Ellington Credit Q4 2025 Earnings Call Transcript

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Provided by Quartr
March 5, 2026

Key Takeaways

  • Negative Sentiment: The fund reported a difficult Q4 with a GAAP net loss of $0.56 per share and a quarterly NAV total return of negative 9.1%, with NAV at $5.19 at year-end—CLO equity mark‑to‑market weakness was the primary driver.
  • Positive Sentiment: Management shifted meaningfully toward CLO mezzanine debt (debt holdings approached ~50% of the CLO portfolio from ~33% at conversion), executed active trading (218 trades across nine months), and realized gains from discounted mezzanine redemptions, contributing to relative outperformance.
  • Neutral Sentiment: The firm increased corporate credit hedges to roughly $175 million (about 90% of NAV) to protect against downside — this materially reduces tail risk but imposes an ongoing carry/drag estimated around 1–2% of NAV annually.
  • Positive Sentiment: EARN avoided most new‑issue CLO equity, focused on secondary market opportunities and defensive mezzanine positions, and is exploring issuing long‑term unsecured debt to raise dry powder at an opportune time.
  • Positive Sentiment: Management believes a portion of recent NAV declines are mark‑to‑market from spread widening (not fundamental credit impairment) and expects to leverage active trading, selective equity buys, and deleveraging mezzanine opportunities to rebuild NII and NAV as markets normalize.
AI Generated. May Contain Errors.
Earnings Conference Call
Ellington Credit Q4 2025
00:00 / 00:00

Transcript Sections

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Operator

Please stand by. Your meeting is about to begin. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company Fiscal Quarter ended December 31st, 2025 results conference call. Today's call will be recorded. At this time, all participants have been placed in 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 any time, please press star 1 on your telephone keypad. At any time, if your question has been answered, you may remove yourself from the queue by pressing star 2. Lastly, should you require operator assistance, please press star 0. It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Please go ahead, sir.

Alaael-Deen Shilleh
Alaael-Deen Shilleh
Associate General Counsel at Ellington Credit Company

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 Merna, Chief Financial Officer. Our earnings conference call presentation is available on our website, ellingtoncredit.com.

Alaael-Deen Shilleh
Alaael-Deen Shilleh
Associate General Counsel at Ellington Credit Company

Today's call will track that presentation, and all statements and references to figures are qualified by the important notice in endnotes at the back of the presentation. With that, I'll turn it over to Larry.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

Thanks, Alain. 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. 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 continued to refinance and reprice at tighter yield spreads.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

These factors continued 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 Company, 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. Opportunistic trading contributed positively to results. As shown on slide 3, yield spreads did widen on CLO debt tranches. The move was much more contained than the dislocation seen in CLO equity.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

Last year, following our conversion to a CLO closed-end fund on April first 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 this strategic shift, approximately 70% of our CLO purchases during this nine 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.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

Nevertheless, the proportion of debt in our CLO portfolio grew substantially, ending the year at just under 50%, up from roughly one-third at our April 1st 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 double B-rated tranches at significantly higher yields.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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 six, you can see that we actually recorded positive realized gains in each sub-sector 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.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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. 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.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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 4th quarter was challenging for CLOs broadly, our disciplined and active portfolio management cushioned the impact, drove EARN 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?

Christopher Smernoff
Christopher Smernoff
CFO at Ellington Credit Company

Thanks, Larry. Good morning, everyone. Please turn to slide 4. For the 4th 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 sub-sector. 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. leverage 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 continued 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.

Christopher Smernoff
Christopher Smernoff
CFO at Ellington Credit Company

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 of 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.

Christopher Smernoff
Christopher Smernoff
CFO at Ellington Credit Company

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 31st, 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 30th. Slide 8 provides an overview of the corporate loans underlying our CLO investments. The collateral remains predominantly first lien, floating rate leverage 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%.

Christopher Smernoff
Christopher Smernoff
CFO at Ellington Credit Company

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 sizes skew towards larger borrowers with 44% in facilities over $1.5 billion and a weighted average size of $1.6 billion, which supports liquidity. Slide nine 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 31st. We also maintained a foreign currency hedge portfolio to manage exposure from our European CLO investments.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

Turning to slide 11. At December 31st, 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?

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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, 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. 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.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

Continued dispersion weighed heavily on performance as fundamental issues and 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 US 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.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

In the fourth quarter, CLO new issue volumes were constrained by a weak arbitrage. As noted, the fund continued to avoid new issue equity. There has been 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. 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.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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. 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.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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 leave EARN well-positioned to take advantage of dislocations and generate alpha through periods of volatility. Back to Larry.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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 1st, 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.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

We executed 218 CLO trades during this nine-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 earning 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.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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. We've continued to add mezzanine debt positions, particularly in deleveraging double B tranches. We have also been active recently in exercising CLO call options, generating real-life 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 EARN's remaining portfolio and helped to build up liquidity in a highly volatile environment.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

More than three-quarters 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, 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.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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. 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 would supply us with a significant additional dry powder at a potentially ideal time.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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

Thank you. If you would like to ask a question, please press star one on your telephone keypad. To leave the queue at any time, please press star two. Again, that is star one to ask a question. We'll pause for just a moment to allow questions to queue. Thank you. Our first question will come from Crispin Love with Piper Sandler. Your line is open.

Benjamin Graham
Benjamin Graham
Equity Research Associate at Piper Sandler

Hi, this is Benjamin Graham in for Crispin Love. Thanks for taking the question. You mentioned earlier that your portfolio is very diversified by industry and that no sector exceeds 11% exposure in your portfolio. Obviously there's a lot of negative headline attention around software, et cetera. 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. Thank you.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

Go ahead, Greg.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

Sure. I think the way we think about 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. If you're gonna have large single name exposure, you just have much more idiosyncratic risk. We find this to be far harder to control.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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, you know, percentage of sectors, percentage of, you know, names, things like that, overall, it just becomes more statistical for us to handle the risk. In regards to views on specific sectors, there was 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.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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, you know, appropriately in line.

Benjamin Graham
Benjamin Graham
Equity Research Associate at Piper Sandler

Awesome. Thanks so much for the color there.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

Sure.

Operator

Thank you. Our next question will come from Jason Weaver with Jones Trading. Your line is open.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Hey, guys. Good morning. Thanks for taking my question. First, I wonder if you could help us quantify the proportion of loans underlying the portfolio that are triple C rated or lower.

Company Representative at Ellington Credit Company

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

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

I don't have it at my fingertips, but I think in general, a lot of these operate. 7.5% is a typical CCC bucket in a CLO. I could get you an exact percentage as an underlying look. Obviously, the percentage exposure, I'm getting some feedback, on a deal basis.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Got it.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

'Cause 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.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Sure. Sure, of course.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

The CLO loan index, for example, is about 4.4%. Considering our diversification that we were just talking about in terms of, you know, equity to mezz across a number of deals, with underlying, a lot of underlying loans, you know, 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.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Got it. Okay. thanks for that.

Company Representative at Ellington Credit Company

Yeah. Sorry, I was just gonna say we'll consider adding that to our monthly tear sheet.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Perfect. Okay, 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. Can you help us understand the amount of negative carry from those positions? At, you know, at current levels of high yield, I see something like $0.04 a quarter, but maybe you executed those a lot tighter.

Company Representative at Ellington Credit Company

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. You know, both declines are modest, 12/31 to 1/31. It was, you know, a smaller credit hedge portfolio, in lockstep with a slightly smaller loan portfolio.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Okay. Thanks.

Company Representative at Ellington Credit Company

Greg, and do you wanna comment on the, kind of the drag you're seeing from the credit hedges on a, they're gonna go-forward basis?

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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 gone on this year, for example, it's been a pretty minimal drag just 'cause you've actually seen, 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. 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. I can get you the exact as of today, 'cause obviously this number shifts around-

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Yeah.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

quite a bit depending upon where things widen to. I would note that we've been very active in repositioning and rotating, considering all this volatility. We're mindful, when we take a look at it, you know, some of these shorts may be in a more liquid high yield index. Some of these shorts may be in loan form, you know, as we've seen very specific loan issues there. You know, as well as on the out of the money side, you know, different types of puts and pairs. I think that overall, as I'm trying to give you an answer off the, you know, a rough, off the top of my head on this, you're seeing probably an overall drag which amounts to something to 1%-2% of fund NAV per annum.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

We think that considering the environments 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, you know, should really kind of persist throughout the year.

Company Representative at Ellington Credit Company

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

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Got it. That's helpful. Sort of you know, decomposition of it would be interesting to see. As you know, we're just looking at high yield CDX, and that's what you put as equivalence. Obviously, there's much more basis of using individual positions. No, I appreciate the color.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

Sure. I think it will still be published, you know?

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Yeah.

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

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

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

It's a lot of, you know, 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, you know, each one of these deals can be hundreds of loans. 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. Unless we think there's an outsized exposure to a single name that exists for some reason, and maybe we wanna take on that, in general, we look to avoid single name bets on the long side and single name bets on the short side.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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 wanna protect and some sort of mixture of those, you know, we'll pivot around and adjust based upon as our portfolio and our loans change, right? The way we see things and the way that we think that that helps sort of protect and manage our risk.

Jason Weaver
Jason Weaver
Managing Director at JonesTrading

Got it. Well, I really appreciate that color. Thanks for all the assistance.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

Mm-hmm.

Operator

Thank you. Our next question will come from Eric Hagen with BTIG. Your line is open.

Eric Hagen
Eric Hagen
Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG

Hey, thanks. Good morning. All right. 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, you know, spread widening in the CLO market?

Laurence Penn
Laurence Penn
CEO at Ellington Credit Company

Greg?

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

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. Listen, I think the concerns around loans, concerns around where interest rates may go, right, has certainly led to, you know, what may drive that. Floating rate funds, you know, There's other ETFs that I think have similar to, you know, 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.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

You know, 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? As there's a much more active market, as price discovery settles in, it's really beneficial in terms of being able to actually actively trade and maneuver. It's been something we've honestly looked forward to.

Eric Hagen
Eric Hagen
Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG

Okay. That's, that's interesting. Thank you. Next one is maybe more related kind of to the general mechanics in working through potential defaults and what the timeline and the structure to work through those defaults looks like. 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?

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

No, no. Historically, if you were to take a look at leveraged loans, these recoveries were well above zero. I mean, recoveries have been pushed down over time. I think that, you know, historically, I think there's a lot of data out on this. You know, 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 par. We look at something called par burn, right? Which is just what's the overall kind of loss of a 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's a distressed exchange, it's not a technical default. And there's generally, you know, some haircut.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

If you look at CLOs, you know, 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, you know, helps to kinda translate to that. When loans are defaulting, you are seeing real recoveries. Now, it varies. Some certainly have been close to 0. You know, others have been much higher. Those are all very deal specific, right? This is where you get into, you know, do you have liability management exercises? How are the sponsors treating things? Are there in-groups and out-groups? You know, defaults and losses have picked up as I think we saw some of these issues.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

CLOs have seen a lot less than in 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, you know, are in terms of bid and offer. We are mindful of where losses could go. They were elevated last year above historical averages. 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. I don't know if that directly answers the question.

Eric Hagen
Eric Hagen
Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG

Yeah, no. That was really helpful detail. Thank you guys so much. Appreciate you.

Gregory Borenstein
Gregory Borenstein
Portfolio Manager at Ellington Credit Company

Sure.

Operator

That was our final question for today. We thank you for your participation in the Ellington Credit Company fiscal quarter ended December 31st, 2025 results conference call. You may now disconnect the line and have a great day.

Executives
    • Alaael-Deen Shilleh
      Alaael-Deen Shilleh
      Associate General Counsel
    • Christopher Smernoff
      Christopher Smernoff
      CFO
    • Gregory Borenstein
      Gregory Borenstein
      Portfolio Manager
    • Laurence Penn
      Laurence Penn
      CEO
    • Company Representative
Analysts
    • Benjamin Graham
      Equity Research Associate at Piper Sandler
    • Eric Hagen
      Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG
    • Jason Weaver
      Managing Director at JonesTrading
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