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Important Date for the Financial Call
Wednesday, May 21, 2025 at 11 a.m. ET
Key Participants in the Conference Call
Chief Executive Officer — Larry Penn
Chief Financial Officer — Chris Smernoff
Portfolio Manager — Greg Borenstein
Operator
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Identifying Financial Risks Ahead
CFO Chris Smernoff revealed a GAAP net loss of $0.23 per share for the first quarter of 2025, attributing this primarily to the mark-to-market losses in the CLO portfolio, alongside net interest income and modest gains from credit hedges. Such losses highlight the challenges faced in the current economic landscape.
CEO Larry Penn further explained that the adjusted distributable earnings (non-GAAP) for the upcoming second quarter of 2025 might not cover the dividend due to elevated cash levels resulting from MBS sales, prior to the full redeployment of those funds.
Key Financial Takeaways from the Call
Net Loss Overview— The reported net loss stood at $0.23 per share (GAAP) for Q1 2025, predominantly driven by CLO mark-to-market losses that outstripped both net interest income and hedging gains.
Adjusted Distributable Earnings— The earnings were recorded at $0.26 per share, successfully covering the dividend for the first quarter of 2025.
Net Interest Margin Insights— The net interest margin increased by 20 basis points, reaching 5.27% in the first quarter of 2025, a rise attributed to a heightened allocation to CLOs.
Book Value Analysis— The book value per share was reported at $6.08 as of March 31, 2025.
Economic Return Metrics— The economic return for the first quarter was recorded as negative 3.2%.
Debt-to-Equity Ratio Evaluation— The debt-to-equity ratio decreased to 2.2 times as of March 31, 2025, down from 2.9 times at the end of December 2024, indicating a deleveraging trend.
CLO Portfolio Growth Statistics— The size of the CLO portfolio expanded by 46% to $250 million as of March 31, 2025, with capital allocation to CLOs increasing to 81% from 72% at the end of December 2024.
CLO Portfolio Composition Insights— As of March 31, 2025, 66% of the CLO portfolio consisted of CLO equity, up from 58% at the end of December 2024.
Agency RMBS Holdings Overview— The holdings in Agency RMBS slightly decreased to $504 million at the close of Q1 2025; all remaining agency mortgage pools were liquidated shortly after April 1.
Portfolio Liquidity Status— The total liquidity was reported at $169 million in cash and unencumbered assets as of March 31, 2025, equating to 74% of shareholders’ equity.
Post-Conversion CLO Purchases— An additional investment of $51 million in CLOs was made from April 1 through May 20, bringing total CLO exposure to $284 million as of May 20, 2025.
Estimated NAV Range Update— As of April 30, 2025, the estimated net asset value (NAV) range was between $5.85 and $5.91 per share, with a midpoint of $5.88 per share.
Dry Powder Availability— As of April 30, 2025, $59 million, or 18.8% of the portfolio, was preserved in cash and cash equivalents for future investment opportunities.
Leverage Status Post-Agency Sale— CEO Penn noted that the current debt leverage is significantly lower, now standing at “less than half a turn,” following the liquidation of agency positions early in April 2025.
Transition to Closed-End Fund Structure— The conversion was successfully completed on April 1, 2025, marking the shift to 1940 Act reporting, with the fiscal year now concluding on March 31.
Comprehensive Summary of Financial Developments
The successful transition of Ellington Credit Company(EARN 0.36%) to a registered closed-end fund on April 1, 2025, has led to considerable changes in its portfolio structure and an enhancement in liquidity. Following this conversion, the company promptly liquidated all agency mortgage pools, reallocating the proceeds to significantly expand its CLO portfolio, with a focus on both equity and mezzanine positions. Although volatility in March caused mark-to-market losses in CLO holdings, the agency mortgage strategy yielded net gains prior to final liquidation in Q1 2025. Management underscored their commitment to active risk management through strategic use of TBA hedges, selective investment in discounted CLO tranches, and maintaining a robust dry powder reserve for opportunistic capital allocation. Looking ahead, plans for potential unsecured debt issuance are in place to optimize the capital structure further.
Portfolio Manager Greg Borenstein noted that the outperformance of European assets compared to U.S. assets and the superior performance of mezzanine over equity during the quarter underlined the advantages of diversification within the portfolio.
CEO Penn indicated that while adjusted distributable earnings (non-GAAP) might not meet the dividend in calendar Q2 2025 due to timing issues in deployment, they anticipate being “on track for CY Q3 2025” to resume full coverage.
To enhance transparency, the company will provide monthly updates on NAV and portfolio performance, fostering clearer communication with investors.
Essential Industry Terms Explained
Agency RMBS: These are mortgage-backed securities that are either issued or guaranteed by government-sponsored enterprises such as Fannie Mae, Freddie Mac, or Ginnie Mae.
CLO (Collateralized Loan Obligation): This refers to a type of securitization that involves pooling leveraged loans and selling them in tranches, each carrying varying degrees of credit risk and yield.
TBA (To-Be-Announced): A forward contract for mortgage-backed securities where specific loans are not yet identified; commonly utilized for hedging within mortgage portfolios.
CLO Equity: The riskiest tranche within a CLO structure, representing the residual interest and presenting the highest potential yield along with the risk of loss.
CLO Mezzanine (Mezz): These are intermediate tranches situated below senior debt but above equity, characterized by moderate risk and yield profiles.
Net Asset Value (NAV): This is defined as the per-share value of a fund or closed-end investment entity, calculated by subtracting total liabilities from total assets and dividing by the number of outstanding shares.
Adjusted Distributable Earnings (ADE): A non-GAAP metric that signifies the cash available for distribution to shareholders, adjusting for certain non-cash or timing discrepancies relative to GAAP earnings.
Complete Transcript of the Conference Call
Larry Penn: Thank you, Alaael-Deen. Good morning to everyone. We appreciate your time and interest in Ellington Credit Company. I am excited to announce that we successfully completed our conversion to a registered closed-end fund on April 1st. As planned, shortly after the conversion, we efficiently liquidated our remaining agency mortgage pools and addressed our TBA short positions, all while causing minimal impact on our net asset value. Indeed, even amidst the market fluctuations in early April, we estimate that these liquidations had only about a $0.01 per share effect on our NAV.
This minimal effect aligns perfectly with our previous estimates shared during the last earnings call, and the precise, well-timed hedging executed by Mark Tecotzky and his team made this outcome possible. As a consequence of our shift to a closed-end fund, we also adjusted our fiscal calendar to commence on April 1st. Therefore, during today’s earnings call, we will reference the quarter ending March 31, 2025, as calendar Q1 to prevent any confusion. Now, let’s delve into our calendar Q1 results.
During calendar Q1, in preparation for our conversion, we expanded our CLO portfolio by 46% to $250 million, while maintaining the size of our long agency mortgage portfolio steady to preserve our exemption from the 1940 Act right until the conversion. Moreover, starting in January, we proactively escalated our TBA short mortgage hedges. Thus, when volatility surged in March, we had already effectively neutralized our exposure to the mortgage basis, preventing losses that would have occurred when spreads widened later in the quarter.
This strategic positioning allowed our agency mortgage portfolio to substantially outperform during the volatile periods leading up to and through our final sales in early April. Turning to Slide 4, let’s assess the market backdrop for the quarter. A robust January and February gave way to turbulence in March as investor sentiment soured amid fears of tariffs, slowing growth, and persistent inflation. Interest rates and spread volatility surged in March, while equity indices declined and credit spreads widened, including within the CLO market, where both mezzanine debt and equity tranches experienced significant price declines.
You can see in the middle of Slide 4 that spreads on high yield, investment grade, and CLO debt tranches widened, resulting in price drops across the board during the quarter, with most of this decline occurring in March. Importantly, the price declines observed were primarily due to potential future credit concerns, especially for companies likely to be affected by rising tariffs, rather than immediate or near-term credit issues. Moving beyond the quarter end and into early April, after liquidating all our mortgage pools post-conversion, our liquidity and purchasing power surged, allowing us to promptly start expanding our CLO portfolio.
We were fortunate with our timing, as we could acquire attractive assets during the tumultuous market conditions in April. Recently, significant tariff de-escalations have led to a reversal of credit spreads and prices in May, recovering a substantial portion of the declines observed in March and April. It was advantageous to deploy fresh capital into CLOs while prices were lower. In summary, while our agency mortgage strategy yielded positive outcomes for the quarter, the falling prices of CLO mezzanine debt and equity precipitated an overall net loss. Nevertheless, our adjusted distributable earnings continued to cover our dividends for the quarter, and we have observed strong price recoveries thus far in calendar Q2.
I’ll now pass it over to Chris to elaborate on some of the financial specifics. Chris?
Chris Smernoff: Thanks, Larry. Good morning, everyone. Please refer to Slide 5. For calendar Q1, we reported a net loss of $0.23 per share and adjusted distributable earnings of $0.26 per share. Our overall net interest margin increased by 20 basis points to 5.27%, supported by our growing capital allocation to CLOs. On Slide 6, you can observe the portfolio P&L by strategy, which was negative $0.24 per share from CLOs and positive $0.08 from agency. In our CLO portfolio, mark-to-market losses surpassed net interest income and modest gains from our credit hedges. Conversely, in our agency portfolio, net gains on Agency RMBS were greater than net losses incurred from interest rate hedges for the quarter.
As of March 31, our book value per share totaled $6.08, and our combined cash and unencumbered assets reached $169 million, or 74% of total shareholders’ equity. The economic return for the quarter was noted as negative 3.2%. Our debt-to-equity ratio, adjusted for unsettled trades, decreased to 2.2 times at March 31, down from 2.9 times at the close of December 2024. During the same period, our net mortgage asset to equity ratio fell to approximately zero from 2.6 times, driven by a net short TBA position that nearly entirely offset our Agency RMBS holdings at quarter end. Slide 9 illustrates our CLO portfolio growing by 46% to $250 million as of March 31, and the capital allocated to CLOs expanded to 81% from 72% at the end of December 2024.
At March 31, CLO equity constituted 66% of our total CLO holdings, an increase from 58%, while investments in European CLOs made up 14% of the total CLO inventory, remaining relatively unchanged from the previous quarter. On Slide 10, we observe that our Agency RMBS holdings slightly declined to $504 million from $512 million at the close of December 2024. As mentioned earlier, we liquidated all remaining mortgage positions soon after April 1. Slide 11 outlines our interest rate hedging portfolio, where our rate hedges were entirely in short TBA positions as of March 31. Slide 12 illustrates our net RMBS exposure, showcasing that our net short TBA position fully offset our long agency pools.
We have also maintained modest credit hedge and foreign exchange hedge portfolios at quarter end related to our CLO investments. Slide 13 indicates that nearly all of our loans underlying our CLO portfolio are floating rate, thus exhibiting significantly lower interest rate duration compared to agency mortgages. In conjunction with the conversion, we modified our fiscal year to conclude on March 31, the day preceding the conversion, with our first complete fiscal year following the conversion ending on March 31, 2026. Consequently, the three-month period ending March 31, 2025, during which we operated as a taxable C corporation, will constitute its own short fiscal year.
Next month, we will be submitting a transition period 10-K for that brief three-month fiscal year. Moving forward, as a closed-end fund, we will be making 1940 Act filings such as N-CSRs, N-CEN, and N-PORT instead of 10-Qs and 10-Ks. We still plan to issue earnings releases quarterly. Furthermore, as a closed-end fund, we will now be reporting a net asset value per share, which is effectively the same metric as the book value per share we’ve reported previously. With that, I’ll hand it over to Portfolio Manager Greg Borenstein to discuss the CLO market performance, our CLO portfolio positioning, and our market outlook.
Greg Borenstein: Thanks, Chris. It is a pleasure to connect with everyone today. Calendar Q1 presented numerous headwinds, especially for CLO equity. While payment default rates remained low and fundamentals generally strong, several challenging technical factors emerged. Continued loan coupon spread compression at the start of the quarter, combined with loan price declines by the end, negatively impacted CLO equity valuations. These challenges were most pronounced in the U.S., while European positions faced comparatively muted effects. In CLO mezzanine, our U.S. positions did experience mark-to-market declines, although these were smaller compared to equity, and mezzanine also outperformed most other corporate credit markets on a credit beta-adjusted basis.
Conversely, our European mezzanine positions benefitted from strong carry and realized gains, which outweighed mark-to-market losses. We also recorded modest gains from our credit hedges. Early in the quarter, loan coupon spread compression remained a concern, with most of the loan market trading above par at the start of the year. This situation resulted in a contraction of CLO net interest margins, consequently impacting equity interest payments. However, certain deals were able to gain from resets and refinancings. Within EARN, we recorded gains from deals that liquidated, which partially offset the mark-to-market declines observed elsewhere in the portfolio.
Concerns about loan coupon spread compression have since diminished, as only 10% of the loan market traded at par by the end of March, and this figure dropped to 4% by the end of April. However, with the rallies in May, this percentage has begun to rise again. Loan prices closed calendar Q1 down $0.82, according to the Morningstar/LSTA U.S. Leveraged Loan Index, declining in line with the sell-off across credit markets. CLO debt tranches, particularly AAAs, experienced widening credit spreads during the quarter. This weakness stemmed from various factors, including declines in investment-grade and high-yield corporate bonds, capital outflows from CLO ETFs, substantial primary CLO supply, and heightened macro volatility.
Wider credit spreads on CLO debt tranches resulted in CLO equity refinancing and reset options becoming less valuable, negatively affecting CLO equity prices. These impacts were more pronounced in the U.S. than in Europe, leading to outperforming European CLO equity investments compared to their U.S. counterparts. Meanwhile, our mezzanine portfolio, both in the U.S. and Europe, held up better. Higher-quality BBs remained well supported by real money investors, resulting in relatively limited price declines during the quarter. While our CLO portfolio had shifted towards a greater concentration in CLO equity in prior months, we have recently identified compelling value in mezzanine tranches again.
Accordingly, we have been redirecting our excess interest cash flows and sale proceeds into attractive BB investments. We believe these investments will help balance the portfolio and shield us from potential increases in credit defaults, given ongoing uncertainties surrounding tariffs and their impact on the fundamental credit landscape moving forward. The outperformance of European assets versus U.S. assets, as well as of mezzanine over equity during the quarter, highlighted the benefits of maintaining a diversified portfolio. We plan to remain active in both the U.S. and Europe, focusing on both equity and mezzanine based on relative value. Overall, we believe the market volatility has been advantageous for EARN.
As previously mentioned, we entered April with capital to deploy. While we experienced some mark-to-market losses in calendar Q1, most of the price declines were driven primarily by widening credit spreads rather than by accelerating realized credit losses. We took an opportunistic approach to our deployment, capitalizing on these wider spreads. Notably, much of the credit widening has significantly retraced in May. Looking ahead, we will continue to prioritize portfolio liquidity and agility, as the current trading environment may require flexibility in response to an uncertain credit backdrop. Now, back to Larry.
Larry Penn: Thank you, Greg. I want to commend Mark Tecotzky and his team for their exceptional job in rotating out of our agency mortgage positions without causing significant impact on net asset value during a particularly challenging market surrounding tariff announcements. We completed the sale of our last mortgage pool on April 7th. In total, our agency mortgage strategy produced positive portfolio income for 2025, amounting to approximately $2.55 million. Conversely, during the same period, the Bloomberg U.S. Agency MBS Index generated a notably negative return in comparison to treasuries. With the conversion now finalized, I am eager to have available capital for our portfolio managers to invest in a compelling market.
Since the conversion on April 1st, we have acquired an additional $51 million in CLO investments. We have also sold several positions at profits that we deemed had become too fully valued. With the agency mortgage pools now liquidated, our debt leverage is now below half a turn. We commenced April with a net asset value of $6.08 per share. Although further credit spread widening in April resulted in additional CLO price declines, the effect on our portfolio was contained, leading us to conclude April with an estimated net asset value ranging from $5.85 to $5.91 per share.
I’m pleased to announce that, similar to many other CLO-focused closed-end funds, we have begun posting a brief tearsheet on our website, where investors can find updates on several of our portfolio metrics as of month-end. We plan to continue sharing these tearsheets on a monthly basis going forward. You can find our monthly tearsheet directly on our homepage, www.ellingtoncredit.com, by clicking on the link labeled monthly NAV and portfolio update. I’ll give you a moment to open up the tearsheet. As you review the page, you’ll find a wealth of information, but I’d like to highlight a few key points.
At the top of the common stock data section, we provide our estimated NAV per share range as of April 30th, centered around $5.88 per share, along with details on our monthly dividend and dividend rate. To the right, in the CLO portfolio underlying loan data section, you’ll find various statistics regarding the corporate loans backing our CLO investments. Further down the page, in the portfolio overview section, we outline the breakdown of our portfolio as of April 30th, indicating that entering May, 18.8% of our total portfolio, approximately $59 million, was held in cash and cash equivalents.
This availability of dry powder positions us well to capitalize on opportunities following the market weakness in April. Additionally, you’ll find the total return performance of our stock in April compared to a selection of relevant indices, whether assessed on a stock price-based total return basis or an NAV-based total economic return basis. We believe our performance in April compared very favorably with other CLO-focused closed-end funds. Moving into May, I want to briefly mention that we have already witnessed a significant amount of credit spread tightening, which has positively impacted our NAV.
As of the previous evening, our total CLO portfolio stood at $284 million, a notable increase from $250 million at the time of our conversion. Despite the prevailing elevated market volatility, we continue to selectively add investments in both CLO mezzanine and CLO equity, and actively trade the portfolio to leverage relative value opportunities across subsectors, all while adhering to our disciplined risk management practices. Even as we deploy capital, we maintain high liquidity levels, enabling us to act decisively should further market dislocations arise. This dynamic market environment is where I believe our active management approach will excel.
As we work to enhance our CLO portfolio, I believe we are well-positioned to drive strong earnings and unlock value for shareholders in the future. Additionally, we aim to incorporate corporate debt into our liability structure later this year, which should positively impact our net investment income. Now, let’s open the floor for questions. Operator, please proceed.
Operator: [Operator Instructions] We will take our first question from Eric Hagen with BTIG.
Eric Hagen: Excellent timing with the divestment of the agency portfolio. If I recall, you mentioned that $50 million of CLOs have been acquired since the conversion. How does the yield on those assets compare to the approximately $250 million that was in the back book? And currently — please forgive me if I missed it. But do you have any dry powder available for deployment, or are you fully invested at this time?
Greg Borenstein: As you can appreciate, the market has shifted in several directions since April 1st. Overall, I would say the weighted average yield we acquired ranged from slightly wider to potentially hundreds of basis points back. It’s crucial to note that we didn’t merely scale up the portfolio on a pro-rata basis. As we discussed earlier, when we began purchasing CLOs, our focus was primarily on discounted mezzanine paper, which we believed offered the best risk-adjusted returns. We have since started to shift more towards equity, particularly in new issues, as the market experienced disruptions.
Moreover, many of the additions have leaned back towards mezzanine. So, simply assessing the overall return may not accurately depict the situation, as the profile of some of the securities we purchased has evolved based on our investment thesis. Thus, it should be analyzed across different sectors. Overall, the yield varied from moderately wider to hundreds of basis points.
Larry Penn: Did you also inquire about…
Eric Hagen: Dry powder…
Larry Penn: Yes, we still possess good dry powder. An interesting aspect of our risk management approach is that we create more dry powder for ourselves. Essentially, we maintain cash reserves that we hold back. As we increase our credit hedges, we effectively enhance our dry powder capacity. When we manage our portfolio risk, increasing credit hedges allows us to expand the asset side of our portfolio. Given that spreads have tightened now, you’ll likely see us implementing more credit hedges soon, which will also facilitate greater dry powder availability. So, we still have ample room to increase our portfolio beyond the current $284 million figure that I mentioned earlier.
Eric Hagen: I assume you are aware of the ongoing discussions in the asset management industry advocating for improved access to private equity in 401(k) plans. What are your thoughts on this? Does it imply a more efficient market with tighter spreads, which would be beneficial, or is the CLO market so substantial and growing rapidly that a significant influx of demand might not disrupt the currently high and attractive returns available in these asset classes?
Larry Penn: I believe it will take some time before we see this affecting the CLO asset class. However, in terms of potential impacts on spreads, Mark or Greg, do you have any insights?
Mark Tecotzky: I would say that the initial effects can be observed not necessarily in the closed-end fund space, although there is certainly significant retail demand. We have seen growth in the ETF sector, particularly with AAA ETFs, which may represent a more appropriate initial entry for such funds. This demand could eventually filter down to CLOs. Additionally, we observed that CLO issuance has remained robust as we transitioned from 2024 into 2025, as demand for AAAs through the AAA ETFs has tightened AAA levels, increasing the attractiveness of securitization.
Thus, it’s a double-edged sword, as while there could be yield compression due to demand, that same demand could also bolster the liability side, creating attractive arbitrage opportunities for equity further down the line. Several factors are at play, and we will have to monitor how the situation develops to determine the true effects.
Operator: We will now take our next question from Crispin Love with Piper Sandler.
Crispin Love: Following up on the dry powder inquiry, you mentioned that you currently hold $284 million in CLOs. What does it look like to be fully deployed, and when do you anticipate achieving full deployment? Were you more aggressive in deploying capital in early to mid-April, given the price movements compared to your initial expectations for redeployment?
Larry Penn: Greg, could you respond to the second part of that question, and I’ll address the first part after?
Greg Borenstein: Certainly! Based on our conversion, we anticipated deploying capital relatively quickly. We noticed that many assets were becoming cheaper towards the end of March. Many market participants would agree that similar bonds trading by the time of the end of April were often better than those at the end of March.
Although it’s difficult to determine the exact timeline, we were indeed more assertive in our deployment during April, given the opportunistic nature of the market. In terms of pace and available dry powder, as Larry mentioned earlier, it largely depends on the level of leverage we choose to utilize. The objective of our credit hedges is not merely to implement a local linear hedge that would detract from dividends. Instead, the purpose of credit hedges in these vehicles is to allow us to use financing on attractive mezzanine or equity investments.
We are mindful of how we approach financing, particularly regarding liquidity in the vehicle. It is vital that we maintain liquidity during shocks or downturns. Therefore, many of our credit hedges are designed to ensure liquidity in such market conditions.
In summary, while we have seen a recovery, we are not being as aggressive as we could be in ensuring that every dollar is at work given our current market sentiments.
Larry Penn: To supplement that, if we take the midpoint of $5.88 per share as our NAV entering May, multiplied by the latest share count we disclosed, that gives us about $220 million in equity. As Greg mentioned, it largely depends on the mix between mezzanine and equity in the portfolio. We have been actively trading and analyzing various subsectors from a rotational perspective. I believe we could easily reach half a turn of leverage, pushing us over the $300 million mark concerning CLOs in the portfolio.
Ultimately, the critical factor will be how we manage risk within the portfolio, which sets the limits on our strategy. Additionally, it’s important to note that we are full derivative users, which necessitates compliance with various tests. While this adds complexity, it also enables us to utilize repos and account for them as derivatives, rather than treating them as senior securities, allowing for greater flexibility regarding leverage as a closed-end fund. In summary, our capacity to increase CLO holdings is more significantly influenced by our risk management and portfolio composition than by conventional leverage restrictions.
Lastly, I want to reiterate that we will explore issuing unsecured debt later this year, which will also contribute to our risk management strategy. This longer-term debt will alleviate some short-term risks associated with repos, thus enabling us to have more assets for each dollar of equity.
Crispin Love: One last question from me. Can you share your latest insights on the trajectory of adjusted distributable earnings (ADE)? Last quarter, you indicated a likely shortfall in covering the dividend in calendar Q2, primarily due to MBS sales and high cash levels prior to full redeployment, with expectations for coverage to resume in calendar Q3. Any updates or additional details?
Larry Penn: We are still following that plan. To clarify, we might experience a slight shortfall this quarter, but I believe we remain on track for the third quarter.
Operator: Thank you. That wraps up today’s Q&A session. We appreciate your participation in Ellington Credit Company’s Q1 2025 financial results conference call. You may now disconnect, and we wish you a wonderful day.
