Ellington Credit Confirms April 1 Conversion Date

Rhea-AI Summary

Ellington Credit Company (NYSE: EARN) has secured all necessary approvals to convert to a Delaware-registered closed-end fund, effective April 1, 2025. Following the conversion, the company plans to:

• Divest remaining Agency MBS pools
• Acquire additional CLOs
• Operate under the Investment Company Act of 1940

CEO Laurence Penn expressed optimism about the transition, suggesting the timing could be advantageous given current market volatility and potentially create attractive investment opportunities. The company aims to enhance its ability to generate strong risk-adjusted returns and create additional shareholder value through this strategic transformation.

Positive

• Strategic portfolio transformation to potentially higher-yielding CLO investments
• Timing advantage during market volatility for new investment opportunities
• Regulatory transition to enhance risk-adjusted returns potential

Negative

• Execution risks associated with portfolio restructuring
• Market risks from planned liquidation of Agency MBS positions
• Uncertainty around success of new investment strategy focused on CLOs

Insights

Investment Structure Analyst

Ellington Credit's conversion to a Delaware-registered closed-end fund represents a significant structural transformation that will fundamentally alter how the company operates and invests. This regulatory shift brings several important implications:

The closed-end fund structure differs materially from the company's previous REIT status, potentially offering greater flexibility in capital deployment while introducing new constraints under the Investment Company Act of 1940. Shareholders should recognize that closed-end funds typically trade at discounts to Net Asset Value (NAV) - a different valuation dynamic than REITs experience.

The planned portfolio transformation - selling Agency MBS and increasing CLO exposure - signals a deliberate shift toward potentially higher-yielding but more complex credit instruments. CLOs typically offer better returns than Agency MBS but introduce increased credit risk and complexity. This portfolio restructuring will alter the company's risk profile, yield characteristics, and interest rate sensitivity.

Management's timing commentary suggests they see opportunity in current market conditions, potentially allowing them to sell Agency MBS before any potential rate cuts might impact values while acquiring CLOs at attractive entry points amid volatility. However, execution risk during this transition period is substantial as markets can shift rapidly.

The structure conversion required both board and shareholder approval, indicating strong internal alignment on this strategic direction. This consensus suggests the benefits were viewed as compelling enough to justify the transition costs and potential disruption.

Fixed Income Strategist

The planned portfolio shift from Agency MBS to CLOs represents a fundamental change in Ellington's investment approach with several key market implications:

Agency MBS and CLOs occupy different risk-return positions in the fixed income universe. Agency MBS offer government-backed credit protection but face prepayment and extension risks tied to interest rate movements. CLOs, structured as tranched securities backed by corporate loans, offer potentially higher yields but introduce direct corporate credit exposure and have more complex cash flow waterfall structures.

This transition aligns with CEO Penn's comment about timing and volatility. With corporate credit spreads having widened in certain segments, entry points for CLO investments may be attractive. Simultaneously, selling Agency MBS before potential rate cuts could help avoid prepayment-driven value compression.

The shift requires specialized expertise. CLO management demands sophisticated credit analysis capabilities and understanding of complex indenture provisions. Investors must evaluate whether Ellington's team possesses the requisite skills to execute this strategy effectively in a different asset class.

For income-focused investors, this change will likely alter the dividend profile. CLOs typically generate higher cash yields but with different payment characteristics and risk profiles than Agency MBS. The cash flow timing, stability, and tax treatment may all change under the new structure and portfolio composition.

The execution of this transition - particularly the sequencing and market timing of portfolio sales and acquisitions - will significantly impact initial performance under the new structure.

OLD GREENWICH, Conn.--(BUSINESS WIRE)-- Ellington Credit Company (NYSE: EARN) (the “Company”) announced today it has obtained all necessary approvals from its Board of Trustees and shareholders to convert to a Delaware-registered closed-end fund, effective April 1, 2025 (the “Conversion”). Upon effectiveness of the Conversion, the Company intends to sell its remaining Agency MBS pools, acquire additional CLOs, and operate in compliance with the Investment Company Act of 1940.

Laurence Penn, Chief Executive Officer and President, stated: “We are excited to begin this new chapter as a closed-end fund, which we believe will enhance our ability to generate strong risk-adjusted returns and unlock additional value for shareholders. Given recent market volatility, our timing may prove advantageous, positioning us for a potentially attractive investment environment in the months ahead.”

Cautionary Statement Regarding Forward-Looking Statements

This release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "may," "expect," "project," "believe," "intend," "seek," "plan" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. Forward-looking statements are based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from those stated or implied by our forward-looking statements: changes in interest rates and the market value of our investments, market volatility, changes in the default rates on corporate loans, our ability to borrow to finance our assets, changes in government regulations affecting our business, a deterioration in the market for collateralized loan obligations, our ability to convert to a closed-end fund/RIC, and other changes in market conditions and economic trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, as stated above, forward-looking statements are subject to numerous risks and uncertainties, including, among other things, those described under Item 1A of our Annual Report on Form 10-K, which can be accessed through the link to our SEC filings under "For Investors" on our website (at www.ellingtoncredit.com) or at the SEC's website (www.sec.gov). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected or implied may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q, 10-K and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

This release and the information contained herein do not constitute an offer of any securities or solicitation of an offer to purchase securities.

View source version on businesswire.com: https://www.businesswire.com/news/home/20250320359138/en/

Investors:

Ellington Credit Company

Investor Relations

(203) 409-3773

info@ellingtoncredit.com

or

Media:

Amanda Shpiner/Grace Cartwright

Gasthalter & Co.

for Ellington Credit Company

(212) 257-4170

Ellington@gasthalter.com

Source: Ellington Credit Company

FAQ

When will Ellington Credit (EARN) complete its conversion to a closed-end fund?

Ellington Credit will convert to a Delaware-registered closed-end fund on April 1, 2025, after receiving all necessary approvals from its Board of Trustees and shareholders.

What changes will EARN make to its portfolio after the conversion?

After conversion, EARN will sell its remaining Agency MBS pools and increase its CLO investments while operating under the Investment Company Act of 1940.

How will the conversion to a closed-end fund benefit EARN shareholders?

The conversion is expected to enhance the company's ability to generate strong risk-adjusted returns and unlock additional value for shareholders, particularly in the current volatile market environment.

What regulatory framework will EARN operate under after the conversion?

Following the conversion, EARN will operate as a closed-end fund in compliance with the Investment Company Act of 1940.