EARN Q1 2026 Earnings Call

Operator (AI Assigned): Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company Q4 ended 31 March 2026 Results Conference Call. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing star two.

Operator (AI Assigned): Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

Alaael-Deen Shilleh (Secretary and Associate General Counsel): Thank you. Before we begin, I'd like to remind everyone that this conference call may include forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our registration statement on Form N-2. Actual results may differ materially from these statements. They should not be considered to be predictions of future events.

Alaael-Deen Shilleh (Secretary and Associate General Counsel): The fund undertakes no obligation to update these forward-looking statements. Joining me today are Laurence Penn, Chief Executive Officer of Ellington Credit Company, Gregory Borenstein, Portfolio Manager, and Christopher Smernoff, Chief Financial Officer. Our earnings conference call presentation is available on our website, ellingtoncredit.com. Today's call will track that presentation and all statements and references are qualified by the important notice in end notes at the back of the presentation.

Alaael-Deen Shilleh (Secretary and Associate General Counsel): With that, I'll turn it over to Larry.

Laurence Penn (CEO, President, and Trustee): Thanks, Alaael-Deen, and good morning, everyone. We appreciate your time and interest in Ellington Credit Company, which we often refer to by its New York Stock Exchange ticker, E-A-R-N, or EARN for short. Please turn to slide three. The Q1 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.

Laurence Penn (CEO, President, and Trustee): Our active trading and up in the capital stack bias once again drove our outperformance versus peers. We believe that the Q1 largely represented a technical dislocation that reset valuations and expanded the opportunity set rather than a fundamental deterioration in underlying credit quality.

Laurence Penn (CEO, President, and Trustee): Much of the asset valuation declines in the sector stemmed 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 in borrower fundamentals. Importantly, we were able to issue debt capital at the end of March, which enabled us to move quickly to capitalize in this opportunity-rich environment by deploying those proceeds promptly and opportunistically.

Laurence Penn (CEO, President, and Trustee): Market conditions have subsequently improved so far in Q2, 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 Q1. The quarter began on a constructive note, with credit spreads tightening and leverage loan prices rising early in the new year.

Laurence Penn (CEO, President, and Trustee): That initial momentum faded in late February, as concerns 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, US and European leverage 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 widened spreads on CLO debt tranches, as shown on slide three.

Laurence Penn (CEO, President, and Trustee): 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 double B-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.

Laurence Penn (CEO, President, and Trustee): As estimated by Nomura Research, the median CLO equity return for Q1 was -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.

Laurence Penn (CEO, President, and Trustee): For EARN, unrealized losses on CLO equity assets were the primary driver of the NAV decline in Q1, 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% five-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.

Laurence Penn (CEO, President, and Trustee): At 31 March, 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 31 March, up from $175 million at year-end.

Laurence Penn (CEO, President, and Trustee): 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 Q1, 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.

Laurence Penn (CEO, President, and Trustee): 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.

Laurence Penn (CEO, President, and Trustee): In addition, as a meaningful portion of our CLO equity portfolio exits its non-call 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.

Laurence Penn (CEO, President, and Trustee): 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.

Laurence Penn (CEO, President, and Trustee): 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 loan 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.

Laurence Penn (CEO, President, and Trustee): I'll now turn it over to Chris to discuss the financial results in more detail. Chris?

Christopher Smernoff (CFO): Thanks, Larry, and good morning, everyone. Please turn to slide 4. For Q1 ended 31 March 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, Q1 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 meaningful mark-to-market volatility across the sector, despite relatively stable underlying credit fundamentals.

Christopher Smernoff (CFO): 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.

Christopher Smernoff (CFO): As illustrated on slide 7, the size of our overall CLO portfolio declined during Q1, driven by net sales, pay downs, 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 31 March, CLO equity represented 53% of total CLO holdings, up slightly from 52% at year-end, while European CLO investments accounted for 10%, down to 12% at 31 December. These figures do not capture the impact of deploying the proceeds from the unsecured note transaction, which closed at Q1 end and was substantially deployed by the end of April. During April, we continued actively repositioning the portfolio, and as of 30 April, our CLO portfolio had grown by more than 6% to approximately $328 million overall.

Christopher Smernoff (CFO): Slide 8 provides an overview of the corporate loans underlying our CLO investments. The collateral remains predominantly first-lien floating rate leveraged loans, representing roughly 95% of the underlying assets. Our industry exposure is well diversified, led by technology, financial services, and healthcare, 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, resulting in a weighted average loan maturity of 4.3 years. Facility sizes skew 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 over-collateralization cushion on our CLO equity tranches only declined by 6 basis points quarter over quarter to 4.29%. Further evidence that the Q1 sell-off was more technical than fundamental in nature.

Christopher Smernoff (CFO): Slide 10 presents a snapshot of our credit hedges as of 31 March. 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 31 December. 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 31 March was $4.09 per share, and cash equivalents totaled $57.7 million. On 30 March, we issued $54 million of 8.5% five-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.

Christopher Smernoff (CFO): 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 30 April, 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 (Managing Director and Head of Corporate Credit): 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 sell-offs. Initially, concerns in the software sector drove underperformance in portfolios of the loan market. Leveraged loans across sectors then weakened in February amid 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 enhanced 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.

Gregory Borenstein (Managing Director and Head of Corporate Credit): With a 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 Twelve-Day War, led the Morningstar LSTA US Leveraged Loan Index to drop nearly 2.5 points in price to lows reached in early March. US 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, CLO equity in particular was poorly bid. Not surprisingly, CLO repricings plummeted, providing some much-needed relief to excess spread.

Gregory Borenstein (Managing Director and Head of Corporate Credit): This dearth of demand created one of the more attractive buying opportunities in secondary CLO equity in some time, and we took advantage by deploying liquidity generated from our hedges, rotating out of fully priced mezzanine positions. 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.

Gregory Borenstein (Managing Director and Head of Corporate Credit): In our view, the Q1 drawdown represented 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 in 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 the number of repricing eligible loans estimated by PitchBook to be around 3% of the loan index as of 8 May, spread compression concerns have reemerged, albeit to a much lesser extent than in Q4.

Gregory Borenstein (Managing Director and Head of Corporate Credit): 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. Our activity has remained muted in that sector. Now, back to Larry.

Laurence Penn (CEO, President, and Trustee): 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 scaled the CLO portfolio, expanding it by 23% year over year. Nearly three-quarters of our CLO purchases have been mezzanine debt tranches, underscoring our up in credit bias, particularly during the challenging past six 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.

Laurence Penn (CEO, President, and Trustee): As of 31 March, our fiscal year-end, the high-yield CDX notional equivalence 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 our robust hedging program.

Laurence Penn (CEO, President, and Trustee): Even after the recovery we've seen in our portfolio so far in Q2, 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. 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.

Laurence Penn (CEO, President, and Trustee): 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. 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.

Laurence Penn (CEO, President, and Trustee): With that, let's open the floor to Q&A. Operator, please proceed.

Operator (AI Assigned): Thank you. If you'd like to ask a question, press star one on your keypad. To leave the queue at any time, press star two. Once again, that is star one to ask a question. Our first question today comes from Crispin Love with Piper Sandler. Your line is now open.

Crispin Love (Director and Senior Research Analyst): Thank you. Good morning, everyone. Larry, you hit on it a little, but can you discuss.

Crispin Love (Director and Senior Research Analyst): Just dry powder. You did the debt offering at the end of the quarter. Seems like much of that has been deployed through May. What do you have to deploy now and then just how close are you to fully invest?

JR Herlihy (COO and Treasurer): Hey, Crispin Love, it's J.R. I can take that. We made the point that through April we were substantially deployed on those unsecured note proceeds. We saw the sell-off through March and a kind of golden opportunity to capitalize, 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 one-pager from Monday night that the portfolio is up about $20 million month over month, that's net of some sales, that's net of some pay downs and just some principal returned 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. I would characterize the proceeds from the notes as kind of deployed and kind of invested at this point.

Laurence Penn (CEO, President, and Trustee): Yeah, 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 profiles especially will make a very meaningful change.

Crispin Love (Director and Senior Research Analyst): Okay, great. Thanks. That's helpful. First calendar quarter, very challenging for a lot of the reasons you discussed. Just on the outlook here, Q2 so far, it seems constructive based on your comments. Laurence, 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 (CEO, President, and Trustee): Yeah. Look, I think we obviously 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. I think that our next step is to get that adjusted NAI for the quarter into the low 20s. That's going to be our next step. I think that once it's there just from that and from actively trading the portfolio, and we are active traders and 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 minimal or no book value erosion. I mean, that's always our goal.

Crispin Love (Director and Senior Research Analyst): Great. Thank you, Larry. Appreciate you taking my questions.

Laurence Penn (CEO, President, and Trustee): Thanks, Crispin.

Operator (AI Assigned): Thank you. That was our final question for today. We thank you for participating in the Ellington Credit Company Q4 fiscal quarter ended 31 March 2026 results conference call. You may disconnect your line and have a nice day.