Release Date: November 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ellington Credit Co (EARN, Financial) reported a strong annualized economic return of 10.8% for the third quarter.
- The company successfully enhanced returns in its CLO debt portfolio through opportunistic trading and liquidation strategies.
- Ellington Credit Co (EARN) achieved positive performance in its CLO equity portfolio, supported by opportunistic trading and deal refinancings.
- The company's net interest margin increased to 5.22% from 4.24% in the prior quarter, reflecting a higher allocation to the credit strategy.
- Ellington Credit Co (EARN) maintained a healthy cash and unencumbered assets position, representing nearly two-thirds of its total equity.
Negative Points
- The company is still short of the required votes to approve its conversion to a Delaware closed-end fund.
- Ellington Credit Co (EARN) experienced a decline in its debt-to-equity ratio, driven by lower leverage on its growing CLO investment portfolio.
- The net interest margin on the credit portfolio declined sequentially, aligning more with first-quarter results.
- The company accrued an income tax expense of $463,000 due to federal and state restrictions on NOL utilization.
- General and administrative expenses increased quarter-over-quarter due to costs associated with the strategic transformation.
Q & A Highlights
Q: Can you speak on the credit quality in the CLO book and how you expect that to trend over time? What are your delinquency and loss expectations as well as risk-adjusted returns?
A: Gregory Borenstein, Head of Corporate Credit, explained that if a high-rate environment persists, it could stress corporate credit, affecting companies' ability to service debt. Currently, the trailing 12-month default rate is below 1%, but historically it could rise above that. In stressed environments like COVID, it peaked over 4%. Credit quality could tighten with more buyer-friendly market conditions, including tighter language and more covenants.
Q: How do you think about the dividend, especially as you rotate more capital into CLOs and leverage continues to tick down?
A: Laurence Penn, CEO, stated that despite lower leverage, the net interest margin is increasing, supporting the dividend. The adjusted distributable earnings for the third quarter were in line with previous quarters, indicating strong support for the dividend as the company continues its rotation into CLOs.
Q: You were active in raising capital through the ATM during the quarter. Can you talk about your continued appetite for that?
A: Laurence Penn, CEO, noted that while the stock price is not currently conducive to tapping the ATM, they took advantage of higher trading prices in the third quarter. Christopher Smernoff, CFO, added that there was $0.04 of dilution, but it is expected to improve G&A ratios going forward.
Q: Would you expect the strong issuance trend to remain in place if pricing remains supportive?
A: Gregory Borenstein, Head of Corporate Credit, indicated that strong issuance is likely to continue, driven by demand for floating rate products and the growth of the CLO ETF space. As AAA spreads tighten, more deals may come to market, supported by loan creation turning back on.
Q: Assuming the shareholder vote is supportive, what does the timeline look like to move capital into new CLO equity?
A: Gregory Borenstein, Head of Corporate Credit, mentioned that they are monitoring the situation and will adjust their strategy accordingly. They aim to be selective with investments, focusing on new issues. Laurence Penn, CEO, added that they could be fully invested in a quarter or less, depending on the shareholder vote outcome.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
