Ellington Credit Company Stock

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company First Fiscal Quarter Ended June 30, 2026 Results Conference Call. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

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 as they should not be considered to be predictions of future events. The company 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 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 and end notes at the back of the presentation. With that, I'll turn the call 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, for short. Please turn to Slide 3. The second calendar quarter marked an important inflection point for EARN's portfolio. The market sell-off earlier in the year widened credit spreads and significantly expanded the CLO opportunity set, and we moved quickly, issuing unsecured debt in late March, rapidly deploying the proceeds in April and actively repositioning the portfolio throughout. Those actions proved to be well timed.

As the second quarter progressed, credit fundamentals improved and active trading and rotation allowed us to further upgrade portfolio quality. For the quarter, we generated an economic return of 8.1% non-annualized, increased our NAV per share and strengthened the portfolio's long-term return profile even as we reduced leverage. Total equity also grew, adding to our balance sheet capacity and financial flexibility. We believe that we are well positioned to grow net investment income in the months ahead as our NII for the full quarter did not yet fully reflect the earnings power of our expanded and repositioned portfolio as of the end of the quarter.

The second quarter was about building earnings capacity, and the upcoming quarters are about converting that capacity into higher net investment income and earnings while maintaining our discipline around credit quality, liquidity and NAV preservation. We see 3 primary drivers of net investment income growth. First, deploying our excess liquidity. Greg will discuss the attractive investment opportunities we're seeing, and that's where we're putting our excess liquidity to work. Second, prudently adding leverage.

Our strong balance sheet, larger equity base and meaningful remaining borrowing capacity give us the flexibility to further expand the portfolio beyond its current size. We also have the ability to issue common equity above NAV when market conditions permit, finding another source of accretive growth capital. And third, portfolio rotation. We expect to continue rotating capital into higher-yielding investments, pursuing attractive CLO refinancings and resets and actively trading across the CLO capital structure. These 3 drivers, all of which are largely within our control, give us a clear path to grow earnings in the coming months.

To be clear, we do not need to reach for yield in order to grow earnings. As Greg will explain, the portfolio repositioning we completed during the second quarter allowed us to increase income potential while actually improving credit quality and in many cases, reducing risk. With that, I'll turn it over to Chris, who will walk through the quarter's financial results in more detail, including how our balance sheet and portfolio are positioned to support NII growth.

Thanks, Larry, and good morning, everyone. Please turn to Slide 4. For the quarter ended June 30, 2026, we reported GAAP net income of $0.33 per share and net investment income of $0.16 per share. Adjusted net investment income was $0.15 per share. Our NAV increased to $4.18 per share at June 30, which, together with the $0.24 per share of distributions during the quarter, produced an economic return of 8.1%. As Larry discussed, significant capital deployment and portfolio repositioning occurred during the quarter. So the resulting increase in earnings capacity was not yet fully reflected in second quarter NII.

Please turn to Slide 6 for a breakdown of our quarterly results by investment category. Our CLO portfolio generated strong results across both debt and equity. NII was complemented by substantial net unrealized gains in U.S. and European CLO debt and U.S. CLO equity as credit spreads tightened and underlying loan performance improved. We also generated trading gains on mezzanine debt and benefited from calls on several discounted positions. These gains were partially offset by losses on our corporate credit hedges as broader credit spreads tightened during the quarter. Most of that hedge drag occurred in April when the credit markets rebounded sharply and during the same period in which our long CLO portfolio generated substantial mark-to-market gains.

Let's go over a few different yield measures since each tells us something different. The weighted average GAAP yield on the entire CLO portfolio was 11.9% during the quarter, while the weighted average yield on our incremental purchases during the quarter was higher at approximately 14.9%. As of June 30, the weighted average yield projected on the portfolio measured using fair value rather than cost was approximately 16.6%, reflecting the stronger forward return profile of our repositioned portfolio.

Meanwhile, attractive reinvestment yields have continued with our weighted average purchase yield so far in the third quarter at approximately 16.8%. Importantly, these higher reinvestment yields do not come from taking on more risk. Rather, they reflect in large part, improving fundamentals in the underlying loan market as well as attractive entry points created by technical selling and capital outflows. As these higher yields work their way through the portfolio, they should provide a tailwind for NII.

Please turn to Slide 7. We purchased $64.8 million of CLO investments and sold $35.1 million, growing the CLO portfolio to $334.1 million at June 30 from $307.9 million at March 31. That 8.5% net portfolio growth actually understates the level of activity during the quarter. Significant cash distributions, calls and paydowns provided additional capital for reinvestment while active portfolio rotation further increased turnover, including sales of positions where we believe much of the remaining upside had been realized.

As you can see on this slide, our portfolio rotation mostly happened within sectors as opposed to cross sectors with CLO equity representing approximately 54% of the overall CLO portfolio at quarter end, up only slightly from 53% and with the European investments remaining at approximately 10% of the overall CLO portfolio. Slides 8 and 9 provide additional detail on the corporate loans underlying our CLO investments. Our CLO collateral remains overwhelmingly first lien floating rate leveraged loans, representing roughly 95% of the underlying assets. These loans are well diversified across industries and issuers 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 2031 and 2032 and the minimal near-term maturities, resulting in a weighted average loan maturity of 4.4 years. Facility sizes skew towards larger borrowers with a weighted average size of $1.9 billion, which supports secondary market liquidity.

Please turn to Slide 10 for an overview of our credit hedges. At June 30, our credit hedge portfolio represented approximately $132 million of high-yield CDX notional equivalents, down from approximately $188 million at March 31. Greg will discuss the drivers of that reduction. We also continue to maintain foreign currency hedges associated with our European CLO investments. Turning to Slide 11. Total net asset value was $159.7 million at June 30, up from $153.8 million at March 31, and NAV per share increased to $4.18 from $4.09. Cash and cash equivalents totaled $23.5 million. Reverse repo borrowings declined by nearly 9% to $151.9 million from $166.3 million, while unsecured notes outstanding remained unchanged at $54 million.

Lower borrowings and a higher net asset value brought our leverage ratios down. Our debt-to-equity declined to 1.29x at June 30 from 1.43x at March 31, leaving us with a stronger, more flexible balance sheet and additional borrowing capacity entering the third quarter. Together with the higher reinvestment yields I mentioned earlier, that additional balance sheet capacity reinforces our ability to grow NII. With that, I'll turn the call over to Greg to discuss the CLO market environment, portfolio positioning and outlook. Greg?

Thanks, Chris. It's a pleasure speaking with everyone again. As Larry and Chris described, Q2 was a great quarter for EARN and provided a particularly attractive opportunity set. Sharp CLO market volatility in Q1, driven first by weakness in software loans and followed by disruption from the Iran war drove an increase in actionable trading opportunities, and our debt issuance put us in a stronger position to capitalize on them. As always, we weigh opportunities across CLO mezz and equity and actively maneuvered the book with 64 trades during the quarter, not including hedges or deal calls.

In particular, we found CLO equity in the secondary market, specifically in the U.S. to be a compelling opportunity. CLO equity NAVs were depressed entering the quarter, but defaults were not meaningfully elevated. In fact, default rates and distressed debt exchange activity both declined modestly in the quarter and loan prices recovered. Further, despite the recovery in loan prices, the share of loans trading above par remained relatively low and much of the strength in loans coming from discounted names. With fewer loans trading above par, par erosion and excess spread compression posed less of a risk, benefiting longer tenor equity profiles with robust interest cash flow streams.

This was a welcome change from prior quarters when loan repricing rates were extremely high and reinvestment opportunities for CLO collateral managers were limited. In response to these developments, we continued shifting towards longer tenor, higher cash flow structures during the quarter, while reducing exposure to shorter tenor positions with greater sensitivity to loan price volatility. Meanwhile, as the quarter marched on and CLO debt spreads recovered, CLO equity in deals that were approaching or passing their first call date saw meaningful benefits from the opportunity to refinance liabilities that had originally been set at wider spreads.

EARN's CLO equity profile benefited from several of these refinancings and resets during the quarter. This favorable dynamic has persisted so far in Q3 with CLO debt spreads remaining resilient. By contrast, the new issue market for CLO equity remains unattractive in our view, and we again purchased no new issue equity during the quarter. CLO mezz has been a relatively steady performer for EARN, and that trend continued into the second quarter. We rotated out of lower coupon, shorter spread duration positions trading near or above par and into higher coupon, wider spread investments with stronger underlying credit fundamentals.

Mezz currently offers an attractive combination of yield, downside protection and liquidity. Our mezz portfolio had a great quarter, led by high net interest margins, and we continued -- we also continue to benefit from calls of shorter-dated mezz bonds. We turn over the mezz portfolio quite actively. And with high-yield corporate bond spreads continuing to trade around 300 basis points, CLO BBs at roughly 2 to 3x that spread continue to offer compelling relative value. Furthermore, these are spreads to maturity, while many of these bonds offer additional upside from deal calls or resets.

As a result, higher quality, higher coupon BB at discounts to par has been one of our favorite areas for incremental investments. In Europe, we remain underweight, particularly in equity, which represented less than 1% of the portfolio at quarter end. Concerns about a tightening loan market on the back of increased CLO issuance make us wary of a repeat of what U.S. CLO equity experienced in 2025 with NIM compression and reduced equity cash flows. Between our active repositioning in both CLO equity and mezzanine and the favorable tailwinds in both sectors, I believe our portfolio's long-term earnings power is substantially stronger than it was 3 months ago.

Lastly, I'd like to highlight the role of our hedges. We trade our portfolio actively, but it can take time to source CLO positions that meet our investment criteria. When we completed our debt deal in March, one of our biggest risks was whether we could deploy the proceeds at wider spread levels before the market potentially tightened back. Given that the cost of the debt was already locked in, this motivated us to hold a smaller hedge portfolio while we were still deploying the proceeds, and this was the primary driver of the decline in hedge notional amount that Chris referenced earlier. This reduced the run rate drag from our hedges during the quarter.

And meanwhile, we continue to carry the CLO positions we previously acquired at wider yield spread levels. Combined with our deployment of the proceeds during the quarter, this all helped minimize the earnings drag associated with the new capital. Looking forward, we're more cautious now that the market has returned to somewhat tighter levels, but loan fundamentals are improving and the CLO equity market looks as attractive as it has in some time. We will continue to value liquidity and the ability to maneuver the book. Now back to Larry.

As Greg's comments make clear, we continue to see plenty of opportunities to actively manage and improve the portfolio. We are already seeing the benefits in our third quarter results. I encourage investors to review the July portfolio update that we posted last night to our website. As reflected in that update, EARN's positive momentum continued into July. We generated an economic return of approximately 3.1% for the month or $0.13 per share. This more than covered our $0.08 monthly distribution and enabled NAV per share to increase by approximately $0.05 in July, using the midpoint of the NAV range reported in that update.

I can also report that adjusted NII for July was approximately $0.06 per share, representing a monthly run rate that's about 20% higher than our second quarter figure. This shows that the earnings capacity we built during the second quarter is beginning to translate into incremental NII. And as mentioned, we still see significant upside from there as we deploy our remaining balance sheet capacity and continue to rotate the portfolio. On the topic of rotation, we have remained highly active in the third quarter, executing 38 CLO trades in just the past 6 weeks. This activity reflects the same portfolio discipline we've applied consistently. We've exited positions where we believe we've already captured most of the value, and we've redeployed that capital into investments that we believe offer better yields, stronger structures and better risk-adjusted returns.

Our overall portfolio size is roughly unchanged so far in the third quarter as new investment activity has roughly offset stronger-than-projected deal call activity, natural return of investment on CLO equity and opportunistic sales. In conclusion, we believe that the current investment environment is ideally suited for EARN to keep growing net investment income and generating attractive total returns. Even if volatility returns, we believe that our active trading, flexible balance sheet and disciplined hedging strategy will once again allow us to capitalize on market dislocations and create value for shareholders. In either case, we believe that EARN is well positioned to generate attractive long-term risk-adjusted returns across a wide range of market environments. Thank you again for your continued interest and support of Ellington Credit Company. Operator, please open the line for questions.

[Operator Instructions] And our first question today comes from Crispin Love with Piper Sandler.

So you definitely took advantage of some of the dislocation in the prior quarter. And you did comment that the June quarter didn't fully reflect the expanded repositioned portfolio. And Larry, you just called out the $0.06 run rate in adjusted net investment income in July. Can you just discuss the potential trajectory as you look forward as you talked about you could add some leverage, could continue to tap the ATM? And then just with all that in mind, how comfortable you are with the current dividend level?

Yes. Start with the dividend, comfortable with the level, and I'm going to reiterate what I think I said on last earnings call, which is we see us getting to -- into the low 20s on net investment income, adjusted net investment income.

Okay. So getting to the low 20s over the next couple of quarters?

Yes, sure.

Okay. And then just looking at the July update, the CLO portfolio is down a little relative to June, the debt portfolio down and CLO equity up slightly. Can you just share some of the thinking there, some of the drivers of the portfolio? Is that more timing of selling more than anything else? You did call out some recent caution? And then just how close are you to being fully invested today?

Greg, do you want to talk about our sort of timing strategy there?

Sure. I mean some of it might just be a function of July was a good month and how much of it comes from distributions and if there's a little bit of PO slippage there. I think overall, when we take a look, I think we see kind of going forward, are you asking about just what's going on in the market and where we want to deploy and just strategy going forward, I guess, or just from a performance base?

Yes.

Okay. Yes. I mean, listen, I think it was clearly a very good opportunity coming out of a lot of the volatility earlier in the year to buy secondary cash flows with very strong CLO equity profiles that have been oversold. I think as we move forward, we're going to start to rotate things that maybe we played for more of a total return that were maybe more of a price discount, rotating out of things that have tightened to a degree that had more total return upside. I think one thing to remember with this portfolio is, obviously, we referenced it on the mezz end -- not everything is just to buy a strong carry coupon.

There's total return that we put in from trading that has to be a large part of our portfolio return. And so I think that as we see some just limited total return on positions that have realized and gone up, we're probably going to rotate into, I think I mentioned, where we do like equity into stronger, higher cash flow, good fundamental longer-dated positions. And I think on the mezz side, cleaner, longer-dated BBs. I think that we were probably getting paid more to take advantage of maybe we'll call it, third quartile top type names in the mezz market through a lot of Q2.

Great. And then if I could just kind of squeeze in one -- last one just on leverage. You did comment a couple of times just potentially selectively adding leverage. I think you've been in the 1.3x to 1.4x range in recent quarters. Can you just share a little bit more color there, just how -- where you could be comfortable getting to on the leverage side?

Sure. Crispin, it's JR. So leverage is also a function of what kind of credit hedges we have in place as they all kind of go together. We mentioned debt equity was 1.43x at March 31, and it was 1.29x at June 30 debt equity. I could see it getting back closer to the March 31 level as we think we have the ability to grow the portfolio another 5%, 10% from the June 30 numbers.

Yes. I would just add a little bit on what I was sort of talking about then to JR's point. With a lot of the distributions that you get in July and some of these deal calls and sales, there's a healthy amount of capacity to be able to keep reinvesting into here. And so that will kind of play into it as well.

Yes, those are lumpy, things like deal calls, spreads will tighten, we'll have an opportunity. So the -- I think you're going to see -- it's going to be the kind of 2 steps forward, 1 step back, right? So it's just going to be some natural variation, we see it on a daily basis, obviously, but just when you're looking at the month-end snapshots. But we think we're definitely headed in that direction. We mentioned we have excess liquidity. So that's obviously the first source of increasing the portfolio size and leverage.

That was our final question for today. We thank you for participating in the Ellington Credit Company First Fiscal Quarter ended June 30, 2026 Results Conference Call.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company Fourth Fiscal Quarter ended March 31, 2026 Results Conference Call. Today's call is being recorded. [Operator Instructions].

It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

Thank you. Before we begin, I'd 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 Bornstein, 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 are qualified by the important notice and 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, we often refer to by its New York Stock Exchange ticker E-A-R-N or EARN for sure. Please turn to Slide 3.

The first calendar quarter of 2026 was marked by continued volatility in the CLO market. As we previously communicated in our monthly portfolio updates, the broader market environment exerted significant pressure on asset valuations and led to a decline in our NAV, but our active trading and up in the capital stack bias, once again drove our outperformance versus peers.

We believe that the first quarter largely represented a technical dislocation that reset valuations and expanded the opportunity set rather than a fundamental deterioration in underlying credit quality. Much of the asset valuation declines in the sector stem from yield spread widening and heavy selling pressure in CLO mezzanine and equity tranches amid thin liquidity and concerns around software sector exposure as opposed to any broad-based weakening and borrower fundamentals.

Importantly, we were able to issue debt capital at the end of March, which enabled us to move quickly to capitalize on this opportunity-rich environment by deploying those proceeds promptly and opportunistically. Market conditions have subsequently improved so far in the second quarter, and this has been a tailwind for what is shaping up to be a strong quarter. I will cover the details of that debt capital raise and deployment as well as our performance in April shortly.

Let's start by reviewing our results for the first quarter. The quarter began on a constructive note, with credit spreads tightening and leveraged loan prices rising early in the new year. But that initial momentum faded in late February as concerned over AI-driven disruption in the software sector which is a small but meaningful component of most CLO collateral pools triggered a sharp decline in those credits. By quarter end, U.S. and European leveraged loan prices had fallen by more than 2% from their January peaks.

This weakness, amplified by geopolitical tensions, fueled a broader risk off sentiment that widens spreads on CLO debt tranches as shown on Slide 3. While the senior AAA through single A-rated CLO tranches held up relatively well, CLO mezzanine debt came under significant selling pressure in February and March. With lower rated tranches, particularly BB-rated tranches, experiencing sharp yield spread widening. CLO equity faced multiple headwinds, including compressed excess spread from a loan repricing wave in January, wider market clearing yields and concerns surrounding those lower-quality loan borrowers.

As estimated by Nomura Research, the median CLO equity return for the quarter was negative 13%. That said, many valuation declines, particularly in CLO equity, occurred on like trading volume. And, in our view, reflected technical market dislocations and liquidity-driven price weakness rather than deterioration in underlying fundamentals or broad-based credit impairment.

For EARN, unrealized losses on CLO equity assets were the primary driver of the NAV decline in the first quarter, more than offsetting net investment income, trading gains and gains from mezzanine tranche redemptions. Turning to our capital structure. In late March, the fund issued $54 million of 8.5% 5-year senior unsecured notes. This transaction strengthened our balance sheet by extending our liability profile adding non-mark-to-market financing and providing dry powder to capitalize on a dislocated market.

At March 31, our CLO portfolio totaled $308 million, and we held a sizable $58 million in cash. Consistent with our positioning throughout the volatility, we prioritized CLO mezzanine debt over equity during the quarter. favoring the subordination levels and structural protections afforded by debt tranches, while staying disciplined in our hedging strategy. As illustrated on Slide 10, and we increased our credit hedge portfolio to approximately $187 million of high-yield CDX notional equivalents at March 31, up from $175 million at year-end.

With overall corporate credit spreads remaining tight relative to CLO spreads, we were able to add this protection at compelling levels on both a relative value basis and an absolute value basis. Following the significant spread widening in the latter part of the first quarter, market conditions improved materially in April and into May. Real money buyers have come back into the market, improving liquidity and driving CLO yield spreads tighter.

From our standpoint, the sell-off has reinvigorated the opportunity set. Prepayments and repricings have slowed, partially relieving the excess spread compression experienced in 2025, investment yields have moved higher, and CLO managers can again build par and preserve excess spread by acquiring performing loans at discounted prices, a dynamic that enhances the long-term return potential for CLO equity investors.

In addition, as a meaningful portion of our CLO equity portfolio exits its noncall period, refinancing and reset opportunities should enhance underlying cash flows, further improving our asset yields and supporting future growth in our net investment income. These factors created an attractive market environment for deployment. We responded to this favorable environment by rapidly investing the majority of our dry powder into new opportunities with deployment substantially complete by the end of April.

Improved secondary market liquidity has also allowed us to be highly active in portfolio construction. In mezzanine debt, we have rotated out of many lower coupon investments priced near par, where we believe the market is overstating the probability of a near-term call, and we have moved into higher coupon wider spread opportunities with stronger underlying credit fundamentals. In equity, we have added longer duration, high cash flow structures with solid covenant cushions while reducing exposure to shorter duration, more highly leveraged physicians with greater sensitivity to low price volatility.

These recent maneuvers contributed to our strong monthly economic return of nearly 7% in April and position us for improved earnings capacity as we rebuild net investment income and as we continue rotating out of investments with limited upside into more attractive risk-adjusted opportunities. 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 quarter ended March 31, 2026, which concluded our inaugural fiscal year as a CLO closed-end fund, we reported a GAAP net loss of $0.86 per share. As detailed on Slide 6, the primary driver was mark-to-market losses in CLO equity, while CLO mezzanine debt proved comparatively more resilient. As Larry discussed, the first quarter was characterized by a sharp risk-off move that disproportionately impacted lower rated CLO securities.

So mezzanine debt, particularly BB-rated tranches experienced significant yield spread widening and selling pressure, while CLO equity was pressured even more severely by lower excess spread water market clearing yields and heightened concerns around more vulnerable borrowers. These dynamics drove a meaningful mark-to-market volatility across the sector despite relatively stable underlying credit fundamentals. Within our CLO mezzanine debt portfolio, net investment income and trading gains together with the positive impact of deal calls of positions owned at discounts to par offset a portion of the mark-to-market write-downs.

Credit hedges were also a moderate drag on results. Adjusted net investment income declined by $0.02 sequentially to $0.19 per share for the quarter, driven by lower asset yields on our CLO equity positions. The weighted average cost yield for the quarter on our CLO portfolio was 12.5%, down from 13.7% in the prior quarter, primarily driven by lower projected cash flows. As illustrated on Slide 7, the size of our overall CLO portfolio declined during the quarter, driven by net sales, paydowns and mark-to-market reductions.

Consistent with our active trading approach, we executed 44 distinct trades during the period, purchasing $30.7 million of investments, 93% in CLO debt and 7% in CLO equity and selling $34.2 million. At March 31, CLO equity represented 53% of total CLO holdings, up slightly from 52% at year-end while -- while European CLO investments accounted for 10% down to 12% at December 31. These figures do not capture the impact of deploying the proceeds from the unsecured note transaction, which closed at quarter end and was substantially deployed by the end of April.

During April, we continued actively repositioning the portfolio. And as of April 30, our CLO portfolio has grown by more than 6% to approximately $328 million overall. 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 health care, with no single sector exceeding 11%.

The loan maturities are spread over several years with the largest concentrations in 2028 and 2031 and minimal near-term maturities and resulting in an average -- weighted average loan maturity of 4.3 years. Facility sizes skewed towards larger borrowers with a weighted average size of $1.7 billion which supports secondary market liquidity. Slide 9 provides further detail on the underlying loan collateral.

Notably, the weighted average junior overcollateralization cushion on our CLO equity tranches only declined by points quarter-over-quarter to 4.29%, further evidence that the Q1 selloff was more technical than fundamental in nature. Slide 10 presents a snapshot of our credit hedges as of March 31. As noted earlier, we further increased our corporate credit hedges during the quarter with that portfolio reaching $187 million in high-yield CDX notional equivalents at quarter end, up from $175 million at December 31. We also continue to maintain a foreign currency hedge portfolio to manage exposure from our European CLO investments.

Turning to Slide 11. Our NAV at March 31 was $4.09 per share and cash and cash equivalents totaled $57.7 million. On March 30, we issued $54 million of 8.5% 5-year senior unsecured notes, which trade on the New York Stock Exchange under the ticker ELLA and incurred approximately $2.3 million of issuance costs, which were fully expensed during the quarter.

As noted earlier, the deployment of the proceeds was substantially complete by the end of April with most of the proceeds deployed into new CLO investments and the balance used to repay short-term secured borrowings. As of April 30, the estimated range on our NAV per share was $4.26 a to $4.32 with a midpoint of $4.29. With that, I'll turn 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. Calendar Q1 was an eventful quarter, presenting both challenges and opportunities. While January was stable, February and March saw both credit and broader market selloffs. Initially, concerns in the software sector drove underperformance in portfolios of the loan market. Leverage loans across sectors then weakened in February and made concerns surrounding private credit and direct lending.

Those pressures were compounded in March when geopolitical conflict led to further declines across broader markets and risk premia increased globally. These largely technical sell-offs ultimately enhance the opportunity set, particularly as EARN completed its first bond deal at the end of Q1. Much of the story in the CLO market through 2025 was the pain of prepayments in the loan market and 2026 began in much the same way. With the repricing wave in early January that drove the share of loans trading above par from 58% at the end of December to 26% at the end of January per Morningstar leaving investors hopeful that the worst of the prepayment wave was behind them.

From there, a software-led sell-off in loans combined with macro shocks from the Iran War, led the Morningstar LSTA U.S. leveraged loan index to drop nearly 2.5 points in price to lows reached in early March. While U.S. loans rebounded by $0.46 from those lows by quarter end, February and March saw price declines in both junior mezzanine and equity CLO tranches. Concerns around credit dispersion persisted and CLO equity in particular, was poorly bid. Not surprisingly, CLO repricing is plummeted, providing some much-needed relief to excess spread.

This dearth of demand created one of the more attractive buying opportunities and secondary CLO equity in some time. And we took advantage by deploying liquidity generated from our hedges rotating out of fully priced mezzanine positions and most significantly, issuing unsecured debt and then deploying the proceeds. The investment opportunity was not just limited to CLO equity as we saw many compelling offerings in mezzanine debt as well. The CLO market dynamics in Q1 were very different from those in Q4 of last year.

In Q4, a significant portion of the price declines were crystallized through spread compression in loans and moderate fundamental losses. In contrast, we believe that most of the CLO price declines in Q1 were technical in nature, driven primarily by spread widening. In our view, the Q1 drawdown represents a compelling opportunity that not only has already benefited in so far in Q2 as reflected in our improved NAV at April month end, but should also benefit us in the months ahead.

As markets have stabilized, secondary trading volumes and CLOs have also normalized, which has allowed us to rotate the portfolio and improve positioning. While CLO equity presented an interesting opportunity in the secondary market in April, we have gradually seen valuations in that sector become less compelling as the market has tightened. In addition, with a number of repricing eligible loans estimated by PitchBook to be around 3% of the loan index as of May 8, spread compression concerns have reemerged, albeit to a much lesser extent than in Q4.

Lastly, we continue to believe that new issue CLO equity remains less compelling, given more attractive risk-adjusted returns available in the secondary markets. And given the limited ability to create attractive cash flow profiles, so our activity has remained muted in that sector. Now back to Larry.

Thanks, Greg. The past year has been productive and eventful for EARN to say the least. We completed our RIC conversion. We successfully transitioned the portfolio out of mortgage-backed securities and into CLO investments with minimal impact to NAV, and we thoughtfully scale the CLO portfolio. Expanding it by 23% year-over-year. Nearly 3/4 of our CLO purchases have been mezzanine debt tranches, underscoring our up in credit bias, particularly during the challenging past 6 months.

In addition, we executed more than 260 trades over the course of the year to capture relative value across the CLO capital structure. At the same time, we strengthened our capital structure through the issuance of long-term unsecured notes, and we built a substantial credit hedging portfolio designed to mitigate downside risk and support opportunistic investing. As of March 31, our fiscal year-end, the high-yield CDX notional equivalents represented by our credit hedges actually exceeded our NAV, which I view as strong evidence of our conservative approach.

We believe that AI-driven disruption, tariffs, geopolitical uncertainty and recession concerns continue to present real risks, and our diversification and active hedging and trading are specifically designed to mitigate these risks. For the full fiscal year, we declared total distributions of $0.96 per common share. And while unrealized mark-to-market losses resulted in a net loss overall, we believe that our underlying portfolio remains fundamentally sound and that many of these markdowns were technical in nature. We remain confident in the earnings prospects of our growing CLO portfolio and a robust hedging program.

Even back to the recovery we've seen in our portfolio so far in the second quarter, we believe that a meaningful portion of the recent price declines remains reversible with potential for further recovery as credit spreads continue to normalize. Relative to other CLO focused closed-end funds, we have delivered stronger and less volatile earnings over the past 12 months, reflecting our disciplined and highly active approach to portfolio construction and risk management. We are particularly pleased with the timing and execution of our unsecured note offering, raising capital at the end of March enabled us to deploy into a dislocated market at highly attractive levels.

And it is encouraging to see the market's recognition of the strength of [ Burn's ] credit story and risk management discipline. Since mid-April, our unsecured notes have consistently traded at a premium to their issue price, even at today's higher treasury yields. As noted earlier, we believe that the market environment has shifted in our favor. With higher reinvestment yields and improving market sentiment, we see a stronger foundation for continued growth.

We entered the new fiscal year with Apple liquidity and a flexible balance sheet that supports increased earnings capacity and the momentum in April and into May has reinforced our confidence in our ability to generate attractive total returns as the year progresses. Our balanced portfolio approach, mezzanine debt for stability, equity for upside, hedging for downside protection and active trading to capture relative value positions us well across a range of market environments.

More than ever, we believe that our focus on liquidity, active trading, disciplined risk management and tail risk hedging will enable us to capitalize on dislocations and generate alpha through periods of volatility.

Thank you for your time and your continued support of Ellington credit. And with that, let's open the floor to Q&A. Operator, please proceed.

[Operator Instructions]. And our first question today comes from Crispin Love with Piper Sandler.

Larry, you said on it a little, but can you discuss just dry powder, you did the debt offering at the end of the quarter. it seems like much of that has been deployed through May. What do you have to deploy now?

And then just how close are you [indiscernible].

Hey, Chrispin. It's Jay. I can take that. So we've made the point that through April, we're substantially deployed on those unsecured note proceeds. So we saw the sell-off through March and a kind of a golden opportunity to capitalize. And so we were pretty quick to deploy and kind of deploy rapidly in new investments and replacing some short-term secured borrowings.

You can see on our April 1 page from Monday night that the portfolio is up about $20 million month-over-month. And so that's net of some sales, that's net of some paydowns and just some principal return on underlying investments. Looking forward, I think that again, the proceeds are mostly deployed. We probably have a little bit of room to add secured borrowings on the margin, but I would characterize the proceeds from the notes is kind of deployed and kind of invest at this point.

Yes. And I think it'll be probably more about recharging our adjusted net investment income through rotations, especially out of, as we mentioned, certain types of of equity profiles into other types of equity promises, especially will make a very meaningful change.

Okay. Great. That's helpful. And then first quarter -- first calendar were very challenging for a lot of the reasons you discussed. Just on the outlook here. Second quarter so far, it seems constructive based on your comments. And then Larry, on just recharging adjusted net investment income. Can you talk about your confidence in covering the dividend with adjusted NII over the near to intermediate term?

Yes. So look, I think we -- obviously, we just raised the debt capital at the end of March. So we're not talking about April, I think after this current quarter is over, right, that's when you'll see the momentum in our adjusted net investment income, I think, sort of be back on the upswing, right? Given the timing of our debt deal. And I think that our next step is to get that adjusted NII for the quarter into the low 20s. That's going to be our next step.

And I think that once it's there, through just from that and from actively trading the portfolio and we are active traders and there's -- the opportunities are, we think, much better than they've been. We'll be where we want to be, which is we'll be paying a high dividend and hopefully, with minimum or no book value erosion. I mean that's always our goal.

That was our final question for today. We thank you for participating in the Ellington Credit Company Fourth Fiscal Quarter ended March 31, 2026 Results Conference Call. You may disconnect your lines, and have a nice day.

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...

That was our final question for today. We thank you for your participation in the Ellington Credit Company Fiscal Quarter ended December 31, 2025 Results Conference Call. You may now disconnect the line and have a great day.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Credit Company Second Fiscal Quarter ended September 30, 2025 Results Conference Call. Today's call is being recorded. [Operator Instructions]

It is now my pleasure to turn the floor over to Alaael-Deen Shilleh, Associate General Counsel. Sir, you may begin.

Thank you. Before we begin, I'd 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 company 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 call -- 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 and 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 for short.

Please turn to Slide 3. The credit markets generally rallied during the third calendar quarter, supported by a dovish shift from the Federal Reserve, which delivered its first interest rate cut for the year in September. Most corporate credit and CLO spreads tightened overall, as shown here on Slide 3, and that was even despite some notable pockets of weak credit performance in the high-yield corporate bond and leveraged loan markets. Major equity index is also advanced on expectations of further monetary easing.

Turning now to Slide 4. Ellington Credit delivered another strong quarter against this backdrop. Our CLO portfolio ramp-up continued at a steady pace, and our net investment income rose accordingly. Our results also benefited from several CLO note redemptions at par on discounted purchases as well as our robust trading activity with more than 90 distinct CLO trades executed during the quarter.

Finally, I'm very pleased to announce that Ellington Credit Company achieved full dividend coverage from net investment income in September, underscoring the earnings power of our portfolio as we get closer to being fully invested.

Active trading remains at the core of our investment approach. And we believe it enables us to capitalize on mispricing to manage risk more effectively and to continually reposition the portfolio for optimal relative value.

This past quarter, we saw yield compression between the CLO debt tranche markets and the leveraged loan markets, and that led us to reposition our portfolio in 2 important ways: First, this yield compression led us to increase our portfolio allocation to mezzanine debt, gaining more attractive yields on a relative value basis, especially with the downside protection they offer. Second, the yield compression led us to reduce our exposure to new issue equity. Instead, we gained similar exposures, but at better pricing in secondary market acquisitions of longer duration equity.

Another advantage of frequent trading is that it provides more accurate and more actionable information on real-time market conditions and it improves our valuation process, as Greg will discuss later. Our predisposition towards active trading also highlights an advantage of EARN's relatively modest size with $225 million of equity to invest rather than say, $1 billion or more, we can remain nimble, rotate the portfolio decisively and be highly selective in our investments without feeling compelled to own the market.

Our portfolio maneuvers this past quarter echoed many of our moves from the prior quarter. Looking back over the last 2 quarters, so dating back to our April 1 conversion to a closed-end fund, approximately 70% of our net CLO purchases have been of mezzanine debt tranches, reflecting our deliberate move up in credit quality. We believe that mezzanine debt tranches currently offer a compelling combination of yield and downside protection, complementing the equity positions we hold.

We've also leaned more heavily into the secondary market where relative value opportunities are often more compelling than a new issue. As I mentioned, we've been especially favoring secondary market acquisitions in the case of CLO equity.

As shown on Slide 7, as of September 30, our $380 million CLO portfolio was almost evenly split between mezzanine debt and equity tranches with about 14% of total investments in Europe.

With that, I'll hand it over to Chris to review our financial results in more detail. Chris?

Thanks, Larry, and good morning, everyone. Please turn back to Slide 4. For calendar Q3, we reported GAAP net income of $0.11 per share and net investment income of $0.23 per share. The weighted average GAAP yield for the quarter on our CLO portfolio was 15.5%.

On Slide 6, you can see a breakout of our portfolio net income by CLO subsector, $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. Strong net investment income across subsectors was complemented by net realized and unrealized gains on CLO debt and partially offset by net realized and unrealized losses on CLO equity and credit hedges.

In the U.S. leveraged loan market, overall index prices were broadly unchanged, but performance diverged sharply by credit quality. Lower triple -- sorry, lower quality, CCC-rated loans felt several points amid isolated default concerns, while B-rated loans advanced on sustained CLO demand, further highlighting the theme of credit dispersion. Callable higher-quality loans continue to be repriced at lower rates with price premiums on those loans giving way to new issuance at par with tighter spreads.

In Europe, leveraged loan prices lagged the U.S., largely due to more extensive repricing activity. Despite the mixed loan backdrop, U.S. and European CLO debt spreads generally tightened, supported by steady capital inflows and limited new CLO issuance. Seasoned mezzanine debt outperformed as loan prepayment and repricing activity remained elevated. CLO equity also benefited from tightening debt spreads, enabling equity investors to refinance or reset liabilities and lower coupons, though this was partially offset in both the U.S. and Europe by continued loan repricing and isolated default concerns.

Slide 7 provides detail on our CLO portfolio, highlighting the continued sequential growth. In total, the CLO portfolio increased by 20% to $380 million. During the quarter, we made new purchases totaling $160 million, 62% of that in CLO debt and 38% in CLO equity and sold $29 million of CLOs, consistent with our active trading approach. At September 30, CLO equity represented 51% of total CLO holdings, down from 53% coming into the quarter, while European CLO investments accounted for 14%, roughly unchanged quarter-over-quarter.

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. Industry exposure is well diversified, led by tech, financial services and health care with no single sector exceeding 11%. Maturities are spread over several years with the largest concentrations in 2028 and 2031 and limited near-term maturities, producing a weighted average loan maturity of 4.2 years. Facility sizes skewed towards lower borrowers with 42% in facilities over $1.5 billion with a weighted average size of $1.6 billion supporting liquidity.

Slide 9 provides further detail on our underlying loan collateral.

Slide 10 presents a snapshot of our credit hedges as of September 30. During the quarter, we increased our corporate credit hedges alongside the growth of our loan portfolio. At quarter end, we also maintained a foreign currency hedge portfolio to manage exposure associated with our European CLO investments.

Turning to Slide 11. At September 30, our NAV was $5.99 per share and cash and cash equivalents totaled $20.1 million. Our NAV-based total return for the quarter was 9.6% annualized.

With that, I'll pass it over to Greg to discuss how the portfolio market has performed, how we positioned our CLO portfolio and our market outlook.

Thanks, Chris. It's a pleasure to speak with everyone today. Calendar Q3 played out almost as a mirror image of Q2. We began with robust performance in July, but momentum faded as the quarter went on. Growing concerns about idiosyncratic credit issues, coupled with continued loan coupon spread compression weighed on CLO equity and even pressured some of the more credit-sensitive mezzanine tranches. Even against this backdrop, both our mezzanine and equity positions contributed positively to performance.

As we've mentioned before, we have been concerned throughout the year about the widening gap between strong and weak credits in both the CLO and broader corporate credit markets. Whether it is the prolonged impact of elevated interest rates on floating rate borrowers or the volatility around winners and losers created by AI, tariffs and changing trade dynamics, we've been deliberate and cautious about owning first loss credit risk.

CLO equity has continued to experience muted return, not only due to default and distressed exchanges and some weaker credits, but also due to prepayments and stronger credits, reducing returns at both ends of the underlying loan portfolios. For CLO equity, the combination of these 2 factors has more than offset the positive impact of tightening liability costs and deals.

On the margin, we generally continue to favor CLO mezzanine tranches as a more attractive balance of risk and return in the portfolio. The subordination and structural protections they offer help insulate us from the dispersion and idiosyncratic concerns mentioned earlier.

That said, almost any investment becomes attractive at the right price, and we are continuing to see opportunities in both parts of the capital structure when they're offered at the right level. We are continuing to find the secondary markets far more compelling than primary markets, as has been the case for most of the year.

We only participated in on new issues equity transaction in calendar Q3. Meanwhile, we saw an uptick in CLO trades for EARN from 79 in Q2 to 92 in Q3, emphasizing our trading-focused flexible approach. In our view, this is something that very much differentiates us from our competitors and should be a source of comfort for investors.

Credit issues such as First Brands have roiled the credit markets, and that has led to selling pressure on the stock of CLO closed ends funds including EARN. Similar to what we've seen with BDC stock prices, I believe this is often due to investor uncertainty about the true condition of the underlying portfolio, including the portfolio marks.

By trading our portfolio so actively, we possess a great deal of confidence in our underlying portfolio marks. Not only do we have a strong sense of where the market transacts, but it has been relatively straightforward to value our positions because many of them trade frequently, which makes us highly confident in the accuracy of our reported NAV. While we continue to favor mezzanine tranches, EARN has been able to take advantage of some interesting opportunities in the CLO equity market. We expect to continue to see compelling special situations, especially in the secondary market, where we find that our strong relationships and reputation as an active trading counterparty often give us early and differentiated access.

While some CLO managers and dealers are willing to offer incentives to entice investors to commit to funding new issue CLO equity investments. We think it's critical to evaluate those incentives in the context of the manager's quality, the deal structure and the underlying collateral and only commit capital when the overall opportunity clears our risk/reward bar.

Now back to Larry.

Thanks, Greg. I'm very pleased with EARN's results this quarter. The steady growth of our net investment income enabled us to achieve full dividend coverage in September, which is an important milestone that reflects the earnings power of our portfolio. While our net investment income can fluctuate month-to-month, as deals are called, distributions are reinvested or profits are taken through trading, we feel confident about our ability to maintain dividend coverage over the long term.

Taking a step back, volatility and credit dispersion have remained defining features of the corporate credit markets in general this year and the CLO market, in particular. Uneven impacts from AI and tariffs have definitely factored greatly into the volatility and credit dispersion, but the recent Tricolor and First Brands bankruptcies first brands being a widely held CLO credit, by the way, underscores that the corporate credit markets are also vulnerable to idiosyncratic volatility and credit dispersion.

Given that corporate credit spreads overall remained relatively tight during the quarter, we continued to expand our credit hedging portfolio as we ramped our investment portfolio.

As shown on Slide 10, we increased our credit hedge portfolio to roughly $90 million of high-yield CDX bond equivalents by the end of the quarter. To put that in perspective, that $90 million equates to about 40% of our NAV as of September 30. So it's a very significant position. And following quarter end, we've continued to increase our credit hedges. This synthetic short position reached more than $150 million in high-yield equivalent as of October 31, as detailed in our October tear sheet that we released last night.

While these hedges, like most hedge, can be expensive to maintain, the downside protection they provide is well worth the cost in our view, especially given where overall corporate credit spreads currently stand. If credit spreads widen, these corporate credit hedges should generate substantial gains to help offset any declines in our long CLO portfolio.

Finally, I'll note that while high-profile defaults like First Brands tend to grab a lot of headlines, they also give you a real-world look at how CLO structures are designed to work and how our approach is meant to protect investors. In EARN, the impact from First Brands on our portfolio was quite modest. Our mezzanine debt tranches were largely protected by their equity buffers. And while some of our equity positions were affected, the overall fundamental effects for us was quite limited and was felt more in shorter-dated deals as opposed to the longer reinvestment period CLOs, where most of our equity exposure sits. And that's really the point of the diversification that the CLO market offers investors. You avoid taking outsized exposure to any one borrower.

That principle, combined with our recent focus on CLO debt tranches served us well through the third calendar quarter. As we move forward, if corporate defaults were to become more widespread, our credit hedges will become even more important as another layer of downside protection.

Looking ahead, with a balanced mix of mezzanine debt and equity tranches and robust credit hedging, I believe we're well positioned for both upside and resilience as market conditions evolve. We expect elevated repricing activity and ongoing credit dispersion to continue to create opportunities for outperformance through active portfolio management, further reinforcing our confidence in delivering strong total returns for shareholders.

And since we're now close to being fully invested, our likely next step is to raise long-term unsecured notes, which we hope to complete in the coming weeks, market conditions permitting. We expect this additional capital to be accretive to both net investment income and GAAP earnings.

Now let's open the floor to Q&A. Operator, please proceed.

[Operator Instructions] We'll take our first question from Crispin Love with Piper Sandler.

My question is on the hedges and the recent moves. As you said, you had a pretty meaningful move in credit hedges from the end of September to end of October. Can you just discuss what you're seeing? What drove the increase versus the end of September? You think spreads are too tight today? And then, of course, we've been hearing some of the -- all the macro noise in credit, private credit. So just curious on your thoughts there and what you're seeing in your portfolio and just more broadly?

Sure. I'll take the first crack at that. Greg, if you don't mind. Just the increase in the size of the credit hedges was mostly a function of just the increase in the portfolio size and the increase in the leverage in terms of just on an absolute dollar basis in terms of how much debt we have through repo. So a major component of how we size our credit hedges is to make sure that in a severe market downturn, we'll have enough liquidity through the profits on our credit hedges to manage any liquidity issues arising from our repo.

So that's really where most of it comes from. But -- and then in terms of timing the market, I'll pass that to Greg. We obviously do have the ability and we like to also adjust size of the credit hedge portfolio in terms of how tight credit spreads are on a historical basis. Greg?

Sure. To echo Larry's point, I think it's important to remember these hedges are here to really sort of protect against a drawdown. It's not a short position, we're necessarily taking. And so early on when we weren't financing our positions as much or if we were more heavy in CLO equity, which we're not necessarily financing the way we'll finance CLO mezzanine positions, they aren't as necessary as we've increased financing on CLO mezzanine position since we've tended to favor those, we've needed to add more protection in these drawdown scenarios from a liquidity point of view.

Now that said, we're constantly trading these hedges around as positions come up and down. If we are selling out of something, we may adjust them down to be careful not to be running shorter than we would like either. But you're right, I think that as we see some of these sales have grown in areas of the corporate credit market, we still think that tail risk is attractively priced. And so entering into some of those hedges at these levels versus where we could enter into long investments with some financing, that equation, we think, works out well for EARN generally.

And I'll just add, we'll be filing our NCSR, shortly, which gives a detailed look at our entire portfolio, including our hedges. And you'll see, if you take a look at those when they come out that they're really mostly what we would call tail hedges, right, to protect against tail scenarios.

Okay. That all make sense. But Larry, I get your point on increasing the hedges with the size of the portfolio in the calendar third quarter. But just looking at October, definitely saw a big increase in hedges, but a decrease in the CLO portfolio, if I'm looking at that right. Was that a more cautious view on credit?

Greg, do you have a view on that? I actually -- I would have to take a closer look at that to answer that.

I would need to take a look. We've not looked to necessarily represent a shorter, more cautious view. I think, in general, you may have seen some rotation. And as I said, the hedges are really there when we're financing mezz physicians, just as we're adding leverage, the drawdown with the financing can be something that we pay more attention to.

The other thing too is earlier on, our hedging options were more limited than they are today in terms of setting up agreements with banks in terms of what we're able to trade. We use a lot of different -- we enter into a lot of different types of markets for different types of tail hedges. And so it's possible from a notional standpoint, you may see some things that are just a lower beta or delta that maybe have a higher notional to that point. And so we'd have to look through in terms of notional sizing. But overall, it's not necessarily an uptick in what we think is the actual risk or equivalent risk of the hedges. It might just notionally look different as we've moved from one product to another.

Okay. And then just last question. Just any color -- I'm just looking at the tear sheet for October. Any color on the CLO portfolio decreased a bit to $371 million from $380 million as you're kind of getting to full deployment? Any reason for the decrease there?

Over the course of October?

Yes.

Well, October is a quarterly payment date, too. So the equity portfolio will have distributions and generally a bit of a markdown in prices. And so while that came out and was distributed, I think there was some of that. Also CLO equity did sell off a little bit in October. I think that's what we saw in the market. And so you saw the NAV move to adjust that a little bit.

Crispin, I'll just add that the debt portfolio increased net month-over-month and the equity portfolio decreased mainly driven by what Greg mentioned, the distribution.

We'll go now to Doug Harter with UBS.

You mentioned potentially being in the market for unsecured debt. Can you talk about your appetite for leverage and how you think about where leverage would be kind of for the context of this conversation, we'll hold the asset composition the same just to take that piece of it out of the equation?

Sure. So as I said, we're really close to fully invested right now. I think at 300 -- between $370 million and $380 million, let's call it, we would have room definitely to go up to around $400 million, maybe a little bigger. We are constrained by all of the restrictions of the '40 Act. We're a fully compliant derivative user and that gives -- that does give us a little more flexibility.

So a little less than 2:1 leverage. Again, that's also given our current 2:1 asset to equity leverage. That's given our current portfolio composition as well, right? So the more mezzanine debt that we have, the more we can leverage the more equity we have, the less generally. And if we were to do an unsecured deal, I think you could see, right? So let's just say for argument's sake that it was a $50 million deal, right? So that additional capital, I think just a good rule of thumb again would be something a little less than 2:1 assets to that additional debt capital.

We'll hear next from Eric Hagen with BTIG.

Do you have any perspectives or predictions on the amount of CLO supply we might see next year? And just how sensitive the market could be at higher levels of issuance and maybe just some of the conditions that you feel like will drive the spread environment next year?

Sure. To be honest, I don't have a lot of conviction there. I think some of it will depend on what we see with new issue loan supply. I think if you speak to a lot of market participants, everyone sort of admits that it's been a challenged ARB with loans being so tight. I think similar to this year, you'll see a lot of reset and refinancing activities of existing deals as opposed to proper new issue, just where the market is today. But that said, it's hard to tell what may happen on both the asset and liability side.

Depending what happens with rates, that can force technicals within the loan market, potentially with on the liability side as well. And if you get a situation where some of the loans tend to sell off and maybe widen on spread while AAAs and maybe some of the up the stack tranches hold in better, this may present a good window for new issue -- true new issue to pick back up. But right now, it feels like we will continue in this environment where things are now, where people are getting creative with existing deals, trying to give them new life and extend them out versus newer -- cleaner new issue deals. That's where we see the demand at least today.

Okay. That's interesting. Do you have any general perspectives on the presence of AI-related credits, which show up in the CLO market, especially the middle market CLO zone? And if you think there's like a lot of indirect sensitivity with respect to like the AI narrative just more generally in the connectivity that it has to the flow of credit?

Sure. So addressing the first part of the question, it definitely will have an impact on the loan market. I think that as AI filters through a lot of different -- it isn't even necessarily all about tech. There's going to be a lot of companies where AI can benefit companies in terms of reducing costs. AI could potentially make some companies uncompetitive though.

And so I think that when we speak to CLO managers and we take a look at our own on some of these credits, you will find that a portion of the market will be affected, sometimes good, sometimes bad, by what AI may ultimately end up bringing. This is another point on our concern around dispersion. If it strongly creates winners and losers, this isn't necessarily the best thing for CLO equity.

If the winners prepay out at tighter levels and the losers have fundamental problems, that's not necessarily good for the overall weighted average spread of the portfolio or good for the default rate of the portfolio. And so this dispersion is one of the things we're concerned about.

As far as it relates to the middle market space, I'm not sure I would specifically comment differently. There's been some information and articles recently about some of those areas maybe of sort of the private credit middle market space that have started to reveal some problems in some of the names. There may be some similarities with the same way AI can affect the broadly syndicated loan market.

It will affect these areas of the credit markets as well. It may just take a second to come through as marks don't move as quickly as the underlying loans there are not as actively traded. And that's something that as much as we will go into those markets, we remain much smaller because given our very trading-focused background, it's not as easy for us to assess the day-to-day risk as things move when underlying portfolio -- or some of those portfolios are not reacting to up-to-date information. And so it does lead us to be cautious in some of those areas, to your point, around how quickly if AI leads to an adverse issue in those portfolios that we'll be able to see that information.

Ladies and gentlemen, that was our final question for today. We thank you for participating in the Ellington Credit Company's Second Fiscal Quarter ended September 30, 2025 Results Conference Call. You may disconnect at this time, and have a wonderful rest of your day.