Ellington Credit Company (EARN) Q4 2025 Earnings Call Summary

1Key Financial Results and Metrics

GAAP Net Loss: $0.56 per share for Q4 2025.

Net Asset Value (NAV): Decreased to $5.19 per share, with a total return of negative 9.1% for the quarter.

Portfolio Composition: Approximately 52% CLO equity and 48% CLO debt, with a significant increase in CLO mezzanine debt holdings.

Net Interest Income: Declined to $0.21 per share, down from $0.23 in the previous quarter, attributed to lower asset yields and portfolio turnover.

CLO Portfolio Size: Totaled $370 million by year-end, reflecting a nearly 50% increase since the conversion to a CLO closed-end fund.

2Strategic Updates and Business Highlights

Portfolio Management: Active trading strategy led to limiting fund losses to approximately 9% of NAV, outperforming peers.

Focus on Mezzanine Debt: Increased allocation to CLO mezzanine debt tranches (70% of CLO purchases in the last nine months), which provided better resilience compared to CLO equity.

Credit Hedging: Expanded credit hedge portfolio to approximately $175 million, representing about 90% of NAV, to mitigate risks from market volatility.

Trading Activity: Executed 47 unique CLO trades in Q4, enhancing portfolio positioning and liquidity.

3Forward Guidance and Outlook

Market Conditions: Entering 2026, EARN anticipates continued challenges in the CLO equity market but sees potential opportunities for recovery as over 40% of its U.S. CLO portfolio will exit non-call periods.

Investment Strategy: Plans to focus on rebuilding net investment income and NAV by capitalizing on distressed market conditions, with a disciplined approach to portfolio management.

Potential Capital Raising: Exploring issuance of long-term unsecured debt to enhance liquidity and investment capacity.

4Bad News, Challenges, or Points of Concern

Market Environment: Q4 was described as the most challenging for CLO equity since mid-2022, with a median CLO equity return of negative 9% for the quarter and negative 14% for the year.

Credit Quality Concerns: Increased pressure on lower-rated loans (CCC and below), with significant defaults impacting overall performance.

NAV Decline: Driven by mark-to-market losses in CLO equity, with concerns about the sustainability of cash flows amid ongoing credit spread widening.

Hedging Costs: Credit hedges have incurred a drag on results, estimated at 1-2% of fund NAV annually, raising questions about their effectiveness in offsetting declines.

5Notable Q&A Insights

Sector Diversification: Management emphasized the importance of diversification across sectors to mitigate risks associated with specific industries, particularly in light of negative sentiment around software and AI-related credits.

Loan Quality Metrics: Estimated CCC-rated loans exposure in the portfolio is consistent with broader market averages, suggesting a cautious approach to credit risk.

Redemptions Impact: Management acknowledged the potential knock-on effects of redemptions in the CLO market but noted that active trading strategies could capitalize on market dislocations.

Recovery Rates: Historically, recoveries from defaulted loans in CLOs are above zero, with a typical loss rate of around 75 basis points annually, indicating a more favorable outlook for recovery compared to private credit markets. This summary encapsulates the key points from the earnings call, providing a balanced view of EARN's performance, strategic direction, and market challenges.