Ellington Financial's 6.75% Series A Preferred Stock: A High-Yield Bet in a Shifting Rate Environment

Ellington Financial’s 6.75% Series A Preferred Stock (EFC.PRA) has emerged as a compelling yet complex investment in today’s interest rate environment. With a current market price of $25.35—a $0.35 premium over its $25 liquidation preference—the security offers a yield that appears attractive at first glance. However, its fixed-to-floating structure, tied to the now-defunct LIBOR and recalibrated to SOFR, introduces layers of volatility and risk that demand careful scrutiny.

Yield Analysis: From Fixed to Floating

The Series A preferred stock initially carried a fixed dividend rate of 6.75% per annum, translating to a quarterly payout of $0.624039 per share. This fixed rate was in place until October 30, 2024, after which the dividend transitioned to a floating rate of three-month SOFR plus a spread of 5.196% per annum [1]. As of September 2025, the 90-day SOFR average stands at 4.36343% [2], implying a current floating rate of approximately 9.56% (4.36% + 5.196%). At the stock’s current price of $25.35, this yields an effective annualized return of roughly 9.42% (calculated as ($0.5975 quarterly dividend / $25.35) × 4).

This yield is notably higher than the company’s common stock dividend yield (based on its $0.13 monthly payout and a hypothetical common share price of $13.49, implying a 11.9% yield if priced at book value). However, the floating rate’s dependence on SOFR introduces uncertainty. If SOFR rises further—a distinct possibility given the Federal Reserve’s hawkish stance—the yield could compress, while a decline in SOFR would amplify returns.

Dividend Reliability: A Mixed Picture

Ellington Financial has demonstrated a consistent track record of dividend payments, with recent declarations for both common and preferred shares [3]. The Series A’s cumulative feature—ensuring unpaid dividends accrue—adds a layer of security for investors. Yet, the company’s financial leverage raises concerns. Its total debt-to-equity ratio of 8.7:1 [2] suggests significant exposure to interest rate risk and refinancing challenges. While its diversified loan portfolios and securitization activities have bolstered capital deployment [4], the reliance on high-yield, high-risk assets could strain liquidity in a downturn.

The credit rating of “BBB+” assigned to Ellington’s preferred stock as of March 2025 [5] further underscores this tension. Though above junk status, the rating reflects a “speculative” outlook, given the company’s aggressive leverage and sensitivity to economic cycles.

Risk-Adjusted Appeal: A Calculated Gamble

The Series A’s risk-adjusted appeal hinges on two factors: the trajectory of SOFR and Ellington’s ability to manage its debt burden. The current SOFR of 4.36% [2] positions the stock as a high-yield alternative to investment-grade preferreds, which typically offer yields in the 5–7% range. However, the 9.42% yield comes with elevated risks. The company’s recourse debt-to-equity ratio of 1.7:1 [2] and its history of hedging gains and losses [4] highlight operational fragility.

Moreover, the preferred stock’s redemption features complicate the risk profile. While the October 2024 redemption event was marked by a realized loss [4], the absence of a stated redemption date for future tranches introduces uncertainty. Investors must weigh the potential for capital preservation against the likelihood of forced redemptions if Ellington’s credit profile deteriorates.

Conclusion: A Niche Play for Risk-Tolerant Investors

Ellington Financial’s 6.75% Series A Preferred Stock offers a tantalizing yield in a low-rate world, but its appeal is contingent on a favorable SOFR outlook and the company’s continued operational resilience. For investors with a high-risk tolerance and a conviction in Ellington’s ability to navigate its debt-heavy structure, the security could serve as a speculative addition to a diversified portfolio. However, those seeking stability may find the risks—particularly the floating rate’s volatility and the company’s leverage—too great to justify the reward.

Source:
[1] Ellington Financial Inc | 6.750% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock [https://www.preferredstockchannel.com/symbol/efc.pra/]
[2] Ellington Financial Inc. Reports Second Quarter 2025 Results [https://www.stocktitan.net/news/EFC/ellington-financial-inc-reports-second-quarter-2025-0377jej96avk.html]
[3] Ellington Financial Declares Common and Preferred Dividends [https://www.businesswire.com/news/home/20250908919879/en/Ellington-Financial-Declares-Common-and-Preferred-Dividends]
[4] Ellington Financial Inc. (EFC-PC) Stock Price, ... [https://www.datainsightsmarket.com/companies/EFC-PC]
[5] Ellington Financial : EFC Presentation to Debt and Preferred Equity Investors [https://www.marketscreener.com/quote/stock/ELLINGTON-FINANCIAL-INC-6718588/news/Ellington-Financial-EFC-Presentation-to-Debt-and-Preferred-Equity-Investors-March-2025-49248952/]