EARN - NYSE

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company Fiscal Quarter ended December 31, 2025 Results Conference Call. Today's call will be recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Please go ahead, sir.

Thank you. Before we begin, I would 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, so they should not be considered to be predictions of future events. The fund undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Credit Company; Greg Borenstein, Portfolio Manager; and Chris 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 to figures are qualified by the important notice in end notes at the back of the presentation. With that, I'll turn it over to Larry.

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. Please turn to Slide 3. The fourth calendar quarter was the most challenging market environment for CLO equity since mid-2022 and before that, since the COVID crisis. Thanks to our active and disciplined portfolio management strategy, Ellington Credit was able to limit fund losses to approximately 9% of NAV, once again outperforming the overall peer set. The CLO equity market was impacted by many of the same factors in the leveraged loan market, particularly elevated credit dispersion and ongoing coupon spread compression. Those same factors that dominated performance in prior quarters. Put simply, weaker credits underperformed, while stronger borrowers continue to refinance and reprice at tighter yield spreads. These factors continue to pressure leveraged loan prices and reduce excess interest across the vast majority of the CLO market. Together, these dynamics weighed heavily on CLO equity performance, leading to lower projected cash flows and weaker mark-to-market valuations with year-end technical selling further compounding the weakness. As estimated by Nomura Research, the median CLO equity return for the quarter was negative 9% and for the full year, negative 14%. For Ellington Credit, our relative up in credit bias and active trading strategy helped mitigate these headwinds. CLO mezzanine debt tranches, which have been a focus of our investment activity in recent months, proved more resilient and opportunistic trading contributed positively to results. As shown on Slide 3, yield spreads did widen on CLO debt tranches, but the move was much more contained than the dislocation seen in CLO equity. Last year, following our conversion to a CLO closed-end fund on April 1 and continuing through the fourth calendar quarter, we steadily increased our allocation to CLO mezzanine debt tranches, which we believed offered a compelling balance of yield and downside protection by virtue of their structural credit enhancement. Reflecting the strategic shift, approximately 70% of our CLO purchases during this 9-month period were mezzanine debt tranches. Meanwhile, we also identified select CLO equity opportunities in the secondary market while generally avoiding new issue CLO equity where pricing dynamics were mostly unattractive. In the fourth quarter, we also benefited as we did throughout much of last year from several mezzanine positions being redeemed at par that we had purchased at discounts, generating realized gains. Those redemptions, coupled with opportunistic trading, offset some of the portfolio growth from new mezzanine investment activity. Nevertheless, the proportion of debt in our CLO portfolio grew substantially, ending the year at just under 50%, up from roughly 1/3 at our April 1 conversion. Active trading once again played an important role in our relative outperformance. We executed 47 unique CLO trades during the quarter, excluding deal liquidations, and we actively managed our credit hedges. We redeployed our October interest payments and equity distributions into higher-quality deleveraging mezzanine debt positions while trimming higher dollar priced, longer spread duration mezzanine debt profiles where we saw less favorable risk reward. We also took advantage of notable spread concessions in the new issue debt market to add BB-rated tranches at significantly higher yields. On the equity side, we remain selective, steering clear of more levered and lower quality profiles. This active approach allowed us to mitigate downside pressure, harvest gains opportunistically and reposition the portfolio for better risk-adjusted returns. The real-time information that comes with this level of trading activity is especially valuable in these high volatility market environments. On Slide 6, you can see that we actually recorded positive realized gains in each subsector for the quarter. All that said, as previously reported in our monthly NAV updates, the magnitude of the market-wide decline in CLO equity valuations led to a drop in the fund's NAV and therefore, a net quarterly loss overall. Not all losses are created equal, however. While price declines emanating from underlying loan losses and from refinancing and repricings of premium loans are irreversible, a portion of the decline in our quarterly NAV was driven by credit spread widening rather than realized credit impairment or fundamental deterioration. As a result, a portion of these mark-to-market losses could reverse if and when market conditions normalize. Now please turn to Slide 10 for an overview of our credit hedges, which we increased significantly during the fourth quarter. With corporate credit spreads remaining tight relative to CLO spreads, we were able to add this protection efficiently and at attractive levels. As shown on Slide 10, we increased our credit hedge portfolio to roughly $175 million of high-yield CDX bond equivalents by year-end. That's approximately 90% of our NAV. So these hedges represent a very significant level of protection. Credit markets have had no shortage of headlines to digest from the collapses of Tricolor and First Brands to growing concern over software sector borrowers facing AI-driven disruption. In short, while the fourth quarter was challenging for CLOs broadly, our disciplined and active portfolio management cushion the impact, drove EARN's relative outperformance and positioned us to play offense in what we believe is an increasingly opportunity-rich investment environment as we move forward into 2026. I'll now turn it over to Chris to discuss the financial results in more detail. Chris?

Thanks, Larry, and good morning, everyone. Please turn to Slide 4. For the fourth calendar quarter, we reported a GAAP net loss of $0.56 per share. On Slide 6, you can see a breakout of portfolio net income by CLO subsector. Significant mark-to-market losses on CLO equity drove our net loss for the quarter, while CLO mezzanine debt held up better by comparison. In the U.S. leveraged loan market, performance diverged sharply by credit quality during the quarter. Lower rated CCC loans came under significant pressure from elevated CLO reset and liquidation activity and rising defaults while premium priced loans continue to refinance at par. Against that backdrop, CLO debt spreads widened and CLO equity bore the brunt of the weakness as spread compression and credit deterioration among weaker loans drove simultaneous declines in both excess interest and underlying asset values. Higher quality seasoned mezzanine tranches proved more resilient. In Europe, the story was more nuanced as loans underperformed their U.S. counterparts, while CLO debt tranche spreads for the most part, held up better by comparison. Within our CLO mezzanine debt portfolio, net interest income and trading gains, together with the positive impact of deal calls on positions owned at discounts to par offset the majority of mark-to-market write-downs. Credit hedges were also a drag on results, reflecting strong performance in the broader credit and equity markets during the period. Net interest income declined by $0.02 sequentially to $0.21 per share for the quarter, driven by lower asset yields and portfolio turnover. The weighted average GAAP yield for the quarter on our CLO portfolio was 13.7%, down from 15.5% in the prior quarter. Slide 7 illustrates a modest sequential decline in the size of our overall CLO portfolio. During the quarter, we made new purchases totaling $66 million, 60% in CLO debt and 40% in CLO equity, and we sold $19 million of CLOs, consistent with our active trading approach. At December 31, CLO equity represented 52% of total CLO holdings, roughly unchanged from the prior quarter, while CLO -- while European CLO investments accounted for 12%, down from 14% at September 30. 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 health care with no single sector exceeding 11%. Loan maturities are spread over several years with the largest concentrations in 2028 and 2031 and low concentrations of near-term maturities, producing a weighted average loan maturity of 4.3 years. Facility size is skewed towards larger borrowers with 44% in facilities over $1.5 billion and a weighted average size of $1.6 billion, which supports liquidity. Slide 9 provides further detail on our underlying loan collateral. Slide 10 presents a snapshot of our credit hedges as of year-end. As Larry noted, we further increased our corporate credit hedges during the quarter with that portfolio equal to roughly 90% of our net asset value as of December 31. We also maintained a foreign currency hedge portfolio to manage exposure from our European CLO investments. Turning to Slide 11. At December 31, our NAV was $5.19 per share and cash and cash equivalents totaled $24.3 million. Our net asset value based total return for the quarter was negative 9.1%. With that, I'll pass it over to Greg to discuss the CLO market environment, our portfolio positioning and our outlook. Greg?

Thanks, Chris. It's a pleasure to speak with everyone today. Overall, calendar Q4 was challenging for junior CLO tranches, especially CLO equity. Many of the themes that weighed on CLO equity through 2025 continued and even accelerated in Q4, further hurting performance. While CLO mezzanine tranches also saw muted returns, they outperformed CLO equity and EARN's increased allocation to mezz benefited the fund and helped mitigate some losses. Further, the weakness in CLO equity was more pronounced in the new issue space than in the secondary market. And once again, EARN stayed away from participating in new issue equity transactions during the quarter. We've only participated in one new issue equity transaction in the 11 months following our conversion. Calendar Q4 was one of the most difficult quarters for CLO equity in recent memory. Continued dispersion weighed heavily on performance as fundamental issues in lower quality credits paired with continued coupon spread compression and better quality credits pressured both interest cash flows and NAV valuations. In addition, because CLO liabilities generally have longer non-call periods than the underlying loans, CLO managers had limited ability to refinance or reset debt tranches at lower financing costs. As a result, CLOs were largely unable to capture the benefit of lower rates at the liability level, which could otherwise have helped offset the effects of coupon spread compression on equity cash flows. That said, entering 2026, more than 40% of EARN's U.S. CLO portfolio consists of deals scheduled to exit their non-call periods before year-end. As these deals become refinanceable, liability refinancings and resets at tighter spreads could help mitigate the drag from coupon spread compression should the market conditions permit. In the fourth quarter, CLO new issue volumes were constrained by a weak arbitrage. And as noted, the fund continued to avoid new issue equity. There has increased attention on the impact of manager-controlled captive funds on new issue pricing dynamics. While that discussion has merit, we believe there are also significant structural and technical factors that warrant caution on new issue equity. We have seen more attractive opportunities in secondary trading, which continues to play to Ellington's strength as an active trader. The subordination levels and structural protections remain paramount in guarding against continued idiosyncratic and sector-specific credit issues. We continue to favor defensive CLO mezzanine positions, which greatly outperformed equity on the quarter. Mezzanine debt is far less vulnerable to coupon spread compression than equity. That said, following the recent drop in loan prices, only about 15% of the universe were priced above par as of the end of February. Prepayment risk on CLO equity has definitely abated. That 15% level is down from 57% coming into the year and marks the lowest level since last April's tariff shocks. Given our active trading approach and relative value framework, we continually reassess our mezz to equity weighting as the opportunity set evolves. In Europe, spreads widened less than on debt tranches relative to the U.S. You can see that on Slide 3, and we were able to monetize gains and rotate capital, reducing our overall European exposure as a result. While similar credit dispersion dynamics emerged during the fourth quarter, CLO equity in Europe avoided the same degree of spread compression seen in the U.S. So far in 2026, CLO equity and mezzanine to a lesser degree, has continued to underperform with weakness spreading into broader markets amid concerns around software and AI-related credits. More than ever, I believe that our active trading, focus on liquidity, disciplined risk management and use of tail hedges, we've earned well positioned to take advantage of dislocations and generate alpha through periods of volatility. Now back to Larry.

Thanks, Greg. First, I'd like to step back from the quarterly results and reflect on the full 2025 calendar year because I think the bigger picture provides important context for where we stand today. 2025 was a transformative year for Ellington Credit. We completed our conversion to a CLO closed-end fund on April 1. And in the days that followed, we efficiently liquidated all remaining mortgage-related assets with minimal NAV impact despite all the market turmoil around the tariff announcements. Given all that volatility, we are particularly proud of how smoothly this went. It was a clean and well-executed transition that positioned us to focus exclusively on the CLO opportunity set going forward. Following conversion, we methodically built out our CLO portfolio, expanding it by nearly 50% to $370 million by calendar year-end and adding credit hedges in lockstep with that expansion. We executed 218 CLO trades during this 9-month period, comprising $272 million of purchases and $63 million of sales, excluding redemptions. Relative to other CLO-focused closed-end funds, we delivered both a meaningfully stronger and significantly less volatile earnings stream, a direct reflection of our disciplined and highly active approach to portfolio construction and risk management. Second, I'll turn to our activity so far in 2026. January and February continued to reflect more of the same difficult market dynamics. CLO equity remained under significant pressure with the underlying credit concerns outlined earlier continuing to weigh on sentiment. Meanwhile, mezzanine debt continued to hold up comparatively well. For January, I'm pleased to report that EARN once again outperformed its peer set, ending the month with an NAV per share of $5.04. February was an even tougher month for the sector, which we think has created many more opportunities. In terms of portfolio activity, our overall portfolio was smaller given the decline in NAV, but we've continued to add mezzanine debt positions, particularly in deleveraging BB tranches. We have also been active recently in exercising CLO call options, generating realized gains on debt tranches purchased at discounts to par. In addition, we've recently collapsed certain CLOs where we held discount positions, which has further strengthened the credit profile of our remaining portfolio and helped to build up liquidity in a highly volatile environment. While more than 3/4 of our purchases in 2026 have been mezzanine debt, we have also selectively increased our CLO equity holdings where we see compelling value, such as deals with mispriced call optionality where we believe the sell-off has been overdone and entry points are attractive. We have also been disciplined about maintaining very substantial credit hedges. Given the dispersion we've seen in the corporate credit market, our credit hedges haven't yet been able to offset the declines in CLO equity prices, but we continue to view them as an indispensable part of our portfolio management strategy. This is all the more true today given that overall yield spreads in the corporate credit markets continue to be relatively tight when viewed on a historical basis. Finally, looking ahead, we are focused on rebuilding net investment income and net asset value as we deploy capital into what is looking more and more like a distressed market. For more passive strategy, that environment only creates headwinds. For us, we see it as fertile ground, creating the kind of relative value and trading opportunities where active trading and disciplined risk management can add meaningful value. Furthermore, and as noted earlier, we continue to believe that a substantial portion of the recent price declines are reversible since they reflect yield spread widening rather than fundamental credit impairment. Equally importantly, we have yet to tap the capital markets as a closed-end fund issuer. We are exploring the potential issuance of long-term unsecured debt in the coming weeks, which will supply us with a significant additional dry powder at a potentially ideal time. We believe the current environment characterized by dislocations and expanding relative value opportunities is especially well suited to our active investing and trading approach, and we look forward to updating you on our progress next quarter. With that, let's open the floor to Q&A. Operator, please proceed.

[Operator Instructions] Our first question will come from Crispin Love with Piper Sandler.

This is Ben Graham in for Crispin Love. You mentioned earlier that your portfolio is very diversified by industry and that no sector exceeds 11% exposure in your portfolio. And obviously, there's a lot of negative headline attention around software, et cetera. So I'm just wondering what your stance is on sentiment there. And then if there are any other sectors that you're particularly excited about.

Go ahead, Greg.

Sure. So I think the way we think about this, this is a lot of the benefit of CLOs. There's a lot of diversification by sector and then there's diversification by name. You see some headlines with what's going on maybe in areas of private credit. But in some of those vehicles, things can be pretty chunky. The same thing goes for certain areas of the middle market and private credit CLO market even. So if you're going to have large single name exposure, you just have much more idiosyncratic risk. We find this to be far harder to control. And so given our whole risk management framework and process, I think we generally feel more comfortable that as long as our portfolio is representative of the overall market, be it percentage of sectors, percentage of names, things like that. Overall, it just becomes more statistical for us to handle the risk in regards to views on specific sectors, there is certainly damage done in software, and the sector has sold off a lot. I think from the way that we look at the credits, the way that we speak to our managers who are looking at the credits, there's going to be winners and losers, which has been the story of a lot of things over the last year. And so in some cases, you might have names that have real warning signs and we should be concerned about and others may be pushed down in sympathy with managers reducing overall sector exposure. I don't think we have a strong view if loan prices are specifically weak or cheap on a name-by-name basis within the sector. I think it's just important to keep these exposures appropriately in line.

Our next question will come from Jason Weaver with JonesTrading.

First, I wonder if you could help us quantify the proportion of loans underlying the portfolio that are CCC rated or lower.

Greg, do you happen to have that at your fingertips?

I don't have it at my fingertips. But I think in general, a lot of these operate around 7.5% is a typical CCC bucket in the CLO. And I could get you an exact percentage at an underlying look. Obviously, the percentage exposure -- I'm getting some feedback on a deal basis. Because if we own, for example, a well-supported mezzanine tranche, if the deal has a certain amount of CCC exposure, we're not necessarily exposed as much as we are if we own an equity tranche. So but the CLO loan index, for example, is about 4.4%. And so considering our diversification that we were just talking about in terms of equity demand across a number of deals with underlying -- a lot of underlying loans underneath all these, I would guess that we're tracking not too far off from that 4.4% number you see in the CLO market in total.

Sorry, I was just going to say we'll consider adding that to our monthly term sheet.

Okay. And then turning back over to the -- I'm getting some feedback. Turning back to the credit hedges. I think in January, the update said you had trimmed the $175 million position a bit. But can you help us understand the amount of negative carry from those positions? At current levels of high yield, I see something like $0.04 a quarter, but maybe you executed those a lot tighter.

Well, I think first, maybe, Greg, you can speak to the carry question. In terms of trimming the size of the credit portfolio, the loan portfolio also declined. Both declines are modest, 12/31 to 1/31, but it was a smaller credit hedge portfolio in lockstep with a slightly smaller loan portfolio. Greg, do you want to comment on the kind of the drag you're seeing from the credit hedges on a go-forward basis?

Sure. I think overall, there's what we've experienced and then there's what we've had so far. I think if you look when you discuss what's going on this year, for example, it's been a pretty minimal drag just because you've actually -- at least year-to-date, some widening in high yield, right? Also, you have to remember that we really focus these hedges for larger drawdown scenarios. We're very mindful of the drag. And so I think the protection we have is much more in sort of these larger shocks, if you take a look at the holdings that we have in there versus what the drag is on a run rate. So I can get you the exact as of today because obviously, this number shifts around quite a bit depending upon where things widen into. But I would note that we've been very active in repositioning and rotating considering all this volatility. And we're mindful when we take a look at it, some of these shorts may be in a more liquid high-yield index. Some of these shorts may be in loan form as we've seen very specific loan issues there as well as on the out of the money side, different types of puts and payers. I think that overall, as I'm trying to give you an answer off a rough -- off the top of my head on this, you're seeing probably an overall drag which amounts to something to 1% to 2% of fund NAV per annum. So we think that considering the environment and the risk right now, it's a small or a very reasonable amount to pay for the type of protection we'll get if volatility or any sort of drawdown should really kind of persist throughout the year.

Even 2% would be less than $0.01 a month, well worth it.

We do, once again, to reiterate by keeping the protection focused more out-of-the-money options, it really does substantially reduce the cost to believe it's protected. To locally more heavily protect, I think the issues become, one, the cost obviously will weigh heavily. And then two, the basis risk, right? The issues that happen that you're exposed to in terms of really tail load names on the capital structure is not easily controllable when you talk about using more liquid indices, right? You would have seen, for example, loans underperform things like high yield or underperform anything in equities. And so we're also mindful around the accuracy and efficacy of the hedge we use, right? And there are a lot of different basis risks. And so we are mindful.

Got it. That's helpful. And the sort of decomposition of it would be interesting to see. We're just looking at it from looking at high-yield CDX, and that's what you put as equivalents. But obviously, there's much more basis of using individual positions. So I appreciate the color.

But it's not...

All be published...

Yes. It's not so much single name positions though. That's not what we're doing. It is more in broad-based CDX and similar instruments.

It's a lot of -- to Larry's point, you'll see different types of indices, potentially ETFs, right? The CLO market, we own a large number of tranches backed by each one of these deals can be hundreds of loans. And so it really creates a lot of diversification, which allows us to be a little more statistical. By using indices as well, it allows us to similarly represent that, right? We're not here. It is not our strength to be making single name bets as we were saying. So unless we think there's an outsized exposure to a single name that exists for some reason and maybe we want to take on that. In general, we look to avoid single name bets on the long side and single name bets on the short side. But when you look at what we generally have, just to give you a set of what we generally use in our arsenal, CDX high-yield index out of the money IWM puts, loan ETF shorts, credit index tranches, loan ETF puts, right? I think it's just sort of all in that area of the market that we think offers different values in how we want to protect and some sort of mixture of those will pivot around and adjust based upon as our portfolio and our longs change, right, the way we see things and the way that we think that, that helps sort of protect and manage our risk.

Our next question will come from Eric Hagen with BTIG.

All right. So obviously, a lot of attention on redemptions for asset managers right now. The question is how much of a knock-on effect do you see between redemptions and conditions and spread widening in the CLO market?

Greg?

Well, I think that one thing to point to is maybe some redemptions you've seen in things like JAAA, right? That ETF will actually sort of move as flows come in and out, and it's more easily trackable. And so listen, I think the concerns around loans, concerns around where interest rates may go, right, has certainly led to what may drive that. Floating rate funds, there's other ETFs that I think have similar to JAAA, which is the big one in the space, have experienced a similar situation. I mean this is what we're sort of looking for as an active trader, it creates great opportunity for us with flows moving from A to B, lots of folks repositioning their portfolios. There's a lot of rotations even from some of these ETFs where it's not necessarily inflows, outflows, but maybe they're rotating, right? And as there's much more active market as price discovery settles in, it's really beneficial in terms of being able to actually actively trade to maneuver. So it's been something we've honestly look forward to.

Okay. That's interesting. Next one is maybe more related kind of to the general mechanics in working through potential defaults and what the time line and the structure to work through those defaults looks like. Is it -- would you chalk it up to basically being like a binary outcome with respect to recovering potential proceeds? Or is the severity almost always 100% in the CLO market?

No, no, no. Historically, if you were to take a look at leveraged loans, these recoveries are well above 0. I mean recoveries have been pushed down over time. I think that historically, I think there's a lot of data out on this. Maybe it was up around 70%. It's probably eased off of that a little bit. I think that -- sorry, if you take a look at CLOs, for example, if you look at -- we look at something called par burn, right, which is just what's the overall kind of loss of the deal just because now you have to be mindful that sometimes there's some loss that's not classified as a default. For example, if something is a distressed exchange, it's not a technical default, and there's generally some haircut. But if you look at CLOs with underlying leveraged loans, the average par burn or loss rate as we sort of see it from a pragmatic standpoint, is about 75 basis points annually, which helps to kind of translate to that. So when loans are defaulting, you are seeing real recoveries. Now it varies. Some certainly have been close to 0. Others have been much higher. And so those are all very deal specific, right? And this is where you get into do you have liability management exercises? How are the sponsors treating things? Are there in groups and out groups? I think overall, we try to be -- defaults and losses have picked up as I think we saw some of these issues. CLOs have seen a lot less than the private credit, right? These broadly syndicated loans that have real transparency on them that do price actively day-to-day, right? You generally know where most of these are in terms of bid and offer. But we are mindful of where losses could go to. They were elevated last year above historical averages. And as you see sector-specific concerns, I think that one reason we are mindful and tepid on increasing equity exposure is that if you're a first loss CLO, you are exposed directly to any defaults that may occur. So I don't know if that directly answers the question, but...