Ellington Credit Co Q2 FY2025 earnings call

• Credit markets rallied in the third calendar quarter with Fed rate cut, corporate credit and CLO spreads tightened. - Ellington Credit's CLO portfolio ramped up, net investment income increased, and achieved full dividend coverage in September. - Active trading led to repositioning: increased mezzanine debt allocation for better yields and downside protection, reduced new issue equity exposure, favored secondary market acquisitions. - U.S. leveraged loan market had mixed performance by credit quality; European leveraged loan prices lagged. - Active trading provides accurate market info and confidence in NAV valuation.

For calendar Q3, GAAP net income was $0.11 per share and net investment income was $0.23 per share. The weighted average GAAP yield for the quarter on the CLO portfolio was 15.5%. Portfolio net income by CLO subsector was $0.13 from U.S. CLO debt, $0.03 from European CLO debt, $0.08 from U.S. CLO equity, and a slight net loss from European CLO equity. The CLO portfolio was $380 million as of September 30, almost evenly split between mezzanine debt and equity tranches with approximately 14% of total investments in Europe.

• Close to being fully invested, likely to raise long-term unsecured notes in coming weeks, expecting additional capital to be accretive to net investment income and GAAP earnings.

• Credit dispersion and idiosyncratic credit issues in corporate and CLO markets. - High-profile defaults like First Brands can impact portfolios, but CLO structure helps diversify exposure. - Credit hedges are important for downside protection but maintaining them can be expensive.

Q: On hedges and recent moves, A: Increase in hedges due to portfolio size and leverage, used for tail risk protection.

Q: On CLO portfolio decrease, A: Due to quarterly distributions and CLO equity sell-off in October.

Q: On CLO supply and spread environment, A: Dependent on new issue loan supply, likely more reset/refinancing than new issue, AI impacts credit dispersion.

Q: On AI-related credits, A: AI creates winners and losers, affecting credit markets, cautious in middle market due to less active trading.