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Filed
pursuant to Rule 424(b)(3)
1933
Act File No. 333-298702
1940
Act File No. 811-24071
PROSPECTUS
SUPPLEMENT
(to
Prospectus dated October 21, 2026)
Ellington Credit
Company
$125,000,000
of Common Shares
Ellington
Credit Company (the “Fund”)
is a non-diversified, closed-end management investment company that has
registered as an investment company under the Investment Company Act of 1940, as
amended (the “1940
Act”).
The Fund’s primary investment objectives are to generate attractive current cash
flow and risk-adjusted total returns for its shareholders. The Fund seeks to
achieve these objectives by investing primarily in mezzanine debt and equity
tranches of corporate collateralized loan obligations (“CLOs”),
which are securitizations that are collateralized by portfolios of corporate
credit assets. See “Prospectus
Supplement Summary—Principal Investment Strategies—Collateralized Loan
Obligation (CLO) Overview.”
The
investment adviser to the Fund is Ellington Credit Company Management LLC (the
“Adviser”).
The Adviser is registered as an investment adviser with the U.S. Securities and
Exchange Commission (the “SEC”)
under the Investment Advisers Act of 1940, as amended (the “Advisers
Act”).
The Adviser is a wholly owned subsidiary of Ellington Management Group, L.L.C.
(“EMG”
and, together with the Adviser, “Ellington”).
The
Fund, the Adviser, and Ellington Credit Company Administration LLC (the
"Administrator"),
have entered into an Equity Distribution Agreement, dated October 23, 2026 (the
“Equity
Distribution Agreement”),
with Citizens JMP Securities, LLC, B. Riley Securities, Inc., Lucid Capital
Markets, LLC, and Armstrong Securities LLC (each, an “Agent”
and collectively, the “Agents”).
Pursuant to the Equity Distribution Agreement, the Fund may offer and sell its
common shares of beneficial interest, no par value (the “Common
Shares”),
having an aggregate offering price of up to $125 million from time to time
through or to the Agents (the “ATM
Program”).
Sales
of the Common Shares, if any, under this prospectus supplement and the
accompanying prospectus may be made in negotiated transactions or transactions
that are deemed to be “at the market” offerings as defined in Rule 415 under the
Securities Act of 1933, as amended (the “Securities
Act”),
including, without limitation, sales made directly on the New York Stock
Exchange (“NYSE”)
or any other existing trading market for Common Shares or sales made to or
through a market maker other than on an exchange. The Agents are not required to
sell any specific number or dollar amount of Common Shares but will make all
sales using commercially reasonable efforts consistent with their normal trading
and sales practices, on mutually agreed terms between the Agents and the Fund.
If the Fund sells Common Shares to the Agents, acting as principal, or if the
Fund sells Common Shares through the Agents, as the Fund’s agents, in privately
negotiated transactions, the parties may enter into a separate agreement setting
forth the terms of such transaction and, to the extent required by applicable
law, the Fund will describe such agreement in a separate prospectus supplement
or pricing supplement.
The
Agents will be entitled to compensation of up to an aggregate of 2.0% of the
gross proceeds from the sale of the Common Shares sold under the Equity
Distribution Agreement, as further described herein under the caption
“Plan
of Distribution.”
In connection with the sale of the Common Shares on behalf of the Fund, the
Agents will be deemed to be “underwriters” within the meaning of the Securities
Act, and the compensation of the Agents will be deemed to be underwriting
commissions or discounts. Please see the section under the caption “Plan
of Distribution”
for further information relating to the compensation arrangements for the
Agents. The Common Shares are listed and traded on the NYSE under the ticker
symbol “EARN.” The midpoint of the range of the Fund’s estimated net asset value
(“NAV”)
per share as of September 30, 2026 was $4.04. As of September 30, 2026, the last
reported sales price of the Common Shares on the NYSE was $4.04, equal to the midpoint of the range
of the Fund’s estimated NAV per share as of September 30, 2026.
Investors
should consider their investment goals, time horizon and risk tolerance before
investing in the Fund’s securities. An investment in the Fund’s securities is
not appropriate for all investors and is not intended to be a complete
investment program. In addition, investing in the Fund’s securities may be
considered speculative and involves a high degree of risk, including the risk of
a substantial loss of investment. Before purchasing any securities, you should
read the discussion of the principal risks of investing in the Fund’s
securities, which are summarized in “Risk Factors” beginning on page 16 of this
prospectus supplement and beginning on page 19 of the accompanying
prospectus.
This
prospectus supplement and the accompanying prospectus contain important
information you should know before investing in the Fund’s securities. Please
read this prospectus supplement and the accompanying prospectus and retain them
for future reference. The Fund files annual and semi-annual shareholder reports,
proxy statements and other information with the SEC. To obtain this information
free of charge or make other inquiries pertaining to the Fund, please call (203)
698-1200. You may also obtain a copy of any information regarding the Fund filed
with the SEC from the SEC’s website (www.sec.gov).
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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Citizens
Capital Markets |
B.
Riley Securities |
Lucid
Capital Markets |
Armstrong
Securities |
The
date of this prospectus supplement is October 23, 2026
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS SUPPLEMENT
This
document is in two parts. The first part is this prospectus supplement, which
describes the specific details regarding this offering, and also adds to and
updates information contained in the accompanying prospectus and the documents
incorporated by reference into this prospectus supplement and the accompanying
prospectus. The second part is the accompanying prospectus, which provides
general information about the Fund and the securities the Fund may offer from
time to time, some of which may not apply to this offering. To the extent the
information contained in this prospectus supplement differs from the information
contained in the accompanying prospectus or the information included in any
document filed prior to the date of this prospectus supplement and incorporated
by reference in this prospectus supplement and the accompanying prospectus, the
information in this prospectus supplement shall control. Generally, when the
Fund refers to this “prospectus,” the Fund is referring to both this prospectus
supplement and the accompanying prospectus combined, together with any free
writing prospectus that the Fund has authorized for use in connection with this
offering.
YOU
SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN AND THEREIN, AND ANY FREE WRITING PROSPECTUS PREPARED BY, OR ON BEHALF
OF, THE FUND THAT RELATES TO THIS OFFERING. THE FUND HAS NOT, AND THE AGENTS
HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL
INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR ADDITIONAL INFORMATION,
YOU SHOULD NOT RELY ON IT. THE FUND IS NOT, AND THE AGENTS ARE NOT, MAKING AN
OFFER TO SELL THE COMMON SHARES IN ANY JURISDICTION WHERE SUCH OFFER OR SALE IS
NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, INCLUDING THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN AND THEREIN, AND ANY FREE WRITING PROSPECTUS
PREPARED BY OR ON BEHALF OF THE FUND THAT RELATES TO THIS OFFERING IS ACCURATE
ONLY AS OF ITS RESPECTIVE DATE, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS, ANY FREE WRITING PROSPECTUS
OR ANY SALES OF THE COMMON SHARES. THE FUND’S BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THOSE
DATES.
Unless
otherwise noted, numerical information relating to the Fund is approximate as of
June 30, 2026.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All
statements contained in or incorporated by reference into this prospectus
supplement or the accompanying prospectus, other than statements of historical
facts, may constitute “forward-looking statements.” These statements may relate
to, among other things, future events or the Fund’s future operating results,
actual and potential conflicts of interest with the Adviser, the Administrator
and their affiliates, the adequacy of the Fund’s financing sources and working
capital, and other factors. In some cases, you can identify forward-looking
statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,”
“provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,”
“intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,”
“likely” or the negative or other variations of such terms or comparable
terminology. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Fund’s actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These factors include:
● changes
in the economy and the capital markets;
● risks
associated with the negotiation and consummation of pending and future
transactions;
● changes
in the Fund’s investment objectives and strategy;
● availability,
terms of, and deployment of capital;
● changes
in interest rates, exchange rates, regulations or the general
economy;
● changes
in governmental regulations, tax rates and similar matters;
● the
Fund’s ability to exit investments in a timely manner;
● the
Fund’s ability to comply with the 1940 Act;
● the
Fund’s ability to maintain its qualification as a RIC;
● the
use of the proceeds from this offering;
● the
ability of the Fund to sell the Common Shares in this offering in the amount and
on the terms contemplated, or at all; and
● those
factors described in the “Risk
Factors”
section of this prospectus supplement and the accompanying prospectus and in
similar sections in the documents incorporated by reference herein and in the
accompanying prospectus.
The
Fund cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Actual results could differ
materially from those anticipated in the Fund’s forward-looking statements and
future results could differ materially from historical performance. The Fund has
based forward-looking statements on information available to the Fund on the
date of this prospectus supplement. The Fund undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, after the date of this prospectus
supplement or the accompanying prospectus, except as otherwise required by
applicable law. The forward-looking statements contained in or incorporated by
reference into this prospectus supplement and the accompanying prospectus are
excluded from the safe harbor protection provided by the Private Securities
Litigation Reform Act of 1995 and Section 27A of the Securities
Act.
PROSPECTUS
SUPPLEMENT SUMMARY
This
prospectus supplement summary highlights certain information contained in the
prospectus supplement. This is only a summary, is not complete and may not
contain all the information that is important to a decision to invest in the
Common Shares. You should read carefully the more detailed information set forth
under “Risk
Factors”
and the other information included in the accompanying prospectus. Except where
the context suggests otherwise:
● The
“Fund”
refers to Ellington Credit Company, a Delaware statutory trust, registered under
the Investment Company Act of 1940, as amended (the “1940
Act”),
as a non-diversified, closed-end management investment company.
● The “Adviser”
refers to Ellington Credit Company Management LLC, an SEC-registered investment
adviser.
● The
“Administrator”
refers to Ellington Credit Company Administration LLC.
Ellington
Credit Company
Ellington
Credit Company (the “Fund”)
is a non-diversified, closed-end management investment company that has
registered as a closed-end management investment company under the Investment
Company Act of 1940, as amended (the “1940
Act”).
The Fund is advised by Ellington Credit Company Management LLC (the
“Adviser”),
pursuant to an advisory agreement dated as of April 1, 2025 (the “Investment
Advisory Agreement”).
The Investment Advisory Agreement was first approved by the Fund’s Board of
Trustees (the “Board”)
and then subsequently approved by shareholders at a special meeting of the
Fund’s shareholders held on January 17, 2025 (the “Special
Meeting”).
Prior
to April 1, 2025 (the “Conversion
Date”),
the Fund was not registered under the 1940 Act and was domiciled in Maryland.
Specifically: (i) from its inception until January 1, 2024, the Fund operated as
a real estate investment trust specializing in residential mortgage-backed
securities (“RMBS”),
and (ii) from January 1, 2024 until the Conversion Date, the Fund operated as a
taxable C-Corporation while gradually shifting its investment focus away from
RMBS and towards corporate collateralized loan obligations (“CLOs”).
In connection with this shift in investment focus, the Fund rebranded as
Ellington Credit Company (from Ellington Residential Mortgage
REIT).
On
the Conversion Date, the Investment Advisory Agreement was executed and became
effective, and the Fund became a Delaware statutory trust and registered
closed-end investment company under the 1940 Act (such actions, collectively,
the “Conversion”).
The Fund intends to elect to be treated, and intends to qualify annually, as a
regulated investment company (a “RIC”)
under the Internal Revenue Code of 1986, as amended (the “Code”)
under Subchapter M of the Code. To facilitate this qualification, the Fund
requested and received Internal Revenue Service (“IRS”)
approval to change its tax year to end on the day prior to the Conversion Date
(March 31). As a RIC, the Fund expects generally not to be subject to corporate
income tax. See “U.S.
Federal Income Tax Matters”
for more information.
The
Fund’s primary investment objectives are to generate attractive current cash
flow and risk-adjusted total returns for its shareholders. The Fund seeks to
achieve these objectives by investing primarily in mezzanine debt and equity
tranches of CLOs, which are securitizations that are collateralized primarily by
corporate credit assets. These corporate credit assets are predominantly
non-investment grade, first lien, senior secured corporate bank loans, although
many CLOs may allocate a portion of their portfolios (typically below ten
percent) to other corporate credit assets, such as second lien or unsecured
loans and/or secured or unsecured corporate bonds. While a CLO’s collateral pool
technically serves as collateral for all debt tranches issued by the CLO, the
more junior tranches (including the mezzanine debt tranches) only have a
subordinated claim on such collateral. Meanwhile, the equity tranche’s claim on
such collateral is unsecured and subordinated to all other tranches of the CLO;
in each period, the equity tranche is generally only entitled to the residual
cash flows (if any) from the collateral after the debt tranches have received
their required interest and principal payments for such period.
Each
CLO is structured as multiple tranches which offer investors varying degrees of
credit risk, maturity and yield characteristics. CLO tranches are typically
categorized as either senior debt, mezzanine debt, or subordinated/equity
according to their relative seniority, payment priority and degree of risk. If
the collateral underlying a given CLO defaults or otherwise underperforms,
scheduled payments to senior tranches of such CLO securitization take precedence
over those of more junior tranches, such as mezzanine debt and equity tranches,
which are the focus of the Fund’s investment strategy. The CLO securities,
including the mezzanine debt and equity tranches, in which the Fund typically
invests are unrated or rated below investment grade and are hence considered
speculative with respect to timely payment of interest and repayment of
principal. While the majority of the CLO tranches in which the Fund invests are
U.S. dollar-denominated, the Fund also invests in CLO tranches denominated in
other currencies, typically Euros. When investing in a CLO tranche in a foreign
currency, the Fund’s primary objective is generating attractive risk-adjusted
returns in that currency, as opposed to profiting from currency movements.
Accordingly, the Fund typically attempts to hedge its foreign currency risk
associated with these investments.
The
Fund may also invest in other related securities and instruments that the
Adviser believes are consistent with its investment objectives, including senior
debt tranches of CLOs; loan accumulation facilities (“LAFs”
or “warehouses”);
corporate loans (including, but not limited to, loans that ultimately may serve
as collateral for CLOs); and securities issued by other securitization vehicles,
such as collateralized bond obligations (“CBOs”).
LAFs are entities that acquire corporate loans and other similar corporate
credit-related assets in anticipation of ultimately collateralizing a CLO
transaction. See “Principal
Investment Strategies—Other Investments.”
The
CLO equity securities in which the Fund invests have capital structures that are
highly leveraged, with debt-to-equity ratios typically ranging from eight to
sixteen times, which magnifies the Fund’s risk of loss on such investments. The
LAFs in which the Fund intends to invest are also highly leveraged, with
debt-to-equity ratios typically ranging from three to six times prior to a CLO’s
pricing, which also magnifies the Fund’s risk of loss on such
investments.
The
Fund may also engage in “Derivative Transactions,” as described herein, from
time to time to hedge against interest rate, credit, credit spread widening,
currency and/or other risks, or for other risk management or investment
purposes, including to accommodate additional investments.
For
a further discussion of the Fund’s principal investment strategies, see
“Investment
Objective, Opportunities and Principal Strategies.”
There can be no assurance that the Fund will achieve its investment objective.
These investment objectives and strategies may be changed by the Board without
prior approval of shareholders. See “Regulation
as a Closed-End Management Investment Company.”
“Names
Rule” Policy
In
accordance with the requirements of the 1940 Act, the Fund has adopted a policy
to invest at least 80% of its assets in the particular type of investments
suggested by its name. Accordingly, under normal circumstances, the Fund invests
at least 80% of the aggregate of its net assets and borrowings for investment
purposes in credit and credit-related instruments. For purposes of this policy,
the Fund considers credit and credit-related instruments to include, without
limitation: (i) equity and debt tranches of CLOs, LAFs and securities
issued by other securitization vehicles, such as CBOs; (ii) secured and
unsecured floating-rate and fixed rate loans; (iii) investments in
corporate debt obligations, including bonds, notes, debentures, commercial paper
and other obligations of corporations to pay interest and repay principal;
(iv) debt instruments issued by governments, their agencies,
instrumentalities, and central banks; (v) commercial paper and short-term
notes; (vi) convertible debt securities; (vii) certificates of
deposit, bankers’ acceptances and time deposits; (viii) certain preferred
equity investments, especially those with dividend rates that either are fixed
or float based on market interest rates; and (ix) other credit-related
instruments. Corporate debt and equity assets may be acquired in conjunction
with the liquidations of CLOs (whether CLOs in which the Fund already holds
investments, or other CLOs), as well as on an outright basis, although they are
not currently a core focus of the Fund’s investment strategy.
The
Fund’s investments in other investment companies, and other instruments designed
to obtain indirect exposure to credit and credit-related instruments will also
be counted towards its 80% investment policy to the extent such instruments have
similar economic characteristics to the investments included within that policy.
Derivatives instruments used by the Fund will be counted toward the Fund’s 80%
investment policy discussed above to the extent the derivatives instruments
provide investment exposure to investments included within that policy or to one
or more of the market risk factors associated with investments included in that
policy. The 80% policy with respect to investments in credit and credit-related
instruments is not fundamental and may be changed by the Board without prior
approval of shareholders. Shareholders will be provided with sixty (60) days’
notice in the manner prescribed by the SEC before making any change to this
policy.
The
Adviser – Ellington Credit Company Management LLC
Ellington
Credit Company Management LLC (the “Adviser”)
serves as the Fund’s investment adviser. The Adviser is registered as an
investment adviser with the SEC under the Advisers Act. Under its advisory
agreement with the Adviser (the “Investment
Advisory Agreement”),
the Fund has agreed to pay the Adviser a quarterly base management fee based on
its Net Asset Value, as well as a performance fee based on its investment
performance. See “The
Investment Advisory Agreement”
for more information.
The
Adviser is an affiliate of Ellington Management Group, L.L.C. (“EMG”
and, together with the Adviser, “Ellington”),
which is a global investment firm that was founded in 1994 and, as of June 30,
2026, has more than 170 employees, including more than 60 investment
professionals, and has approximately $23.0 billion in assets under
management.
The
Fund expects to benefit from the ability of the Adviser’s team to identify
attractive opportunities, conduct diligence on and value prospective
investments, negotiate terms where appropriate, and manage and monitor the
Fund’s portfolio. The Adviser’s investment team members have broad investment
backgrounds, with prior experience at investment banks, unregistered
investment
funds and other financial services companies, and have collectively developed a
broad network of contacts to provide the Fund with its principal source of
investment opportunities.
The
Adviser is led by Michael Vranos, Chief Executive Officer, who serves as a
Portfolio Manager of the Fund; Laurence Penn, Executive Vice President, who
serves as Chief Executive Officer of the Fund; Gregory Borenstein, who also
serves as a Portfolio Manager of the Fund; and Mark Tecotzky, Executive Vice
President, who serves as Executive Vice President of the Fund.
Messrs. Vranos, Penn, Borenstein and Tecotzky are assisted by Christopher
Smernoff, who serves as Chief Financial Officer of the Fund; and JR Herlihy, who
serves as Chief Operating Officer of the Fund.
An
affiliate of the Adviser and EMG, Ellington Credit Company Administration LLC
(the “Administrator”),
performs, or arranges for the performance of, its required administrative
services. The Fund reimburses the Administrator for its allocable portion of
overhead and other expenses incurred by the Administrator in performing its
obligations under an administration agreement by and among the Fund and the
Administrator (the “Administration
Agreement”),
including rent, the fees and expenses associated with performing administrative
functions, and its allocable portion of the compensation of its Chief Financial
Officer, Chief Operating Officer and any administrative support staff, including
accounting personnel. The Fund also reimburses the Adviser for the costs
associated with the functions performed by its Chief Compliance Officer that the
Adviser pays on the Fund’s behalf pursuant to the terms of an agreement between
the Fund and Vigilant, LLC (“Vigilant”).
These arrangements could create conflicts of interest that the Fund’s Board
must monitor.
For
a description of the fees and expenses that the Fund pays to the Adviser and the
Administrator, see “The
Adviser and the Administrator—Investment Advisory Agreement—Management Fee and
Performance Fee”
and “The
Adviser and the Administrator—The Administrator and the Administration
Agreement.”
Principal
Investment Strategies
Collateralized
Loan Obligation (CLO) Overview
The
Fund’s investment portfolio consists primarily of investments in mezzanine debt
and equity tranches of corporate collateralized loan obligations (“CLOs”),
which are securitizations that are collateralized primarily by corporate credit
assets. These corporate credit assets are predominantly non-investment grade,
first lien, senior secured corporate bank loans, although many CLOs may allocate
a portion of their portfolios (typically below ten percent) to other corporate
credit assets, such as second lien or unsecured loans and/or secured or
unsecured corporate bonds.
CLOs
are generally required to hold a portfolio of assets that is highly diversified
by underlying borrower and industry and that is subject to a variety of asset
concentration limitations. By focusing its investments primarily in CLOs, the
Fund believes that it correspondingly diversifies its industry-related exposures
and avoids undue exposure to specific economic themes, such as the possible
disruptions and imbalances arising from advances in, and the growing
significance of, artificial intelligence.
While
a CLO’s collateral pool technically serves as collateral for all debt tranches
issued by the CLO, the more junior tranches (including the mezzanine debt
tranches) only have a subordinated claim on such collateral. Meanwhile, the
equity tranche’s claim on such collateral is unsecured and subordinated to all
other tranches of the CLO; in each period, the equity tranche is generally only
entitled to the residual cash flows (if any) from the collateral after the debt
tranches have received their required interest and principal payments for such
period. The CLO equity securities in which the Fund invests have capital
structures that are highly leveraged, with debt-to-equity ratios typically
ranging from eight to sixteen times, which magnifies the Fund’s risk of loss on
such investments.
Each
CLO is structured as multiple tranches which offer investors varying degrees of
credit risk, maturity, and yield characteristics. CLO tranches are typically
categorized as either senior debt, mezzanine debt, or subordinated/equity
according to their relative seniority, payment priority and degree of risk. If
the collateral underlying a given CLO defaults or otherwise underperforms,
scheduled payments to senior tranches of such CLO securitization take precedence
over those of more junior tranches, such as mezzanine debt and equity tranches,
which are the focus of the Fund’s investment strategy. The CLO securities,
including the mezzanine debt and equity tranches, in which the Fund typically
invests are unrated or rated below investment grade and are hence considered
speculative with respect to timely payment of interest and repayment of
principal. While the majority of the CLO tranches in which the Fund invests are
U.S. dollar-denominated, the Fund also invests in CLO tranches denominated in
other currencies, typically Euros. When investing in a CLO tranche in a foreign
currency, the Fund’s primary objective is generating attractive risk-adjusted
returns in that currency, as opposed to profiting from currency movements.
Accordingly, the Fund typically attempts to hedge its foreign currency risk
associated with these investments.
Most
CLOs are non-static, revolving structures that generally allow for reinvestment
of capital by an external manager (the “CLO
Collateral Manager”)
over a pre-specified period (the “Reinvestment
Period”),
typically up to five years from issuance. The terms and covenants governing a
typical CLO are, with certain exceptions, based primarily on the cash flow
generated by, and the par value (as opposed to the market price or fair value)
of, the collateral.
A
CLO finances its initial purchase of a portfolio of assets via the issuance of
CLO debt and equity tranches, with the debt tranches typically carrying
floating-rate coupons. CLO debt tranches typically carry ratings at issuance
ranging from “AAA” (or its equivalent) at the most senior level to “BB-” or “B-”
(or its equivalent), which are below investment grade, at the junior level,
typically by Moody’s Investors Service, Inc. (“Moody’s”),
S&P Global Ratings (“S&P”)
and/or Fitch Ratings, Inc. (“Fitch”).
The coupon on CLO debt tranches is typically lowest at the AAA-level and
generally increases at each level down the ratings scale. CLO equity tranches
are unrated, and at issuance typically represent approximately 6% to 11% of a
CLO’s capital structure. The diagram below is for illustrative purposes only and
is intended to depict the general structure of a typical CLO. Some CLOs also
include a B-rated debt tranche (in which the Fund may invest), and the structure
of CLOs in which the Fund invests may otherwise vary from this example. The left
column represents the CLO’s assets, which support the liabilities and equity in
the right column. The right column shows the various classes of debt and equity
issued by the CLO in order of seniority as to relative rights to receive
payments from the assets. The ranges appearing directly below the rating of each
class represent the percentages that such classes typically comprise, at
issuance, of the overall “capital structure” (i.e., total debt and equity issued
by the CLO).
CLOs
typically have two priority-of-payment schedules (commonly called “waterfalls”),
which are detailed in a CLO’s indenture and govern how cash generated from a
CLO’s underlying collateral is distributed to the CLO’s debt and equity
tranches.
First,
the “interest waterfall” applies to interest payments received on a CLO’s
underlying collateral. Subject to compliance with certain tests as set forth in
the interest waterfall, the CLO’s equity tranche is entitled to receive any
excess interest available after the required regular interest payments to CLO
debt investors are made and certain CLO fees and expenses (such as
administration and collateral management fees) are paid. To the extent that any
of these compliance tests (such as overcollateralization and/or interest
coverage tests) are breached, cash flows could be diverted away from CLO
mezzanine debt and equity tranches in favor of the more senior CLO debt tranches
until and unless such breaches are cured.
Second,
the “principal waterfall” applies to cash flow received from the return of
principal on the underlying collateral, primarily through loan repayments and
proceeds from loan sales. During the CLO’s Reinvestment Period, this principal
cash flow is typically used to purchase new assets, whereas after the
Reinvestment Period, it is typically used to pay down CLO debt tranches
sequentially based on relative seniority.
A
CLO’s indenture typically requires that the CLO Collateral Manager only purchase
assets for such CLO with maturity dates (which for a senior secured loan are
typically five to eight years from the loan issuance date) that are shorter than
the maturity date of the CLO’s liabilities (which are typically 12 to 13 years
from the CLO issuance date). Subject to the covenants set forth in the CLO
indenture, a CLO Collateral Manager is able to trade an underlying CLO’s assets
and reinvest proceeds from the sales or repayments of CLO assets. As a result,
CLO investors can face significant reinvestment risk with respect to a CLO’s
underlying portfolio. Furthermore, in addition to the risk that underlying CLO
assets may prepay, debt investors in most CLO transactions are subject to
additional prepayment risk in that the holders of a majority of the equity
tranche can direct a call or refinancing of a CLO, which could cause the CLO’s
outstanding CLO debt securities to be repaid at a sub-optimal time.
Other
Investments
As
part of its investment strategy, the Fund may also invest in other related
securities and instruments that the Adviser believes are consistent with its
investment objectives, including senior debt tranches of CLOs; loan accumulation
facilities (“LAFs”
or “warehouses”);
corporate loans (including, but not limited to, loans that ultimately may serve
as collateral for CLOs); and securities issued by other securitization vehicles,
such as collateralized bond obligations (“CBOs”).
LAFs are vehicles that acquire corporate loans and other similar corporate
credit-related assets in anticipation of ultimately collateralizing a CLO
transaction.
LAFs
receive debt financing from the “LAF provider”, which is generally the
investment bank expected to ultimately serve as the arranger on the ultimate CLO
transaction. The equity capital provided by the LAF investors, combined with the
debt financing provided by the LAF provider, is used by the LAF to acquire
corporate loans and other similar corporate credit-related assets that are
expected to collateralize the ultimate CLO transaction. This period of
accumulating assets, known as the “warehouse period,” terminates when the
ultimate CLO transaction closes, whereupon the vehicle repays the debt financing
using the proceeds from the sale of the CLO debt and equity
securities.
The
debt financing provided to LAFs typically carry maturities ranging from one to
two years (subject to potential extension). Notwithstanding these longer
maturities, the Fund’s investments in LAFs are generally expected to last from
one to three months, as the Fund would typically invest in the LAF after the
debt tranches of the related CLO have been priced (with such investments
typically being referred to as “price-to-close” LAF investments). Typically, the
Fund commits a specified amount of equity capital to the LAF, and the LAF draws
down this equity capital over time as it acquires assets, with leverage in the
LAF generally maintained between four and six times. During this commitment
period, the debt financing provided by the LAF provider typically bears interest
at a floating rate with a specified margin over a benchmark rate such as the
Secured Overnight Financing Rate (“SOFR”).
The LAF investors primarily earn the difference between the interest earned on
the accumulated assets and the interest paid to the LAF provider.
While
LAF investors (including the Fund) generally expect to invest in the equity
tranche of the ultimate CLO transaction (assuming it is launched), they are not
contractually required to do so. In cases where the CLO is not ultimately
launched, the LAF is generally unwound and the accumulated assets liquidated. In
such cases, LAF investors would receive the excess, if any, of the proceeds from
the sale of the LAF’s assets over the unpaid principal balance of the debt
financing, in addition to any interest differential described
above.
FINANCING
AND HEDGING STRATEGY
Leverage
by the Fund.
Subject to prevailing market conditions, the Fund may add financial leverage if,
immediately after such borrowing, it would have asset coverage (as defined in
the 1940 Act) of 300% or more (for leverage obtained through debt or other
“senior securities”) or 200% or more (for leverage obtained through preferred
shares). As one example, if the Fund has $100 in “Net Asset Value” (as defined
below), it may utilize leverage through obtaining debt or other “senior
securities” subject to a 300% asset coverage requirement, which will typically
result in a debt limit of $50 (e.g., $150 in total assets compared to $50 in
debt or other “senior securities”). As another example, if the Fund has $100 in
“Net Asset Value” (as defined below) and no debt, it may issue $100 in preferred
shares subject to a 200% asset coverage requirement, which will typically result
in a $100 limit on preferred shares (e.g., $200 in total assets compared to $100
in preferred shares). “Net
Asset Value”
means the total assets of the Fund minus the Fund’s total liabilities. The Fund
also may add financial leverage through borrowings entered into under reverse
repurchase agreements subject to the requirements discussed under “Derivatives
Transactions”
below. The Fund may use leverage opportunistically and may choose to increase or
decrease its leverage, or use different types or combinations of leveraging
instruments, at any time based on the Fund’s assessment of market conditions and
the investment environment. Certain instruments that create leverage are
considered to be senior securities under the 1940 Act.
In
the event the Fund fails to meet its applicable asset coverage ratio
requirements, the Fund may not be able to incur additional debt and/or issue
preferred shares, and could be required by law or otherwise to sell a portion of
its investments to repay some debt or redeem preferred shares (if any) when it
is disadvantageous to do so, which could have a material adverse effect on its
operations, and the Fund may not be able to make certain distributions or pay
dividends of an amount necessary to continue to qualify for treatment as a RIC
for U.S. federal income tax purposes.
The
Fund expects that it will, or may need to, raise additional capital in the
future to fund its continued growth or otherwise, and the Fund may do so by
entering into a credit facility, issuing preferred shares or debt securities or
through other leveraging instruments. Subject to the limitations under the 1940
Act, the Fund may incur additional leverage opportunistically and may choose to
increase or decrease its leverage. In addition, the Fund may borrow for
temporary, emergency or other purposes as permitted under the 1940 Act, which
indebtedness would be in addition to the asset coverage requirements described
above. By leveraging its investment portfolio, the Fund may create an
opportunity for increased net income and capital appreciation. However, the use
of leverage also involves significant risks and expenses, which will be borne
entirely by its shareholders, and its leverage strategy may not be successful.
For example, the more leverage is employed, the more likely a substantial
negative change will occur in the Fund’s net asset value per share. Accordingly,
any event that adversely affects the value of an investment would be magnified
to the extent leverage is utilized.
Derivative
Transactions.
The Fund engages in “Derivative Transactions,” as described below, primarily to
hedge against credit, credit spread widening, currency, interest rate, and/or
other risks, or for other risk management or investment purposes, including to
accommodate additional investments. Such Derivatives Transactions may include:
(i) purchasing credit protection, via credit default swaps, on broad-based
indices tracking high-yield credit (such as the Markit CDX North America High
Yield Index), as well as tranches on such credit default swaps, (ii) purchases
of payer swaptions (puts) on such credit default swaps, and (iii) purchases of
put options on exchange-traded funds (ETFs) that track broad-based high yield
corporate bond or leveraged loan indices.
However,
the Fund may also use Derivative Transactions for investment purposes to the
extent consistent with its investment objectives if the Adviser deems it
appropriate to do so. The Fund may purchase and sell a variety of derivative
instruments, including exchange-listed and over-the-counter (“OTC”)
options, futures, options on futures, swaps and similar instruments, various
interest rate-related products, such as fixed-to-floating interest rate swaps,
caps, floors or collars, and credit transactions and credit default swaps. The
Fund also may purchase and sell derivative instruments that combine features of
these instruments. Collectively, the Fund refers to these financial management
techniques as “Derivative
Transactions.”
The use of Derivative Transactions, if any, will generally be deemed to create
leverage for the Fund and involves significant risks. No assurance can be given
that the strategy and use of derivatives will be successful, and the Fund’s
investment performance could diminish compared with what it would have been if
Derivative Transactions were not used.
As
required by Rule 18f-4 under the 1940 Act (the “Derivatives
Rule”),
funds that engage in derivatives transactions, other than “limited derivatives
users” (as defined under the Derivatives Rule), generally must adopt and
implement a written derivatives risk management program (the “Derivatives
Risk Management Program”),
that is reasonably designed to manage the Fund’s derivatives risks, while taking
into account the Fund’s derivatives and other investments. The Derivatives
Rule mandates that the fund adopt and/or implement: (i) value-at-risk
limitations (“VaR”);
(ii) a written derivatives risk management program; (iii) Board
oversight responsibilities; and (iv) reporting and recordkeeping
requirements. The Fund has adopted and implemented a Derivatives Risk Management
Program. However, the Fund may elect in the future, without notice to
shareholders, to operate as a “limited derivatives user,” in which case it would
no longer be required to maintain its Derivatives Risk Management
Program.
The
Derivatives Rule also provides special treatment for reverse repurchase
agreements, similar financing transactions and unfunded commitment agreements.
Specifically, a fund may elect whether to treat reverse repurchase agreements
and similar financing transactions as “derivatives transactions” subject to the
requirements of the Derivatives Rule or as senior securities equivalent to
bank borrowings for purposes of Section 18 of the 1940 Act. Repurchase
agreements are not subject to the Derivatives Rule but are still subject to
other provisions of the 1940 Act. In addition, when-issued or forward settling
securities transactions that physically settle within 35 days are deemed not to
involve a “senior security” for the purposes of the asset coverage tests
described above. The Fund has currently elected to treat reverse repurchase
agreements and similar financing transactions as “derivatives transactions,”
subject to the requirements of the 1940 Act under the Derivatives Rule, but
alternatively may elect to treat such transactions as borrowings subject to the
asset coverage requirements discussed above. Further, the Fund is permitted
under the Derivatives Rule to enter into an unfunded commitment agreement,
and such unfunded commitment agreement will not be subject to the asset coverage
requirements under the 1940 Act, if the Fund reasonably believes, at the time
the Fund enters into such agreement, that the Fund will have sufficient cash and
cash equivalents to meet its obligations with respect to all such agreements as
they come due. However, the Fund may elect in the future, without notice to
shareholders, to no longer treat these types of liabilities as derivative
transactions.
Hedging
with Short Sales.
As part of its hedging program, the Fund may engage in short sales or take short
positions, such as short sales of (or short positions in) ETFs that track
leveraged loan indices, such as the Morningstar LSTA US Leveraged Loan 100
Index. Short selling typically involves selling securities that are not owned
and borrowing the same securities for delivery to the purchaser, with an
obligation to repurchase the borrowed securities at a later date. Short selling
allows an investor to profit from declines in market prices to the extent such
declines exceed the transaction costs and the costs of borrowing the securities.
A short sale may create the risk of an unlimited loss, in that the price of the
underlying security might theoretically increase without limit, thus increasing
the cost of repurchasing the securities.
In
executing its hedging strategy, the Fund may not be able to borrow the
securities that it seeks to sell short, or repurchase the securities that it has
sold short. Market conditions, including lower liquidity and regulatory
restrictions during periods of financial stress, could limit the Fund’s ability
to enter or maintain short positions effectively. Further, repurchasing
securities to close out a short position can itself cause the price of the
securities to rise further, thereby exacerbating the Fund’s loss.
Temporary
Defensive Position.
The Fund may take a temporary defensive position and substantially increase its
credit hedges and/or invest all or a substantial portion of its total assets in
cash or cash equivalents, government securities or short-term fixed income
securities during periods in which the Fund believes that adverse market,
economic, political or other conditions make it advisable to maintain a
temporary defensive position. As the CLOs and other assets in which the Fund
invests are generally illiquid in nature, the Fund may not be able to dispose of
such investments and take a defensive position. To the extent that the Fund
invests defensively, the Fund likely will not achieve its investment
objectives.
OPERATING
AND REGULATORY STRUCTURE
The
Fund is a non-diversified closed-end management investment company that has
registered as an investment company under the 1940 Act. As a registered
closed-end management investment company, the Fund is required to meet certain
regulatory tests. See “Regulation
as a Closed-End Management Investment Company.”
In addition, the Fund intends to elect to be treated, and intends to qualify
annually, as a RIC under Subchapter M of the Code.
Pursuant
to the Investment Advisory Agreement by and between the Fund and the Adviser,
and in consideration of the advisory services provided by the Adviser to the
Fund, the Adviser is entitled to a fee consisting of two components—a base
management fee (the “Base
Management Fee”)
and a performance fee (the “Performance
Fee”).
The
Base Management Fee is calculated and payable quarterly in arrears at the annual
rate of 1.50% of the Fund’s “Net Asset Value” as of the end of such fiscal
quarter. The Base Management Fee is prorated for partial quarterly periods based
on the number of days in such partial period compared to a 90-day quarter and is
calculated and payable quarterly in arrears.
The
Performance Fee is calculated and payable quarterly in arrears based upon the
Fund’s “Pre-Performance Fee Net Investment Income” with respect to each fiscal
quarter, and is subject to a hurdle rate, expressed as a rate of return on the
Fund’s common equity equal to 2.00% per quarter (i.e., 8.00% per annum), and is
subject to a “catch-up” feature.
Specifically:
● If
the Fund’s Pre-Performance Fee Net Investment Income for a fiscal quarter does
not exceed the Hurdle Amount (as defined below) for such quarter, then no
Performance Fee is payable to the Adviser with respect to such
quarter;
● If
the Fund’s Pre-Performance Fee Net Investment Income for a fiscal quarter
exceeds the Hurdle Amount for such quarter but is less than or equal to 121.21%
of the Hurdle Amount, then 100% of the portion of the Fund’s Pre-Performance Fee
Net Investment Income that exceeds the Hurdle Amount (the “Catch-Up”)
is payable to the Adviser as the Performance Fee with respect to such
quarter;
○ Therefore,
once the Fund’s Pre-Performance Fee Net Investment Income for such quarter
exactly reaches 121.21% of the Hurdle Amount, the Adviser will have accrued a
Performance Fee with respect to such quarter that is exactly equal to 17.5% of
the Pre-Performance Fee Net Investment Income (because 21.21% of the Hurdle
Amount (which is the Pre-Performance Fee Net Investment Income captured by the
Adviser during the Catch-Up phase) is equal to 17.5% of 121.21% of the Hurdle
Amount (which is the entire Pre-Performance Fee Net Investment Income at the end
of the Catch-Up phase)); and
● If
the Fund’s Pre-Performance Fee Net Investment Income for a fiscal quarter
exceeds 121.21% of the Hurdle Amount for such quarter, then 17.5% of the Fund’s
Pre-Performance Fee Net Investment Income is payable to the Adviser as the
Performance Fee with respect to such quarter.
With
respect to the Performance Fee, there will be no accumulation of the Hurdle
Amount from quarter to quarter, no claw back of amounts previously paid if the
Pre-Performance Fee Net Investment Income in any subsequent quarter is below the
Hurdle Amount for such subsequent quarter, and no delay or adjustment of payment
if the Pre-Performance Fee Net Investment Income in any prior quarter was below
the Hurdle Amount for such prior quarter.
For
these purposes, the following definitions are applicable:
“Hurdle
Amount”
for any fiscal quarter means the result obtained by multiplying the Net Asset
Value of Common Equity at the end of the immediately preceding fiscal quarter by
the Hurdle Rate. The Hurdle Amount will be appropriately adjusted for any common
share issuances or repurchases during the fiscal quarter.
“Hurdle
Rate”
means 2.00% per quarter, or 8.00% per annum. The Hurdle Rate will be
appropriately prorated for partial quarterly periods based on the number of days
in such partial period compared to a 90-day quarter.
“Net
Asset Value”
means the figure that is equal to the total assets of the Fund minus its total
liabilities.
“Net
Asset Value of Common Equity”
means the portion of Net Asset Value attributable to common equity.
“Pre-Performance
Fee Net Investment Income”
for any fiscal quarter means interest income (including accretions of discounts,
amortization of premiums, and payment-in-kind income), dividend income, and any
other income (including any fee income) earned or accrued by the Fund during
such fiscal quarter, minus the Fund’s operating expenses for such quarter
(which, for this purpose, will not include any litigation-related expenses, any
extraordinary expenses, or Performance Fee). Pre-Performance Fee Net Investment
Income does not include any realized capital gains, realized capital losses or
unrealized capital appreciation or depreciation. For purposes of computing
Pre-Performance Fee Net Investment Income, the calculation methodology will look
through total return swaps as if the Fund owned the referenced assets directly.
As a result, Pre-Performance Fee Net Investment Income includes net interest
(whether positive or negative) associated with a total return swap, which is the
difference between (a) the interest income and transaction fees related to
the reference assets and (b) all interest and other expenses paid by the
Fund to the total return swap counterparty. In the case of an interest rate
swap, Pre-Performance Fee Net Investment Income includes the net payments and
net accruals of periodic payments.
The
“catch-up” provision is intended to provide the Adviser with a performance fee
of 17.5% on all of the Fund’s Pre-Performance Fee Net Investment Income when the
Fund’s Pre-Performance Fee Net Investment Income reaches 2.424% of Net Asset
Value of Common Equity in a quarter. See “The
Investment Advisory Agreement—Management Fees.”
The
Adviser is obligated to pay expenses associated with providing the investment
services stated in the Investment Advisory Agreement, including compensation of
and office space for its officers and employees connected with research, trading
and investment management of the Fund.
CONFLICTS
OF INTEREST
Affiliations
of the Adviser and the Administrator
The
Fund’s executive officers, Portfolio Managers and certain trustees, and the
Adviser, the Administrator and their affiliates’ officers and employees, have
several conflicts of interest as a result of affiliations they have and other
activities in which they engage. The Adviser and the Administrator are
indirectly owned by Ellington Management Group, L.L.C. (“EMG”),
a registered investment adviser that provides advisory services to several
clients unrelated to the Fund. The Fund’s executive officers, Portfolio Managers
and certain trustees, and members of the Adviser’s and the Administrator’s
respective management teams, are also employees, officers and/or principals of
EMG. Under the Services Agreement, EMG provides such services, including
personnel, support and resources, to the Adviser and the Administrator as the
Adviser and the Administrator, respectively, may determine to be reasonably
necessary to perform their respective obligations under the Advisory Agreement
and the Administration Agreement. The fact that the same individuals affiliated
with the Fund are also affiliated with the Adviser, the Administrator and EMG
may result in conflicts of interest that may not be foreseen or resolved in a
manner that is always or exclusively in the Fund’s best interest.
The
Fund’s executive officers and trustees, as well as other current and potential
future affiliated persons, officers and employees of the Adviser, the
Administrator, EMG and certain of their affiliates, may serve as officers,
directors or principals of, or manage the accounts for, other entities with
investment strategies that substantially or partially overlap with the strategy
that the Fund pursues. Accordingly, they may have obligations to investors in
those entities, the fulfillment of which obligations may not be in the best
interests of the Fund or its shareholders. The Adviser has entered into, and may
in the future enter into, additional business arrangements with certain of the
Fund’s shareholders, including granting beneficial ownership in limited
liability company interests in the Adviser. In such cases, such shareholders may
have an incentive to vote shares held by them in a manner that takes such
arrangements into account. As a result of these relationships and separate
business activities, the Adviser has conflicts of interest in allocating
management time, services and functions among the Fund, other advisory clients
and other business activities.
Other
Accounts
The
Adviser is responsible for the investment decisions made on the Fund’s behalf.
There are no restrictions on the ability of the Adviser and certain of its
affiliates to manage accounts for multiple clients, including accounts for
affiliates of the Adviser or their directors, officers or employees, following
the same, similar, or different investment objectives, philosophies, and
strategies as those used by the Adviser for its account. In those situations,
the Adviser and its affiliates may have conflicts of interest in allocating
investment opportunities between the Fund and any other account managed by such
person. See “—Allocations
of Opportunities”
below. Such conflicts of interest would be expected to be heightened where the
Adviser manages an account for an affiliate or its directors, officers, or
employees. In addition, certain of these accounts may provide for higher
management fees or have higher performance fees than the Fund, and/or may allow
for higher expense reimbursements, all of which may contribute to a conflict of
interest and create an incentive for the Adviser to favor such other accounts.
Further, accounts managed by the Adviser or certain of its affiliates may hold
certain investments in CLOs, such as mezzanine debt and equity tranches, which
conflict with the positions held by other accounts in such CLOs, such as those
held by the Fund. In these cases, when exercising the rights of each account
with respect to such investments, the Adviser and/or its affiliate will have a
conflict of interest, as actions on behalf of one account may have an adverse
effect on another account managed by the Adviser or such affiliate, including
the Fund.
Further,
the professional staff of the Adviser and Administrator will devote as much time
to the Fund as such professionals deem appropriate to perform their duties in
accordance with the Investment Advisory Agreement and Administration Agreement,
respectively. However, such persons may be committed to providing investment
advisory and other services for other clients and engage in other business
ventures in which the Fund has no interests. In addition, payments under the
Administration Agreement are equal to an amount based upon the Fund’s allocable
portion of certain of the Administrator’s expenses. See “The
Adviser and the Administrator—The Administrator and the Administration
Agreement”
herein. As a result of these separate business activities, the Adviser and
Administrator may have conflicts of interest in allocating management and
administrative time, services, and functions among the Fund and its affiliates
and other business ventures or clients.
Allocation
of Investment Opportunities
As
a fiduciary, Ellington has a duty to act in the best interests of its clients
and to allocate investment opportunities in a fair and equitable manner over
time. Ellington has adopted policies and procedures designed to govern the
allocation of investment opportunities among multiple client accounts in a
manner that it believes is consistent with its fiduciary duties, taking into
account various factors. These factors may include, but are not limited to,
regulatory, tax, or legal considerations applicable to an account, the
investment guidelines and restrictions of a particular client, the risk and
return profile of the investment, available capital, liquidity needs, and other
relevant circumstances.
Investment
opportunities may be allocated using various methodologies, including
rotational, percentage-based, or other allocation approaches, provided that such
methodologies are consistent with Ellington’s internal conflict of interest and
allocation policies and the requirements of applicable law, including the
Advisers Act, the 1940 Act and other applicable laws, rules, and regulations.
Automated allocation tools may be utilized as part of its portfolio management
system to assist in trade allocation, and may be subject to review and oversight
by Ellington’s risk management and compliance teams.
In
certain cases, priority may be given to accounts in a ramp-up or start-up phase,
including the Fund, as such accounts seek to establish their investment
portfolios. While this prioritization is permitted within Ellington’s policies,
the policies allow for a protocol of allocating assets so that, on an overall
basis, each account is treated equitably. As part of these policies, the Fund
may be excluded from specified allocations of assets for tax, regulatory, risk
management, or similar reasons.
In
addition, an account managed by the Adviser, such as the Fund, is expected to be
considered for the allocation of investment opportunities alongside other
accounts managed by Ellington. However, there is no assurance that a particular
opportunity will be allocated to any particular account in a certain manner or
that any such account, including the Fund, will be able to participate in all
investment opportunities that are suitable for it.
Valuation
The
market for the Fund’s targeted investments is more limited than the market for
other credit-related investments. As a result, the Fund’s investments are
generally measured at fair value. The values of such investments are determined
by the Adviser in good faith, subject to the Board’s oversight and in accordance
with the 1940 Act and the Fund’s valuation policies, based on relevant
information compiled by the Adviser and third-party pricing services (when
available), as follows:
● For
investments that are readily valued, such as exchange-traded securities,
valuations are generally based on market prices provided by recognized pricing
sources.
● For
investments that do not have readily available market quotations, including CLO
securities and other structured products, the Adviser may value these
investments using third-party pricing services, if available. The Adviser’s
Valuation Committee oversees the valuation process and reviews third-party
prices when received. In cases where third-party pricing
is
unavailable, deemed unreliable or otherwise not received, The Adviser may
determine fair value in good faith using internal models, market data, and/or
input from portfolio management.
Due
to the limited market liquidity of certain investments, valuations may involve
subjective judgment and could differ materially from values that would be
realized in an actual transaction. There is no guarantee that the Fund will be
able to sell an investment at the fair value of such investment as determined by
the Fund. See “Determination
of Net Asset Value”
for more information.
The
Interested Trustees are associated with the Adviser and have an interest in the
Adviser’s economic success. The participation of the Adviser’s investment
professionals in the valuation process, and the interest of the Interested
Trustees in the Adviser and Ellington, could result in a conflict of interest
because, for example, the management fees paid to the Adviser are based in part
on the Fund’s Net Asset Value.
Co-Investment
Relief and Related Party Transactions
In
the ordinary course of business, and to the extent permitted by the 1940 Act and
other applicable law, the Fund may enter into transactions with persons
affiliated with it by reason of common control of the Adviser, the
Administrator, or their affiliates, including EMG. To ensure compliance with
applicable regulations, the Fund has adopted policies and procedures requiring
its executive officers to review transactions for potential affiliations among
the Fund, the Adviser, the Administrator, and their respective affiliates,
employees, officers, and directors. The Fund will not enter into such
transactions unless satisfied that doing so is consistent with the 1940 Act,
applicable SEC rules, interpretations or guidance, or the terms of any exemptive
relief granted to it. Because of these affiliations, the Fund may be required to
forgo certain investment opportunities, including investments in CLOs managed by
Adviser affiliates.
The
Nominating and Corporate Governance Committee (the “Governance
Committee”)
of the Fund reviews and approves in advance any related-party transactions,
except for certain transactions pre-approved under guidelines or
rules established by the Governance Committee or the Board. The Governance
Committee may prohibit any transaction it determines to be inconsistent with the
interests of the Fund and its shareholders.
In
certain instances, the Fund may co-invest concurrently with other accounts
managed by the Adviser, Ellington or certain of the Adviser’s affiliates,
subject to compliance with applicable regulations, regulatory guidance, and the
Adviser’s allocation procedures. The Fund, the Adviser and certain of their
affiliates have received an exemptive order from the SEC that permits the Fund
and other investment funds managed by Ellington to coinvest with each other and
with other affiliated entities (the “Co-Investment
Exemptive Order”).
As required by the Co-Investment Exemptive Order, the Fund has adopted, and the
Board has approved, policies and procedures reasonably designed to ensure
compliance with its terms, and the Adviser and the Fund’s Chief Compliance
Officer provide regular reports to the Board regarding the Fund’s co-investment
activity. Co-investments made under order are subject to certain conditions and
requirements, which could limit the Fund’s ability to participate in specific
transactions. As a result, there may be significant overlap among the Fund’s
investments and those of affiliated Ellington entities that could avail
themselves of the exemptive relief and that have investment objectives similar
to the Fund's. The Fund may also co-invest with funds managed by Ellington or
its affiliates, subject to applicable regulations, regulatory guidance, and the
Adviser’s allocation policy. A copy of the Co-Investment Exemptive Order,
including all of the conditions and the related order, is available on the SEC’s
website at www.sec.gov.
Material
Non-Public Information
In
the course of their advisory and other activities, the Adviser and Ellington may
acquire confidential or material non-public information or become subject to
trading restrictions in certain securities. As a result, the Adviser may be
unable to use or disclose such information, even when it could be useful to
investment decisions. These restrictions may limit the Adviser’s ability to
initiate or exit transactions on behalf of the Fund, which could prevent the
Fund from acquiring or disposing of certain investments.
Other
Conflicts of Interest
In
the ordinary course of its business, Ellington may face other conflicts of
interest in managing multiple client accounts. These conflicts may arise due to
differing investment advice, competing interests in the same issuer or
securitization, joint participation in transactions, investment in other client
accounts, service provider relationships, and the receipt of administrative,
servicing, or other fees. For example, client accounts may be provided with
differing investment recommendations, take opposing positions in the same
security, or invest in different levels of an issuer’s capital structure, which
may create competing economic interests. In certain cases, Ellington or its
affiliates may manage securitizations or structured vehicles in which client
accounts invest, act as a servicer or administrator for client transactions, or
determine whether services should be provided by third-party vendors or in-house
resources. These situations may present conflicts where Ellington has incentives
to maximize fees, allocate investments among accounts, or select service
providers based on existing
relationships.
Additionally, conflicts may arise when client accounts provide guarantees,
indemnities, or financing through joint vehicles, or when Ellington determines
whether to invest in affiliated entities.
Both
EMG and the Adviser have adopted policies and procedures to identify, manage,
and mitigate potential conflicts of interest in a manner consistent with their
fiduciary duties. However, there is no guarantee that all conflicts can be
eliminated or that actions taken on behalf of another client account will not
adversely affect the Fund.
Code
of Ethics and Compliance Procedures
To
address potential conflicts of interest, the Fund has adopted a code of ethics
under Rule 17j-l under the 1940 Act. Separately, the Adviser has adopted
EMG’s Code of Ethics (the “Adviser
Code of
Ethics”)
which applies to the Adviser’s officers and employees. The Adviser Code of
Ethics requires personnel to (i) act in the best interests of the Adviser
and its client accounts (including the Fund), (ii) conduct themselves in
good faith and in an ethical manner, (iii) avoid conflicts of interest with
client accounts to the extent reasonably possible, and (iv) identify and
manage conflicts of interest as they arise. Personnel subject to each code of
ethics may invest in securities for their personal accounts, including
investments that may be purchased or held by the Fund, provided that such
transactions comply with the applicable pre-clearance, reporting, and trading
restrictions. The Fund’s trustees and officers, and the officers and employees
of the Adviser, must also comply with applicable U.S. federal securities laws
and promptly report any actual or suspected violations to supervisory
personnel.
The
Adviser believes it has established a working environment, firm-wide compliance
culture, and compliance procedures and systems reasonably designed to manage
potential conflicts of interest. The Adviser has adopted policies and procedures
governing, among other things, the execution of portfolio transactions, personal
trading by employees, and other potential conflicts of interest. These policies
are designed to ensure that all client accounts are treated equitably over
time.
In
addition, each code of ethics referenced above is incorporated by reference as
an exhibit to the registration statement that this prospectus supplement is a
part of and is available on the EDGAR Database on the SEC’ s website at
www.sec.gov. Copies may also be obtained for a duplicating fee by
emailing [email protected].
ADDITIONAL
INFORMATION
The
Fund will file with or submit to the SEC periodic and current reports, proxy
statements and other information meeting the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act").
The Fund maintains a website at http://www.ellingtoncredit.com and makes all of
its periodic and current reports, proxy statements and other publicly filed
information available, free of charge, on or through the Fund’s website. The
Fund makes its website content available for informational purposes only. The
Fund’s website should not be relied upon for investment purposes, nor is it
incorporated by reference into this prospectus supplement or the accompanying
prospectus. The SEC maintains a website that contains reports, proxy and
information statements and other information the Fund files with the SEC at
www.sec.gov. Copies of these reports, proxy and information statements and other
information may also be obtained for a duplicating fee by emailing
[email protected].
CORPORATE
INFORMATION
The
Fund’s principal executive offices are located at 53 Forest Avenue, Suite 301,
Old Greenwich, Connecticut 06870. The Fund maintains a website at
www.ellingtoncredit.com (which is not intended to be an active hyperlink).
Information contained on the Fund’s website is not incorporated by reference
into this prospectus supplement or the accompanying prospectus, and you should
not consider that information to be part of this prospectus supplement or the
accompanying prospectus.
THE
OFFERING
Set
forth below is additional information regarding offerings of the Common
Shares:
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Issuer |
Ellington
Credit Company |
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Securities
Offered |
Up
to $125 million offering price of Common Shares. |
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Manner
of Offering |
“At
the market” offerings that may be made from time to time through or to the
Agents, using commercially reasonable efforts consistent with their normal
sales and trading practices. See “Plan
of Distribution”
in this prospectus supplement. The Adviser or its affiliates may, from
time to time, in their sole discretion, pay some or all of the commissions
payable under the Equity Distribution Agreement or make additional
supplemental payments to ensure that the sales price per share of the
Common Shares sold by the Fund in connection with all of the offerings
made hereunder will not be less than the Fund’s then-current NAV per
share. Any such payments made by the Adviser or its affiliates will not be
subject to reimbursement by the Fund. |
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Use
of Proceeds |
The
Fund expects to use any net proceeds from the sale of the Common Shares
pursuant to this prospectus supplement and the accompanying prospectus for
general corporate purposes, including to acquire investments in accordance
with its investment objectives and strategies described in this prospectus
supplement and the accompanying prospectus. The Fund currently anticipates
that it will generally take not more than one month to deploy the net
proceeds from the completion of any sale of Common Shares, although this
timeline may vary depending on market conditions and the availability of
appropriate investment opportunities. Pending such deployment, the Fund
may repay short-term borrowings under reverse repurchase agreements, which
the Fund uses to finance many of its investments, or may invest the net
proceeds in temporary investments, which are expected to earn
substantially lower returns than the Fund’s principal investment
strategies. See “Use
of Proceeds”
in this prospectus supplement. |
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Custodian
and Transfer Agent |
The
Bank of New York Mellon Trust Company, National Association serves as the
Fund’s custodian, and Equiniti Trust Company, LLC serves as the Fund’s
distribution paying agent, registrar and transfer agent. See “Custodians,
Distribution Paying Agent, Transfer Agent and Registrar”
in the accompanying prospectus. |
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Listing |
The
Common Shares are listed and traded on the NYSE under the ticker symbol
“EARN”. |
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Leverage |
Subject
to prevailing market conditions, the Fund may incur financial leverage if,
immediately after such incurrence, it would have asset coverage (as
defined in the 1940 Act) of at least 300% for leverage obtained through
debt or other “senior securities”, or at least 200% for leverage obtained
through preferred shares.
As
an example, if the Fund has $100 in “Net Asset Value” (as defined below),
it may utilize leverage through debt or other “senior securities” subject
to a 300% asset coverage requirement, which will typically result in a
maximum debt of $50 (e.g., $150 in total assets against $50 in debt or
other “senior securities”). As a further example, if the Fund has $100 in
Net Asset Value (as defined below) and no debt, it may issue up to $100 in
preferred shares subject to a 200% asset coverage requirement (e.g., $200
in total assets against $100 in preferred shares). “Net Asset Value” means
the total assets of the Fund minus the Fund’s total
liabilities.
The
Fund may also incur financial leverage through reverse repurchase
agreements, subject to the requirements discussed under “Derivatives
Transactions” herein. The Fund may use leverage opportunistically and may
choose to increase or decrease its leverage, or use different types or
combinations of leveraging instruments, at any time based on its
assessment of market conditions and the investment environment. Certain
instruments that create leverage may be considered senior securities under
the 1940 Act. See “Prospectus
Supplement Summary—Financing and Hedging Strategy.” |
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U.S.
Federal Income Taxes |
The
Fund intends to elect to be treated, and intends to qualify annually
thereafter, as a RIC for U.S. federal income tax purposes, beginning with
its tax year ended March 31, 2026.
As
a RIC, the Fund generally will not be required to pay U.S. federal income
taxes on ordinary income or capital gains that it distributes to holders
of its Common Shares. To qualify and maintain its status as a RIC, the
Fund must meet specific source-of-income and asset diversification
requirements and distribute, in each taxable year, at least 90% of the sum
of its investment company taxable income and net tax-exempt interest, if
any, to holders of its Common Shares. If, in any taxable year, the Fund
fails to qualify as a RIC, it would be taxed as an ordinary corporation,
and could be required to recognize unrealized gains, pay substantial
taxes, and make substantial distributions before re-qualifying as a RIC.
Prospective investors are urged to consult their own tax advisors
regarding the tax implications of acquiring, holding and disposing of
Common Shares in light of their particular circumstances. See
“U.S.
Federal Income Tax Matters”
in the accompanying prospectus. |
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Risk
Factors |
Investing
in the Common Shares involves significant risks. Please carefully consider
the information set forth under “Risk
Factors”
in this prospectus supplement and beginning on page 19 of the accompanying
prospectus to read about factors you should consider, including the risks
of leverage, before investing in the Common Shares. |
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Available
Information |
The
Fund is required to file periodic reports, proxy statements and other
information with the SEC. Such information is available on the SEC’s
website at www.sec.gov and
free of charge on the Fund’s website, at www.ellingtoncredit.com, or by
contacting the Fund at: Ellington Credit Company, 53 Forest Avenue, Suite
301, Old Greenwich, CT 06870, Attention: Secretary, or by telephone at
(203) 698-1200. |
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Trading
at a Discount |
Shares
of closed-end investment companies that are listed on an exchange
frequently trade at a discount to their NAV. If the Common Shares trade at
a discount to the Fund's NAV, it will likely increase the risk of loss for
purchasers in this offering. Investing in the Common Shares involves a
high degree of risk. Before buying any Common Shares, you should read the
discussion of the principal risks of investing in the Common Shares under
“Risk
Factors”
in this prospectus supplement and beginning on page 19 of the accompanying
prospectus. |
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Dividend
Reinvestment Plan |
Under
the dividend reinvestment plan, or the “DRP,”
cash dividends and/or distributions on Common Shares, net of any
applicable U.S. withholding tax, are automatically reinvested in
additional Common Shares unless a shareholder elects to receive cash. The
DRP is administered by Equiniti as plan agent (the “Plan
Agent”).
Shareholders are automatically enrolled but may opt out by notifying the
Plan Agent before the applicable record date; shareholders holding through
a broker or other nominee must contact that nominee to make such election.
Participants generally receive newly issued Common Shares at a price equal
to 95% of the market price of the Common Shares on the NYSE on the
distribution payment date, although the Board may authorize open-market
purchases instead. The automatic reinvestment of distributions does not
relieve participants of applicable U.S. federal, state or local income
taxes. See “Dividend
Reinvestment Plan”
in the accompanying prospectus. |
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SUMMARY
OF FEES AND EXPENSES
The
following table is designed to assist investors in understanding the costs and
expenses borne, directly or indirectly, by an investor in the Common Shares,
based on the assumptions set forth below. The percentages below are estimates
and may vary in practice. Except where the context suggests otherwise, whenever
this table refers to fees or expenses, the Fund will pay such fees and expenses
out of its net assets and, consequently, shareholders will indirectly bear such
fees and expenses as investors in the Fund.
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SHAREHOLDER
TRANSACTION EXPENSES |
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Sales
load (as a percentage of the offering price) |
2.00 |
% |
(1) |
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Offering
expenses borne by the Fund (as a percentage of the offering
price) |
0.55 |
% |
(2) |
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Dividend
reinvestment plan expenses |
— |
% |
(3) |
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Total
Shareholder Transaction Expenses (as a percentage of offering
price) |
2.55 |
% |
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ANNUAL
FUND EXPENSES |
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(as
a percentage of average Net Asset Value of Common Equity) |
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Management/Advisory
Fees |
1.46 |
% |
(4) |
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Performance
Fee payable under Investment Advisory Agreement (17.5%) |
2.81 |
% |
(5) |
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Interest
Payments and Fees on Borrowed Funds |
6.72 |
% |
(6) |
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Other
Expenses |
3.00 |
% |
(7) |
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Total
Annual Fund Expenses |
13.99 |
% |
(8) |
(1)Represents
the maximum sales commissions with respect to the Common Shares being sold in
this offering, which the Fund will pay the Agents in connection with sales of
the Common Shares effected by such Agents under the Equity Distribution
Agreement. There is no guarantee that there will be any sales of Common Shares
pursuant to this prospectus supplement and the accompanying
prospectus.
(2)The
offering expenses of this offering are estimated to be approximately
$690,000.
(3)The
expenses of administering the DRP are included in “Other Expenses.” Shareholders
may incur brokerage charges if they direct their broker or the Plan Agent to
sell their Common Shares acquired pursuant to the DRP. See “Dividend
Reinvestment Plan”
in the accompanying prospectus.
(4)The
Management Fee is calculated and payable quarterly in arrears at an annual rate
of 1.50% of the Fund’s “Net Asset Value” (total assets less total liabilities).
Assumes Management Fee for the year ended March 31, 2026 adjusted to reflect the
issuance of an additional $15 million of Common Shares pursuant to the offering
described herein.
(5)Under
the Investment Advisory Agreement, the Fund pays the Adviser a Performance Fee
calculated and payable quarterly in arrears based upon the Fund’s
“Pre-Performance Fee Net Investment Income” for the immediately preceding
quarter, subject to a hurdle rate, expressed as a rate of return on the Fund’s
common equity, equal to 2.00% per quarter (or an annualized hurdle rate of
8.00%), subject to a “catch-up” feature. For this purpose, “Pre-Performance Fee
Net Investment Income” means, for any fiscal quarter, interest income (including
discount accretion, premium amortization, and payment-in-kind income), dividend
income, and any other income (including any fee income) earned or accrued by the
Fund during such quarter, minus the Fund’s operating expenses for such quarter
(excluding any litigation-related expenses, extraordinary expenses, and the
Performance Fee). Pre-Performance Fee Net Investment Income does not include
realized capital gains, realized capital losses or unrealized capital
appreciation or depreciation. For purposes of computing Pre-Performance Fee Net
Investment Income, the calculation will look through total return swaps as if
the Fund owned the referenced assets directly. As a result, Pre-Performance Fee
Net Investment Income includes net interest (whether positive or negative)
associated with any total return swap, which is the difference between
(a) the interest income and transaction fees related to the reference
assets and (b) all interest and other expenses paid to the swap
counterparty. For interest rate swaps, Pre-Performance Fee Net Investment Income
includes the net payments and net accruals of periodic payments.
The
calculation of the Performance Fee for each quarter is as follows:
•If
the Fund’s Pre-Performance Fee Net Investment Income for a quarter does not
exceed the Hurdle Amount for such quarter, then no Performance Fee is payable
for such quarter;
•If
the Fund’s Pre-Performance Fee Net Investment Income for a quarter exceeds the
Hurdle Amount for such quarter but is less than or equal to 121.21% of the
Hurdle Amount, then 100% of the portion of the Catch-Up is payable to the Fund’s
Adviser as the Performance Fee with respect to such
quarter.
Therefore,
once the Fund’s Pre-Performance Fee Net Investment Income for such quarter
exactly reaches 121.21% of the Hurdle Amount, the Fund’s Adviser will have
accrued a Performance Fee with respect to such quarter that is exactly equal to
17.5% of the Pre-Performance Fee Net Investment Income (because 21.21% of the
Hurdle Amount (which is the Pre-Performance Fee Net Investment Income captured
by the Adviser during the Catch-Up phase) is equal to 17.5% of 121.21% of the
Hurdle Amount (which is the entire Pre-Performance Fee Net Investment Income at
the end of the Catch-Up phase)); and
•If
the Fund’s Pre-Performance Fee Net Investment Income for a fiscal quarter
exceeds 121.21% of the Hurdle Amount for such quarter, then 17.5% of
Pre-Performance Fee Net Investment Income is payable to the Fund’s Adviser as
the Performance Fee with respect to such quarter.
•With
respect to the Performance Fee, there will be no accumulation of the Hurdle
Amount from quarter to quarter, no claw back of amounts previously paid if the
Pre-Performance Fee Net Investment Income in any subsequent quarter is below the
Hurdle Amount for such subsequent quarter, and no delay or adjustment of payment
if the Pre-Performance Fee Net Investment Income in any prior quarter was below
the Hurdle Amount for such prior quarter.
The
Performance Fee assumes that Pre-Performance Fee Net Investment Income exceeds
121.21% of the Hurdle Amount in each quarter, and that it will be based on the
Performance Fee accrued for the year ended March 31, 2026 adjusted to reflect a
proportional increase in the Performance Fee corresponding to the issuance of an
additional $15 million of common stock pursuant to the offering described
herein.
(6)The
figures above assume average borrowings of $258 million at an average interest
rate of 5.84% per annum, which includes the senior unsecured notes of $54
million issued in March 2026 and average borrowings under reverse repurchase
agreements of $204 million. If the Fund issues additional debt securities and/or
utilizes additional reverse repurchase agreement borrowings, then its interest
expense and total annual expenses would increase accordingly.
(7)“Other
Expenses” includes the Fund’s overhead expenses, including payments under the
Administration Agreement based on the Fund’s allocable portion of overhead and
other expenses incurred by the Administrator, as well as fees associated with
outsourced administrative functions, and is based on amounts for the fiscal year
ended March 31, 2026. “Other Expenses” also includes fees paid to the Fund’s
independent accounts and legal counsel; compensation paid to independent
trustees; and debt issuance costs associated with the Fund’s senior unsecured
notes issued in March 2026, for which the Fund has elected the fair value option
and therefore expensed those costs at issuance.
(8)“Total
Annual Fund Expenses” are presented as a percentage of average Net Asset Value
of Common Equity, because common shareholders bear all of the fees and expenses
listed above (and not the holders of any preferred stock or debt
securities). The indirect expenses associated with the Fund’s CLO
equity investments are not included above, but if included, the Fund’s total
annual expenses would increase to 25.90% of the average Net Asset Value of
Common Equity.
The
following example illustrates the hypothetical expenses payable by a common
shareholder on a $1,000 investment assuming a 5% annual net return, net of total
fund expenses of 13.99%:
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Example
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1
Year |
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3
Years |
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5
Years |
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10
Years |
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A
shareholder would pay the following expenses on a $1,000 investment,
assuming a 5% annual net return |
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$140 |
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$441 |
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$773 |
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$1,759 |
The
example and fee tables above do not represent the Fund’s future expenses; actual
expenses may be greater or less than those shown. While the example assumes a
5.0% annual return, as required by the SEC, the Fund’s actual performance will
vary and may differ materially. For a more complete description of the fees and
expenses borne directly and indirectly by the Fund, see “Fund
Expenses”
and “The
Investment Advisory Agreement—Management Fees.”
Also, while the example assumes reinvestment of all distributions at net asset
value, participants in the Fund's DRP will receive Common Shares in accordance
with the terms of the plan.
See
“Dividend
Reinvestment Plan.”
RISK
FACTORS
Investing
in the Common Shares involves a significant number of risks. In addition to the
risks described below and in “Risk
Factors”
in the accompanying prospectus, you should carefully consider all other
information contained in this prospectus supplement, the accompanying
prospectus, any free writing prospectus that the Fund authorizes and the
documents incorporated by reference in this prospectus supplement and the
accompanying prospectus before making a decision to purchase the Common Shares.
If any of the following risks actually materialize, the Fund’s business,
financial condition and results of operations could be materially adversely
affected. In such case, the Net Asset Value and/or market price of the Common
Shares and other securities could decline substantially, in which case investors
could lose all or part of their investment in the Fund. Investors should also be
aware that during times of increased uncertainty, volatility and distress in
economies, financial markets, and labor and health conditions, the risks to
which the Fund is subject may also increase significantly compared to normal
conditions. Finally, the risks set out below are not the only risks the Fund
faces. Additional risks and uncertainties not presently known to it, or not
presently deemed material by it, may also impair its operations and performance,
as well as the Net Asset Value and/or the market price of the Common
Shares.
The
risks described below specifically relate to this offering. Please also see the
“Risk
Factors”
section of the accompanying prospectus and the risks described in the Fund’s
Annual Report on Form N-CSR for the fiscal year ended March 31, 2026, filed with
the SEC on May 29, 2026 and incorporated by reference herein, and in any other
documents incorporated by reference herein, and in any other documents
incorporated by reference herein.
Risks
Related to the Offering
The
actual number of Common Shares the Fund sells under the Equity Distribution
Agreement, if any, and the actual gross proceeds from those sales cannot be
predicted. In addition, the Fund may not be able to sell the full amount
available under the ATM Program.
Pursuant
to the Equity Distribution Agreement, the Fund may offer and sell from time to
time up to $125 million of Common Shares through or to the Agents. The Fund
controls the timing and amount of any sales of Common Shares under the Equity
Distribution Agreement, subject to market conditions and other factors that the
Fund determines to be appropriate. The Fund may ultimately elect to sell all,
some or none of the Common Shares available for sale pursuant to the Equity
Distribution Agreement.
Because
the sales price per Common Share will fluctuate based on the market price of the
Common Shares during the applicable sales period, it is not possible to predict
the number of Common Shares the Fund will sell, the price per Common Share at
which the Fund will sell them or the aggregate gross proceeds the Fund will
receive under the ATM Program, if any. The Fund may not be able to sell Common
Shares under the ATM Program in the amounts contemplated by the Equity
Distribution Agreement or at all. The Fund’s inability to generate all or any of
the potential revenue available through sales of Common Shares under the ATM
Program, in the absence of other financing sources, could adversely affect the
Fund’s business, financial condition, results of operations and ability to make
distributions to its shareholders.
The
Fund will have broad discretion in the use of the net proceeds from this
offering and may not deploy those proceeds effectively.
The
Fund cannot determine in advance the precise uses of the net proceeds, if any,
from sales of Common Shares under the ATM Program. Accordingly, the Fund will
have broad discretion in determining how to apply those proceeds, and investors
will not have an opportunity to evaluate those decisions as part of an
investment decision. The Fund’s use of the net proceeds may not improve its
financial condition or the market value of its Common Shares, and the Fund may
not deploy the proceeds in a manner that produces a favorable return for
shareholders.
The
ultimate use of any net proceeds will depend on a variety of factors and may
differ materially from the Fund’s currently anticipated uses. Pending their use,
the Fund may invest the net proceeds in temporary investments, including cash,
cash equivalents, U.S. government securities and other high-quality debt
investments with maturities of one year or less. Those investments may generate
returns that are substantially lower than the returns the Fund expects to earn
on investments made in accordance with its investment objectives and
strategies.
Sales
of Common Shares under the ATM Program, or the perception that such sales may
occur, could adversely affect the market price of the Common
Shares.
The
Fund may issue and sell Common Shares from time to time under the ATM Program at
prevailing market prices. Actual or anticipated sales of a substantial number of
Common Shares under the ATM Program could place downward pressure on the market
price of the Common Shares. In addition, the issuance of Common Shares under the
ATM Program will dilute the ownership interest of existing
shareholders.
The
market price of the Common Shares may be adversely affected by the perception
that sales under the ATM Program may occur, even if no sales are made. Actual or
anticipated sales under the ATM Program also could adversely affect the Fund’s
ability to raise additional equity capital in the future on terms it would
otherwise consider acceptable.
Investors
who purchase Common Shares at different times will likely pay different
prices.
Pursuant
to the Equity Distribution Agreement, the Fund has discretion, subject to market
demand, to vary the timing, prices and number of Common Shares sold under the
ATM Program. As a result, investors who purchase Common Shares at different
times will likely pay different prices and may experience different investment
outcomes.
Investors
may experience a decline in the value of their Common Shares as a result of
future sales by the Fund under the ATM Program, including sales at prices lower
than the prices those investors paid.
USE
OF PROCEEDS
Sales
of the Common Shares under this prospectus supplement and the accompanying
prospectus may be made in negotiated transactions or by any method that is
deemed to be an “at the market offering,” as defined in Rule 415 under the
Securities Act. There is no guarantee that there will be any sales of the Common
Shares pursuant to this prospectus supplement and the accompanying prospectus.
Actual sales, if any, of Common Shares under this prospectus supplement and the
accompanying prospectus may be less than the amount set forth on the cover page
of this prospectus supplement depending on, among other things, the market price
of the Common Shares, at the time of any such sale. As a result, the actual net
proceeds the Fund receives may be more or less than the amount of net proceeds
estimated in this prospectus supplement. However, the sales price per share of
the Common Shares offered pursuant to this prospectus supplement and the
accompanying prospectus, less commissions payable under the Equity Distribution
Agreement, will not be less than the NAV per share of the Common Shares at the
time of such sale; provided that the Adviser or its affiliates may, in their
sole discretion, pay some or all of such commissions or make additional
supplemental payments in connection with a sale in order to satisfy this
requirement. Any such payments by the Adviser or its affiliates will not be
subject to reimbursement by the Fund.
Assuming
the sale of $125 million of Common Shares and the payment by the Fund of the
maximum 2.0% sales agent commission in connection with all such sales, the Fund
anticipates that its net proceeds from this offering will be approximately
$121.81 million, after deducting the Agents’ commissions and estimated offering
expenses payable by the Fund.
The
Fund intends to use any net proceeds from the sale of the Common Shares pursuant
to this prospectus supplement for general corporate purposes, including to
acquire investments in accordance with its investment objectives and strategies
described in this prospectus supplement and the accompanying
prospectus.
The
Fund currently anticipates that it will generally take not more than one month
to deploy the net proceeds from the completion of any sale of Common Shares,
although this timeline may vary depending on market conditions and the
availability of appropriate investment opportunities consistent with its
investment objectives and strategies. The Fund’s investment decisions will
depend on prevailing market conditions and the opportunities identified by the
Adviser and may be adjusted in response to changes in interest rates or the
economic and credit environment. The Fund cannot assure investors that it will
achieve its targeted investment pace, which may adversely affect its returns.
Until the Fund identifies appropriate investments or other uses for such
proceeds, the Fund may repay short-term borrowings under reverse repurchase
agreements, which the Fund uses to finance many of its investments, or may
invest in temporary investments, such as cash, cash equivalents, and
high-quality debt instruments; the Fund expects returns on such instruments to
be substantially lower than those anticipated from its principal investment
strategies. Accordingly, before the Fund has fully deployed the proceeds
hereunder in accordance with its investment objectives and strategies, such
proceeds are likely to earn only modest income, which may not cover the Fund’s
expenses during such period.
While
the Fund intends to use any net proceeds from a sale of Common Shares as
described above, it will have significant flexibility in deploying such proceeds
and may use them to acquire assets with which investors may not agree, or that
differ from those in which the Fund has historically invested, or for purposes
outside the scope described herein.
As
of October 19, 2026, the Fund’s asset coverage (as defined in the 1940 Act) with
respect to senior securities that are debt was approximately 686%.
DESCRIPTION
OF THE COMMON SHARES
For
a description of the particular terms of the Common Shares, see “Description
of the Common Shares”
in the accompanying prospectus.
PLAN
OF DISTRIBUTION
We
have entered into the Equity Distribution Agreement with the Agents under which
we may issue and sell our Common Shares from time to time in an amount up to
$125,000,000 through or to the Agents, acting as our sales agents or principals.
Upon
written instructions from us, the Agents will use their commercially reasonable
efforts consistent with their normal sales and trading practices to sell, as our
sales agent, our Common Shares under the terms and subject to the conditions set
forth in the Equity Distribution Agreement and our instructions. We will
instruct the designated Agent as to the amount of Common Shares to be sold by it
and the minimum price below which sales of Common Shares may not be made. We may
instruct the Agents not to sell our Common Shares if the sales cannot be
effected at or above the price designated by us in any instruction, or for any
other reason. The sales price per Common Share offered by this prospectus
supplement and the accompanying prospectus, less commissions payable under the
Equity Distribution Agreement and discounts, if any, will not be less than the
net asset value per share of our Common Shares at the time of such
sale.
Sales
of our Common Shares, if any, under this prospectus supplement and the
accompanying prospectus may be made by any method that is deemed to be an “at
the market offering,” as defined in Rule 415 under the Securities Act. The
Agents will provide written confirmation of a sale to us no later than the
opening of the trading day on the NYSE following each trading day in which our
Common Shares are sold under the Equity Distribution Agreement. Each
confirmation will include the number of Common Shares sold on the preceding day,
the net proceeds to us and the commission payable by us to the designated Agent,
in connection with the sales.
The
Agents will receive a commission from us up to 2.0% of the gross sales price of
any Common Shares sold through them under the Equity Distribution Agreement. We
have agreed to reimburse fees and expenses of counsel of the Agents up to
$25,000 for entering into the Equity Distribution Agreement. We estimate that
the total expenses for the offering, excluding commission and reimbursements
payable to the Agents under the terms of the Equity Distribution Agreement, will
be approximately $665,000.
Unless
otherwise specified in our instructions, settlement for sales of our Common
Shares will occur on the first trading day following the date on which such
sales are made (or such other settlement cycle as may be in effect under Rule
15c6-1 under the Exchange Act from time to time), in return for payment of the
net proceeds to us. There is no arrangement for funds to be received in an
escrow, trust or similar arrangement. We will disclose, through our annual
reports, semi-annual reports and quarterly reports, as applicable, at least
quarterly, the number of Common Shares sold through the Agents under the Equity
Distribution Agreement and the net proceeds to us.
In
connection with the sale of our Common Shares on our behalf, the Agents will be
deemed to be “underwriters” within the meaning of the Securities Act, and the
commission of the Agents will be deemed to be underwriting commissions or
discounts. We have agreed to provide indemnification and contribution to the
Agents against certain civil liabilities, including liabilities under the
Securities Act.
The
offering of our Common Shares pursuant to the Equity Distribution Agreement will
terminate upon the earlier of (i) the sale of all the Common Shares registered
under the registration statement of which this prospectus supplement forms a
part or (ii) the termination of the Equity Distribution Agreement as permitted
therein. We may terminate the Equity Distribution Agreement in its entirety or
with respect to any one or multiple of the Agents in our sole discretion at any
time by giving five days’ prior written notice to the Agents. Each Agent may
terminate the Equity Distribution Agreement with respect to itself under the
circumstances specified in the Equity Distribution Agreement and in its sole
discretion at any time by giving five days’ prior written notice to
us.
The
Agents and their affiliates have provided and may in the future provide various
investment banking and advisory services to us from time to time for which they
have received, and are expected to receive, customary fees and
expenses.
Armstrong
Securities LLC (“Armstrong”),
one of the Agents, is a subsidiary of Ellington Financial Inc. and an affiliate
of the Fund. As an Agent, Armstrong will receive compensation for any Common
Shares that it may sell in this offering.
LEGAL
COUNSEL
Certain
legal matters with respect to the Common Shares offered hereby will be passed
upon for the Fund by Dechert LLP, New York, New York. Certain legal matters with
respect to this offering will be passed upon for the
Agents
by Duane Morris LLP, New York, New York.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The
financial statements as of March 31, 2026 and for the year ended March 31, 2026,
incorporated by reference in this prospectus supplement and the accompanying
prospectus, have been audited by PricewaterhouseCoopers LLP, 300 Madison Avenue,
New York, New York, 10017, an independent registered public accounting firm, as
stated in their report incorporated by reference herein.
The
Board has approved the engagement of PricewaterhouseCoopers LLP to serve as the
Fund’s independent registered public accounting firm.
ADDITIONAL
INFORMATION
The
Fund files with or submits to the SEC annual and semi-annual reports, proxy
statements and other information meeting the informational requirements of the
Exchange Act or pursuant to Rule 30b2-1 under the 1940 Act. The SEC
maintains a website that contains reports, proxy and information statements and
other information the Fund files with the SEC at www.sec.gov. This information
is also available free of charge on its website (www.ellingtoncredit.com) or by
calling (203) 698-1200. Information on its website and the SEC’s website is not
incorporated into or a part of this prospectus supplement or the accompanying
prospectus.
INCORPORATION
BY REFERENCE
As
noted above, this prospectus supplement and the accompanying prospectus are part
of a registration statement that the Fund has filed with the SEC. The Fund is
allowed to “incorporate by reference” the information that it files with the
SEC, which means that it can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus supplement and the accompanying prospectus, and
later information that the Fund files with the SEC will automatically update and
supersede this information.
The
Fund incorporates by reference any future filings (including those made after
the date of the filing of the registration statement of which this prospectus
supplement and the accompanying prospectus are a part) that it will make with
the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act or
pursuant to Rule 30b2-1 under the 1940 Act, including any filings on or after
the date of this prospectus supplement and the accompanying prospectus from the
date of filing (excluding any information furnished, rather than filed), until
the Fund has sold all of the offered securities to which this prospectus and any
accompanying prospectus supplement relates or the offering is otherwise
terminated. The information incorporated by reference is an important part of
this prospectus. Any statement in a document incorporated by reference into this
prospectus supplement and the accompanying prospectus will be deemed to be
automatically modified or superseded to the extent a statement contained in (1)
this prospectus supplement, (2) the accompanying prospectus or (3) any other
subsequently filed document that is incorporated by reference into this
prospectus supplement or the accompanying prospectus modifies or supersedes such
statement. The documents incorporated by reference herein include:
● The
Fund’s Notification of Registration on Form
8-A,
filed with the SEC on March 31, 2026;
● The
Fund’s definitive proxy statement on Schedule
14A,
filed with the SEC on May 5, 2026;
● The
Fund’s Annual Report on Form
N-CSR
for the fiscal year ended March 31, 2026, filed with the SEC on May 29, 2026;
and
● The
Fund’s Current Reports on Form 8-K, filed with the SEC on April
8, 2026,
May
11, 2026,
June
8, 2026,
June
25, 2026,
July
8, 2026,
August
10, 2026,
September
8, 2026,
and October
7, 2026.
The
Fund’s periodic reports filed pursuant to Section 30(b)(2) of the 1940 Act and
Sections 13 or 15(d) of the Exchange Act, as well as this prospectus supplement
and the accompanying prospectus, are available on the Fund’s website at
www.ellingtoncredit.com. Information contained on the Fund’s website is not
incorporated into this prospectus supplement and the accompanying prospectus,
and you should not consider information contained on the Fund’s website to be
part of this prospectus supplement or the accompanying prospectus. The Fund will
provide without charge to each person, including any beneficial owner, to whom
this prospectus supplement and the accompanying prospectus are delivered, upon
written or oral request, a copy of any and all of the documents that have been
or may be incorporated by reference in this prospectus supplement or the
accompanying prospectus (other than exhibits, unless the exhibits are
specifically incorporated by reference into these documents). Requests should be
directed to:
Ellington
Credit Company
53
Forest Avenue, Suite 301
Old
Greenwich, CT 06870
(203)
698-1200
All
filings made by the Fund pursuant to the Exchange Act or Rule 30b2-1 under the
1940 Act after the date of this registration statement and prior to the
effectiveness of the registration statement shall be deemed to be incorporated
by reference into this prospectus supplement and the accompanying
prospectus.
You
should rely only on the information incorporated by reference or provided in
this prospectus supplement or the accompanying prospectus. The Fund has not
authorized anyone to provide you with different or additional information, and
you should not rely on such information if you receive it. The Fund is not
making an offer of, or soliciting an offer to buy, any securities in any state
or other jurisdiction where such offer or sale is not permitted. You should not
assume that the information in this prospectus supplement or the accompanying
prospectus incorporated by reference herein or in the accompanying prospectus is
accurate as of any date other than the date on the front of this prospectus
supplement or the accompanying prospectus (as applicable) or those
documents.
