Contradictions in Q3 2025 Earnings Calls: CLO Issuance and AI Impact on Market Dynamics

Date of Call: November 20, 2025

Financials Results

• EPS: $0.11 GAAP net income per share; net investment income $0.23 per share; weighted average GAAP yield on CLO portfolio 15.5%; NAV $5.99 per share (NAV-based total return 9.6% annualized).

Guidance:

• Close to fully invested (~$370–$380M CLO portfolio); management expects to raise long-term unsecured notes in coming weeks, market permitting, and expects incremental capital to be accretive to net investment income and GAAP earnings.
• Expect elevated loan repricing and continued credit dispersion to create active trading and relative-value opportunities.
• Increased credit hedges for downside protection (≈$90M high-yield CDX equivalent at 9/30; >$150M high-yield equivalent as of Oct 31).
• Will continue to favor mezzanine debt and secondary-market CLO equity when pricing meets risk/reward criteria.

Business Commentary:

• Strong Portfolio Performance and Investments:
• Ellington Credit Company achieved full dividend coverage from net investment income in September, reaching a NAV of $5.99, with a NAV-based total return of 9.6% annualized.

• The strong performance was driven by increasing portfolio allocation to mezzanine debt, reducing exposure to new issue equity, and active trading that enabled better risk management and optimal relative value positioning.

• CLO Portfolio Expansion and Diversification:

• 
• The CLO portfolio increased by 20% to $380 million, with approximately 70% of net CLO purchases in mezzanine debt tranches.

• The expansion and diversification were due to yield compression between CLO debt tranche markets and leveraged loan markets, as well as the company's focus on secondary market acquisitions for better relative value opportunities.

• Hedging Strategy and Risk Management:

• Ellington increased its corporate credit hedges to roughly $90 million of high-yield CDX bond equivalents by the end of Q3, and further increased it to more than $150 million as of October 31.

• This was a strategic move to manage liquidity risks associated with leverage and to provide downside protection against potential credit spread widening.

• Market and Economic Conditions:

• The credit markets rallied during Q3, with corporate credit and CLO spreads tightening, despite some weak credit performance in high-yield corporate bond and leveraged loan markets.
• The dovish shift from the Federal Reserve, including a rate cut in September, contributed to this rally, along with expectations of further monetary easing.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management: "Ellington Credit delivered another strong quarter" and "achieved full dividend coverage in September," noting confidence in maintaining coverage and being "well positioned for both upside and resilience." They highlighted portfolio growth, active trading, and increased hedging as supporting earnings power and downside protection.

Q&A:

• Question from Crispin Love (Piper Sandler & Co., Research Division): 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?
  Response: Hedge notional rose mainly because the portfolio and repo financing grew; hedges are tail-protection to preserve liquidity in severe drawdowns, are actively adjusted, and management believes tail risk is attractively priced relative to financed long investments.

• Question from Crispin Love (Piper Sandler & Co., Research Division): 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?
  Response: Not necessarily more cautious—October moves reflected rotation, funding and product-mix changes, and differences in hedge product notionals; management would need to review details but sees the adjustments as technical rather than a material change in credit stance.

• Question from Crispin Love (Piper Sandler & Co., Research Division): 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?
  Response: October decline was driven by CLO equity distributions and a modest selloff/markdown in equity prices; debt holdings increased net month-over-month while equity decreased due to distributions and mark-to-market moves.

• Question from Douglas Harter (UBS Investment Bank, Research Division): 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?
  Response: They're nearly fully invested (~$370–$380M) and could modestly expand assets (toward ~$400M); current leverage is under 2:1 and a contemplated unsecured issuance (e.g., ~$50M) would likely keep assets-to-debt under ~2:1 given portfolio composition.

• Question from Eric Hagen (BTIG, LLC, Research Division): 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?
  Response: Low conviction on future supply; depends on loan new-issue activity and rates—expect more resets/refinancings and creative extensions vs. robust true new issuance, with technicals and rates driving spreads and potential windows for new-issue pickup.

• Question from Eric Hagen (BTIG, LLC, Research Division): 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?
  Response: AI will increase credit dispersion—creating winners and losers—which can hurt CLO equity (prepayments from winners, fundamental deterioration for losers); management is cautious, especially in less-liquid middle-market/private credit where marks lag and day-to-day risk is harder to monitor.

Contradiction Point 1

CLO Issuance and Market Dynamics

It involves differing perspectives on the expected levels of CLO issuance and the impact of market dynamics on new issue CLOs, which are critical for understanding the company's investment strategy and market outlook.

What are your expectations for CLO supply next year and how sensitive the market is to higher issuance? - Eric Hagen (BTIG, LLC, Research Division)

2025Q3: CLO new issue supply is expected to be limited due to tight lending conditions. There's more activity in refinancing and extending existing deals. The market will depend on loan and rate dynamics, but new issuance may pick up if spreads widen on loans. - **Gregory Borenstein(Portfolio Manager)**

If the current dynamic remains unchanged, would you expect your allocation to be similar to the June quarter's, with a focus on debt and equity? - Douglas Michael Harter (UBS Investment Bank, Research Division)

2025Q2: If secondary markets become less attractive or the assets and liability math doesn't change, we might see some rebalancing away from new issue CLOs. Overall, we see less attraction in new issues given current conditions. - **Gregory Borenstein(Portfolio Manager)**

Contradiction Point 2

AI Impact on CLO Market

It involves the potential impact of AI on the CLO market, which could affect investment strategies and risk management.

How do you view the presence of AI-related credits in the CLO market, especially in the middle market, and their sensitivity to AI narratives? - Eric Hagen (BTIG, LLC, Research Division)

2025Q3: AI will impact the loan market, affecting winners and losers, which is a concern for CLO equity. AI's influence may be similar in middle market areas, but less actively traded portfolios might be slower to react. - **Gregory Borenstein(Portfolio Manager)**

How does the yield on the $50 million CLOs acquired post-conversion compare to the existing $250 million portfolio? Do you have dry powder to deploy now? - Eric Hagen (BTIG)

2025Q1: The first order effect of the asset management industry pushing for 401(k) plans to have better access to private equity is visible in ETF growth. This may eventually filter down to the CLO asset class, impacting spreads. The demand could compress yields or create attractive arbs for equity further down the line. - **Mark Tecotzky(EVP)**