Greg?

Gregory Borenstein: Thanks, Chris. It's a pleasure to speak with everyone today. Calendar Q1 was an eventful quarter, presenting both challenges and opportunities. While January was stable, February and March saw both credit and broader market selloffs. Initially, concerns in the software sector drove underperformance in portfolios of the loan market. Leverage loans across sectors then weakened in February and made concerns surrounding private credit and direct lending. Those pressures were compounded in March, when geopolitical conflict led to further declines across broader markets and risk premia increased globally. These largely technical sell-offs ultimately enhance the opportunity set, particularly as EARN completed its first bond deal at the end of Q1.

Much of the story in the CLO market through 2025 was the pain of prepayments in the loan market and 2026 began in much the same way. With the repricing wave in early January that drove the share of loans trading above par from 58% at the end of December to 26% at the end of January per Morningstar, leaving investors hopeful that the worst of the prepayment wave was behind them. From there, a software-led sell-off in loans combined with macro shocks from the Iran War, led the Morningstar LSTA U.S. leveraged loan index to drop nearly 2.5 points in price to lows reached in early March.

While U.S. loans rebounded by $0.46 from those lows by quarter end, February and March saw price declines in both junior mezzanine and equity CLO tranches. Concerns around credit dispersion persisted, and CLO equity in particular, was poorly bid. Not surprisingly, CLO repricing is plummeted, providing some much-needed relief to excess spread. This dearth of demand created one of the more attractive buying opportunities and secondary CLO equity in some time. And we took advantage by deploying liquidity generated from our hedges rotating out of fully priced mezzanine positions and most significantly, issuing unsecured debt and then deploying the proceeds.

The investment opportunity was not just limited to CLO equity as we saw many compelling offerings in mezzanine debt as well. The CLO market dynamics in Q1 were very different from those in Q4 of last year. In Q4, a significant portion of the price declines were crystallized through spread compression in loans and moderate fundamental losses. In contrast, we believe that most of the CLO price declines in Q1 were technical in nature, driven primarily by spread widening. In our view, the Q1 drawdown represents a compelling opportunity that not only has already benefited EARN so far in Q2 as reflected in our improved NAV at April month end, but should also benefit us in the months ahead.

As markets have stabilized, secondary trading volumes and CLOs have also normalized, which has allowed us to rotate the portfolio and improve positioning. While CLO equity presented an interesting opportunity in the secondary market in April, we have gradually seen valuations in that sector become less compelling as the market has tightened. In addition, with a number of repricing eligible loans estimated by PitchBook to be around 3% of the loan index as of May 8, spread compression concerns have reemerged, albeit to a much lesser extent than in Q4. Lastly, we continue to believe that new issue CLO equity remains less compelling, given more attractive risk-adjusted returns available in the secondary markets.

And given the limited ability to create attractive cash flow profiles, so our activity has remained muted in that sector. Now back to Larry.

Laurence Penn: Thanks, Greg. The past year has been productive and eventful for EARN to say the least. We completed our RIC conversion. We successfully transitioned the portfolio out of mortgage-backed securities and into CLO investments with minimal impact to NAV, and we thoughtfully scale the CLO portfolio, expanding it by 23% year-over-year. Nearly 3/4 of our CLO purchases have been mezzanine debt tranches, underscoring our up in credit bias, particularly during the challenging past 6 months. In addition, we executed more than 260 trades over the course of the year to capture relative value across the CLO capital structure.

At the same time, we strengthened our capital structure through the issuance of long-term unsecured notes, and we built a substantial credit hedging portfolio designed to mitigate downside risk and support opportunistic investing. As of March 31, our fiscal year-end, the high-yield CDX notional equivalents represented by our credit hedges actually exceeded our NAV, which I view as strong evidence of our conservative approach. We believe that AI-driven disruption, tariffs, geopolitical uncertainty and recession concerns continue to present real risks, and our diversification and active hedging and trading are specifically designed to mitigate these risks. For the full fiscal year, we declared total distributions of $0.96 per common share.

And while unrealized mark-to-market losses resulted in a net loss overall, we believe that our underlying portfolio remains fundamentally sound and that many of these markdowns were technical in nature. We remain confident in the earnings prospects of our growing CLO portfolio and a robust hedging program. Even after the recovery we've seen in our portfolio so far in the second quarter, we believe that a meaningful portion of the recent price declines remains reversible with potential for further recovery as credit spreads continue to normalize. Relative to other CLO focused closed-end funds, we have delivered stronger and less volatile earnings over the past 12 months, reflecting our disciplined and highly active approach to portfolio construction and risk management.

We are particularly pleased with the timing and execution of our unsecured note offering, raising capital at the end of March enabled us to deploy into a dislocated market at highly attractive levels. And it is encouraging to see the market's recognition of the strength of EARN's credit story and risk management discipline. Since mid-April, our unsecured notes have consistently traded at a premium to their issue price, even at today's higher treasury yields. As noted earlier, we believe that the market environment has shifted in our favor. With higher reinvestment yields and improving market sentiment, we see a stronger foundation for continued growth.

We entered the new fiscal year with ample liquidity and a flexible balance sheet that supports increased earnings capacity and the momentum in April and into May has reinforced our confidence in our ability to generate attractive total returns as the year progresses. Our balanced portfolio approach, mezzanine debt for stability, equity for upside, hedging for downside protection and active trading to capture relative value positions us well across a range of market environments. More than ever, we believe that our focus on liquidity, active trading, disciplined risk management and tail risk hedging will enable us to capitalize on dislocations and generate alpha through periods of volatility. Thank you for your time and your continued support of Ellington credit.

And with that, let's open the floor to Q&A. Operator, please proceed.

Operator: [Operator Instructions]. And our first question today comes from Crispin Love with Piper Sandler.

Crispin Love: Larry, you said on it a little, but can you discuss just dry powder. You did the debt offering at the end of the quarter. it seems like much of that has been deployed through May. What do you have to deploy now? And then just how close are you [indiscernible].

Jason Frank: Hey, Crispin. It's Jay. I can take that. So we've made the point that through April, we're substantially deployed on those unsecured note proceeds. So we saw the sell-off through March and a kind of a golden opportunity to capitalize. And so we were pretty quick to deploy, and kind of, deploy rapidly in new investments and replacing some short-term secured borrowings. You can see on our April 1 pager from Monday night that the portfolio is up about $20 million month-over-month. And so that's net of some sales, that's net of some paydowns and just some principal return on underlying investments. Looking forward, I think that again, the proceeds are mostly deployed.

We probably have a little bit of room to add secured borrowings on the margin, but I would characterize the proceeds from the notes is, kind of, deployed and, kind of, invest at this point.

Laurence Penn: Yes. And I think it'll be probably more about recharging our adjusted net investment income through rotations, especially out of, as we mentioned, certain types of equity profiles into other types of equity promises, especially will make a very meaningful change.

Crispin Love: Okay. Great. That's helpful. And then first quarter -- first calendar quarter, very challenging for a lot of the reasons you discussed. Just on the outlook here. Second quarter so far, it seems constructive based on your comments. And then Larry, on just recharging adjusted net investment income. Can you talk about your confidence in covering the dividend with adjusted NII over the near to intermediate term?

Laurence Penn: Yes. So look, I think we -- obviously, we just raised the debt capital at the end of March. So we're not talking about April, I think after this current quarter is over, that's when you'll see the momentum in our adjusted net investment income, I think, sort of be back on the upswing, given the timing of our debt deal. And I think that our next step is to get that adjusted NII for the quarter into the low 20s. That's going to be our next step.

And I think that once it's there, through just from that and from actively trading the portfolio and we are active traders and there's -- the opportunities are, we think, much better than they've been. We'll be where we want to be, which is we'll be paying a high dividend and hopefully, with minimum or no book value erosion. I mean that's always our goal.

Operator: That was our final question for today. We thank you for participating in the Ellington Credit Company Fourth Fiscal Quarter ended March 31, 2026 Results Conference Call. You may disconnect your lines, and have a nice day.

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