earn-20260331
ELLINGTON
CREDIT COMPANY
TABLE
OF CONTENTS
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| PAGE |
| Letter
to Shareholders and Management Discussion of Fund Performance |
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| Important
Information |
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| Summary
of Certain Portfolio Characteristics |
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| Fees
and Expenses |
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| Consolidated
Financial Statements for the Year Ended March 31, 2026 |
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| Summary
of Risk Factors |
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| Price
Range of Common Shares |
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| Dividend
Reinvestment Plan |
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| Additional
Information |
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Letter
to Shareholders and Management’s Discussion of Fund Performance
Dear
Fellow Shareholders:
We
are pleased to provide you with the following annual report of Ellington Credit
Company (“we,” “us,” “our,” or the “Fund”) for the fiscal year ended
March 31, 2026. This marks our first annual report to shareholders since
completing our April 1, 2025 conversion to a closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
“1940 Act”) (the “Conversion”).
The
Fund is externally advised by an affiliate of Ellington Management Group,
L.L.C., a leading fixed-income investment manager founded in 1994. The Fund
benefits from Ellington’s three decades of experience in structured credit
investing, portfolio construction, and disciplined risk management.
The
Fund’s common shares trade on the New York Stock Exchange (“NYSE”) under the
ticker symbol “EARN.” As of March 31, 2026, the Fund’s net asset value
(“NAV”) per share was $4.09, and it had approximately 37.6 million common shares
outstanding. The closing price per share of our common shares on March 31,
2026 was $4.43, which represented an 8.3% premium to NAV per common share as of
such date.
As
of March 31, 2026, the Fund had $54.0 million aggregate principal amount of
senior unsecured notes, accruing interest at 8.5% per annum and maturing in
2031. These notes have been rated ‘BBB’ by Egan-Jones Ratings Company, a
nationally recognized statistical rating organization, and they trade on the
NYSE under the ticker symbol “ELLA.”
INVESTMENT
OBJECTIVES AND STRATEGY
Our
primary investment objectives are to generate attractive current income and
risk-adjusted total returns for shareholders. We seek to achieve these
investment objectives by investing primarily in the mezzanine debt and equity
tranches of corporate collateralized loan obligations (“CLOs”), which are
securitizations predominantly backed by portfolios of non-investment-grade,
first-lien senior secured corporate loans. Certain CLOs may also hold a limited
portion (typically less than 10% in the U.S.) of other corporate credit assets,
such as second-lien or unsecured loans and bonds.
Our
investment philosophy emphasizes value, diversification, and flexibility across
the CLO capital structure. We allocate dynamically between mezzanine debt and
equity tranches and across both U.S. and European markets, allowing us to shift
up or down in the capital structure and across markets as fundamentals and
valuations evolve. Active trading is a core element of our strategy. During the
fiscal year ended March 31, 2026, we executed 262 discrete CLO trades,
reflecting our commitment to identifying and monetizing relative-value
opportunities as they emerge.
In
March 2026, we enhanced our capital structure through the issuance of $54
million of long-term senior unsecured notes. As of March 31, 2026 our
borrowings consisted of these long-term senior unsecured notes, as well as
$166.3 million of reverse repurchase agreements, and the average overall funding
cost on our borrowings was 5.77%.
We
complement our active trading approach with disciplined risk management. We
opportunistically use derivative instruments to hedge against adverse credit
events and credit-spread widening. These hedges, together with prudent leverage,
liquidity management and rigorous portfolio monitoring, are designed to protect
NAV and reduce volatility across market cycles.
OVERVIEW
OF RESULTS FOR THE FISCAL YEAR ENDED MARCH 31, 2026
•Net
investment income of $27.8 million, or $0.74 per share, and adjusted net
investment income of $30.2 million, or $0.80 per share. See “Reconciliation of
Adjusted Net Investment Income to Net Investment Income” below for additional
details.
•GAAP
net loss of $(38.9) million, or $(1.03) per share, primarily due to net realized
and unrealized losses.
•Total
distributions of $0.96 per common share ($0.08 per month).
•NAV
per common share was $4.09 as of March 31, 2026.
•Following
Conversion, remaining mortgage-related assets and hedges were liquidated with
minimal NAV impact (approximately $0.01 per common share).
•CLO
portfolio1
expanded by 23% to $308.4 million.
◦262
CLO trades executed, consisting of $302.8 million of portfolio purchases and
$95.2 million of portfolio sales.
1
Also
includes CLO-related corporate debt and equity securities.
◦Weighted
average GAAP yield2,
based on amortized cost, of 14.2% for CLO portfolio.
◦$68.6
million, or $1.82 per common share, in recurring cash distributions3
from CLO portfolio, well in excess of total operating expenses and distributions
to shareholders.
•Added
significant credit hedges designed to protect against downside risk, alongside
the expansion of the CLO portfolio.
◦Credit
hedges totaled $187.5 million of high-yield CDX notional equivalents4
as of March 31, 2026.
•Enhanced
capital structure by issuing $54.0 million of long-term senior unsecured notes,
and following fiscal year-end, deployed the proceeds primarily into new CLO
investments, along with refinancing certain short-term secured
financing.
Portfolio
Overview
Shortly
after the Conversion, we completed the disposition of our legacy
mortgage-related assets and hedges, with minimal impact on NAV, and subsequently
expanded our CLO portfolio. The timing of the Conversion proved advantageous, as
heightened macroeconomic uncertainty following the unexpected tariff
announcements in early April 2025 led to sharp declines in asset prices and
elevated market volatility. We capitalized on this opportunity by efficiently
redeploying capital into CLO investments near their April 2025 lows, ahead of
the subsequent market rebound. With market conditions favorable following the
April rebound, we increased the size of our CLO portfolio by 52% during the
first half of the fiscal year, to $380 million as of September 30,
2025.
The
second half of the fiscal year proved more challenging for the CLO market,
particularly for CLO equity tranches, as discussed in greater detail below.
Given the market headwinds, most of our purchases were of CLO mezzanine debt,
which proved more resilient than CLO equity, and we generally avoided new-issue
equity in view of less appealing pricing dynamics, only participating in one
new-issue equity transaction during the entire fiscal year. Where we did add
equity investments, we prioritized higher-quality, longer-dated positions in the
secondary market. These new investments were more than offset by opportunistic
sales, paydowns, fair value declines concentrated in CLO equity, and several
redemptions of mezzanine positions at par, resulting in a decline in the CLO
portfolio to $308.4 million as of March 31, 2026.
Overall,
we executed 262 discrete CLO trades during the year, purchasing $302.8 million
of CLO investments and selling $95.2 million. Of these purchases, approximately
72% (by investment amount) were CLO mezzanine debt and 28% were equity. Our CLO
portfolio grew by 23% year over year, from $250.3 million at March 31, 2025 to
$308.4 million at March 31, 2026. As shown in the table below, our holdings at
fiscal year-end primarily consisted of $162.8 million of equity tranches ($159.6
million dollar-denominated and $3.2 million non-dollar-denominated) and $145.1
million of mezzanine debt tranches ($117.7 million dollar-denominated and $27.4
million non-dollar-denominated).
The
following table summarizes the composition of the investment portfolio as of
March 31, 2026.
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| Amortized
Cost |
| Fair
Value |
| %
of Total Investments |
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| (In
thousands) |
| |
| U.S.
CLO debt |
| $ |
129,681 |
|
| $ |
117,708 |
|
| 38.2 |
% |
| European
CLO debt |
| 33,379 |
|
| 27,416 |
|
| 8.9 |
% |
| Total
CLO debt |
| 163,060 |
|
| 145,124 |
|
| 47.1 |
% |
| U.S.
CLO equity |
| 204,092 |
|
| 159,597 |
|
| 51.8 |
% |
| European
CLO equity |
| 5,341 |
|
| 3,217 |
|
| 1.0 |
% |
| Total
CLO equity |
| 209,433 |
|
| 162,814 |
|
| 52.8 |
% |
| Total
CLO debt and equity |
| 372,493 |
|
| 307,938 |
|
| 99.9 |
% |
| Other
investments |
| 446 |
|
| 425 |
|
| 0.1 |
% |
| Total
investments |
| $ |
372,939 |
|
| $ |
308,363 |
|
| 100.0 |
% |
2
Based
on amortized cost; used in the calculation of interest income.
3
Recurring
cash distributions primarily includes distributions received from our CLO
investments but excludes cash received from CLO redemptions or sales during the
quarter. Recurring cash distributions includes certain cash distributions that
may be characterized as return of capital.
4
Notional
equivalents are estimated based on historical price relationships between credit
hedges (and/or their underlying components) and the Index, together with other
factors. Our estimations of price relationships between instruments may change
over time, and actual price relationships experienced may differ from those
previously estimated.
Our
CLO portfolio is diversified across U.S. and European markets and represents
more than 75 underlying collateral managers, providing access to nearly 2,000
underlying corporate obligors across a wide range of industries. While we
continue to invest opportunistically in both U.S. dollar and
non-dollar-denominated CLOs based on evolving relative value, we expect our
portfolio to remain predominantly U.S. dollar-denominated. As of March 31, 2026,
the weighted-average maturity of the corporate loans underlying our CLO
portfolio was approximately 4.3 years, with an average facility size of $1.7
billion, which supports secondary market liquidity.
Alongside
the expansion of our long CLO portfolio, we significantly increased the size of
our credit hedging portfolio during the fiscal year. Our selective use of credit
hedges, combined with prudent leverage and liquidity management, is designed to
mitigate downside risk while preserving flexibility as market conditions evolve.
These hedges are intended to protect against more severe market dislocations
rather than offset less pronounced market movements. As of March 31, 2026, we
held substantial credit hedges, which we estimated represented high-yield CDX
notional equivalents of $187 million, or more than 100% of our NAV. We also
maintained a foreign currency hedge portfolio to manage exposure related to our
European CLO investments.
We
ended the fiscal year with cash and cash equivalents of $57.7 million, compared
to $17.4 million as of March 31, 2025, providing meaningful dry powder for
future deployment.
The
following table summarizes our credit hedges, expressed in estimated notional
equivalents1
of the Markit CDX North American High Yield Index (the "Index"), as of March 31,
2026:
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| (In
thousands) |
| Estimated
Index Equivalents |
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Credit
Hedges2 |
| $ |
(187,462) |
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(1)Notional
equivalents are estimated based on historical price relationships between credit
hedges (and/or their underlying components) and the Index, together with other
factors. Our estimations of price relationships between instruments may change
over time, and actual price relationships experienced may differ from those
previously estimated.
(2)Corporate
credit hedges may include CDS, ETFs, equities, total return swaps, and similar
instruments referencing both single issuers and indices, as well as options,
tranches, and other derivatives on such instruments.
Portfolio
Performance
We
began the fiscal year by exiting our legacy mortgage-related investments and
redeploying the proceeds into CLO investments following the April tariff-related
sell-off, a timely move that boosted performance. Our investment portfolio
generated positive results during the first half of the fiscal year, driven by
net investment income and appreciation on CLO mezzanine debt. During the second
half, however, macroeconomic volatility, weakness in lower-quality credits, and
refinancings and repricings of premium loans created headwinds in the CLO market
and led to portfolio losses that more than offset the positive performance from
the first half.
On
balance, our investment portfolio generated negative results for the full fiscal
year, as unrealized losses primarily concentrated in CLO equity exceeded net
investment income, trading gains, and gains from the call of mezzanine debt
positions held at discounts to par. Results for the fiscal year also reflected
modest losses on credit hedges, as corporate credit spreads were relatively
resilient.
At
March 31, 2026, our CLOs had a fair value of $307.9 million and a weighted
average projected yield of 16.5%, based on fair value, and we held cash and cash
equivalents of $57.7 million.
Market
Overview
The
fiscal year ended March 31, 2026 was marked by early strength in CLO
markets that was ultimately undermined by macro volatility and weakening
fundamentals later in the year.
Following
tariff-related uncertainty in early April 2025, a subsequent pause in tariffs
and Federal Reserve interest rate cuts supported a rebound in risk assets and
positive momentum through the first half of our fiscal year. Strong demand for
leveraged loans, improving borrower fundamentals, and capital inflows supported
the CLO market. Credit spreads tightened and volatility declined.
Conditions
deteriorated in the second half, however, as U.S. leveraged loan prices declined
and performance diverged sharply by credit quality. Higher-quality,
premium-priced loans continued to reprice and refinance at par, compressing
excess interest, and BB-rated loans declined modestly while CCC-rated loans fell
significantly amid rising idiosyncratic default concerns. Markets entered
calendar 2026 on firmer footing but weakened quickly, as concerns around
AI-driven disruption in
the
software sector—a small but still meaningful component of CLO collateral—as well
as broader geopolitical risks, including the conflict in Iran, weighed on credit
markets.
Default
rates increased in both the U.S. and Europe during the fiscal year. Over the
course of the year, the trailing 12-month default rate on the Morningstar LSTA
U.S. Leveraged Loan Index increased from 0.82% to 1.44%, and the default rate on
the Morningstar LSTA EU Leveraged Loan Index increased from 0.29% to 1.42%. Over
the same period, the average price of loans underlying the Morningstar LSTA U.S.
Leveraged Loan Index declined to $94.63 from $96.31, but this masked significant
dispersion between resilient higher-quality loans and pronounced declines in
lower-quality credits.
Loan
repricing activity was elevated throughout the fiscal year in both the U.S. and
Europe, as callable, higher-quality, premium loans were repriced with tighter
coupon spreads at par. This trend began to reverse near the end of the fiscal
year, as repricing activity declined significantly, reducing a headwind that had
previously compressed CLO portfolio excess spreads. For the full fiscal year,
leveraged loan issuance totaled $1.2 trillion, including $450 billion of
repricings. Total CLO issuance was over $490 billion, including nearly $290
billion of refinancings and resets, as managers and equity investors capitalized
on tighter spreads—primarily in the first half—to refinance or reset existing
deals.
CLO
performance followed a similar trajectory. U.S. and European CLO debt spreads
generally tightened in the first half amid strong demand, benefiting mezzanine
tranches. Higher-quality, seasoned mezzanine debt tranches outperformed as
prepayment and repricing activity remained elevated. For CLO equity, tighter CLO
debt spreads enabled liabilities to be refinanced or reset at lower coupons, but
tighter loan spreads contributed to excess spread compression, while isolated
defaults further pressured performance.
These
trends reversed in the second half, as loan weakness and credit concerns drove
credit spread widening, particularly in lower-rated CLO tranches, while senior
CLO debt remained relatively stable. Lower-rated CLO debt experienced spread
widening amid selling pressures and sector-specific weakness. Overall for the
year, credit spreads on senior CLO tranches were modestly tighter, while those
on lower-rated CLO tranches were unchanged to wider.
For
CLO equity, elevated default concerns weighed heavily on valuations,
particularly for CLOs with higher exposure to lower-rated loans. These pressures
were further compounded by the continued excess spread compression within most
CLOs, which reduced the excess interest available to CLO equity tranches. With
excess spreads and CLO liquidation values declining for much of the second half
of the fiscal year, CLO equity generated significant losses and underperformed
CLO debt.
Looking
ahead, market dislocations have improved the forward opportunity set, with
valuations reset and higher projected risk-adjusted yields. Loan repricing risk
has declined, near-term loan maturities remain limited, and CCC exposure is at
multi-year lows, while continued investor demand for new issue CLOs provides
technical support for CLO tranches. As of March 31, 2026 approximately 14% of
loans trade at par and above, suggesting near-term repricing risk has somewhat
abated. Less than 0.5% of loans mature before 2027, indicating limited near-term
refinancing pressure, while the share of loans rated CCC+ or below has fallen to
just 4.4%, a multi-year low. Demand for loans remains strong, supported by CLO
formation and higher base rates.
Reconciliation
of Adjusted Net Investment Income to Net Investment Income
We
calculate Adjusted Net Investment Income as net investment income adjusted for:
(i) non-recurring expenses; (ii) non-capitalized transaction costs, (iii) net
realized gain (loss) and change in net appreciation (depreciation) associated
with periodic settlements on interest rate swaps, and (iv) interest and dividend
income (expense) net of transaction fees associated with the referenced assets
on total return swaps. Adjusted Net Investment Income is a supplemental non-GAAP
financial measure. We believe that the presentation of Adjusted Net Investment
Income provides information useful to investors, because: (i) we believe that it
is a useful indicator of both current and projected long-term financial
performance, in that it excludes the impact of certain expenses and
non-capitalized transaction costs that we believe are less useful in forecasting
long-term performance and distribution-paying ability; and (ii) we believe that
realized and accrued periodic settlements on interest rates swaps and interest
and dividend income (expense) net of transaction fees on total return swaps are
similar to net investment income and are more appropriately classified as
recurring.
Our
calculation of Adjusted Net Investment Income may differ from the calculation of
similarly titled non-GAAP financial measures by our peers, with the result that
these non-GAAP financial measures might not be directly comparable. In addition,
because Adjusted Net Investment Income is an incomplete measure of our financial
results and differs from net investment income computed in accordance with U.S.
GAAP, it should be considered supplementary to, and not as a substitute for, net
investment income computed in accordance with U.S. GAAP.
In
setting our distributions, our Board of Trustees considers our earnings,
liquidity, financial condition, distribution requirements, and financial
covenants, along with other factors that our Board of Trustees may deem relevant
from time to time.
The
following table reconciles, for the year ended March 31, 2026, our Adjusted
Net Investment Income to the line on our Consolidated Statement of Operations
entitled Net Investment Income, which we believe is the most directly comparable
U.S. GAAP measure:
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| (In
thousands except share amounts and per share amounts) |
|
Year
Ended
March 31,
2026 |
| Net
Investment Income |
| $ |
27,824 |
|
| Adjustments: |
| |
|
Less:
Non-capitalized transaction costs and non-recurring expenses(1) |
| (2,409) |
|
| Plus:
Net realized and change in net appreciation (depreciation) on periodic
settlements of interest rate swaps and net interest and dividend income
(expense) on total return swaps |
| $ |
(3) |
|
| Adjusted
Net Investment Income |
| $ |
30,230 |
|
| Weighted
Average Shares Outstanding |
| 37,566,273 |
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| Adjusted
Net Investment Income Per Share |
| $ |
0.80 |
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(1)For
the year ended March 31, 2026, includes $1.7 million of underwriters' fees
related to the issuance of the Senior Notes, for which we have elected the fair
value option, $0.6 million of professional fees and other expenses incurred in
connection with such issuance, and $0.1 million of expenses incurred in
connection with our strategic transformation.
DISTRIBUTIONS
For
the year ended March 31, 2026, monthly distributions totaling $0.96 per
common share were declared. During and subsequent to the year ended
March 31, 2026, our Board of Trustees (the “Board”) declared the following
distributions on our common shares:
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| Declaration
Date |
| Record
Date |
| Payment
Date |
| Distribution
per common share |
| April
3, 2025 |
| April
30, 2025 |
| May
27, 2025 |
| $ |
0.08 |
|
| May
7, 2025 |
| May
30, 2025 |
| June
30, 2025 |
| 0.08 |
|
| June
9, 2025 |
| June
30, 2025 |
| July
31, 2025 |
| 0.08 |
|
| July
8, 2025 |
| July
31, 2025 |
| August
29, 2025 |
| 0.08 |
|
| August
7, 2025 |
| August
29, 2025 |
| September
30, 2025 |
| 0.08 |
|
| September
8, 2025 |
| September
30, 2025 |
| October
31, 2025 |
| 0.08 |
|
| October
7, 2025 |
| October
31, 2025 |
| November
28, 2025 |
| 0.08 |
|
| November
10, 2025 |
| November
28, 2025 |
| December
31, 2025 |
| 0.08 |
|
| December
4, 2025 |
| December
31, 2025 |
| January
30, 2026 |
| 0.08 |
|
| January
8, 2026 |
| January
30, 2026 |
| February
27, 2026 |
| 0.08 |
|
| February
9, 2026 |
| February
27, 2026 |
| March
31, 2026 |
| 0.08 |
|
| March
9, 2026 |
| March
31, 2026 |
| April
30, 2026 |
| 0.08 |
|
| April
7, 2026 |
| April
30, 2026 |
| May
29, 2026 |
| 0.08 |
|
| May
7, 2026 |
| May
29, 2026 |
| June
30, 2026 |
| 0.08 |
|
We
have also adopted a dividend reinvestment plan (“DRIP”), which enables
shareholders to compound returns by automatically reinvesting cash distributions
in additional common shares of the Fund at a 5% discount to the then-current
market price. We generally issue new shares under the DRIP, although the Board
reserves the right to authorize open-market purchases of shares in connection
with the DRIP. The DRIP is administered by Equiniti Trust Company, LLC, as plan
agent. See “Dividend
Reinvestment Plan.”
CONCLUDING
THOUGHTS
The
fiscal year ended March 31, 2026 was, in many ways, a tale of two halves for
EARN. Our successful transition to a closed-end fund at the start of the fiscal
year, the rapid redeployment of capital into the CLO market, and strong
performance in the first half highlighted many of the capabilities that
differentiate us. While market conditions deteriorated in the latter half, our
up-in-credit bias and active trading drove meaningful outperformance relative to
peers, even as we generated an overall net loss. Over the course of the year, we
executed more than 260 trades to capture relative value across the CLO capital
structure, with nearly three-quarters of our purchases in mezzanine debt,
reflecting our disciplined positioning higher in the capital stack, particularly
during the more challenging second half.
We
believe recent market headwinds have reset valuations and significantly improved
the forward opportunity set. Loan prepayments and repricings have slowed and CLO
credit spreads have widened, creating attractive entry points for new CLO
investments. At the same time, CLO managers are increasingly able to acquire
performing loans at attractive discounts, which supports deal structures and
enhances return potential. Ongoing dispersion in credit performance is also
creating compelling opportunities for active management and tactical capital
rotation. With higher reinvestment yields and improving market sentiment, we
believe the current environment provides a strong foundation for continued
portfolio growth.
Our
portfolio benefits from diversification across CLO equity and mezzanine debt in
both the U.S. and Europe, enhancing our resilience in a complex macro
environment. While tariffs, AI-related disruption, geopolitical turbulence, and
recessionary risks pose uncertainty, our portfolio diversification, active
trading, and robust credit hedging are designed to mitigate downside risks and
preserve flexibility during periods of volatility.
We
entered the new fiscal year with dry powder, enhanced balance sheet flexibility,
and an expanding opportunity set. Our recent issuance of unsecured notes has
increased our earnings capacity, with proceeds already deployed into
high-conviction investments that have contributed to positive performance in the
new fiscal year. This balance sheet strength has enabled us to deploy capital
into a dislocated market at attractive levels. April results were very strong,
with an estimated economic return of nearly 7%, and this momentum has continued
into May, reinforcing our confidence in the forward return outlook.
We
believe that our balanced approach—mezzanine debt for stability, equity for
upside, hedging for downside protection, and active trading—positions us to
generate compelling income and total returns for our shareholders across market
environments. We enter this next phase with a focused investment strategy, a
disciplined approach to risk, and a portfolio we believe is well-suited to
capitalize on the opportunities ahead.
Thank
you for your continued support and confidence.
Laurence
E. Penn
Chief
Executive Officer & President
About
Ellington Credit Company
The
Fund is a non-diversified closed-end fund that seeks to provide attractive
current yields and risk-adjusted total returns by investing primarily in
corporate CLOs, with a focus on mezzanine debt and equity tranches. The Fund is
externally managed and advised by an affiliate of Ellington Management Group,
L.L.C., a leading fixed-income investment manager founded in 1994. The Fund
benefits from Ellington’s extensive experience and deep expertise in portfolio
management, credit analysis, and risk management.
Special
Note Regarding Forward-Looking Statements
When
used in this Certified Shareholder Report of Registered Management Investment
Companies on Form N-CSR, in future filings with the Securities and Exchange
Commission, or the "SEC," or in press releases or other written or oral
communications, statements which are not historical in nature, including those
containing words such as "believe," "expect," "anticipate," "estimate,"
"project," "plan," "continue," "intend," "should," "would," "could," "goal,"
"objective," "will," "may," "seek," or similar expressions or their negative
forms or references to strategy, plans or intentions, are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and, as such, may involve known and unknown
risks, uncertainties and assumptions.
Forward-looking
statements are based on our beliefs, assumptions and expectations of our future
operations, business strategies, performance, financial condition, liquidity and
prospects, taking into account information currently available to us. These
beliefs, assumptions, and expectations are subject to numerous risks and
uncertainties and can change as a result of many possible events or factors, not
all of which are known to us. If a change occurs, our business, financial
condition, liquidity, results of operations and strategies may vary materially
from those expressed or implied in our forward-looking statements. The following
factors are examples of those that could cause actual results to vary from those
stated or implied by our forward-looking statements: changes in interest rates
and the market value of our investments, market volatility, changes in the
default rates on corporate loans, our ability to borrow to finance our assets,
changes in government regulations affecting our business, a deterioration in the
market for collateralized loan obligations, our ability to adapt to the new
regulatory regime associated with our conversion to a closed-end fund/RIC,
potential business disruption related to our conversion to a closed-end
fund/RIC, ability to achieve the anticipated benefits of our conversion to a
closed-end fund/RIC, and other changes in market conditions and economic trends,
such as changes to fiscal or monetary policy, heightened inflation, increased
tariffs, slower growth or recession, and currency fluctuations. Furthermore, as
stated above, forward-looking statements are subject to numerous risks and
uncertainties, including, among other things, those described under the heading
“Risk Factors” in our Registration Statement on Form N-2, which can be accessed
through the link to our SEC filings under "For Investors" on our website (at
www.ellingtoncredit.com) or at the SEC's website (www.sec.gov). Other risks,
uncertainties, and factors that could cause actual results to differ materially
from those projected or implied may be described from time to time in reports we
file with the SEC, and it is not possible for us to predict or identify them
all. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
“Names
Rule” Policy
In
accordance with the requirements of the 1940 Act, we have adopted a policy to
invest at least 80% of our assets in the particular type of investments
suggested by our name. Accordingly, under normal circumstances, we invest at
least 80% of the aggregate of our net assets and borrowings for investment
purposes in credit and credit-related instruments. For purposes of this policy,
we consider 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
we already hold investments, or other CLOs), as well as on an outright basis,
although they are not currently a core focus of our investment strategy.
Our
investments in other investment companies, and other instruments designed to
obtain indirect exposure to credit and credit-related instruments will also be
counted towards our 80% investment policy to the extent such instruments have
similar economic characteristics to the investments included within that policy.
Derivatives instruments we use will be counted toward our 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 our 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.
Fundamental
Investment Restrictions
Our
stated fundamental policies, which may only be changed by the affirmative vote
of a majority of our outstanding voting securities (the shares), are listed
below. For the purposes of this report, “majority of the outstanding voting
securities of the Fund” means the vote, at an annual or special meeting of
shareholders, duly called, (a) of 67% or more of the shares present at such
meeting, if the holders of more than 50% of the outstanding shares are present
or represented by proxy; or (b) of more than 50% of the outstanding shares,
whichever is less. We may not:
(1)Borrow
money, except as permitted by (i) the 1940 Act, or interpretations or
modifications by the SEC, SEC staff or other authority with appropriate
jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC
staff or other authority with appropriate jurisdiction. We may borrow for
investment purposes, for temporary liquidity, or to finance repurchases of our
shares.
(2)Issue
senior securities, except as permitted by (i) the 1940 Act, or interpretations
or modifications by the SEC, SEC staff or other authority with appropriate
jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC
staff or other authority with appropriate jurisdiction.
(3)Underwrite
securities of other issuers, except insofar as we may be deemed an underwriter
under the Securities Act of 1933, as amended (the “Securities Act”) in
connection with the disposition of its portfolio securities. We may invest in
restricted securities (those that must be registered under the Securities Act
before they may be offered or sold to the public) to the extent permitted by the
1940 Act.
(4)Invest
more than 25% of the market value of our assets in the securities of companies,
entities or issuers engaged in any one industry. This limitation does not apply
to investment in the securities of the U.S. Government, its agencies or
instrumentalities.
(5)Purchase
or sell real estate or interests in real estate. This limitation is not
applicable to investments in securities that are secured by or represent
interests in real estate (e.g., mortgage loans evidenced by notes or other
writings defined to be a type of security). Additionally, the preceding
limitation on real estate or interests in real estate does not preclude us from
investing in mortgage-related securities or investing in companies engaged in
the real estate business or that have a significant portion of their assets in
real estate (including real estate investment trusts), nor from disposing of
real estate that may be acquired pursuant to a foreclosure (or equivalent
procedure) upon a security interest.
(6)Purchase
or sell commodities, commodity contracts, including commodity futures contracts,
unless acquired as a result of ownership of securities or other investments,
except that we may invest in securities or other instruments backed by or linked
to commodities, and invest in companies that are engaged in a commodities
business or have a significant portion of their assets in commodities, and may
invest in commodity pools and other entities that purchase and sell commodities
and commodity contracts.
(7)Make
loans, except to the extent permitted by (i) the 1940 Act, or interpretations or
modifications by the SEC, SEC staff or other authority with appropriate
jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC
staff or other authority with appropriate jurisdiction. For purposes of this
investment restriction, the purchase of debt obligations (including acquisitions
of loans, loan participations or other forms of debt instruments) shall not
constitute loans made by us. Additionally, the preceding limitation on loans
does not preclude us from modifying note terms.
With
respect to participation interests, we will treat both the financial
intermediary and the borrower as “issuers” for purposes of fundamental
investment restriction (5).
The
fundamental investment restrictions set forth above limit our ability to engage
in certain practices and purchase securities and other instruments other than as
permitted by, or consistent with, applicable law, including the 1940 Act.
Relevant limitations of the 1940 Act as they presently exist are described
below. These limitations are based either on the 1940 Act itself, the rules or
regulations thereunder or applicable orders of the SEC. In addition,
interpretations and guidance provided by the SEC staff may be taken into account
to determine if a certain practice or the purchase of securities or other
instruments is permitted by the 1940 Act, the rules or regulations thereunder or
applicable orders of the SEC. As a result, the foregoing fundamental investment
policies may be interpreted differently over time as the statute, rules,
regulations or orders (or, if applicable, interpretations) that relate to the
meaning and effect of these policies change, and no vote of shareholders, as
applicable, will be required or sought.
Non-Fundamental
Investment Restrictions
We
are also subject to the following non-fundamental restrictions and policies,
which may be changed by our Board without the approval of the holders of a
majority of our outstanding voting securities. We may not:
(1)Change
or alter our investment objective or 80% policy;
(2)Purchase
securities of other investment companies, except to the extent that such
purchases are permitted by applicable law, including any exemptive orders issued
by the SEC; and
(3)Purchase
any securities on margin except that we may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio investments
(the deposit or payment by the Fund of initial or variation margin in connection
with swaps, forward contracts and financial futures contracts and options
thereon is not considered the purchase of a security on margin).
Compliance
with any policy or limitation of ours that is expressed as a percentage of
assets is determined at the time of purchase of portfolio securities. The policy
will not be violated if these limitations are exceeded because of changes in the
market value or investment rating of our assets or if a borrower distributes
equity securities incident to the purchase or ownership of a portfolio
investment or in connection with a reorganization of a borrower. We interpret
our policies with respect to borrowing and lending to permit such activities as
may be lawful for us, to the full extent permitted by the 1940 Act or by
exemption from the provisions therefrom pursuant to an exemptive order of the
SEC.
Use
of Leverage and Leverage Risks
The
use of leverage, whether directly or indirectly through investments such as CLO
equity, mezzanine debt securities or other instruments that inherently involve
leverage, may magnify our risk of loss. CLO equity and junior debt securities
are very highly leveraged (with CLO equity securities typically having
debt-to-equity ratios ranging from eight to sixteen times), and therefore the
CLO securities in which we are currently invested and in which we intend to
invest are subject to a higher degree of loss since the use of leverage
magnifies losses.
Further,
subject to prevailing market conditions, we may add financial leverage if,
immediately after such borrowing, we 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 we have $100 in “Net Asset Value” (as defined
below), we 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 we have $100 in “Net
Asset Value” (as defined below) and no debt, we 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 our total assets o minus our total
liabilities. We also may add financial leverage through borrowings entered into
under reverse repurchase agreements subject to the requirements discussed under
“Derivatives Transactions” in our Registration Statement on Form N-2. We may use
leverage opportunistically and may choose to increase or decrease our leverage,
or use different types or combinations of leveraging instruments, at any time
based on our 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 we fail to meet our applicable asset coverage ratio requirements, we
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 our 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 our operations, and we
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.
We
expect that we will, or may need to, raise additional capital in the future to
fund our continued growth or otherwise, and we 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, we may
incur additional leverage opportunistically and may choose to increase or
decrease its leverage. In addition, we 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 our
investment portfolio, we 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 our 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.
See
"Risk Factors—Risks Related to the Fund's Financing, Hedging and Derivatives
Activities—The Fund uses financial leverage in executing its business strategy,
which may adversely affect the return on its assets and may reduce cash
available for distribution to its shareholders, as well as increase losses when
economic conditions are unfavorable" for a tabular illustration of the effect of
the use of direct leverage on returns from an investment in our common shares
assuming various annual returns, net of expenses.
Performance
Data
The
graph below compares the cumulative shareholder return on our common shares with
that of the S&P BDC Index for the period from April 1, 2025 through March
31, 2026. We do not believe there is an appropriate index of companies with an
investment strategy similar to our own with which to compare the return on our
common stock. The graph assumes that, on April 1, 2025, a person invested
$10,000 in each of our common shares and the S&P BDC Index.
The
graph measures cumulative total shareholder return, which takes into account
both changes in share price and distributions. Total return based on market
value is calculated assuming that our common shares were purchased at the market
price as of the beginning of the period and that the total number of shares were
sold at the closing market price per share on the last day of the period.
Distributions are assumed to be reinvested at prices obtained under the DRIP.
See “Dividend Reinvestment Plan” below in this report on Form N-CSR for
additional information regarding our DRIP. The computation does not reflect any
sales commission investors may incur in purchasing or selling our shares.
Returns do not reflect the deduction of taxes that a shareholder would pay on
any distributions received or on the sale of shares. S&P BDC Index returns
do not reflect payment of any sales charges or fees an investor may pay to
purchase the underlying securities or investment funds that are intended to
track the performance of the S&P BDC Index.
Performance
figures for certain periods ended March 31, 2026:
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| Year
Ended
March 31, 2026 |
| Annualized
Total Return |
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|
| 1
Year |
|
From
Inception(1) |
| EARN |
| (1.26) |
% |
| (1.26) |
% |
| (1.26) |
% |
| S&P
BDC Index |
| (13.98) |
% |
| (13.98) |
% |
| (13.98) |
% |
(1)For
the period April 1, 2025, date of the Conversion, to March 31,
2026.
Data
for the Fund represents returns based on the change in the market price of our
common shares, assuming the reinvestment of all distributions at prices obtained
under the DRIP.
The
performance of an index is not an exact representation of any particular
investment, as you cannot invest directly in an index. The index shown herein
has not been selected to represent a benchmark for our strategy’s performance,
but is instead disclosed to allow for comparison of our returns to those of
known, recognized, and/or similar indices. The S&P BDC Index is designed to
measure the performance of all business development companies (“BDCs”) listed on
the NYSE or NASDAQ and satisfy market capitalization and other eligibility
requirements. Although we are not a BDC, BDCs generally invest in high-yielding
credit investments, as do we. In addition, similar to us, BDCs generally elect
to be classified as a “regulated investment company” under Subchapter M of the
Internal Revenue Code of 1986, as amended (the “Code”), which generally requires
an investment company to distribute its taxable income to
shareholders.
The
performance data quoted herein represents past performance. Past performance is
not indicative of, or a guarantee of, future results. Future results may vary
and may be higher or lower than the data shown. A new fund’s performance may not
represent how the fund is expected to or may perform in the long term. Current
performance may be lower or higher than the performance data quoted above.
Investment return and principal value will fluctuate, so that shares, when
redeemed, may be worth more or less than their original cost. Our performance,
especially over very short periods of time, should not be the sole factor in
making your investment decisions.
Summary
of Certain Portfolio Characteristics (Unaudited)
The
below chart summarizes the Fund’s investment portfolio as of March 31,
2026:
The
following provides details on the underlying CLO portfolio as of March 31,
2026. The information is presented on a look-through basis to the CLO tranches
(both equity and mezzanine) held by the Fund as of March 31, 2026 and
reflects the aggregate underlying exposure of the Fund based on the portfolios
of those investments.
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SUMMARY
OF UNDERLYING PORTFOLIO(1)(2) |
| |
| Number
of Unique Underlying Loan Issuers |
| 1,967 |
|
| Floating
Rate Loan Spread |
| 3.10% |
|
Junior
Over-collateralization Cushion(3) |
| 4.29% |
|
Percentage
of Loans that are Senior Secured(4) |
| 95.5% |
|
Loan
Credit Rating(5) |
| B+/B |
| Loan
Maturity |
| 4.3
years |
| Loan
Facility Size |
| $1.7
billion |
| Currency:
USD/EUR Exposure |
| 90%/10% |
(1)Includes
corporate bonds.
(2)This
data is estimated and is derived from sources including CLO trustee reports,
custody statements, and other information received from CLO collateral managers
and other third party sources. Weighted averages shown unless otherwise
indicated.
(3)Weighted
average junior over-collateralization cushion is calculated solely with respect
to positions in CLO equity tranches.
(4)Represents
the percentage of the total collateral underlying the Fund’s CLO investments
(including corporate loans and bonds) that are characterized as senior secured
loans.
(5)Based
on loan credit ratings assigned by Standard & Poor’s (“S&P”) or, for
loans without an S&P rating, the S&P-equivalent rating of another rating
agency that does/did rate the loan.
The
following charts(1)(2)
provide additional information on the assets underlying the Fund’s CLO portfolio
as of March 31, 2026:
(1)Includes
corporate bonds.
(2)This
data is estimated and is derived from sources including CLO trustee reports,
custody statements, and other information received from CLO collateral managers
and other third party sources.
(3)Industry
classifications are based on Moody’s industry categorization of each obligor as
reported in CLO trustee reports, to the extent such information is available. In
cases where CLO trustee reports do not provide an industry classification for an
underlying obligor, it is included under “All Other Industries.” As a result,
the Fund’s actual exposure to certain industries may be higher than what is
presented if industry categories were available for all obligors."
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 Fund’s 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 FEES |
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| |
| Sales
load |
| — |
% |
(1) |
| Offering
expenses borne by the Fund |
| — |
% |
(2) |
| Dividend
reinvestment plan expenses |
| — |
% |
(3) |
| Total
shareholder transaction fees |
| — |
% |
(4) |
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| |
| ANNUAL
FUND EXPENSES (as a percentage of average Net Asset Value of Common
Equity) |
|
| |
| Management/Advisory
Fees |
| 1.46 |
% |
(5) |
| Performance
Fee payable under Investment Advisory Agreement (17.5%) |
| 2.82 |
% |
(6) |
| Interest
Payments and Fees on Borrowed Funds |
| 5.38 |
% |
(7) |
| Other
Expenses |
| 2.97 |
% |
(8) |
| Total
annual fund expenses |
| 12.63 |
% |
(9) |
(1)In
the event that the Fund sells its securities through underwriters or agents, the
related prospectus supplement will disclose any applicable sales
load.
(2)In
the event the Fund publicly sells its securities through underwriters or agents,
the related prospectus supplement will disclose the estimated total offering
expense (which may include offering expenses borne by third parties on the
Fund’s behalf), the offering price and the offering expenses borne by the Fund
as a percentage of the offering
price.
(3)The
expenses of administering the DRIP are included in “Other Expenses.”
Shareholders may incur brokerage charges if they direct their broker or the Plan
Agent (as defined herein) to sell their Common Shares acquired pursuant to the
DRIP. See “—Dividend Reinvestment Plan.”
(4)In
the event that the Fund publicly sells its securities through underwriters or
agents, the related prospectus supplement will disclose the offering price and
total shareholder transaction expenses as a percentage of the offering
price.
(5)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 estimated Management Fee for the year ended March 31, 2026 adjusted to
reflect the issuance of an additional $17.5 million of common
shares.
(6)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 calendar quarter is as
follows:
•If
the Fund’s Pre-Performance Fee Net Investment Income for a fiscal quarter does
not exceed the Hurdle Amount for such quarter, then no Performance Fee is
payable to the Fund’s Adviser with respect to 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 Fund’s Pre-Performance Fee Net
Investment Income that exceeds the Hurdle Amount (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
estimated 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 $17.5 million of common
stock.
(7)The
average borrowings of $210 million at an average interest rate of 5.81% per
annum, which includes the senior unsecured notes of $54 million issued in March
2026 and average borrowings under reverse repurchase agreements of $156 million.
If the Fund issues additional debt securities and/or utilizes additional reverse
repurchase agreements, then its interest expense and total annual expenses would
increase accordingly.
(8)“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 estimated amounts for the
fiscal year ended March 31, 2026. “Other Expenses” also includes fees paid to
the Fund’s independent accountants and legal counsel; compensation paid to
independent trustees; and estimated 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.
(9)“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 21.03% of the average Net Asset Value of Common
Equity.
The
following examples illustrate 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 12.63%:
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| Example |
| 1
Year |
| 3
Years |
| 5
Years |
| 10
Years |
| A
shareholder would pay the following expenses on a $1000 investment,
assuming a 5% annual net return |
| $ |
126 |
|
| $ |
398 |
|
| $ |
698 |
|
| $ |
1,589 |
|
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 the Notes to
Consolidated Financial Statements included in Item 1 of this report on Form
N-CSR. Also, while the example assumes reinvestment of all distributions at net
asset value, participants in our DRIP will receive shares of our common stock in
accordance with the terms of the plan. See “Dividend
Reinvestment Plan.”
Consolidated
Financial Statements for the Year Ended March 31, 2026
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| Page |
| Report
of Independent Registered Public Accounting Firm |
| |
| Consolidated
Statement of Assets and Liabilities |
|
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| Consolidated
Schedule of Investments |
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| Consolidated
Statement of Operations |
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| Consolidated
Statement of Changes in Net Assets |
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| Consolidated
Statement of Cash Flows |
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| Notes
to Consolidated Financial Statements |
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Report
of Independent Registered Public Accounting Firm
To
the Board of Trustees and Shareholders of Ellington Credit Company
Opinion
on the Financial Statements
We
have audited the accompanying consolidated statement of assets and liabilities,
including the consolidated schedule of investments, of Ellington Credit Company
and its subsidiaries (the "Fund") as of March 31, 2026, and the related
consolidated statements of operations, of changes in net assets, and of cash
flows for the year ended March 31, 2026, including the related notes
(collectively referred to as the "consolidated financial statements"). In our
opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Fund as of March 31, 2026, and the
results of its operations, the changes in its net assets and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
We
have previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Ellington Credit Company and its subsidiaries as of March 31, 2025 and December
31, 2024, and the related consolidated statements of operations, of
shareholders’ equity and of cash flows for the three-month period ended March
31, 2025 and for the year ended December 31, 2024 (not presented herein), and in
our report dated June 23, 2025, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated statement of shareholders’ equity information for
the three-month period ended March 31, 2025 and for the year ended December 31,
2024,
is
fairly stated, in all material respects, in relation to the consolidated
statement of shareholders’ equity from which it has been derived.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Fund’s
management. Our responsibility is to express an opinion on the Fund’s
consolidated financial statements based on our audit. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Fund in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audit of these consolidated financial statements in accordance
with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or
fraud.
Our
audit included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated
financial statements. Our procedures included confirmation of securities owned
as of March 31, 2026 by correspondence with the custodian, transfer agent and
brokers; when replies were not received from the custodian and brokers, we
performed other auditing procedures. We believe that our audit provides a
reasonable basis for our opinion.
/s/PricewaterhouseCoopers
LLP
New
York, New York
May
29, 2026
We
have served as the Fund’s auditor since 2012.
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
STATEMENT OF ASSETS AND LIABILITIES |
|
|
|
| |
|
|
| (In
thousands, except share and per share amounts) |
| March
31, 2026 |
| ASSETS |
| (Expressed
in U.S. Dollars) |
|
Investments,
at fair value (cost $372,939) |
| $ |
308,363 |
|
| Cash
and cash equivalents |
| 57,726 |
|
| Due
from brokers |
| 13,542 |
|
|
Financial
derivatives–assets, at fair value (net upfront premiums paid (received)
$2,585) |
| 2,398 |
|
|
|
| |
| Interest
and principal receivable |
| 4,531 |
|
| Other
assets |
| 367 |
|
| Total
Assets |
| 386,927 |
|
| LIABILITIES |
| |
| Reverse
repurchase agreements (Note 5) |
| 166,274 |
|
| Unsecured
borrowings, at fair value (principal amount $54,000) (Note 5) |
| 54,000 |
|
| Payable
for securities purchased and financial derivatives |
| 2,157 |
|
| Due
to brokers |
| 7 |
|
|
Financial
derivatives–liabilities, at fair value (net upfront premiums paid
(received) $(4,573)) |
| 3,228 |
|
| Distributions
payable |
| 3,006 |
|
| Performance
fee payable to affiliate |
| 1,074 |
|
| Management
fee payable to affiliate |
| 583 |
|
| Interest
payable |
| 624 |
|
| Accrued
expenses and other liabilities |
| 2,152 |
|
| Total
Liabilities |
| 233,105 |
|
| COMMITMENTS
AND CONTINGENCIES (Note 10) |
| |
|
NET
ASSETS applicable to common shares of beneficial interest, no par value,
unlimited shares authorized, 37,579,569 shares issued and
outstanding |
| $ |
153,822 |
|
| COMPOSITION
OF NET ASSETS |
| |
| Paid-in
capital |
| 193,775 |
|
| Total
distributable earnings/(accumulated losses) |
| (39,953) |
|
| Total
Net Assets |
| $ |
153,822 |
|
| Net
asset value per common share |
| $ |
4.09 |
|
See
Notes to Consolidated Financial Statements
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Collateralized
Loan Obligations—Debt |
| United
States |
| Structured
Finance |
| 37
Capital CLO 1, Ltd. (5)(7) |
| Secured
Note — Class E, 11.13% (SOFR + 7.46% due October 15, 2034) |
| 08/05/25 |
| $ |
1,670 |
|
| $ |
1,670 |
|
| $ |
1,531 |
|
| 1.00 |
% |
| Atlas
Senior Loan Fund X, Ltd. (5)(7) |
| Secured
Note — Class E, 9.63% (SOFR + 5.96% due January 15, 2031) |
| 07/22/25 |
| 1,850 |
|
| 1,775 |
|
| 1,561 |
|
| 1.01 |
% |
| Atlas
Senior Loan Fund XIV, Ltd. (5)(6)(7) |
| Secured
Note — Class E, 10.87% (SOFR + 7.20% due July 20, 2032) |
| 05/16/24 |
| 1,250 |
|
| 1,048 |
|
| 743 |
|
| 0.48 |
% |
| Atlas
Static Senior Loan Fund I, Ltd. (5)(7) |
| Secured
Note — Class E, 12.18% (SOFR + 8.51% due July 15, 2030) |
| 03/09/26 |
| 1,000 |
|
| 996 |
|
| 995 |
|
| 0.65 |
% |
| Bain
Capital Credit CLO 2017-2, Limited (5)(7) |
| Secured
Note — Class ER3, 11.01% (SOFR + 7.34% due July 25, 2037) |
| 06/24/25 |
| 6,560 |
|
| 6,560 |
|
| 5,962 |
|
| 3.88 |
% |
| Bain
Capital Credit CLO 2022-2, Limited (5)(7) |
| Secured
Note — Class ER, 11.02% (SOFR + 7.35% due April 22, 2035) |
| 06/13/25 |
| 1,620 |
|
| 1,620 |
|
| 1,365 |
|
| 0.89 |
% |
| Ballyrock
CLO 19 Ltd. (5)(7) |
| Secured
Note — Class D, 10.78% (SOFR + 7.11% due April 20, 2035) |
| 08/20/25 |
| 2,130 |
|
| 2,130 |
|
| 2,005 |
|
| 1.30 |
% |
| Canyon
CLO 2016-1, Ltd. (7) |
| Secured
Note — Class ER, 9.68% (SOFR + 6.01% due July 15, 2031) |
| 07/15/25 |
| 1,500 |
|
| 1,486 |
|
| 1,275 |
|
| 0.83 |
% |
| Canyon
CLO 2016-2, Ltd. (5)(7) |
| Secured
Note — Class ER, 9.93% (SOFR + 6.26% due October 15, 2031) |
| 10/28/25 |
| 2,250 |
|
| 2,147 |
|
| 1,519 |
|
| 0.99 |
% |
| Canyon
CLO 2019-1, Ltd. (5)(7) |
| Secured
Note — Class ERR, 11.17% (SOFR + 7.50% due July 15, 2037) |
| 07/24/25 |
| 650 |
|
| 645 |
|
| 596 |
|
| 0.39 |
% |
| Carlyle
Global Market Strategies CLO 2015-5, Ltd. (5)(7) |
| Secured
Note — Class DR, 10.63% (SOFR + 6.96% due January 20, 2032) |
| 11/25/25 |
| 3,800 |
|
| 3,754 |
|
| 3,608 |
|
| 2.35 |
% |
| Crown
City CLO III (5)(7) |
| Secured
Note — Class D, 10.68% (SOFR + 7.01% due July 20, 2034) |
| 05/08/25 |
| 2,000 |
|
| 1,924 |
|
| 1,688 |
|
| 1.10 |
% |
| Crown
Point CLO 10, Ltd. (5)(7) |
| Secured
Note — Class E, 10.78% (SOFR + 7.11% due July 20, 2034) |
| 07/01/25 |
| 1,700 |
|
| 1,686 |
|
| 1,557 |
|
| 1.01 |
% |
| Crown
Point CLO 9 Ltd. (5)(7) |
| Secured
Note — Class ER, 10.69% (SOFR + 7.02% due July 14, 2034) |
| 05/06/25 |
| 2,500 |
|
| 2,472 |
|
| 2,376 |
|
| 1.54 |
% |
| Dryden
54 Senior Loan Fund LLC (5)(7) |
| Secured
Note — Class E, 10.13% (SOFR + 6.46% due October 19, 2029) |
| 08/20/24 |
| 1,750 |
|
| 1,654 |
|
| 1,536 |
|
| 1.00 |
% |
| Elevation
CLO 2013-1, Ltd. (5)(6)(7) |
| Secured
Note — Class ER3, 11.42% (SOFR + 7.75% due July 25, 2038) |
| 08/11/25 |
| 3,600 |
|
| 3,430 |
|
| 3,392 |
|
| 2.20 |
% |
| First
Eagle BSL CLO 2019-1 Ltd. (5)(7) |
| Secured
Note — Class D, 11.63% (SOFR + 7.96% due January 20, 2033) |
| 05/16/25 |
| 5,590 |
|
| 5,509 |
|
| 5,333 |
|
| 3.47 |
% |
| Fortress
Credit BSL IX Limited (5)(7) |
| Secured
Note — Class ER, 11.27% (SOFR + 7.60% due October 20, 2033) |
| 10/24/25 |
| 4,950 |
|
| 4,950 |
|
| 4,718 |
|
| 3.07 |
% |
| Fortress
Credit BSL VI Limited (5)(7) |
| Secured
Note — Class ER, 10.38% (SOFR + 6.71% due July 23, 2031) |
| 07/30/25 |
| 1,000 |
|
| 1,000 |
|
| 947 |
|
| 0.62 |
% |
| Fortress
Credit BSL VIII Limited (5)(6)(7) |
| Secured
Note — Class E, 10.94% (SOFR + 7.27% due October 20, 2032) |
| 03/06/24 |
| 3,000 |
|
| 2,939 |
|
| 2,698 |
|
| 1.75 |
% |
| Fortress
Credit BSL XII Limited (5)(7) |
| Secured
Note — Class E, 11.06% (SOFR + 7.39% due October 15, 2034) |
| 06/26/25 |
| 1,000 |
|
| 968 |
|
| 813 |
|
| 0.53 |
% |
| Fortress
Credit BSL XVII Limited (5)(7) |
| Secured
Note — Class E, 11.82% (SOFR + 8.15% due October 23, 2034) |
| 06/10/24 |
| 2,750 |
|
| 2,750 |
|
| 2,448 |
|
| 1.59 |
% |
| Greywolf
CLO II, Ltd. (5)(7) |
| Secured
Note — Class DRR, 10.98% (SOFR + 7.31% due April 15, 2034) |
| 02/20/25 |
| 2,000 |
|
| 1,950 |
|
| 1,939 |
|
| 1.26 |
% |
| Guggenheim
CLO 2020-1, Ltd. (5)(7) |
| Secured
Note — Class ER, 11.08% (SOFR + 7.41% due April 15, 2031) |
| 03/26/26 |
| 2,000 |
|
| 1,997 |
|
| 1,990 |
|
| 1.29 |
% |
| HalseyPoint
CLO 3, Ltd. (5)(7) |
| Secured
Note — Class ER, 11.78% (SOFR + 8.11% due July 30, 2037) |
| 08/23/24 |
| 860 |
|
| 860 |
|
| 793 |
|
| 0.52 |
% |
| ICG
US CLO 2014-1, Ltd. (5)(7) |
| Secured
Note — Class DR2, 12.28% (SOFR + 8.61% due October 20, 2034) |
| 05/22/24 |
| 4,000 |
|
| 3,624 |
|
| 3,838 |
|
| 2.49 |
% |
| ICG
US CLO 2014-2, Ltd. (5)(7) |
| Secured
Note — Class ERR, 9.13% (SOFR + 5.46% due January 15, 2031) |
| 01/15/25 |
| 1,750 |
|
| 1,551 |
|
| 1,581 |
|
| 1.03 |
% |
See
Notes to Consolidated Financial Statements
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| ICG
US CLO 2014-2, Ltd. (5)(6) |
| Secured
Note — Class FRR, 11.35% (SOFR + 7.68% due January 15, 2031) |
| 01/29/26 |
| $ |
285 |
|
| $ |
6 |
|
| $ |
9 |
|
| 0.01 |
% |
| ICG
US CLO 2017-1, Ltd. (5)(7) |
| Secured
Note — Class ERR, 11.29% (SOFR + 7.62% due July 28, 2034) |
| 05/16/25 |
| 2,500 |
|
| 2,388 |
|
| 2,246 |
|
| 1.46 |
% |
| Jamestown
CLO XI Ltd. (5)(7) |
| Secured
Note — Class D, 9.95% (SOFR + 6.28% due July 14, 2031) |
| 10/23/25 |
| 2,000 |
|
| 1,999 |
|
| 1,918 |
|
| 1.25 |
% |
| Jefferies
Credit Partners Direct Lending CLO 2024-I Ltd. (5)(7) |
| Secured
Note — Class E, 11.92% (SOFR + 8.25% due July 25, 2036) |
| 01/20/26 |
| 1,000 |
|
| 1,009 |
|
| 980 |
|
| 0.64 |
% |
| Madison
Park Funding XXIV, Ltd. (5)(7) |
| Secured
Note — Class ER2, 10.72% (SOFR + 7.05% due October 20, 2029) |
| 05/14/24 |
| 4,100 |
|
| 4,029 |
|
| 4,080 |
|
| 2.65 |
% |
| Marathon
CLO 2021-16 Ltd. (5)(7) |
| Secured
Note — Class DR, 10.52% (SOFR + 6.85% due April 15, 2034) |
| 06/25/25 |
| 2,500 |
|
| 2,500 |
|
| 2,325 |
|
| 1.51 |
% |
| Marathon
CLO VI Ltd. (6) |
| Secured
Note — Class DRR, 10.04% (SOFR + 6.41% due May 13, 2028) |
| 11/29/23 |
| 360 |
|
| — |
|
| — |
|
| — |
% |
| NGC
2024-I Ltd. (5)(7) |
| Secured
Note — Class E, 12.4% (SOFR + 8.73% due July 20, 2037) |
| 03/25/26 |
| 2,000 |
|
| 2,012 |
|
| 2,003 |
|
| 1.30 |
% |
| Northwoods
Capital 27, Limited (5)(6)(7) |
| Secured
Note — Class E, 10.97% (SOFR + 7.30% due October 17, 2034) |
| 02/20/25 |
| 1,150 |
|
| 1,090 |
|
| 931 |
|
| 0.60 |
% |
| Octagon
Investment Partners 44, Ltd. (5)(6) |
| Secured
Note — Class ER, 10.68% (SOFR + 7.01% due October 15, 2034) |
| 07/23/25 |
| 827 |
|
| 733 |
|
| 784 |
|
| 0.51 |
% |
| Octagon
Investment Partners 50, Ltd. (5)(6)(7) |
| Secured
Note — Class ER, 10.73% (SOFR + 7.06% due January 15, 2035) |
| 07/18/25 |
| 1,500 |
|
| 1,449 |
|
| 1,155 |
|
| 0.75 |
% |
| OZLM
XIX, Ltd. (5)(7) |
| Secured
Note — Class DR, 11.56% (SOFR + 7.89% due January 15, 2035) |
| 09/11/25 |
| 1,500 |
|
| 1,500 |
|
| 1,379 |
|
| 0.90 |
% |
| OZLM
XXIV, Ltd. (5)(6)(7) |
| Secured
Note — Class D, 10.98% (SOFR + 7.31% due July 20, 2032) |
| 10/25/24 |
| 2,600 |
|
| 2,183 |
|
| 2,054 |
|
| 1.34 |
% |
| Park
Avenue Institutional Advisers CLO Ltd. 2022-2 (5)(7) |
| Secured
Note — Class DR, 12.38% (SOFR + 8.71% due January 20, 2037) |
| 03/26/26 |
| 4,400 |
|
| 4,406 |
|
| 4,381 |
|
| 2.85 |
% |
| Park
Avenue Institutional Advisers CLO Ltd. 2017-1 (5)(7) |
| Secured
Note — Class DR2, 10.40% (SOFR + 6.75% due February 14, 2034) |
| 09/24/25 |
| 1,670 |
|
| 1,670 |
|
| 1,587 |
|
| 1.03 |
% |
| Park
Avenue Institutional Advisers CLO Ltd. 2021-2 (5)(7) |
| Secured
Note — Class E, 10.94% (SOFR + 7.27% due July 15, 2034) |
| 05/15/25 |
| 3,000 |
|
| 2,906 |
|
| 2,670 |
|
| 1.74 |
% |
| Park
Blue CLO 2025-VIII, Ltd. (5)(6)(12) |
| Secured
Note — Class F, 11.97% (SOFR + 8.14% due October 25, 2038) |
| 08/21/25 |
| 100 |
|
| 87 |
|
| 98 |
|
| 0.06 |
% |
| Pikes
Peak CLO 3 (5) |
| Secured
Note — Class ERR, 10.54% (SOFR + 6.87% due October 25, 2034) |
| 03/31/26 |
| 2,000 |
|
| 1,815 |
|
| 1,839 |
|
| 1.20 |
% |
| Rockford
Tower CLO 2021-3, Ltd. (5)(7) |
| Secured
Note — Class ER, 11.09% (SOFR + 7.42% due January 15, 2038) |
| 11/22/24 |
| 1,950 |
|
| 1,913 |
|
| 1,727 |
|
| 1.12 |
% |
| Saratoga
Investment Corp. CLO 2013-1, Ltd. (5)(6)(7) |
| Secured
Note — Class ER3, 11.43% (SOFR + 7.76% due April 20, 2033) |
| 09/13/24 |
| 2,000 |
|
| 1,440 |
|
| 913 |
|
| 0.59 |
% |
| Symphony
CLO XVI, Ltd. (5)(7) |
| Secured
Note — Class ER, 10.03% (SOFR + 6.36% due October 15, 2031) |
| 09/19/24 |
| 2,255 |
|
| 1,934 |
|
| 1,929 |
|
| 1.25 |
% |
| Tralee
CLO V, Ltd. (5)(6) |
| Secured
Note — Class FR, 12.82% (SOFR + 9.15% due October 20, 2034) |
| 03/28/24 |
| 410 |
|
| 303 |
|
| 123 |
|
| 0.08 |
% |
| Trinitas
CLO IX, Ltd. (5)(6) |
| Secured
Note — Class E, 10.18% (SOFR + 6.51% due January 20, 2032) |
| 02/06/25 |
| 49 |
|
| 4 |
|
| — |
|
| — |
% |
| Trinitas
CLO IX, Ltd. (6) |
| Secured
Note — Class E, 10.18% (SOFR + 6.51% due January 20, 2032) |
| 01/17/24 |
| 83 |
|
| 14 |
|
| — |
|
| — |
% |
| Trinitas
CLO VI, Ltd. (5)(6) |
| Secured
Note — Class F, 12.64% (SOFR + 8.98% due January 25, 2034) |
| 04/04/24 |
| 1,600 |
|
| 1,222 |
|
| 480 |
|
| 0.31 |
% |
| Trinitas
CLO VI, Ltd. (5)(7) |
| Secured
Note — Class ER, 10.75% (SOFR + 7.08% due January 25, 2034) |
| 07/16/25 |
| 1,000 |
|
| 978 |
|
| 750 |
|
| 0.49 |
% |
| Trinitas
CLO XII, Ltd. (5)(7) |
| Secured
Note — Class E, 11.33% (SOFR + 7.66% due April 25, 2033) |
| 12/11/24 |
| 1,890 |
|
| 1,834 |
|
| 1,667 |
|
| 1.08 |
% |
| Unity-Peace
Park CLO, Ltd. (5)(7) |
| Secured
Note — Class ER, 10.66% (SOFR + 7.00% due April 20, 2035) |
| 01/27/26 |
| 3,330 |
|
| 3,330 |
|
| 2,831 |
|
| 1.84 |
% |
| Venture
36 CLO Limited (5)(6)(7) |
| Secured
Note — Class E, 10.85% (SOFR + 7.18% due April 20, 2032) |
| 05/12/25 |
| 3,500 |
|
| 1,892 |
|
| 1,130 |
|
| 0.73 |
% |
See
Notes to Consolidated Financial Statements
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Venture
XV CLO, Limited (5)(6) |
| Secured
Note — Class ER2, 11.12% (SOFR + 7.45% due July 15, 2032) |
| 04/02/24 |
| $ |
1,500 |
|
| $ |
1,008 |
|
| $ |
345 |
|
| 0.22 |
% |
| Venture
XVIII CLO, Limited (5)(6)(7) |
| Secured
Note — Class ER, 10.52% (SOFR + 6.85% due October 15, 2029) |
| 03/28/24 |
| 2,092 |
|
| 1,112 |
|
| 1,145 |
|
| 0.74 |
% |
| Venture
XXII CLO, Limited (5)(6) |
| Secured
Note — Class ER, 9.58% (SOFR + 5.91% due January 15, 2031) |
| 04/30/24 |
| 520 |
|
| 276 |
|
| 166 |
|
| 0.11 |
% |
| Venture
XXVI CLO, Limited (5)(6)(7) |
| Secured
Note — Class E, 10.73% (SOFR + 7.06% due January 20, 2029) |
| 12/17/24 |
| 1,303 |
|
| 577 |
|
| 529 |
|
| 0.34 |
% |
| Venture
XXVII CLO, Limited (5)(6) |
| Secured
Note — Class E, 10.28% (SOFR + 6.61% due July 20, 2030) |
| 06/20/24 |
| 450 |
|
| 212 |
|
| 185 |
|
| 0.12 |
% |
| Venture
XXX CLO, Limited (5)(6)(7) |
| Secured
Note — Class E, 10.23% (SOFR + 6.56% due January 15, 2031) |
| 07/24/24 |
| 1,345 |
|
| 718 |
|
| 400 |
|
| 0.26 |
% |
| Vibrant
CLO III, Ltd. (5)(6) |
| Secured
Note — Class DRR, 10.28% (SOFR + 6.61% due October 20, 2031) |
| 08/29/24 |
| 250 |
|
| 222 |
|
| 227 |
|
| 0.15 |
% |
| Voya
CLO 2013-3, Ltd. (5)(7) |
| Secured
Note — Class DR, 9.83% (SOFR + 6.16% due October 18, 2031) |
| 02/02/26 |
| 2,500 |
|
| 2,505 |
|
| 2,488 |
|
| 1.62 |
% |
| Wellfleet
CLO 2019-1, Ltd. (5)(6)(7) |
| Secured
Note — Class D, 10.83% (SOFR + 7.16% due July 20, 2032) |
| 11/29/23 |
| 1,220 |
|
| 1,072 |
|
| 938 |
|
| 0.61 |
% |
| Wellfleet
CLO 2021-3, Ltd. (5)(7) |
| Secured
Note — Class E, 11.03% (SOFR + 7.36% due January 15, 2035) |
| 06/10/25 |
| 1,250 |
|
| 1,205 |
|
| 1,046 |
|
| 0.68 |
% |
| WhiteHorse
X, Ltd. (6) |
| Secured
Note — Class F, 10.18% (SOFR + 6.51% due April 17, 2027) |
| 01/23/24 |
| 287 |
|
| 57 |
|
| — |
|
| — |
% |
| Wind
River 2019-3 CLO Ltd. (5)(6)(7)(12) |
| Secured
Note — Class ER3, 12.29% (SOFR + 8.50% due January 15, 2038) |
| 10/24/25 |
| 1,550 |
|
| 1,550 |
|
| 1,449 |
|
| 0.94 |
% |
| Wind
River 2022-1 CLO Ltd. (5)(7) |
| Secured
Note — Class E, 11.79% (SOFR + 8.12% due July 20, 2035) |
| 08/21/25 |
| 2,500 |
|
| 2,460 |
|
| 2,223 |
|
| 1.45 |
% |
| ZAIS
CLO 13, Limited (5)(7) |
| Secured
Note — Class E, 12.58% (SOFR + 8.91% due July 15, 2032) |
| 01/08/25 |
| 6,520 |
|
| 6,114 |
|
| 5,379 |
|
| 3.50 |
% |
| ZAIS
CLO 3, Limited (5)(6)(7) |
| Secured
Note — Class DR, 10.84% (SOFR + 7.17% due July 15, 2031) |
| 05/30/25 |
| 1,430 |
|
| 850 |
|
| 392 |
|
| 0.25 |
% |
| ZAIS
CLO 6, Limited (5)(6) |
| Secured
Note — Class E, 10.93% (SOFR + 7.26% due July 15, 2029) |
| 12/18/24 |
| 126 |
|
| 2 |
|
| — |
|
| — |
% |
| Total
Collateralized Loan Obligations—Debt, United States |
| $ |
129,681 |
|
| $ |
117,708 |
|
| 76.52 |
% |
| European
Union—Various |
|
|
|
|
|
|
|
|
|
|
| |
| Structured
Finance |
|
|
|
|
|
|
|
|
|
|
| |
| Adagio
IX EUR CLO DAC (7) |
| Secured
Note — Class E, 8.12% (EURIBOR + 6.02% due September 15, 2034) |
| 02/05/26 |
| $ |
1,801 |
|
| $ |
1,767 |
|
| $ |
1,705 |
|
| 1.11 |
% |
| Aqueduct
European CLO 7-2022 DAC (7) |
| Secured
Note — Class FR, 10.51% (EURIBOR + 8.41% due August 15, 2037) |
| 07/10/25 |
| 1,749 |
|
| 1,763 |
|
| 1,507 |
|
| 0.98 |
% |
| BlackRock
European CLO II DAC (7) |
| Secured
Note — Class ERR, 8.32% (EURIBOR + 6.30% due April 15, 2034) |
| 02/05/26 |
| 1,790 |
|
| 1,830 |
|
| 1,788 |
|
| 1.16 |
% |
| Bosphorus
CLO V DAC (7) |
| Secured
Note — Class F, 11.62% (EURIBOR + 9.54% due December 12, 2032) |
| 11/07/25 |
| 2,338 |
|
| 2,357 |
|
| 2,257 |
|
| 1.47 |
% |
| Dryden
73 Euro CLO 2018 B.V. (7) |
| Secured
Note — Class E, 8.84% (EURIBOR + 6.82% due January 15, 2034) |
| 09/23/25 |
| 2,309 |
|
| 2,357 |
|
| 2,166 |
|
| 1.41 |
% |
| Harvest
CLO XXIX DAC (7) |
| Secured
Note — Class FR, 10.64% (EURIBOR + 8.62% due July 15, 2037) |
| 06/25/25 |
| 3,464 |
|
| 3,474 |
|
| 3,106 |
|
| 2.02 |
% |
| Henley
CLO XIII DAC (6)(7) |
| Secured
Note — Class F, 10.45% (EURIBOR + 8.42% due October 15, 2038) |
| 07/03/25 |
| 1,155 |
|
| 1,155 |
|
| 1,052 |
|
| 0.68 |
% |
| Invesco
Euro CLO XIV DAC (5)(6) |
| Secured
Note — Class F, 10.58% (EURIBOR + 8.56% due January 15, 2039) |
| 09/08/25 |
| 289 |
|
| 281 |
|
| 259 |
|
| 0.17 |
% |
| Jubilee
CLO 2013-X B.V. (6)(7) |
| Secured
Note — Class FRR, 10.57% (EURIBOR + 8.55% due July 15, 2034) |
| 04/23/24 |
| 866 |
|
| 770 |
|
| 661 |
|
| 0.43 |
% |
| Jubilee
CLO 2017-XIX DAC (5)(7) |
| Secured
Note — Class FR, 10.73% (EURIBOR + 8.70% due April 25, 2038) |
| 07/01/25 |
| 3,464 |
|
| 3,475 |
|
| 3,037 |
|
| 1.97 |
% |
| Nassau
Euro CLO I DAC (7) |
| Secured
Note — Class F, 11.49% (EURIBOR + 9.39% due December 15, 2034) |
| 11/26/25 |
| 1,189 |
|
| 1,195 |
|
| 1,071 |
|
| 0.70 |
% |
See
Notes to Consolidated Financial Statements
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Nassau
Euro CLO III DAC (7) |
| Secured
Note — Class FR, 10.19% (EURIBOR + 8.17% due October 15, 2039) |
| 09/03/25 |
| $ |
1,230 |
|
| $ |
1,222 |
|
| $ |
1,035 |
|
| 0.67 |
% |
| OCP
EURO CLO 2022-6 DAC (7) |
| Secured
Note — Class FRR, 10.65% (EURIBOR + 8.62% due July 20, 2036) |
| 07/03/25 |
| 2,425 |
|
| 2,467 |
|
| 2,075 |
|
| 1.35 |
% |
| Ravensdale
Park CLO DAC (7) |
| Secured
Note — Class F, 9.38% (EURIBOR + 7.35% due April 25, 2038) |
| 02/27/25 |
| 2,309 |
|
| 2,081 |
|
| 1,942 |
|
| 1.26 |
% |
| Rockford
Tower Europe CLO 2021-2 DAC (7) |
| Secured
Note — Class F, 10.93% (EURIBOR + 8.90% due January 24, 2035) |
| 11/12/24 |
| 1,155 |
|
| 1,061 |
|
| 1,070 |
|
| 0.70 |
% |
| St.
Paul’s CLO IV DAC (6)(7) |
| Secured
Note — Class ERR, 8.61% (EURIBOR + 6.58% due April 25, 2030) |
| 03/27/25 |
| 1,155 |
|
| 1,013 |
|
| 577 |
|
| 0.37 |
% |
| St.
Paul’s CLO IX DAC (6) |
| Secured
Note — Class FR, 11.96% (EURIBOR + 9.93% due July 20, 2035) |
| 08/28/25 |
| 1,674 |
|
| 1,668 |
|
| 424 |
|
| 0.28 |
% |
| St.
Paul's CLO IV DAC |
| Secured
Note — Class DRR, 7.00% (EURIBOR + 4.97% due April 25, 2030) |
| 01/15/26 |
| 115 |
|
| 112 |
|
| 104 |
|
| 0.07 |
% |
| St.
Paul's CLO V DAC (5)(6) |
| Secured
Note — Class FR, 8.61% (EURIBOR + 6.60% due August 20, 2030) |
| 07/11/24 |
| 1,905 |
|
| 1,694 |
|
| 762 |
|
| 0.49 |
% |
| Toro
European CLO 6 DAC (5)(6)(7) |
| Secured
Note — Class F, 10.52% (EURIBOR + 8.49% due January 12, 2032) |
| 06/05/25 |
| 1,732 |
|
| 1,637 |
|
| 818 |
|
| 0.53 |
% |
| Total
Collateralized Loan Obligations - Debt, European Union - Various |
| $ |
33,379 |
|
| $ |
27,416 |
|
| 17.82 |
% |
| Total
Collateralized Loan Obligations - Debt |
| $ |
163,060 |
|
| $ |
145,124 |
|
| 94.34 |
% |
| Collateralized
Loan Obligations - Equity |
|
|
|
|
| |
| United
States |
|
|
|
|
|
|
|
|
|
|
| |
| Structured
Finance |
|
|
|
|
|
|
|
|
|
|
| |
| 522
Funding CLO 2019-5, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 3.57%, maturity April 15, 2035) |
| 03/24/25 |
| $ |
4,200 |
|
| $ |
740 |
|
| $ |
385 |
|
| 0.25 |
% |
| AB
BSL CLO 1 Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 14.55%, maturity October 15, 2038) |
| 10/23/25 |
| 14,500 |
|
| 5,666 |
|
| 5,207 |
|
| 3.39 |
% |
| AG
CC Funding II, Ltd. (6) |
| Subordinated
Note, (effective yield 12.25%, maturity November 17, 2036) |
| 11/05/25 |
| 27 |
|
| 3,293 |
|
| 3,237 |
|
| 2.10 |
% |
| AIMCO
CLO, Series 2018-A (5)(7) |
| Subordinated
Note, (effective yield 14.41%, maturity October 17, 2037) |
| 08/06/25 |
| 3,690 |
|
| 2,152 |
|
| 1,467 |
|
| 0.95 |
% |
| Allegro
CLO VII, Ltd (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity June 13, 2031) |
| 05/16/24 |
| 4,120 |
|
| — |
|
| — |
|
| — |
% |
| Allegro
CLO XI, Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity January 19, 2033) |
| 07/29/25 |
| 3,074 |
|
| 93 |
|
| — |
|
| — |
% |
| Anchorage
Credit Funding 6, Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 25, 2036) |
| 06/17/24 |
| 1,670 |
|
| — |
|
| 31 |
|
| 0.02 |
% |
| Apidos
CLO L (5)(6)(7) |
| Subordinated
Note, (effective yield 10.80%, maturity January 20, 2038) |
| 11/01/24 |
| 6,600 |
|
| 4,450 |
|
| 3,960 |
|
| 2.58 |
% |
| Apidos
CLO XLII Ltd (5)(7) |
| Subordinated
Note, (effective yield 10.65%, maturity April 20, 2038) |
| 05/06/25 |
| 1,070 |
|
| 815 |
|
| 666 |
|
| 0.43 |
% |
| Apidos
CLO XVIII-R (5)(6)(7) |
| Subordinated
Note, (effective yield 6.70%, maturity January 22, 2038) |
| 07/28/25 |
| 4,171 |
|
| 1,839 |
|
| 1,126 |
|
| 0.73 |
% |
| Apidos
CLO XXXIV (5)(7)(8)(12) |
| Subordinated
Note, (effective yield 10.08%, maturity January 20, 2039) |
| 12/05/25 |
| 14,822 |
|
| 7,710 |
|
| 6,596 |
|
| 4.29 |
% |
| Ares
Loan Funding IX, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 11.13%, maturity March 31, 2038) |
| 11/10/25 |
| 3,600 |
|
| 2,687 |
|
| 2,232 |
|
| 1.45 |
% |
| Ares
XLIII CLO Ltd. (5)(6) |
| Subordinated
Note, (effective yield 7.37%, maturity January 15, 2038) |
| 04/01/25 |
| 7,519 |
|
| 1,946 |
|
| 1,340 |
|
| 0.87 |
% |
| Ares
XXXIX CLO Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 7.76%, maturity April 18, 2031) |
| 07/24/24 |
| 15,000 |
|
| 4,497 |
|
| 3,435 |
|
| 2.23 |
% |
| Atlas
Senior Loan Fund XXIII, Ltd. (6)(7) |
| Subordinated
Note, (effective yield 10.80%, maturity July 20, 2037) |
| 01/13/25 |
| 4,475 |
|
| 1,903 |
|
| 1,698 |
|
| 1.10 |
% |
| Atlas
Senior Loan Fund XXIV, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 12.82%, maturity January 20, 2038) |
| 01/31/25 |
| 3,010 |
|
| 1,534 |
|
| 1,515 |
|
| 0.99 |
% |
| Bain
Capital Credit CLO 2024-3, Limited (5)(6)(7) |
| Subordinated
Note, (effective yield 5.25%, maturity July 16, 2037) |
| 05/29/24 |
| 4,490 |
|
| 2,664 |
|
| 1,976 |
|
| 1.28 |
% |
See
Notes to Consolidated Financial Statements
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Balboa
Bay Loan Funding 2024-2 Ltd (5)(6)(7)(8) |
| Subordinated
Note, (effective yield 10.43%, maturity January 20, 2038) |
| 12/11/24 |
| $ |
7,000 |
|
| $ |
4,602 |
|
| $ |
3,509 |
|
| 2.28 |
% |
| Ballyrock
CLO 15 Ltd. (5) |
| Subordinated
Note, (effective yield 18.02%, maturity January 15, 2038) |
| 02/12/26 |
| 2,725 |
|
| 1,135 |
|
| 1,106 |
|
| 0.72 |
% |
| Battalion
CLO IV Ltd. (5)(6)(9) |
| Income
Note, (effective yield 0.00%, maturity July 15, 2031) |
| 09/24/24 |
| 2,500 |
|
| 79 |
|
| 12 |
|
| 0.01 |
% |
| Battalion
CLO XV Ltd. (5)(6) |
| Subordinated
Note, (effective yield 3.36%, maturity January 17, 2033) |
| 11/21/24 |
| 2,000 |
|
| 509 |
|
| 95 |
|
| 0.06 |
% |
| Battalion
CLO XV Ltd. (6)(8) |
| Subordinated
Note, (effective yield 3.40%, maturity January 17, 2033) |
| 09/24/24 |
| 4,100 |
|
| 1,044 |
|
| 195 |
|
| 0.13 |
% |
| Benefit
Street Partners CLO XIV Ltd. (5)(6) |
| Subordinated
Note, (effective yield 14.50%, maturity October 20, 2037) |
| 12/21/23 |
| 830 |
|
| 161 |
|
| 155 |
|
| 0.10 |
% |
| Blue
Owl BSL CLO 2025-1, Ltd. (5)(6)(7)(8)(12) |
| Subordinated
Note, (effective yield 8.57%, maturity January 20, 2039) |
| 12/11/25 |
| 2,740 |
|
| 2,008 |
|
| 1,891 |
|
| 1.23 |
% |
| BlueMountain
CLO XXV Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 12.61%, maturity January 15, 2038) |
| 11/12/25 |
| 7,215 |
|
| 2,593 |
|
| 2,185 |
|
| 1.42 |
% |
| Boyce
Park CLO, Ltd (5)(6) |
| Subordinated
Note, (effective yield 2.63%, maturity April 21, 2035) |
| 08/15/24 |
| 840 |
|
| 386 |
|
| 226 |
|
| 0.15 |
% |
| Bridge
Street CLO I Ltd. (5)(6)(7)(8) |
| Subordinated
Note, (effective yield 3.92%, maturity July 20, 2037) |
| 02/19/25 |
| 3,500 |
|
| 1,812 |
|
| 1,473 |
|
| 0.96 |
% |
| Bridge
Street CLO III Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 11.30%, maturity October 20, 2034) |
| 01/31/25 |
| 1,680 |
|
| 954 |
|
| 773 |
|
| 0.50 |
% |
| Bridge
Street CLO V Ltd. (5)(7) |
| Subordinated
Note, (effective yield 13.00%, maturity April 20, 2038) |
| 02/21/25 |
| 20,500 |
|
| 14,765 |
|
| 12,701 |
|
| 8.26 |
% |
| Canyon
CLO 2019-1, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 4.57%, maturity July 15, 2037) |
| 09/20/24 |
| 14,423 |
|
| 5,800 |
|
| 3,750 |
|
| 2.44 |
% |
| CarVal
CLO IV Ltd. (5)(6) |
| Subordinated
Note, (effective yield 14.99%, maturity July 20, 2034) |
| 10/24/25 |
| 3,508 |
|
| 981 |
|
| 977 |
|
| 0.64 |
% |
| Cedar
Funding IX CLO, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 4.49%, maturity July 20, 2037) |
| 01/17/25 |
| 3,950 |
|
| 1,171 |
|
| 859 |
|
| 0.56 |
% |
| CIFC
Funding 2014-II-R, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 13.64%, maturity April 24, 2030) |
| 04/02/25 |
| 6,200 |
|
| 1,050 |
|
| 520 |
|
| 0.34 |
% |
| CIFC
Funding 2018-IV, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 13.31%, maturity October 17, 2031) |
| 06/11/25 |
| 2,220 |
|
| 809 |
|
| 560 |
|
| 0.36 |
% |
| Crown
City CLO I (5)(6) |
| Subordinated
Note, (effective yield 14.03%, maturity July 20, 2038) |
| 11/07/23 |
| 6,850 |
|
| 2,154 |
|
| 1,781 |
|
| 1.16 |
% |
| Crown
City CLO II (5)(6)(7) |
| Subordinated
Note, (effective yield 12.15%, maturity April 20, 2035) |
| 08/21/24 |
| 5,217 |
|
| 1,733 |
|
| 1,358 |
|
| 0.88 |
% |
| Crown
City CLO III (5)(6) |
| Subordinated
Note, (effective yield 8.54%, maturity July 20, 2034) |
| 03/21/24 |
| 5,580 |
|
| 1,854 |
|
| 1,375 |
|
| 0.89 |
% |
| Crown
Point CLO 11 Ltd. (5)(6) |
| Subordinated
Note, (effective yield 13.16%, maturity February 28, 2038) |
| 11/13/25 |
| 1,200 |
|
| 608 |
|
| 506 |
|
| 0.33 |
% |
| Eaton
Vance CLO 2019-1, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 0.40%, maturity April 15, 2031) |
| 01/23/25 |
| 1,800 |
|
| 583 |
|
| 424 |
|
| 0.28 |
% |
| Elmwood
CLO 24 Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 13.82%, maturity December 11, 2033) |
| 02/27/25 |
| 8,000 |
|
| 5,676 |
|
| 3,624 |
|
| 2.36 |
% |
| Empower
CLO 2022-1, LLC (5)(6)(7) |
| Subordinated
Note, (effective yield 14.24%, maturity October 20, 2037) |
| 10/30/24 |
| 13,620 |
|
| 10,520 |
|
| 6,538 |
|
| 4.25 |
% |
| Generate
CLO 2 Ltd. (5)(6) |
| Subordinated
Note, (effective yield 8.32%, maturity October 22, 2037) |
| 03/18/25 |
| 7,058 |
|
| 2,154 |
|
| 1,426 |
|
| 0.93 |
% |
| Generate
CLO 9 Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 10.10%, maturity October 20, 2034) |
| 08/04/25 |
| 5,550 |
|
| 3,094 |
|
| 2,642 |
|
| 1.72 |
% |
| Greywolf
CLO II, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 8.77%, maturity April 15, 2034) |
| 04/03/24 |
| 1,930 |
|
| 368 |
|
| 244 |
|
| 0.16 |
% |
| Greywolf
CLO II, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 5.88%, maturity April 15, 2034) |
| 04/03/24 |
| 1,370 |
|
| 310 |
|
| 198 |
|
| 0.13 |
% |
| Greywolf
CLO II, Ltd. (6) |
| Subordinated
Note, (effective yield 10.69%, maturity April 15, 2034) |
| 11/17/23 |
| 1,130 |
|
| 217 |
|
| 163 |
|
| 0.11 |
% |
See
Notes to Consolidated Financial Statements
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| HPS
Loan Management 2025-24, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 10.68%, maturity April 25, 2038) |
| 02/18/25 |
| $ |
2,000 |
|
| $ |
1,573 |
|
| $ |
1,385 |
|
| 0.90 |
% |
| ICG
US CLO 2021-3, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 11.76%, maturity October 20, 2034) |
| 05/30/24 |
| 2,600 |
|
| 865 |
|
| 639 |
|
| 0.42 |
% |
| KKR
CLO 14 Ltd. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity August 15, 2031) |
| 07/22/24 |
| 1,500 |
|
| 271 |
|
| 69 |
|
| 0.04 |
% |
| LCM
32 Ltd. (5)(6) |
| Income
Note, (effective yield 3.94%, maturity July 20, 2034) |
| 08/12/24 |
| 1,640 |
|
| 315 |
|
| 150 |
|
| 0.10 |
% |
| LCM
40 Ltd. (5)(6) |
| Income
Note, (effective yield 4.36%, maturity January 15, 2036) |
| 07/25/25 |
| 1,000 |
|
| 626 |
|
| 464 |
|
| 0.30 |
% |
| Madison
Park Funding LIX, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 8.04%, maturity April 18, 2037) |
| 02/11/25 |
| 2,338 |
|
| 1,380 |
|
| 818 |
|
| 0.53 |
% |
| Madison
Park Funding XIX, Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity January 22, 2037) |
| 11/12/24 |
| 2,285 |
|
| 634 |
|
| 483 |
|
| 0.31 |
% |
| Madison
Park Funding XXXIV, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 25.03%, maturity April 25, 2048) |
| 01/22/26 |
| 2,262 |
|
| 731 |
|
| 655 |
|
| 0.43 |
% |
| Magnetite
XXX, Limited (5)(7) |
| Subordinated
Note, (effective yield 15.58%, maturity October 25, 2037) |
| 05/30/24 |
| 9,793 |
|
| 6,206 |
|
| 4,472 |
|
| 2.91 |
% |
| Marble
Point CLO XX Ltd. (5)(6) |
| Income
Note, (effective yield 1.76%, maturity April 23, 2051) |
| 07/25/24 |
| 2,000 |
|
| 523 |
|
| 302 |
|
| 0.20 |
% |
| Marble
Point CLO XXII Ltd. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 25, 2050) |
| 05/14/24 |
| 5,400 |
|
| 927 |
|
| 571 |
|
| 0.37 |
% |
| MDPK
2018-28A SUB (5)(6) |
| Subordinated
Note, (effective yield 14.49%, maturity July 15, 2030) |
| 05/29/25 |
| 1,290 |
|
| 556 |
|
| 381 |
|
| 0.25 |
% |
| Monroe
Capital MML CLO VI, Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity April 15, 2030) |
| 12/18/24 |
| 3,000 |
|
| 119 |
|
| 5 |
|
| — |
% |
| Mountain
View CLO 2017-2 Ltd. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity January 16, 2031) |
| 01/23/24 |
| 3,000 |
|
| — |
|
| — |
|
| — |
% |
| Neuberger
Berman CLO XVII, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 13.82%, maturity July 22, 2037) |
| 08/21/24 |
| 6,200 |
|
| 940 |
|
| 953 |
|
| 0.62 |
% |
| New
Mountain CLO 2 Ltd (5)(7) |
| Subordinated
Note, (effective yield 16.36%, maturity April 15, 2034) |
| 12/13/24 |
| 11,960 |
|
| 7,099 |
|
| 5,262 |
|
| 3.42 |
% |
| Oaktree
CLO 2019-3, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 8.60%, maturity January 20, 2038) |
| 07/31/25 |
| 1,750 |
|
| 984 |
|
| 725 |
|
| 0.47 |
% |
| Oaktree
CLO 2019-4, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 5.84%, maturity July 20, 2037) |
| 07/02/24 |
| 3,400 |
|
| 1,922 |
|
| 1,496 |
|
| 0.97 |
% |
| Oaktree
CLO 2020-1, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 11.34%, maturity January 15, 2038) |
| 07/18/24 |
| 8,135 |
|
| 4,414 |
|
| 3,559 |
|
| 2.31 |
% |
| Oaktree
CLO 2023-1, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 10.21%, maturity April 15, 2038) |
| 08/14/25 |
| 7,310 |
|
| 4,419 |
|
| 3,530 |
|
| 2.29 |
% |
| Ocean
Trails CLO V (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 13, 2031) |
| 08/12/25 |
| 3,779 |
|
| — |
|
| — |
|
| — |
% |
| Octagon
Investment Partners 18-R, Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity April 16, 2031) |
| 03/15/24 |
| 3,651 |
|
| — |
|
| 3 |
|
| — |
% |
| Octagon
Investment Partners 18-R, Ltd. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity April 16, 2031) |
| 10/26/23 |
| 5,000 |
|
| — |
|
| 4 |
|
| — |
% |
| Octagon
Investment Partners 40, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 0.30%, maturity January 20, 2035) |
| 09/11/25 |
| 2,830 |
|
| 531 |
|
| 360 |
|
| 0.23 |
% |
| Octagon
Investment Partners 41, Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 15, 2033) |
| 09/04/24 |
| 1,270 |
|
| 314 |
|
| 123 |
|
| 0.08 |
% |
| Octagon
Investment Partners 44, Ltd. (5)(6)(9) |
| Income
Note, (effective yield 0.00%, maturity October 15, 2034) |
| 01/12/26 |
| 6,355 |
|
| 384 |
|
| 372 |
|
| 0.24 |
% |
| OHA
Credit Partners X-R, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 13.92%, maturity April 20, 2038) |
| 09/09/25 |
| 7,117 |
|
| 3,184 |
|
| 2,471 |
|
| 1.61 |
% |
| OHA
Loan Funding 2013-1, Ltd. (6) |
| Subordinated
Note, (effective yield 24.66%, maturity April 23, 2037) |
| 11/12/24 |
| 875 |
|
| 361 |
|
| 236 |
|
| 0.15 |
% |
| OSD
CLO 2023-27, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 12.57%, maturity July 15, 2038) |
| 04/24/24 |
| 9,060 |
|
| 5,620 |
|
| 4,974 |
|
| 3.23 |
% |
See
Notes to Consolidated Financial Statements
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Park
Blue CLO 2023-III, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 5.39%, maturity April 20, 2038) |
| 07/16/25 |
| $ |
8,000 |
|
| $ |
4,274 |
|
| $ |
3,120 |
|
| 2.03 |
% |
| Park
Blue CLO 2025-VIII, Ltd. (5)(6)(7)(12) |
| Subordinated
Note, (effective yield 11.37%, maturity October 25, 2038) |
| 08/21/25 |
| 7,700 |
|
| 7,150 |
|
| 5,852 |
|
| 3.80 |
% |
| PPM
CLO 2 Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity April 16, 2037) |
| 04/24/24 |
| 1,260 |
|
| 187 |
|
| 48 |
|
| 0.03 |
% |
| Regatta
31 Funding Ltd. (5)(6)(7)(8) |
| Subordinated
Note, (effective yield 12.01%, maturity March 25, 2038) |
| 02/21/25 |
| 1,571 |
|
| 1,315 |
|
| 1,116 |
|
| 0.73 |
% |
| Regatta
II Funding LP (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity January 15, 2029) |
| 02/27/25 |
| 5 |
|
| — |
|
| — |
|
| — |
% |
| Regatta
XV Funding Ltd. (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 25, 2031) |
| 12/06/23 |
| 3,500 |
|
| — |
|
| — |
|
| — |
% |
| Rockford
Tower CLO 2022-3, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 6.84%, maturity July 20, 2037) |
| 10/24/24 |
| 1,050 |
|
| 604 |
|
| 461 |
|
| 0.30 |
% |
| Rockford
Tower Credit Funding I, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 11.25%, maturity April 20, 2040) |
| 09/15/25 |
| 1,780 |
|
| 1,071 |
|
| 848 |
|
| 0.55 |
% |
| RR
5 LTD (5)(6) |
| Subordinated
Note, (effective yield 10.57%, maturity October 15, 2118) |
| 04/30/25 |
| 2,250 |
|
| 588 |
|
| 518 |
|
| 0.34 |
% |
| Symphony
CLO XXIII, Ltd. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity January 15, 2048) |
| 05/14/24 |
| 3,000 |
|
| 766 |
|
| 405 |
|
| 0.26 |
% |
| Symphony
CLO XXVI, Ltd. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity April 20, 2033) |
| 01/09/24 |
| 1,620 |
|
| 122 |
|
| 30 |
|
| 0.02 |
% |
| TCW
CLO 2021-1, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 7.95%, maturity January 20, 2038) |
| 02/26/25 |
| 8,400 |
|
| 3,371 |
|
| 2,678 |
|
| 1.74 |
% |
| TCW
CLO 2023-1, Ltd. (5)(6) |
| Income
Note, (effective yield 15.35%, maturity March 31, 2038) |
| 03/25/25 |
| 740 |
|
| 307 |
|
| 311 |
|
| 0.20 |
% |
| TCW
CLO 2023-1, Ltd. (6) |
| Income
Note, (effective yield 15.35%, maturity March 31, 2038) |
| 01/31/24 |
| 1,600 |
|
| 665 |
|
| 672 |
|
| 0.44 |
% |
| TCW
CLO 2025-1, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 9.58%, maturity April 20, 2038) |
| 02/18/25 |
| 1,775 |
|
| 1,328 |
|
| 1,012 |
|
| 0.66 |
% |
| Tralee
CLO VII, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 15.65%, maturity April 25, 2034) |
| 11/06/25 |
| 1,710 |
|
| 649 |
|
| 650 |
|
| 0.42 |
% |
| Vibrant
CLO XIII, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 8.89%, maturity July 15, 2034) |
| 05/21/24 |
| 7,880 |
|
| 4,151 |
|
| 2,994 |
|
| 1.95 |
% |
| Vibrant
CLO XV, Ltd. (5)(6) |
| Subordinated
Note, (effective yield 11.45%, maturity January 20, 2035) |
| 08/29/24 |
| 1,510 |
|
| 672 |
|
| 592 |
|
| 0.39 |
% |
| Voya
CLO 2024-3, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 10.93%, maturity July 20, 2037) |
| 06/18/24 |
| 9,400 |
|
| 6,244 |
|
| 5,358 |
|
| 3.48 |
% |
| Voya
CLO 2024-5, Ltd. (5)(7) |
| Subordinated
Note, (effective yield 10.14%, maturity October 15, 2037) |
| 10/18/24 |
| 10,000 |
|
| 6,736 |
|
| 5,400 |
|
| 3.51 |
% |
| Voya
CLO 2025-1, Ltd. (5)(6)(7) |
| Subordinated
Note, (effective yield 11.14%, maturity April 20, 2038) |
| 02/12/25 |
| 3,200 |
|
| 2,655 |
|
| 2,286 |
|
| 1.49 |
% |
| Wellfleet
CLO 2021-3, Ltd. (5)(6)(8) |
| Subordinated
Note, (effective yield 2.58%, maturity January 15, 2035) |
| 09/11/24 |
| 7,600 |
|
| 1,847 |
|
| 1,221 |
|
| 0.79 |
% |
| Wind
River 2019-3 CLO Ltd. (5)(6)(8) |
| Subordinated
Note, (effective yield 22.07%, maturity January 15, 2038) |
| 05/30/25 |
| 12,710 |
|
| 1,518 |
|
| 1,938 |
|
| 1.26 |
% |
| Wind
River 2021-1 CLO Ltd. (5)(6)(7)(8) |
| Subordinated
Note, (effective yield 7.32%, maturity July 20, 2037) |
| 07/12/24 |
| 4,650 |
|
| 1,752 |
|
| 1,488 |
|
| 0.97 |
% |
| ZAIS
CLO 3, Limited (5)(6)(8)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 15, 2031) |
| 10/17/25 |
| 1,530 |
|
| 15 |
|
| — |
|
| — |
% |
| ZAIS
CLO 3, Limited (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 15, 2031) |
| 10/17/25 |
| 1,723 |
|
| 17 |
|
| — |
|
| — |
% |
| ZAIS
CLO 6, Limited (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 15, 2029) |
| 07/09/25 |
| 3,387 |
|
| 71 |
|
| — |
|
| — |
% |
| ZAIS
CLO 9, Limited (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 20, 2031) |
| 02/08/24 |
| 720 |
|
| — |
|
| — |
|
| — |
% |
| Total
Collateralized Loan Obligations - Equity, United States |
| $ |
204,092 |
|
| $ |
159,597 |
|
| 103.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| |
See
Notes to Consolidated Financial Statements
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| European
Union—Various |
|
|
|
|
|
|
|
|
|
|
| |
| Structured
Finance |
|
|
|
|
|
|
|
|
|
|
| |
| Barings
Euro CLO 2021-1 DAC (5)(6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity April 24, 2034) |
| 02/12/25 |
| $ |
1,443 |
|
| $ |
356 |
|
| $ |
184 |
|
| 0.12 |
% |
| BNPP
IP Euro CLO 2015-1 B.V. (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 15, 2030) |
| 01/21/25 |
| 1,732 |
|
| 217 |
|
| 9 |
|
| 0.01 |
% |
| Carlyle
Euro CLO 2019-2 DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity August 15, 2032) |
| 03/27/25 |
| 289 |
|
| 46 |
|
| 18 |
|
| 0.01 |
% |
| Carlyle
Global Market Strategies Euro CLO 2014-2 DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity November 17, 2031) |
| 01/22/25 |
| 2,309 |
|
| 34 |
|
| — |
|
| — |
% |
| Invesco
Euro CLO I DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 15, 2031) |
| 03/27/24 |
| 2,274 |
|
| 361 |
|
| 40 |
|
| 0.03 |
% |
| Invesco
Euro CLO V DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity January 15, 2034) |
| 03/27/24 |
| 1,986 |
|
| 559 |
|
| 15 |
|
| 0.01 |
% |
| Jubilee
CLO 2021-XXV DAC (6)(7)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 15, 2035) |
| 01/27/25 |
| 2,309 |
|
| 986 |
|
| 703 |
|
| 0.46 |
% |
| Oak
Hill European Credit Partners VII DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 20, 2031) |
| 05/23/24 |
| 2,309 |
|
| — |
|
| — |
|
| — |
% |
| Palmer
Square European Loan Funding 2022-1 DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity October 15, 2031) |
| 03/27/24 |
| 2,702 |
|
| — |
|
| — |
|
| — |
% |
| St.
Paul’s CLO IV DAC (6) |
| Subordinated
Note, (effective yield 2.02%, maturity April 25, 2030) |
| 05/31/24 |
| 1,616 |
|
| 540 |
|
| 298 |
|
| 0.19 |
% |
| St.
Paul’s CLO VII DAC (6)(9) |
| Subordinated
Note, (effective yield 0.00%, maturity July 18, 2034) |
| 04/05/24 |
| 1,732 |
|
| 496 |
|
| 253 |
|
| 0.16 |
% |
| Tikehau
CLO XIII DAC (6) |
| Subordinated
Note, (effective yield 2.79%, maturity October 15, 2038) |
| 02/27/25 |
| 2,309 |
|
| 1,746 |
|
| 1,697 |
|
| 1.10 |
% |
| Total
Collateralized Loan Obligations - Equity, European Union—Various |
| $ |
5,341 |
|
| $ |
3,217 |
|
| 2.09 |
% |
| Total
Collateralized Loan Obligations - Equity |
| $ |
209,433 |
|
| $ |
162,814 |
|
| 105.85 |
% |
| Bank
Debt Term Loan |
|
|
|
|
| |
| United
States (4) |
|
|
|
|
| |
| Automotive |
|
|
|
|
|
|
|
|
|
|
| |
| First
Brands Group LLC (6) |
| Bank
Debt Term Loan, 10.67% (SOFR + 7.00%, maturity June 29, 2026) |
| 12/03/25 |
| $ |
58 |
|
| $ |
5 |
|
| $ |
— |
|
| — |
% |
| First
Brands Group LLC (6) |
| Bank
Debt Term Loan, 10.78% (SOFR + 7.11%, maturity March 30, 2027) |
| 09/29/25 |
| 51 |
|
| 18 |
|
| — |
|
| — |
% |
| First
Brands Group LLC (6) |
| Bank
Debt Term Loan, 13.67% (SOFR + 10.00%, maturity June 29, 2026) |
| 11/10/25 |
| 21 |
|
| 19 |
|
| 5 |
|
| — |
% |
| Beverage,
Food & Tobacco |
|
|
|
|
| |
| Isagenix
International LLC (6) |
| Bank
Debt Term Loan, 11.27% (SOFR + 7.60%, maturity September 22,
2027) |
| 07/31/25 |
| 105 |
|
| 8 |
|
| 8 |
|
| 0.01 |
% |
| Moran
Foods LLC (6) |
| Bank
Debt Term Loan, 11.02% (SOFR + 7.35%, maturity June 30, 2026) |
| 02/27/26 |
| 253 |
|
| 30 |
|
| 30 |
|
| 0.03 |
% |
| Chemicals,
Plastics & Rubber |
|
|
|
|
| |
| Flint
Group Topco Limited (6) |
| Bank
Debt Term Loan, 10.93% (SOFR + 7.26%, maturity December 31,
2027) |
| 10/01/24 |
| 654 |
|
| 27 |
|
| 45 |
|
| 0.03 |
% |
| Retail
/ Consumer Goods: Non-Durable |
|
|
|
|
| |
| Solaray,
LLC (6) |
| Bank
Debt Term Loan, 11.38% (SOFR + 6.85%, maturity December 15,
2028) |
| 09/24/24 |
| 196 |
|
| 156 |
|
| 160 |
|
| 0.10 |
% |
| Solaray,
LLC (6) |
| Bank
Debt Term Loan, 7.13% (SOFR + 2.60%, maturity December 15, 2028) |
| 09/24/24 |
| 103 |
|
| 96 |
|
| 97 |
|
| 0.06 |
% |
| Total
Bank Debt Term Loan |
| $ |
359 |
|
| $ |
345 |
|
| 0.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| |
See
Notes to Consolidated Financial Statements
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer(1) |
| Investment
Description |
|
Acquisition
Date(2) |
| Principal
Amount/Shares |
| Cost |
|
Fair
Value(3) |
| %
of Net Assets |
| ($
in thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Common
Stock |
|
|
|
|
| |
| United
States (4) |
|
|
|
|
| |
| Chemicals,
Plastics & Rubber |
|
|
|
|
| |
| Flint
Group Topco Limited |
| Common
Stock |
| 10/23/24 |
| 438,201 |
|
| $ |
— |
|
| $ |
— |
|
| — |
% |
| Metals
& Mining |
|
|
|
|
| |
| FORESIGHT
ENERGY LLC (6) |
| Common
Stock |
| 05/08/24 |
| 2,381 |
|
| 10 |
|
| 11 |
|
| 0.01 |
% |
| Aerospace
& Defense |
|
|
|
|
| |
| New
Constellis Holdings Inc (6) |
| Common
Stock |
| 09/19/24 |
| 7,104 |
|
| — |
|
| — |
|
| — |
% |
| Banking,
Finance, Insurance & Real Estate |
|
|
|
|
| |
| Resolute
Investment Managers Inc (6) |
| Common
Stock |
| 09/19/24 |
| 7,213 |
|
| 33 |
|
| 33 |
|
| 0.02 |
% |
| Total
Common Stock |
| $ |
43 |
|
| $ |
44 |
|
| 0.03 |
% |
| Private
Corporations |
|
|
|
|
| |
| United
States (4) |
|
|
|
|
| |
| Banking,
Finance, Insurance & Real Estate |
|
|
|
|
| |
| Chief
Power Finance LLC (6) |
| Private
Equity Fund |
| 07/31/25 |
| 200 |
|
| $ |
34 |
|
| $ |
26 |
|
| 0.02 |
% |
| Beverage,
Food & Tobacco |
|
|
|
|
| |
| Moran
Foods LLC |
| Private
Corporation |
| 07/31/25 |
| 539,650 |
|
| — |
|
| — |
|
| — |
% |
| Consumer
Goods: Non-Durable |
|
|
|
|
| |
| Isagenix
International LLC (6) |
| Private
Corporation |
| 07/31/25 |
| 6,300 |
|
| — |
|
| — |
|
| — |
% |
| Containers,
Packaging & Glass |
|
|
|
|
| |
| LIBBEY
GLASS INC. (6) |
| Private
Corporation |
| 07/31/25 |
| 4,400 |
|
| 10 |
|
| 10 |
|
| 0.01 |
% |
| Total
Private Corporations |
| $ |
44 |
|
| $ |
36 |
|
| 0.03 |
% |
| Warrants |
|
|
|
|
| |
| United
States (4) |
|
|
|
|
| |
| Retail
/ Consumer Goods: Non-Durable |
|
|
|
|
| |
| Careismatic
Brands Warrants |
| Warrant |
| 09/19/24 |
| 3,363 |
|
| — |
|
| — |
|
| — |
% |
| Total
Warrants |
| $ |
— |
|
| $ |
— |
|
| — |
% |
| Total
Investments |
| $ |
372,939 |
|
| $ |
308,363 |
|
| 200.47 |
% |
| Cash
Equivalents |
|
|
|
|
| |
| United
States (4) |
|
|
|
|
| |
| Funds |
|
|
|
|
| |
| Goldman
Sachs Government Institutional Class, 3.55% |
| Money
Market Fund |
|
|
| $ |
56,960 |
|
| $ |
56,960 |
|
| $ |
56,960 |
|
| 37.03 |
% |
| Total
Cash Equivalents |
| $ |
56,960 |
|
| $ |
56,960 |
|
| 37.03 |
% |
| Total
Investments and Cash Equivalents |
| $ |
429,899 |
|
| $ |
365,323 |
|
| 237.50 |
% |
See
Notes to Consolidated Financial Statements
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Credit
Default Swaps |
| Counterparty |
| Reference
Index |
| Transaction
Type |
| Fixed
Rate Amount |
| Payment
Frequency |
| Termination
Date |
| Notional
Amount |
| Payments
Upfront |
| Unrealized
Appreciation/(Depreciation) |
| Fair
Value |
|
|
|
|
|
|
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| J.P.
Morgan Securities LLC |
| CDX.NA.HY.S46 |
| Purchased
protection |
| 5.00 |
% |
| Quarterly |
| 06/20/31 |
| $ |
15,000 |
|
| $ |
(591) |
|
| $ |
(154) |
|
| $ |
(745) |
|
| JPMorgan
Chase Bank, National Association |
| ITRX.EUR.XOVER.S36 |
| Purchased
protection |
| 5.00 |
% |
| Quarterly |
| 12/20/26 |
| 46,182 |
|
| (3,049) |
|
| 1,344 |
|
| (1,705) |
|
| JPMorgan
Chase Bank, National Association |
| ITRX.EUR.XOVER.S38 |
| Purchased
protection |
| 5.00 |
% |
| Quarterly |
| 12/20/27 |
| 11,546 |
|
| (933) |
|
| 169 |
|
| (764) |
|
| Total
Credit Default Swaps |
| $ |
(4,573) |
|
| $ |
1,359 |
|
| $ |
(3,214) |
|
| Interest
Rate Swaps |
| Counterparty |
| Reference
Index |
| Transaction
Type |
| Fixed
Rate Amount |
| Payment
Frequency |
| Termination
Date |
| Notional
Amount |
| Payments
Upfront |
| Unrealized
Appreciation/(Depreciation) |
| Fair
Value |
|
|
|
|
|
|
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| J.P.
Morgan Securities LLC |
| SOFR |
| Pay
fixed rate |
| 3.39 |
% |
| Annual |
| 11/07/28 |
| $ |
3,050 |
|
| $ |
— |
|
| $ |
21 |
|
| $ |
21 |
|
| Wells
Fargo Securities, LLC |
| SOFR |
| Pay
floating rate |
| 3.70 |
% |
| Annual |
| 03/27/28 |
| 74,976 |
|
| — |
|
| 102 |
|
| 102 |
|
| Wells
Fargo Securities, LLC |
| SOFR |
| Pay
floating rate |
| 3.65 |
% |
| Annual |
| 03/27/31 |
| 9,444 |
|
| — |
|
| 13 |
|
| 13 |
|
| Wells
Fargo Securities, LLC |
| SOFR |
| Pay
floating rate |
| 3.79 |
% |
| Annual |
| 03/30/28 |
| 5,734 |
|
| — |
|
| 18 |
|
| 18 |
|
| Wells
Fargo Securities, LLC |
| SOFR |
| Pay
floating rate |
| 3.75 |
% |
| Annual |
| 03/30/31 |
| 880 |
|
| — |
|
| 5 |
|
| 5 |
|
| Total
Interest Rate Swaps |
| $ |
— |
|
| $ |
159 |
|
| $ |
159 |
|
| Futures
Contracts |
| Underlying |
| Transaction
Type |
| Number
of Contracts |
| Payment
Frequency |
| Termination
Date |
| Notional
Amount |
| Payments
Upfront |
| Unrealized
Appreciation/(Depreciation) |
| Fair
Value |
|
|
|
|
|
|
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| Euro |
| Contract
to sell |
| 71 |
| Payment
on settlement |
| 06/15/26 |
| $ |
8,875 |
|
| $ |
— |
|
| $ |
(14) |
|
| $ |
(14) |
|
| Total
Currency Futures Contracts |
| $ |
— |
|
| $ |
(14) |
|
| $ |
(14) |
|
| Total
Return Swaps |
| Counterparty |
| Reference
Index |
| Financing
Rate Index |
| Financing
Rate Spread |
| Payment
Frequency |
| Termination
Date |
| Notional
Amount |
| Payments
Upfront |
| Unrealized
Appreciation/(Depreciation) |
| Fair
Value |
|
|
|
|
|
|
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| Barclays
Bank PLC, Barclays Capital Securities Limited |
| State
Street Blackstone Senior Loan ETF |
| OBFR |
| 350
bps |
| Monthly |
| 01/31/27 |
| $ |
24,437 |
|
| $ |
— |
|
| $ |
— |
|
| $ |
— |
|
| Total
Total Return Swaps |
| $ |
— |
|
| $ |
— |
|
| $ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
See
Notes to Consolidated Financial Statements
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
SCHEDULE OF INVESTMENTS |
| MARCH
31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Exchange
Traded Options |
| Reference
Index |
| Transaction
Type |
| Strike
Price |
| Payment
Frequency |
| Expiration
Date |
|
Notional
Amount(12) |
| Payments
Upfront |
| Unrealized
Appreciation/(Depreciation) |
| Fair
Value |
|
|
|
|
|
|
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| Invesco
Senior Loan ETF |
| Put |
| $20 |
| Payment
on settlement |
| 07/17/26 |
| $ |
8,000 |
|
| $ |
161 |
|
| $ |
(31) |
|
| $ |
130 |
|
| iShares
Russell 2000 ETF |
| Put |
| $200 |
| Payment
on settlement |
| 05/15/26 |
| 20,000 |
|
| 314 |
|
| (220) |
|
| 94 |
|
| Janus
Henderson B-BBB CLO ETF |
| Put |
| $46 |
| Payment
on settlement |
| 06/18/26 |
| 920 |
|
| 14 |
|
| 7 |
|
| 21 |
|
| State
Street Blackstone Senior Loan ETF |
| Put |
| $39 |
| Payment
on settlement |
| 05/15/26 |
| 3,327 |
|
| 12 |
|
| 16 |
|
| 28 |
|
| Russell
2000 Index |
| Put |
| $1,950 |
| Payment
on settlement |
| 06/18/26 |
| 21,450 |
|
| 197 |
|
| (25) |
|
| 172 |
|
| Russell
2000 Index |
| Put |
| $2,000 |
| Payment
on settlement |
| 06/18/26 |
| 58,000 |
|
| 715 |
|
| (171) |
|
| 544 |
|
| Russell
2000 Index |
| Put |
| $2,130 |
| Payment
on settlement |
| 06/18/26 |
| 10,863 |
|
| 123 |
|
| 35 |
|
| 157 |
|
| S&P
500 Index |
| Put |
| $5,250 |
| Payment
on settlement |
| 06/18/26 |
| 31,500 |
|
| 214 |
|
| (13) |
|
| 201 |
|
| S&P
500 Index |
| Put |
| $5,300 |
| Payment
on settlement |
| 06/18/26 |
| 23,850 |
|
| 160 |
|
| 1 |
|
| 161 |
|
| S&P
500 Index |
| Put |
| $5,500 |
| Payment
on settlement |
| 06/18/26 |
| 33,000 |
|
| 280 |
|
| 1 |
|
| 281 |
|
| Total
Exchange Traded Options |
| $ |
2,190 |
|
| $ |
(400) |
|
| $ |
1,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Over
the Counter Options |
| Counterparty |
| Reference
Index |
|
Transaction
Type(10) |
| Strike
Price |
| Payment
Frequency |
| Expiration
Date |
|
Notional
Amount(11) |
| Payments
Upfront |
| Unrealized
Appreciation/(Depreciation) |
| Fair
Value |
|
|
|
|
|
|
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
| JPMorgan
Chase Bank, National Association |
| CDX.NA.HY.S45 |
| Put |
| $ |
100 |
|
| Payment
on settlement |
| 06/17/26 |
| $ |
40,000 |
|
| $ |
196 |
|
| $ |
99 |
|
| $ |
295 |
|
| JPMorgan
Chase Bank, National Association |
| CDX.NA.IG.S45 |
| Put |
| $ |
70 |
|
| Payment
on settlement |
| 04/15/26 |
| 300,000 |
|
| 199 |
|
| (43) |
|
| 155 |
|
| Total
Over the Counter Options |
| $ |
395 |
|
| $ |
56 |
|
| $ |
450 |
|
(1)The
Fund does not “control” and is not an “affiliate” of any of its portfolio
companies, each as defined in the 1940 Act. In general, under the 1940 Act, the
Fund would be presumed to “control” a portfolio company if it owned more than
25% of the voting securities and would be an “affiliate” of a portfolio company
if Fund owned 5% or more of its voting securities.
(2)Acquisition
date represents date the investment was initially acquired by the Fund and may
be earlier than the date on which the Fund converted to a RIC.
(3)Fair
value is determined by the Adviser in accordance with written valuation policies
and procedures, subject to oversight by the Fund’s Board, in accordance with
Rule 2a‐5 under the 1940 Act; see Note 2 of the Notes to Consolidated Financial
Statements.
(4)Represents
the principal country or region of risk where the investment has
exposure.
(5)144(a)—Security
was purchased pursuant to Rule 144a under the Securities Act of 1933 and may not
be resold subject to that rule, except to qualified institutional
buyers.
(6)Investment
is categorized as Level 3 per the Fund's fair value hierarchy.
(7)All
or a portion of the security is pledged as collateral for Reverse Repurchase
Agreements.
(8)Fair
Value and Amortized Cost includes fee rebates related to the Fund's interest in
CLO Subordinated notes.
(9)As
of March 31, 2026, this investment is non-income producing.
(10)Represents
the option on the part of the Fund to enter into a credit default swap on a
corporate bond index whereby the Fund would pay a fixed rate and receive credit
protection payments.
(11)Notional
value represents the number of underlying index units multiplied by the
reference price on the underlying index and the contract size.
(12)Investment
is co-invested with certain of the Fund’s affiliates, see Note 8 for additional
details.
See
Notes to Consolidated Financial Statements
31
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
STATEMENT OF OPERATIONS |
|
|
|
| (In
thousands) |
|
Year
Ended
March 31,
2026 |
| INVESTMENT
INCOME |
| (Expressed
in U.S. Dollars) |
| Interest
income |
| $ |
51,056 |
|
| Other
income |
| 749 |
|
| Total
investment income |
| 51,805 |
|
| EXPENSES |
| |
| Interest
expense |
| 8,312 |
|
| Performance
fees to affiliate |
| 5,901 |
|
| Management
fees to affiliate |
| 3,047 |
|
| Compensation
expense |
| 1,580 |
|
| Professional
fees |
| 1,550 |
|
| Underwriters’
fees |
| 1,688 |
|
|
Other
operating expenses(1) |
| 1,903 |
|
| Total
expenses |
| 23,981 |
|
| Net
investment income |
| 27,824 |
|
| NET
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) |
| |
| Net
realized gain (loss) on investments |
| 2,186 |
|
| Net
realized gain (loss) on financial derivatives |
| (6,697) |
|
| Net
realized gain (loss) on foreign currency transactions |
| 821 |
|
| Change
in net unrealized appreciation (depreciation) on investments |
| (64,971) |
|
| Change
in net unrealized appreciation (depreciation) on financial
derivatives |
| 1,170 |
|
| Change
in net unrealized appreciation (depreciation) on foreign currency
transactions |
| 816 |
|
| Total
net realized gain (loss) and change in unrealized appreciation
(depreciation) |
| (66,675) |
|
| NET
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ATTRIBUTABLE
TO COMMON SHAREHOLDERS |
| $ |
(38,851) |
|
(1)Includes
$0.4 million of trustee fees and expenses.
See
Notes to Consolidated Financial Statements
32
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
STATEMENT OF CHANGES IN NET ASSETS |
|
|
|
|
|
|
Year
Ended
March 31,
2026 |
| (In
thousands, except share amounts) |
| (Expressed
in U.S. Dollars) |
| NET
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: |
| |
| Net
investment income |
| $ |
27,824 |
|
| Net
realized gain (loss) on investments, financial derivatives, and foreign
currency transactions |
| (3,690) |
|
| Change
in net unrealized appreciation (depreciation) on investments, financial
derivatives, and foreign currency transactions |
| (62,985) |
|
| NET
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
| (38,851) |
|
| DISTRIBUTIONS
TO SHAREHOLDERS: |
| |
| Distributions
from earnings |
| — |
|
| Distributions
from return of capital |
| (36,065) |
|
| TOTAL
DISTRIBUTIONS TO SHAREHOLDERS |
| (36,065) |
|
| CAPITAL
TRANSACTIONS: |
| |
| Reinvestment
of distributions |
| 139 |
|
| Share
based compensation |
| 98 |
|
| NET
INCREASE (DECREASE) FROM CAPITAL TRANSACTIONS |
| 237 |
|
| TOTAL
INCREASE (DECREASE) IN NET ASSETS |
| (74,679) |
|
|
NET
ASSETS—Beginning of Year(1) |
| 228,501 |
|
| NET
ASSETS—End of Year |
| $ |
153,822 |
|
| Capital
share activity: |
| |
| Shares
issued from distribution reinvestment plan |
| 28,077 |
|
| Forfeiture
of common shares to satisfy tax withholding obligations |
| (7,703) |
|
| Net
Increase in Shares Outstanding |
| 20,374 |
|
(1)On
April 1, 2025, the date the Fund converted to a Delaware closed-end fund
registered under the Investment Company Act of 1940, as amended. See Note 1 and
Note 2 of the Notes to Consolidated Financial Statements for
details.
See
Notes to Consolidated Financial Statements
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
|
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY(1)(2) |
|
|
|
| Common
Shares |
| Common
Shares,
par value |
| Preferred
Shares |
| Preferred
Shares,
par value |
| Additional
Paid-in Capital |
| Accumulated
(Deficit) Earnings |
| Total |
| (In
thousands except for share amounts) |
|
|
|
|
|
|
|
|
|
|
|
| |
| BALANCE,
December 31, 2023 |
18,601,464 |
|
| $ |
186 |
|
| — |
|
| $ |
— |
|
| $ |
274,698 |
|
| $ |
(138,646) |
|
| $ |
136,238 |
|
|
Common
shares issued(3) |
10,964,023 |
|
| 110 |
|
|
|
|
|
| 73,448 |
|
|
|
| 73,558 |
|
| Preferred
shares issued |
|
|
|
| 1,000 |
|
| 1 |
|
|
|
|
|
| 1 |
|
| Issuance
of restricted shares |
90,229 |
|
| 1 |
|
|
|
|
|
| (1) |
|
|
|
| — |
|
| Share
based compensation |
|
|
|
|
|
|
|
| 442 |
|
|
|
| 442 |
|
| Forfeiture
of common shares to satisfy tax withholding obligations |
(4,163) |
|
| — |
|
|
|
|
|
| — |
|
|
|
| — |
|
|
Dividends
declared(4) |
|
|
|
|
|
|
|
|
|
| (23,099) |
|
| (23,099) |
|
| Net
income (loss) |
|
|
|
|
|
|
|
|
|
| 6,586 |
|
| 6,586 |
|
| BALANCE,
December 31, 2024 |
29,651,553 |
|
| $ |
297 |
|
| 1,000 |
|
| $ |
1 |
|
| $ |
348,587 |
|
| $ |
(155,159) |
|
| $ |
193,726 |
|
|
Common
shares issued(3) |
8,075,118 |
|
| 81 |
|
|
|
|
|
| 52,055 |
|
|
|
| 52,136 |
|
| Preferred
shares redeemed |
|
|
|
| (1,000) |
|
| (1) |
|
|
|
|
|
| (1) |
|
| Share
based compensation |
|
|
|
|
|
|
|
| 203 |
|
|
|
| 203 |
|
| Repurchase
of common shares |
(167,476) |
|
| (2) |
|
|
|
|
|
| (976) |
|
|
|
| (978) |
|
|
Dividends
declared(4) |
|
|
|
|
|
|
|
|
|
| (8,715) |
|
| (8,715) |
|
| Net
income (loss) |
|
|
|
|
|
|
|
|
|
| (7,870) |
|
| (7,870) |
|
| BALANCE,
March 31, 2025 |
37,559,195 |
|
| $ |
376 |
|
| — |
|
| $ |
— |
|
| $ |
399,869 |
|
| $ |
(171,744) |
|
| $ |
228,501 |
|
(1)As
discussed in Note 1 of the Notes to Consolidated Financial Statements, the Fund
converted to a Delaware closed-end fund registered under the Investment Company
Act of 1940, as amended. As discussed in Note 2 to Consolidated Financial
Statements, the Fund prospectively adopted ASC 946, Financial
Services—Investment Companies
(“ASC 946”) which resulted in changes to terminology and presentation of the
Fund’s financial statements. The Consolidated Statement of Shareholders’ Equity
is the equivalent of the Consolidated Statement of Changes in Net Assets,
required by ASC 946. See Note 7 to Consolidated Financial Statements for
additional details.
(2)Derived
from the audited financials for the three-month period ended March 31, 2025 and
the year ended December 31, 2024.
(3)Net
of discounts and commissions and offering costs.
(4)For
the three-month period ended March 31, 2025, dividends totaling $0.24 per common
share outstanding were declared. For the year ended December 31, 2024, dividends
totaling $0.96 per common share outstanding were declared.
See
Notes to Consolidated Financial Statements
34
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
STATEMENT OF CASH FLOWS |
|
|
|
| (In
thousands) |
|
Year
Ended
March 31,
2026 |
|
|
| (Expressed
in U.S. Dollars) |
| CASH
FLOWS FROM OPERATING ACTIVITIES: |
| |
| Net
increase (decrease) in net assets resulting from operations |
| $ |
(38,851) |
|
| Adjustments
to reconcile net increase in net assets resulting from operations to net
cash provided by (used in) operating activities: |
| |
| Purchases
of investments |
| (331,249) |
|
| Proceeds
from sale of investments |
| 598,479 |
|
| Principal
payments of investments |
| 77,475 |
|
|
Net
reductions to CLO equity and related investment cost(1) |
| 22,856 |
|
| Repurchase
of investments sold short |
| (505,371) |
|
| Proceeds
from disposition of financial derivatives |
| 17,851 |
|
| Purchase
of financial derivatives |
| (22,869) |
|
| Underwriters’
fees |
| 1,688 |
|
| Net
realized (gain) loss on investments |
| (2,186) |
|
| Net
realized (gain) loss on financial derivatives |
| 6,697 |
|
| Net
realized (gain) loss on foreign currency transactions |
| (821) |
|
| Change
in net unrealized (appreciation) depreciation on investments |
| 64,971 |
|
| Change
in net unrealized (appreciation) depreciation on financial
derivatives |
| (1,170) |
|
| Change
in net unrealized (appreciation) depreciation on foreign currency
transactions |
| (816) |
|
| Amortization
of premiums and accretion of discounts, net |
| (3,058) |
|
| Share
based compensation |
| 98 |
|
| (Increase)
decrease in operating assets: |
| |
| Receivable
for investments sold |
| 503,133 |
|
| Due
from brokers, net |
| (6,440) |
|
| Interest
receivable |
| 59 |
|
| Other
assets |
| 219 |
|
| Increase
(decrease) in operating liabilities: |
| |
| Due
to brokers, net |
| (3) |
|
| Performance
fee payable to affiliate |
| 1,074 |
|
| Management
fees payable to affiliate |
| (277) |
|
| Interest
payable |
| (1,304) |
|
| Accrued
expenses and other liabilities |
| (132) |
|
| Net
cash provided by (used in) operating activities |
| 380,053 |
|
| CASH
FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
| |
| Offering
costs paid |
| (310) |
|
| Distributions
paid (net of distribution reinvestment plan of $139) |
| (35,924) |
|
| Borrowings
under reverse repurchase agreements |
| 1,088,859 |
|
| Repayments
of borrowings under reverse repurchase agreements |
| (1,440,939) |
|
| Due
from brokers, net |
| (2,797) |
|
| Due
to brokers, net |
| (904) |
|
| Proceeds
from the issuance of unsecured borrowings, at fair value |
| 52,313 |
|
| Cash
provided by (used in) financing activities |
| (339,702) |
|
| NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 40,351 |
|
| CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
| 17,375 |
|
| CASH
AND CASH EQUIVALENTS, END OF PERIOD |
| 57,726 |
|
|
|
| |
See
Notes to Consolidated Financial Statements
35
|
|
|
|
|
|
|
|
| |
| ELLINGTON
CREDIT COMPANY |
| CONSOLIDATED
STATEMENT OF CASH FLOWS |
|
|
|
| (In
thousands) |
|
Year
Ended
March 31,
2026 |
|
|
| (Expressed
in U.S. Dollars) |
| Supplemental
disclosure of cash flow information: |
| |
| Interest
paid |
| $ |
9,616 |
|
| Distribution
payable |
| 3,006 |
|
| Value
of shares issued in connection with dividend reinvestment plan
(non-cash) |
| 139 |
|
| Share
based compensation (non-cash) |
| 98 |
|
(1)Includes
return of capital on CLO equity investments from recurring cash flows and
distributions from called deals.
See
Notes to Consolidated Financial Statements
36
ELLINGTON
CREDIT COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2026
1.Organization
Ellington
Credit Company ("EARN") was initially formed as a real estate investment trust
("REIT") on August 2, 2012, and commenced operations on September 25, 2012. EARN
conducts its business through its wholly owned subsidiaries, EARN OP GP LLC (the
"General Partner"), and Ellington Credit Company LP (formerly Ellington
Residential Mortgage LP) (the "Operating Partnership"), which were formed as a
Delaware limited liability company and a Delaware limited partnership,
respectively, on July 31, 2012 and commenced operations on September 25, 2012.
The Operating Partnership conducts its business of acquiring, investing in, and
managing targeted assets through its wholly owned subsidiaries. EARN, the
General Partner, the Operating Partnership, and their consolidated subsidiaries
are hereafter defined as the "Fund."
On
April 1, 2025, the Fund converted to a Delaware closed-end fund registered under
the Investment Company Act of 1940, as amended (the "1940 Act") that intends to
elect to be treated as a regulated investment company ("RIC"), (the
"Conversion"). After the Conversion, the Fund is required to comply with the
rules and regulations of the 1940 Act.
The
Fund is focused on acquiring and actively managing a portfolio of corporate
CLOs, primarily mezzanine debt and equity tranches, which are typically
collateralized by portfolios consisting primarily of below-investment-grade
senior secured loans with a large number of discrete underlying borrowers across
various industry sectors. Additionally, the Fund may also invest in CLO loan
accumulation facilities, which are entities that acquire corporate loans and
other similar corporate credit-related assets in anticipation of ultimately
collateralizing a CLO transaction.
The
Fund is externally managed by Ellington Credit Company Management LLC (the
"Adviser") which serves as the adviser of the Fund pursuant to the terms of an
advisory agreement, as described in Note 8. The Adviser is an affiliate of
Ellington Management Group, L.L.C. (“EMG”), an investment management firm that
is an SEC-registered investment adviser with over three decades of experience in
structured credit investing, portfolio construction and risk management. In
accordance with the terms of the Advisory Agreement, Administration Agreement,
and the Services Agreement (each as defined and described in Note 8), the
Adviser and the Administrator are responsible for advising and administering,
respectively, the Fund's business activities and day-to-day operations, and
perform certain services, subject to oversight by the Fund’s Board of Trustees
(the “Board”).
2.Significant
Accounting Policies
(A)
Basis of Presentation: The
Fund's consolidated financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America, or
"U.S. GAAP," for investment companies, ASC 946, Financial
Services—Investment Companies (“ASC
946”) and Regulation S-X. The Fund generally will not consolidate its interests
in any company other than in its subsidiaries that qualify as investment
companies under ASC 946. All inter-company balances and transactions have been
eliminated. The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and those
differences could be material. In management's opinion, all material adjustments
considered necessary for a fair statement of the Fund's consolidated financial
statements have been included and are only of a normal recurring
nature.
Effective
April 1, 2025, upon the Conversion, the Fund adopted ASC 946 as required under
the 1940 Act. The most significant changes as a result of the Fund’s change in
accounting methodology are as follows:
•The
Condensed Consolidated Balance Sheet has been changed to a Statement of Assets
and Liabilities;
•The
Consolidated Schedule of Investments has been added;
•The
presentation of the Statement of Operations has been changed to conform to the
requirements under ASC 946;
•The
Statement of Cash Flows has been changed to conform to the requirements under
ASC 946 and the section for investing activities has been removed;
•Certain
footnotes to the consolidated financial statements have been added or removed to
reflect conformity with requirements under ASC 946;
•Securities
sold under agreements to be repurchased at an agreed-upon price and date, which
were formerly referred to as "repurchase agreements," are now referred to as
"reverse repurchase agreements";
•The
Fund’s cost basis in each of its investments was adjusted to fair value as of
the date of Conversion; and
•The
financial highlights disclosures required under ASC 946 have been
added.
(B)
Valuation:
The Fund carries all of its investments at fair value in accordance with ASC
946. There is no single method for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each investment while employing a consistently
applied valuation process for the types of investments the Fund makes. Rule 2a-5
under the 1940 Act establishes requirements for determining fair value in good
faith for purposes of the 1940 Act. Pursuant to Rule 2a-5, the Board has elected
to designate the Adviser as the Fund’s “valuation designee” to perform fair
value determinations in respect to the Fund’s assets and liabilities. The
Adviser, subject to the Board’s oversight, determines the fair value of the
Fund’s assets and liabilities in accordance with the terms of FASB Accounting
Standards Codification Topic 820, Fair Value Measurement (“ASC 820”). The
valuation procedures are set forth in more detail below.
The
Fund applies ASC 820-10, Fair
Value Measurement ("ASC 820-10"),
to its holdings of financial instruments. ASC 820-10 establishes a three-level
valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy is based upon the observability of inputs to the valuation of an asset
or liability as of the measurement date. The three levels are defined as
follows:
•Level
1—inputs to the valuation methodology are observable and reflect quoted prices
(unadjusted) for identical assets or liabilities in active markets. The types of
financial instruments the Fund generally includes in this category are
exchange-traded derivatives;
•Level
2—inputs to the valuation methodology other than quoted prices included in Level
1 are observable for the asset or liability, either directly or indirectly. The
types of financial instruments that the Fund generally includes in this category
are certain CLOs, and actively traded derivatives such as credit default swaps,
or "CDS", foreign currency forwards, and other over-the-counter derivatives;
and
•Level
3—inputs to the valuation methodology are unobservable and significant to the
fair value measurement. Currently, this category generally includes certain
CLOs, private corporate debt and equity investments, and certain
CDS.
For
certain financial instruments, the various inputs that management uses to
measure fair value may fall into different levels of the fair value hierarchy.
For each such financial instrument, the determination of which category within
the fair value hierarchy is appropriate is based on the lowest level of input
that is significant to the fair value measurement. ASC 820 prioritizes the
various inputs that management uses to measure fair value, with the highest
priority given to inputs that are observable and reflect quoted prices
(unadjusted) for identical assets or liabilities in active markets (Level 1),
and the lowest priority given to inputs that are unobservable and significant to
the fair value measurement (Level 3). The assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the financial instrument. The Fund may use
valuation techniques consistent with the market and income approaches to measure
the fair value of its assets and liabilities. The market approach uses
third-party valuations and information obtained from market transactions
involving identical or similar assets or liabilities. The income approach uses
projections of the future economic benefits of an instrument to determine its
fair value, such as in the discounted cash flow methodology. The inputs or
methodology used for valuing financial instruments are not necessarily an
indication of the risk associated with investing in these financial instruments.
The leveling of each financial instrument is reassessed at the end of each
period. Transfers between levels of the fair value hierarchy are assumed to
occur at the end of the reporting period.
Summary
Valuation Techniques
For
financial instruments that are traded in an "active market," the best measure of
fair value is the quoted market price. However, many of the Fund's financial
instruments are not traded in an active market. Therefore, management generally
uses third-party valuations when available. If third-party valuations are not
available, management uses other valuation techniques, such as the discounted
cash flow methodology. The following are summary descriptions, for the various
categories of financial instruments, of the valuation methodologies management
uses in determining fair value of the Fund's financial instruments in such
categories. Management utilizes such methodologies to assign a fair value (the
estimated price that, in an orderly transaction at the valuation date, would be
received to sell an asset, or paid to transfer a liability, as the case may be)
to each such financial instrument.
For
the Fund's investments in securities, management generally seeks to obtain at
least one third-party valuation, and often obtains multiple valuations when
available. The Adviser has been able to obtain third-party valuations on the
majority of these instruments and expects to continue to solicit third-party
valuations in the future. The Adviser generally values each financial instrument
at the average of third-party valuations received and not rejected as described
below. Third-party valuations are not binding; the Adviser may adjust the
valuations it receives (e.g., downward adjustments for odd lots), and may
challenge or reject a valuation when, based on its validation criteria, the
Adviser determines that such valuation is unreasonable or
erroneous.
Furthermore, based on its validation criteria, the Adviser may determine that
the average of the third-party valuations received for a given instrument does
not result in what the Adviser believes to be the fair value of such instrument,
and in such circumstances the Adviser may override this average with its own
good faith valuation. The validation criteria may take into account output from
EMG’s or third-party models, recent trading activity in the same or similar
instruments, and valuations received from third parties. The use of proprietary
models requires the use of a significant amount of judgment and the application
of various assumptions including, but not limited to, assumptions concerning
future prepayment rates and default rates.
CLOs
and corporate debt are generally classified as either Level 2 or Level 3 based
on the analysis of available market data and/or third-party valuations.
Furthermore, the methodology used by the third-party valuation providers is
reviewed at least annually by management, so as to ascertain whether such
providers are utilizing observable market data to determine the valuations that
they provide.
Interest
rate swaps and foreign currency forwards are typically valued based on internal
models that use observable market data, including applicable interest rates and
foreign currency rates in effect as of the measurement date; the model-generated
valuations are then typically compared to counterparty valuations for
reasonableness; these financial derivatives are generally designated as Level 2
instruments.
For
financial derivatives with greater price transparency, such as CDS on corporate
indices, market-standard pricing sources are used to obtain valuations; these
financial derivatives are generally classified as Level 2.
In
valuing its derivatives, the Fund also considers the creditworthiness of both
the Fund and its counterparties, along with collateral provisions contained in
each derivative agreement.
The
Fund's reverse repurchase agreements are carried at cost, which approximates
fair value. Reverse repurchase agreements are classified as Level 2 assets and
liabilities based on the adequacy of the collateral and their short term
nature.
The
Fund's valuation process, including the application of validation criteria, is
directed by the Adviser's Valuation Committee ("Valuation Committee"). The
Valuation Committee includes senior level executives from various departments
within EMG, and each quarter the Valuation Committee reviews and approves the
valuations of the Fund's investments. The valuation process also includes a
monthly review by the Fund's third party sub-administrator. The goal of this
review is to replicate various aspects of the Fund's valuation process based on
the Fund's documented procedures.
Because
of the inherent uncertainty of valuation, the estimated fair value of the Fund's
financial instruments may differ significantly from the values that would have
been used had a ready market for the financial instruments existed, and the
differences could be material to the consolidated financial
statements.
(C)
Purchase and Sales of Investments:
Purchases and sales of investments are recorded on trade date and realized gain
(loss) and unrealized appreciation (depreciation) are calculated based on
identified cost.
(D)
Interest Income:
Coupon interest income from CLO debt investments is accrued based on the
outstanding principal balance and the current coupon rate to the extent such
amounts are expected to be collected. Amortization of premium or accretion of
discount is recognized using the effective interest method.
Interest
income from CLO equity investments is recognized using the effective interest
method in accordance with ASC 325-40, Beneficial
Interests in Securitized Financial Assets,
based upon estimated cash flows, their expected timing, and expected redemption.
Differences between cash distributed and the amount calculated pursuant to the
effective interest method is recorded as an adjustment to the amortized cost
basis of the investment.
In
estimating future cash flows on the Fund's CLO debt and equity investments,
there are a number of assumptions that are subject to significant uncertainties
and contingencies; these estimates require the use of a significant amount of
judgment. The Fund reviews the effective yield for each position at each
measurement date and updates are made based upon the facts and circumstances
known to the Fund. The Fund's accretion of discounts and amortization of
premiums on securities for U.S. federal income tax and other tax purposes is
likely to differ from the accounting treatment under U.S. GAAP of these items as
described above.
(E)
Other Income:
In connection with certain of the Fund's CLO equity investments, the Fund
receives distributions from fee letters associated to such CLO equity positions.
Distributions from such fee letters are generally based upon a percentage of the
collateral manager's fees. Income from fee letters is included in Other income,
on the Consolidated Statement of Operations.
(F)
Cash and Cash Equivalents: Cash
and cash equivalents include cash, highly liquid investments, and short term
investments with original maturities of three months or less at the date of
acquisition. Cash and cash equivalents typically include amounts held in
interest bearing overnight accounts and amounts held in money market funds, and
these balances generally exceed insured limits. The Fund holds its cash at
institutions that it believes to be highly creditworthy.
(G)
Due from brokers/Due to brokers: Due
from brokers and Due to brokers accounts on the Consolidated Statement of Assets
and Liabilities include collateral transferred to or received from
counterparties, including clearinghouses, along with receivables and payables
for open and/or closed derivative positions.
(H)
Financial Derivatives: The
Fund enters into various types of financial derivatives subject to its
investment guidelines. The Fund's financial derivatives are predominantly
subject to bilateral master trade agreements or clearing in accordance with the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Fund may
be required to deliver or may receive cash or securities as collateral upon
entering into derivative transactions. In addition, changes in the relative
value of financial derivative transactions may require the Fund or the
counterparty to post or receive additional collateral. In the case of cleared
financial derivatives, the clearinghouse becomes the Fund's counterparty and a
futures commission merchant acts as intermediary between the Fund and the
clearinghouse with respect to all facets of the related transaction, including
the posting and receipt of required collateral. Collateral received by the Fund
is reflected on the Consolidated Statement of Assets and Liabilities as "Due to
Brokers." Conversely, collateral posted by the Fund is reflected as "Due from
Brokers" on the Consolidated Statement of Assets and Liabilities. The types of
financial derivatives that have been utilized by the Fund to date primarily
include interest rate swaps, credit default swaps, options, forwards, and
futures.
Swaps:
The
Fund enters into various types of swaps including credit default swaps, interest
rate swaps, and total return swaps. The primary risk associated with the Fund's
credit default and total return swaps is credit risk. The primary risk
associated with the Fund's interest rate swap activity is interest rate risk.
The Fund is subject to credit and interest rate risk exposure in the normal
course of pursuing its investment objectives.
A
credit default swap is a contract under which one party agrees to compensate
another party for the financial loss associated with the occurrence of a "credit
event" in relation to a "reference amount" or notional value of a "reference
asset" (usually a bond or an index or basket of bonds). The definition of a
credit event may vary from contract to contract. A credit event may occur
(i) when the reference asset (or underlying asset, in the case of a
reference asset that is an index or basket) fails to make scheduled principal or
interest payments to its holders, (ii) with respect to credit default swaps
referencing asset-backed securities and indices, when the reference asset (or
underlying asset, in the case of a reference asset that is an index or basket)
is downgraded below a certain rating level, or (iii) with respect to credit
default swaps referencing corporate entities and indices, upon an event of
default of the obligor of the reference asset (or underlying obligor, in the
case of a reference asset that is an index).
Interest
rate swaps are contractual agreements whereby one party pays a floating interest
rate on a notional principal amount and receives a fixed-rate payment on the
same notional principal, or vice versa, for a fixed period of time.
The
Fund enters into total return swaps in order to take a "long" or "short"
position with respect to an underlying reference asset. The Fund is subject to
market price volatility of the underlying reference asset. A total return swap
involves commitments to pay interest in exchange for a market-linked return
based on a notional value. To the extent that the total return of the corporate
debt, security, group of securities or index underlying the transaction exceeds
or falls short of the offsetting interest obligation, the Fund will receive a
payment from or make a payment to the counterparty.
Swaps
change in value with movements in interest rates or total return of the
reference securities. During the term of swap contracts, changes in value are
recognized as unrealized appreciation or depreciation on the Consolidated
Statement of Operations. When a contract is terminated, the Fund realizes a gain
or loss equal to the difference between the proceeds from (or cost of) the
closing transaction and the Fund's basis in the contract, if any. Periodic
payments or receipts required by swap agreements are recorded as unrealized
appreciation or depreciation when accrued and realized gain or loss when
received or paid. Upfront payments paid and/or received by the Fund to open swap
contracts are recorded as an asset and/or liability on the Consolidated
Statement of Assets and Liabilities and are recorded as a realized gain or loss
on the termination date.
Futures
Contracts:
The Fund enters into futures contract, typically U.S. Treasury futures
contracts. A futures contract is an exchange-traded agreement to buy or sell an
asset for a set price on a future date. Initial margin deposits are made upon
entering into futures contracts and can be either in the form of cash or
securities. During the period the futures contract is open, changes in the value
of the contract are recognized as unrealized appreciation or depreciation by
marking-to-market to reflect the current market value of the contract.
Unrealized gains or (losses) are included in Change in net unrealized
appreciation (depreciation) on financial derivatives in the Consolidated
Statement of Operations. Variation margin payments are made or received
periodically, depending upon whether unrealized losses or gains are incurred.
When the contract is closed, the Fund
records
a realized gain or loss equal to the difference between the proceeds of the
closing transaction and the Fund's basis in the contract. Realized gains or
(losses) are included in Net realized gain (loss) on financial derivatives on
the Consolidated Statement of Operations.
Options:
The Fund may purchase or write put or call options contracts which are entered
into typically to help mitigate overall market, credit, or interest rate risk
depending on the type of options contract. When the Fund purchases an options
contract, the option asset is initially recorded at an amount equal to the
premium paid, if any, and is subsequently marked-to-market. Premiums paid for
purchasing options contracts that expire unexercised are recognized on the
expiration date as realized losses. If an options contract is exercised, the
premium paid is subtracted from the proceeds of the sale or added to the cost of
the purchase to determine whether the Fund has realized a gain or loss on the
related transaction. When the Fund writes an options contract, the option
liability is initially recorded at an amount equal to the premium received, if
any, and is subsequently marked-to-market. Premiums received for writing options
contracts that expire unexercised are recognized on the expiration date as
realized gains. If an options contract is exercised, the premium received is
subtracted from the cost of the purchase or added to the proceeds of the sale to
determine whether the Fund has realized a gain or loss on the related investment
transaction. When the Fund enters into a closing transaction, the Fund will
realize a gain or loss depending upon whether the amount from the closing
transaction is greater or less than the premiums paid or received. The Fund may
also enter into options contracts that contain forward-settling premiums. In
this case, no money is exchanged upfront. Instead, the agreed-upon premium is
paid by the buyer upon expiration of the option, regardless of whether or not
the option is exercised.
Forward
Currency Contracts:
A forward currency contract is an agreement between two parties to purchase or
sell a specific quantity of currency with the delivery and settlement at a
specific future date and exchange rate. During the period the forward currency
contract is open, changes in the value of the contract are recognized as
unrealized gains or losses. When the contract is settled, the Fund records a
realized gain or loss equal to the difference between the proceeds of the
closing transaction and the Fund's basis in the contract.
Financial
derivative assets are included in Financial derivatives–assets, at fair value on
the Consolidated Statement of Assets and Liabilities while financial derivative
liabilities are included in Financial derivatives–liabilities, at fair value on
the Consolidated Statement of Assets and Liabilities.
(I)
Reverse Repurchase Agreements: The
Fund enters into reverse repurchase agreements with third-party broker-dealers,
whereby it sells securities under agreements to repurchase at an agreed upon
price and date. The Fund accounts for reverse repurchase agreements as
collateralized borrowings, with the initial sale price representing the amount
borrowed, and with the future repurchase price consisting of the amount borrowed
plus interest, at the implied interest rate of the reverse repurchase agreement,
on the amount borrowed over the term of the reverse repurchase agreement. The
interest rate on a reverse repurchase agreement is based on competitive market
rates (or competitive market spreads, in the case of agreements with floating
interest rates) at the time such agreement is entered into. When the Fund enters
into a reverse repurchase agreement, the lender establishes and maintains an
account containing cash and/or securities having a value not less than the
repurchase price, including accrued interest, of the reverse repurchase
agreement. Reverse repurchase agreements are carried at their contractual
amounts, which approximate fair value due to their short-term
nature.
(J)
Offering Costs and Underwriters’ fees:
For the issuance of equity securities or debt carried at cost, if any, offering
costs, underwriters' discounts and commissions and fees, are charged against
shareholders' equity within Additional paid-in capital. Offering costs typically
include legal, accounting, and other fees associated with the cost of raising
equity capital. Offering costs and underwriters’ discounts and commissions and
fees incurred in connection with the issuance of debt, for which the Company has
elected the fair value option, are expensed at issuance of such
debt.
(K)
Distributions:
Distributions on our common shares are recorded on the ex-date.
The
Fund has a dividend reinvestment plan (the “DRIP”) under which the Fund’s
distributions on common shares, net of any applicable U.S. withholding tax, are
reinvested in additional shares of the same class of shares of the Fund as the
respective distribution declared. Shareholders automatically participate in the
DRIP unless they opt out; shareholders who opt out will receive distribution in
cash.
Under
the DRIP, whenever the Fund declares a distribution on its common shares, such
distributions would be reinvested in newly issued shares of the Fund at a price
per share equal to 95% of the market price per share at the close of regular
trading on the NYSE on the payment date of such distribution (or, if no sale is
reported that day, the average of the last bid and ask prices reported by the
NYSE). While the Fund plans to generally issue new shares for DRIP purposes, the
Board reserves the right to authorize the purchase of common shares in the open
market in connection with the implementation of the DRIP.
(L)
Expenses:
Expenses are recognized as incurred on the Consolidated Statement of
Operations.
(M)
Foreign Currency:
The functional currency of the Fund is U.S. dollars. Assets and liabilities
denominated in foreign currencies are remeasured into U.S. dollars at current
exchange rates at the following dates: (i) assets, liabilities, and unrealized
appreciation/depreciation—at the valuation date; and (ii) income, expenses, and
realized gain (loss)—at the accrual/transaction date. For investments and
financial derivatives denominated in a foreign currency, the Fund isolates the
portion of realized gain (loss) and change in unrealized appreciation
(depreciation) resulting from changes in the foreign currency exchange rate from
the fluctuations arising from changes in fair value (as measured in such foreign
currency). Realized gain (loss) due to foreign currency and change in unrealized
appreciation (depreciation) due to foreign currency are included in Net realized
gain (loss) on foreign currency transactions and Change in net unrealized
appreciation (depreciation) on foreign currency transactions, respectively, on
the Consolidated Statement of Operations.
(N)
Share Repurchases:
Common shares that are repurchased by the Fund subsequent to issuance are
immediately retired upon settlement and decrease the total number of shares
issued and outstanding. The cost of such share repurchases is charged against
Paid-in capital on the Fund's Consolidated Statement of Assets and
Liabilities.
(O)
Income Taxes:
The Fund intends to operate in a manner to qualify to be taxed as a RIC under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
not to be subject to federal income tax on the portions of its taxable income
and capital gains that are distributed to shareholders. To qualify as a RIC, the
Fund must meet certain requirements, including: (i) registering as an investment
company under the 1940 Act and filing tax Form 1120-RIC; (ii) at least 90% of
the Fund’s gross income must be from qualifying income sources; (iii) at least
50% of the Fund’s assets must be held in cash, government securities, or other
securities meeting diversification thresholds; (iv) no more than 25% of the
Fund’s total assets may be invested in securities of a single issuer or of two
or more issuers engaged in the same trade or business; and (v) at least 90% of
the Fund’s taxable income, excluding net capital gains and exempt-interest
income, must be distributed annually to shareholders. Distributions declared in
October, November, and December of any calendar year, and paid on or prior to
January 31st of the following year, are generally treated as having been
received by the recipient in the year declared for tax reporting
purposes.
In
addition, based on the excise distribution requirements, the Fund is subject to
a 4% nondeductible federal excise tax on undistributed income unless the Fund
distributes, in a timely manner, an amount at least equal to the sum of (i) 98%
of its ordinary income for each calendar year, (ii) 98.2% of its capital gain
net income (both long-term and short-term) for the one-year period ending
October 31st
of such calendar year and (iii) any income realized, but not distributed, in the
preceding year. The Fund expects to make sufficient distributions each taxable
year to satisfy these excise distribution requirements.
U.S.
federal income tax regulations differ from U.S. GAAP, as a result, the
calculation of ordinary income and capital gains under tax regulations may
differ from net investment income and realized gains as recognized for financial
reporting purposes.
The
characterization of distributions paid to common shareholders as net investment
income or capital gains is determined in accordance with U.S. federal income tax
regulations, which differ from U.S. GAAP. Generally, for U.S. federal income tax
purposes, distributions to shareholders will be taxable as ordinary income,
although a portion of such distributions may be designated as long-term capital
gains or qualified dividend income, or may constitute a return of
capital.
The
Fund follows the authoritative guidance on accounting for and disclosure of
uncertainty on tax positions, which requires the Adviser to determine whether a
tax position of the Fund is more likely than not to be sustained upon
examination by the applicable taxing authority, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. For uncertain tax positions, the tax benefit to be recognized is
measured as the largest amount of benefit that is more than 50% likely to be
realized upon ultimate settlement. The Fund did not have any unrecognized tax
benefits resulting from tax positions related to the current period, or its open
tax years (2022, 2023, 2024, and 2025). In the normal course of business, the
Fund may be subject to examination by federal, state, local, and foreign
jurisdictions, where applicable, for the current period and its open tax years.
The Fund may take positions with respect to certain tax issues which depend on
legal interpretation of facts or applicable tax regulations. Should the relevant
tax regulators successfully challenge any of such positions, the Fund might be
found to have a tax liability that has not been recorded in the accompanying
consolidated financial statements. Also, management's conclusions regarding the
authoritative guidance may be subject to review and adjustment at a later date
based on changing tax laws, regulations, and interpretations thereof. The Fund
recognizes interest and penalties, if any, related to uncertain tax positions,
as income tax expense included in Income tax expense (benefit) on the
Consolidated Statement of Operations. As of March 31, 2026, the Fund has not
recorded a liability for uncertain tax positions pursuant to ASC 740,
Income
Taxes.
(P)
Segment Reporting:
An operating segment is defined as a component of an entity that (i) engages in
business activities from which revenues are recognized and expenses incurred,
(ii) has discrete financial information available, and (iii) is evaluated on a
regular basis by the Chief Operating Decision Maker (the "CODM") for
decision-making purposes, including
investment
and operating decisions, including capital and resource allocation decisions;
and communicates results, strategy, and other relevant information to the Board
and shareholders. The Fund's CODM is, collectively, its Chief Executive Officer
and President and its Portfolio Managers.
The
Fund operates through a single operating and reporting segment with an objective
to generate attractive current yields and risk-adjusted total returns for its
shareholders by acquiring, investing in, and managing its targeted assets. The
Fund’s CODM assesses performance and makes investment and operating decisions
based on net income reported on the Consolidated Statement of Operations, among
other metrics. Significant expenses are separately disclosed on the Consolidated
Statements of Operations.
(Q)
Recent Accounting Pronouncements: In
November 2024, the FASB issued ASU 2024-03, Disaggregation
of Income Statement Expenses ("ASU
2024-03"). ASU 2024-03 requires public entities to provide tabular disclosure of
certain expenses including employee compensation, on an interim and annual
basis, in the notes to the financial statements. ASU 2024-03 is effective for
annual periods beginning after December 15, 2026, and interim periods in fiscal
years beginning after December 15, 2027, with early adoption permitted. ASU
2024-03 should be applied on either a prospective basis to financial statements
issued for reporting periods after the effective date of ASU 2024-03 or
retrospectively to any or all prior periods presented in the financial
statements. ASU 2024-03 is not expected to have a material impact on the Fund's
consolidated financial statements.
In
November 2023, the FASB issued ASU 2023-07, Segment
Reporting—Improvements to Reportable Segment Disclosures
("ASU 2023-07") which requires incremental disclosures related to an entity's
reportable segments, including identifying significant segment expense
categories and any multiple measures of segment profit or loss used by the CODM.
Additionally, ASU 2023-07 provides further guidance on interim reporting,
disclosures required by entities with a single reportable segment, and recasting
of previously reported segment information. ASU 2023-07 became effective for
fiscal years beginning after December 15, 2023, and interim periods in fiscal
years beginning after December 15, 2024, with early adoption permitted. The Fund
has applied ASU 2023-07 on a retrospective basis, which did not have a material
impact on the Fund's consolidated financial statements.
3.
Fair Value Measurements
The
following table presents the Fund's financial instruments measured at fair value
on March 31, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Description |
| Level
1 |
| Level
2 |
| Level
3 |
| Total |
|
|
| (In
thousands) |
| Assets: |
|
|
|
|
|
|
| |
| Investments: |
|
|
|
|
|
|
| |
| CLOs |
| $ |
— |
|
| $ |
175,566 |
|
| $ |
132,372 |
|
| $ |
307,938 |
|
| Corporate
debt |
| — |
|
| — |
|
| 345 |
|
| 345 |
|
| Corporate
equity |
| — |
|
| — |
|
| 80 |
|
| 80 |
|
| Total
investments, at fair value |
| — |
|
| 175,566 |
|
| 132,797 |
|
| 308,363 |
|
| Financial
derivatives–assets, at fair value: |
|
|
|
|
|
|
| |
| Interest
rate swaps |
| — |
|
| 159 |
|
| — |
|
| 159 |
|
| Options |
| 1,789 |
|
| 450 |
|
| — |
|
| 2,239 |
|
| Total
financial derivatives–assets, at fair value |
| 1,789 |
|
| 609 |
|
| — |
|
| 2,398 |
|
| Total
assets, at fair value |
| 1,789 |
|
| 176,175 |
|
| 132,797 |
|
| 310,761 |
|
| Liabilities: |
|
|
|
|
|
|
| |
| Financial
derivatives–liabilities, at fair value: |
|
|
|
|
|
|
| |
| Futures |
| (14) |
|
| — |
|
| — |
|
| (14) |
|
| Credit
default swaps |
| — |
|
| (3,214) |
|
| — |
|
| (3,214) |
|
| Total
financial derivatives–liabilities, at fair value |
| (14) |
|
| (3,214) |
|
| — |
|
| (3,228) |
|
| Unsecured
borrowings, at fair value |
| — |
|
| (54,000) |
|
| — |
|
| (54,000) |
|
| Total
liabilities, at fair value |
| $ |
(14) |
|
| $ |
(57,214) |
|
| $ |
— |
|
| $ |
(57,228) |
|
The
table below includes a roll-forward of the Fund's financial instruments measured
at fair value for the year ended March 31, 2026 (including change in fair
value), for financial instruments classified by the Fund within Level 3 of the
valuation hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| CLOs |
| Corporate
Debt |
| Corporate
Equity |
|
| (In
thousands) |
| Beginning
balance—April 1, 2025 |
$ |
133,423 |
|
| $ |
434 |
|
| $ |
56 |
|
| Purchases |
67,402 |
|
| 1,863 |
|
| 56 |
|
| Proceeds
from sales and principal payments |
(46,502) |
|
| (2,327) |
|
| (12) |
|
| Net
realized gain (loss) |
1,418 |
|
| 392 |
|
| (13) |
|
| Change
in net unrealized appreciation (depreciation) |
(27,005) |
|
| (17) |
|
| (7) |
|
| Net
reductions to CLO equity and related investment cost |
(16,090) |
|
| — |
|
| — |
|
| (Amortization)/accretion,
net |
1,305 |
|
| — |
|
| — |
|
|
|
|
|
|
| |
| Transfers
into Level 3 |
60,013 |
|
| — |
|
| — |
|
| Transfers
out of Level 3 |
(41,592) |
|
| — |
|
| — |
|
|
Ending
balance—March 31, 2026 |
$ |
132,372 |
|
| $ |
345 |
|
| $ |
80 |
|
All
amounts of net realized gain (loss) and net change in net unrealized
appreciation (depreciation) in the table above are reflected in the accompanying
Consolidated Statement of Operations. The table above incorporates changes in
net unrealized appreciation (depreciation) for both Level 3 financial
instruments held by the Fund at March 31, 2026, as well as Level 3
financial instruments disposed of by the Fund during the year ended
March 31, 2026. For Level 3 financial instruments held by the Fund as of
March 31, 2026, change in net unrealized appreciation (depreciation) of
$(43.2) million, $(17) thousand, and $(6) thousand for the year
ended March 31, 2026 relate to CLOs, corporate debt, and corporate equity,
respectively.
At
March 31, 2026, the Fund transferred $41.6 million of assets from Level 3
to Level 2 and $60.0 million of assets from Level 2 to Level 3. Transfers
between hierarchy levels are based on the availability of sufficient observable
inputs to meet Level 2 versus Level 3 criteria. The level designation of each
financial instrument is reassessed at the end of each period, and is based on
pricing information received from third party pricing sources.
The
following table identifies the significant unobservable inputs that affect the
valuation of the Fund's Level 3 financial instruments as of March 31,
2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Range |
| |
|
Description |
|
Fair
Value |
|
Valuation
Technique |
|
Significant
Unobservable
Input |
|
Min |
|
Max |
|
Weighted
Average(1) |
|
|
| (In
thousands) |
|
|
|
|
|
|
|
|
| |
| CLOs |
| $ |
75,081 |
|
| Market
quotes |
| Non-binding
third-party valuation |
| $0.01 |
| $98.03 |
| $43.95 |
|
|
| 57,290 |
|
| Discounted
cash flows |
|
Yield(2) |
| 6.5% |
| 66.8% |
| 18.3% |
|
|
| 132,372 |
|
|
|
|
|
|
|
|
|
| |
| Corporate
debt |
| 345 |
|
| Discounted
cash flows |
| Yield |
| 1.1% |
| 48.5% |
| 13.5% |
| Corporate
equity |
| 80 |
|
| Discounted
cash flows |
| Yield |
| 19.2% |
| 23.8% |
| 19.9% |
(1)Averages
are weighted based on the fair value of the related instrument.
(2)Excludes
CLOs with a fair value of $1.2 million which have expected yields below 0% or
greater than 100%.
Third-party
non-binding valuations are validated by comparing such valuations to internally
generated prices based on EMG's and/or third-party models and, when available,
to recent trading activity in the same or similar instruments. For those
instruments valued using discounted cash flows, such estimates of future cash
flows may incorporate projections of interest and principal payments, fee
rebates, credit losses, and redemptions.
Material
changes in any of the inputs above in isolation could result in a significant
change to reported fair value measurements.
Not
included in the disclosures above are the Fund’s other financial instruments,
which are carried at cost, and include cash and cash equivalents, due to/from
broker, and reverse repurchase agreements. Cash and cash equivalents includes
cash held in interest bearing overnight accounts, for which fair value equals
the carrying value, and cash held in money market
accounts,
which are liquid in nature and for which fair value equals the carrying value;
such assets are considered Level 1 assets. Due from brokers and Due to brokers
include collateral transferred to or received from counterparties, along with
receivables and payables for open and/or closed derivative positions. These
receivables and payables are short term in nature and any collateral transferred
consists primarily of cash; fair value of these items approximates carrying
value and such items are considered Level 1 assets and liabilities. The Fund's
reverse repurchase agreements are carried at cost, which approximates fair value
due to their short term nature and are classified as Level 2 liabilities based
on the adequacy of the collateral and their short term nature.
4.
Financial Derivatives
The
Fund manages certain risks associated with its investments and borrowings,
including interest rate, credit, liquidity, and foreign exchange rate risk
primarily by managing the amount, sources, and duration of its investments and
borrowings, and through the use of derivative financial instruments. The Fund's
derivative financial instruments are used to manage differences in the amount,
timing, and duration of its known or expected cash receipts and its known or
expected cash payments principally related to its investments and borrowings, as
well as to mitigate changes in the fair value of its investments that are caused
by changes in overall market conditions; see Note 2 for additional
details.
Financial
derivative assets are included in Financial derivatives–assets, at fair value on
the Consolidated Statement of Assets and Liabilities while financial derivative
liabilities are included in Financial derivatives–liabilities, at fair value on
the Consolidated Statement of Assets and Liabilities. Realized gain (loss)
recognized on financial derivatives is included in Realized gain (loss) on
financial derivatives and changes in the fair value of financial derivatives is
included in Change in unrealized appreciation (depreciation) on financial
derivatives on the Consolidated Statement of Operations.
The
table below details the average notional values of the Fund's financial
derivatives, using absolute value of month end notional values, for the year
ended March 31, 2026:
|
|
|
|
|
|
|
|
| |
| Derivative
Type |
|
Year
Ended
March 31,
2026 |
|
|
| (In
thousands) |
| Options |
| $ |
483,504 |
|
| Credit
default swaps |
| 55,116 |
|
| Futures |
| 16,548 |
|
| Interest
rate swaps |
| 8,560 |
|
| Total
return swaps |
| 2,520 |
|
| Forward |
| 437 |
|
Gains
and losses on the Fund's financial derivatives for the year ended March 31,
2026 are summarized in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Derivative
Type |
| Net
Realized Gain (Loss) on Periodic Settlements of Interest Rate
Swaps |
|
Net
Realized Gain (Loss) on Financial Derivatives Other Than Periodic
Settlements of Interest Rate Swaps(1) |
|
Net
Realized Gain (Loss) on Financial Derivatives(1) |
| Change
in Net Unrealized Appreciation (Depreciation) on Accrued Periodic
Settlements of Interest Rate Swaps |
|
Change
in Net Unrealized Appreciation (Depreciation) on Financial Derivatives
Other Than on Accrued Periodic Settlements of Interest Rate
Swaps(2) |
|
Change
in Net Unrealized Appreciation (Depreciation) on Financial
Derivatives(2) |
| (In
thousands) |
|
|
|
|
|
|
|
|
|
|
| |
| Interest
rate swaps |
| $ |
19 |
|
| $ |
53 |
|
| $ |
72 |
|
| $ |
5 |
|
| $ |
160 |
|
| $ |
165 |
|
| Credit
default swaps |
|
|
| (1,983) |
|
| (1,983) |
|
|
|
| 1,374 |
|
| 1,374 |
|
| Total
return swaps |
|
|
| (246) |
|
| (246) |
|
|
|
| — |
|
| — |
|
| Futures |
|
|
| (1,356) |
|
| (1,356) |
|
|
|
| (14) |
|
| (14) |
|
| Options |
|
|
| (3,181) |
|
| (3,181) |
|
|
|
| (345) |
|
| (345) |
|
| Total |
| $ |
19 |
|
| $ |
(6,713) |
|
| $ |
(6,694) |
|
| $ |
5 |
|
| $ |
1,175 |
|
| $ |
1,180 |
|
(1)Includes
realized gain (loss) on transactions involving foreign-currency denominated
financial derivatives in the amount of $3 thousand for the year ended March 31,
2026 which is included in Net realized gain (loss) on foreign currency
transactions on the Consolidated Statement of Operations.
(2)Includes
unrealized appreciation (depreciation) on transactions involving
foreign-currency denominated financial derivatives in the amount of $10 thousand
for the year ended March 31, 2026 which is included in Change in net unrealized
appreciation (depreciation) on foreign currency transactions on the Consolidated
Statement of Operations.
5.
Borrowings
Reverse
Repurchase Agreements
The
Fund enters into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of an asset to a counterparty together with a simultaneous
agreement to repurchase the transferred asset or similar asset from such
counterparty at a future date. The Fund accounts for its reverse repurchase
agreements as collateralized borrowings, with the transferred assets effectively
serving as collateral for the related borrowing. The Fund's reverse repurchase
agreements typically range in term from 30 to 364 days. The principal economic
terms of each reverse repurchase agreement—such as loan amount, interest rate,
and maturity date—are typically negotiated on a transaction-by-transaction
basis. Other terms and conditions, such as relating to events of default, are
typically governed under the Fund's master repurchase agreements. Absent an
event of default, the Fund maintains beneficial ownership of the transferred
securities during the term of the reverse repurchase agreement and receives the
related principal and interest payments. Interest rates on these borrowings are
generally fixed based on prevailing rates corresponding to the terms of the
borrowings, and interest is paid at the termination of the reverse repurchase
agreement at which time the Fund may enter into a new reverse repurchase
agreement at prevailing market rates with the same counterparty, repay that
counterparty and possibly negotiate financing terms with a different
counterparty, or choose to no longer finance the related asset. In response to a
decline in the fair value of the transferred securities, whether as a result of
changes in market conditions, security paydowns, or other factors, reverse
repurchase agreement counterparties will typically make a margin call, whereby
the Fund will be required to post additional securities and/or cash as
collateral with the counterparty in order to re-establish the agreed-upon
collateralization requirements. In the event of increases in fair value of the
transferred securities, the Fund generally can require the counterparty to post
collateral with it in the form of cash or securities. The Fund is generally
permitted to sell or re-pledge any securities posted by the counterparty as
collateral; however, upon termination of the reverse repurchase agreement, or
other circumstance in which the counterparty is no longer required to post such
margin, the Fund must return to the counterparty the same security that had been
posted. The contractual amount (loan amount) of the Fund's reverse repurchase
agreements approximates fair value, based on the short-term nature of the debt
and the adequacy of the collateral.
At
any given time, the Fund seeks to have its outstanding borrowings under reverse
repurchase agreements with several different counterparties in order to reduce
the exposure to any single counterparty. As of March 31, 2026, the Fund had
outstanding borrowings under reverse repurchase agreements with eight
counterparties.
The
following table details the Fund's outstanding borrowings under reverse
repurchase agreements as of March 31, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| Weighted
Average |
| Remaining
Days to Maturity |
| Borrowings
Outstanding |
| Interest
Rate |
| Remaining
Days to Maturity |
|
|
| (In
thousands) |
|
|
| |
| 30
days or less |
| $ |
13,896 |
|
| 4.94 |
% |
| 16 |
| 31-60
days |
| 84,180 |
|
| 5.13 |
|
| 45 |
| 61-90
days |
| 57,487 |
|
| 4.52 |
|
| 78 |
| 91-120
days |
| 5,205 |
|
| 4.77 |
|
| 97 |
| 121-150
days |
| 4,745 |
|
| 4.77 |
|
| 149 |
| 181-364
days |
| 761 |
|
| 4.93 |
|
| 181 |
| Total |
| $ |
166,274 |
|
| 4.88 |
% |
| 59 |
Reverse
repurchase agreements involving underlying investments that the Fund sold prior
to period end, for settlement following period end, are shown using their
contractual maturity dates even though such reverse repurchase agreements may be
expected to be terminated early upon settlement of the sale of the underlying
investment.
As
of March 31, 2026, the fair value of CLOs transferred as collateral under
outstanding borrowings under reverse repurchase agreements was
$258.8 million. Additionally, as of March 31, 2026, the Fund posted to
(received from) reverse repurchase agreement counterparties net cash collateral
of $3.6 million as a result of margin calls with various reverse repurchase
agreement counterparties.
Amount
at risk represents the excess, if any, for each counterparty of the fair value
of collateral held by such counterparty over the amounts outstanding under
reverse repurchase agreements. The following table provides details by
counterparty for such counterparties for which the amounts at risk relating to
our reverse repurchase agreements was greater than 10% of NAV as of
March 31, 2026.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Counterparty |
| Amount
at Risk |
| Weighted
Average Remaining Days
to Maturity |
| Percentage
of Net Asset Value |
|
|
| (In
thousands) |
|
|
| |
| RBC
Capital Markets LLC |
| $ |
24,631 |
|
| 77 |
| 16.0 |
% |
| BNP
Paribas Securities Corp. |
| 21,790 |
|
| 48 |
| 14.2 |
% |
| Barclays
Capital Inc. |
| 16,115 |
|
| 50 |
| 10.5 |
% |
Unsecured
Borrowings
In
March 2026, the Fund issued $54.0 million of outstanding principal amount of
unsecured long-term debt maturing on March 30, 2031 unless earlier redeemed or
repurchased (the “8.50% Senior Notes”). The 8.50% Senior Notes bear an interest
rate of 8.50% payable quarterly in arrears. As detailed in the indenture, on or
after March 30, 2028, the Fund may redeem the 8.50% Senior Notes, in whole or in
part, at any time and from time to time, at a redemption price equal to 100% of
the principal amount of the 8.50% Senior Notes being redeemed plus accrued and
unpaid interest thereon to, but excluding, the redemption date. There are a
number of covenants associated with this borrowing; as of March 31, 2026,
the Fund was in compliance with all of its covenants.
Asset
Coverage
In
accordance with the provisions of the 1940 Act, the Fund is permitted to issue
senior securities provided that the Fund satisfy and maintain certain asset
coverage requirements. The Fund is required to have asset coverage on senior
debt securities of at least 300%, calculated as the ratio of the Fund’s total
consolidated assets, less total liabilities excluding the liability represented
by the senior debt securities, over the aggregate amount of the Fund’s
outstanding senior debt securities. If the Fund’s asset coverage declines below
300%, the Fund would be prohibited from incurring additional debt.
The
following table summarized the Fund’s asset coverage as of March 31,
2026:
|
|
|
|
|
|
|
|
| |
| ($
In thousands) |
| March
31, 2026 |
| Total
assets |
| $ |
386,927 |
|
|
Less
liabilities and indebtedness not represented by senior securities
(1) |
| 12,831 |
|
| Net
total assets and liabilities |
| $ |
374,096 |
|
| Unsecured
borrowings, at fair value—outstanding principal amount |
| $ |
54,000 |
|
|
Asset
coverage of debt securities
(2) |
| 693 |
% |
(1)Excludes
reverse repurchase agreements, which the Fund has elected to treat as derivative
transactions under Rule 18f-4 of the 1940 Act.
(2)The
asset coverage ratio of debt securities is calculated in accordance with section
18(h) of the 1940 Act, as generally described above.
6.
Offsetting of Assets and Liabilities
In
connection with its financial derivatives and reverse repurchase agreements, and
related trading agreements, the Fund and its counterparties are required to
pledge collateral. Cash or other collateral is exchanged as required with each
of the Fund's counterparties in connection with open derivative positions and
reverse repurchase agreements.
The
following table presents information about certain assets and liabilities
representing financial instruments as of March 31, 2026. The Fund has not
previously entered into master netting agreements with any of its
counterparties. Certain of the Fund's reverse repurchase agreements and
financial derivative transactions are governed by underlying agreements that
generally provide a right of net settlement, as well as a right of offset in the
event of default or in the event of a bankruptcy of either party to the
transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Description |
|
Amount
of Assets (Liabilities) Presented in the Consolidated Statement of Assets
and Liabilities(1) |
|
Financial
Instruments
Available
for Offset |
|
Financial
Instruments Transferred or Pledged as Collateral(2)(3) |
|
Cash
Collateral (Received) Pledged(2)(3) |
| Net
Amount |
| (In
thousands) |
|
|
|
|
|
|
|
|
| |
| Assets: |
|
|
|
|
|
|
|
|
| |
| Financial
derivatives–assets |
| $ |
2,398 |
|
| $ |
(485) |
|
| $ |
— |
|
| $ |
— |
|
| $ |
1,913 |
|
| Liabilities: |
|
|
|
|
|
|
|
|
| |
| Financial
derivatives–liabilities |
| (3,228) |
|
| 485 |
|
| — |
|
| 2,743 |
|
| — |
|
| Reverse
repurchase agreements |
| (166,274) |
|
| — |
|
| 162,666 |
|
| 3,608 |
|
| — |
|
(1)In
the Fund's Consolidated Statement of Assets and Liabilities, all balances
associated with reverse repurchase agreements and financial derivatives are
presented on a gross basis.
(2)For
the purpose of this presentation, for each row the total amount of financial
instruments transferred or pledged and cash collateral (received) or pledged may
not exceed the applicable gross amount of assets or (liabilities) as presented
here. Therefore, the Fund has reduced the amount of financial instruments
transferred or pledged as collateral related to the Fund's reverse repurchase
agreements and cash collateral pledged on the Fund's financial derivative assets
and liabilities. As of March 31, 2026, the fair value of financial
instruments transferred or pledged as collateral on the Fund's reverse
repurchase agreements, net of the fair value of any financial instruments
received by the Fund as the result of margin calls, were $258.8 million. As of
March 31, 2026, total cash collateral (received) pledged on financial
derivative assets and financial derivative liabilities excludes $3.6 million and
$3.5 million, respectively, of net excess cash collateral.
(3)When
collateral is pledged to or pledged by a counterparty, it is often pledged or
posted with respect to all positions with such counterparty, and in such cases
such collateral cannot be specifically identified as relating to a particular
asset or liability. As a result, in preparing the above table, the Fund has made
assumptions in allocating pledged or posted collateral among the various
rows.
7.
Common Shares
The
Fund has authorized unlimited common shares of beneficial interest, no par
value; as of March 31, 2026, there were 37,579,569 common shares
outstanding.
Detailed
below is a roll forward of the Fund's common shares outstanding for the year
ended March 31, 2026:
|
|
|
|
|
|
|
|
| |
|
|
|
Year
Ended March 31, 2026 |
| Common
Shares Outstanding—April 1, 2025 |
| 37,559,195 |
|
| Share
Activity: |
| |
| Common
shares issued under DRIP |
| 28,077 |
|
| Forfeiture
of common shares to satisfy tax withholding obligations |
| (7,703) |
|
|
Common
Shares Outstanding—March 31, 2026 |
| 37,579,569 |
|
|
Unvested
restricted shares outstanding—March 31, 2026 |
| 14,991 |
|
As
discussed in Note 1, as a result of the Conversion, the Fund adopted ASC 946 and
changed its fiscal year end. Prior to the Conversion the Fund had authorized
500,000,000 common shares, $0.01 par value per share. Detailed below is a roll
forward of the Fund's common shares outstanding for the three-month period ended
March 31, 2025 and the year ended December 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Three-Month
Period Ended March 31, 2025 |
| Year
Ended December 31, 2024 |
| Common
Shares Outstanding—December 31, 2024 and 2023, respectively |
29,651,553 |
|
| 18,601,464 |
|
| Share
Activity: |
|
| |
|
Common
shares issued(1) |
8,075,118 |
|
| 10,964,023 |
|
|
Restricted
common shares issued(2) |
— |
|
| 90,229 |
|
|
Common
shares repurchased(3) |
(167,476) |
|
| — |
|
| Forfeiture
of common shares to satisfy tax withholding obligations |
— |
|
| (4,163) |
|
| Common
Shares Outstanding—March 31, 2025 and December 31, 2024,
respectively |
37,559,195 |
|
| 29,651,553 |
|
| Unvested
restricted shares outstanding—March 31, 2025 and December 31, 2024,
respectively |
39,577 |
|
| 62,729 |
|
(1)Issued
under an “at the market” offering program which was terminated upon the
Conversion.
(2)Issued
under an equity incentive plan which was terminated upon the
Conversion.
(3)Repurchased
under a share repurchase program which was terminated upon the
Conversion.
As
of March 31, 2026, there were 14,991 unvested restricted common shares
outstanding that had been granted to the Fund’s partially dedicated personnel on
December 20, 2024 pursuant to share award agreements in place prior to the
Conversion. Such shares vest and become non-forfeitable on December 12,
2026.
The
below table provides details on the Fund's distributions during the year ended
March 31, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Record
Date |
| Payment
Date |
| Distribution
Per Common Share |
| Cash
Distribution |
| Value
of DRIP Shares Issued |
| Total
Distribution |
| DRIP
Shares Issued |
| DRIP
Share Issuance Price |
|
|
|
|
|
|
| (In
thousands) |
| (In
thousands) |
| (In
thousands) |
|
|
| |
| April
30, 2025 |
| May
27, 2025 |
| $ |
0.08 |
|
| $ |
3,005 |
|
| $ |
— |
|
| $ |
3,005 |
|
| — |
|
| $ |
— |
|
| May
30, 2025 |
| June
30, 2025 |
| 0.08 |
|
| 3,005 |
|
| — |
|
| 3,005 |
|
| — |
|
| — |
|
| June
30, 2025 |
| July
31, 2025 |
| 0.08 |
|
| 2,989 |
|
| 16 |
|
| 3,005 |
|
| 2,919 |
|
| 5.56 |
|
| July
31, 2025 |
| August
29, 2025 |
| 0.08 |
|
| 2,990 |
|
| 15 |
|
| 3,005 |
|
| 2,796 |
|
| 5.42 |
|
| August
29, 2025 |
| September
30, 2025 |
| 0.08 |
|
| 2,990 |
|
| 15 |
|
| 3,005 |
|
| 2,939 |
|
| 5.18 |
|
| September
30, 2025 |
| October
31, 2025 |
| 0.08 |
|
| 2,992 |
|
| 13 |
|
| 3,005 |
|
| 2,755 |
|
| 4.84 |
|
| October
31, 2025 |
| November
28, 2025 |
| 0.08 |
|
| 2,991 |
|
| 14 |
|
| 3,005 |
|
| 2,809 |
|
| 5.15 |
|
| November
28, 2025 |
| December
31, 2025 |
| 0.08 |
|
| 2,991 |
|
| 15 |
|
| 3,006 |
|
| 3,090 |
|
| 5.01 |
|
| December
31, 2025 |
| January
30, 2026 |
| 0.08 |
|
| 2,990 |
|
| 16 |
|
| 3,006 |
|
| 3,021 |
|
| 5.19 |
|
| January
30, 2026 |
| February
27, 2026 |
| 0.08 |
|
| 2,989 |
|
| 17 |
|
| 3,006 |
|
| 3,579 |
|
| 4.65 |
|
| February
27, 2026 |
| March
31, 2026 |
| 0.08 |
|
| 2,988 |
|
| 18 |
|
| 3,006 |
|
| 4,169 |
|
| 4.21 |
|
| March
31, 2026 |
| April
30, 2026 |
| 0.08 |
|
| 2,988 |
|
| 18 |
|
| 3,006 |
|
| 3,878 |
|
| 4.48 |
|
|
|
|
|
|
|
| $ |
35,908 |
|
| $ |
157 |
|
| $ |
36,065 |
|
| 31,955 |
|
| |
Distribution
Policy
The
timing and frequency of distributions will be determined by the Board based upon
a variety of factors deemed relevant by the Fund's trustees, including
restrictions under applicable law, the RIC distribution rules, and capital
requirements of the Fund. As discussed in Note 9, the Fund has elected
mark-to-market treatment under Section 475(f) of the Code. As a result,
distributions to shareholders generally will be taxable as ordinary income,
although a portion of such distributions may be designated as long-term capital
gain or qualified dividend income, or may constitute a return of capital. The
Fund will furnish annually to each shareholder a statement setting forth
distributions paid or deemed paid during the preceding year and their U.S.
federal income tax treatment.
8.
Related Party Transactions
Investment
Advisor
The
Fund and the Adviser are parties to the Advisory Agreement (the "Advisory
Agreement") which became effective upon the Conversion. Pursuant to the terms of
the Advisory Agreement, the Adviser is responsible for managing the Fund’s
investment program, including identifying, structuring, executing, monitoring,
and servicing the Fund’s investments, and for providing such personnel and
related services as it deems necessary or useful to perform these duties. The
Fund does not have any employees.
Under
the terms of the Advisory Agreement, the Adviser receives a quarterly base
management fee in an amount equal to 1.50% per annum of the Fund's NAV,
calculated as the Fund's total assets minus its total liabilities (the "Base
Management Fee"). The Base Management Fee is payable quarterly in arrears. For
the year ended March 31, 2026, the total Base Management Fee incurred was
$3.0 million.
In
addition to the Base Management Fee, pursuant to the Advisory Agreement, the
Fund will pay the Adviser a performance fee (the "Performance Fee"). 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. 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 Performance Fee is subject to a hurdle
rate of 2.00% per quarter, or 8.00% per annum (the "Hurdle Rate"), 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 result obtained by multiplying the NAV attributable to common
equity at the end of the immediately preceding fiscal quarter by the Hurdle Rate
(the "Hurdle Amount") 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
the year ended March 31, 2026, the Fund incurred Performance Fees of $5.9
million.
The
Advisory Agreement has an initial term of two years. Thereafter, unless the Fund
or the Adviser exercise its respective termination rights, the Advisory
Agreement will renew annually so long as such continuance shall be approved at
least annually by (a) the vote of the Fund’s Board, or by the vote of a majority
of the outstanding voting securities of the Fund and (b) the vote of a majority
of the Fund’s Trustees who are not parties to the Advisory Agreement or
“interested persons” (as such term is defined in Section 2(a)(19) of the 1940
Act) of any such party, in accordance with the requirements of the 1940
Act.
Under
the terms of the Advisory Agreement, the Fund is required to reimburse the
Adviser for certain operating expenses related to the Fund that are incurred by
the Adviser, including expenses relating to legal, accounting, due diligence,
other services, and other costs and expenses. The Fund's reimbursement
obligation is not subject to any dollar limitation.
During
the year ended March 31, 2026, the Fund reimbursed the Adviser
$4.1 million for previously incurred operating expenses. As of
March 31, 2026, the outstanding payable to the Adviser for operating
expenses was $1.1 million which is included in Accrued expenses and other
liabilities on the Consolidated Statement of Assets and
Liabilities.
Administrator
The
Fund has entered into an administration agreement (the “Administration
Agreement”) with Ellington Credit Company Administrator LLC (the
“Administrator”). Pursuant to the Administration Agreement, the Administrator
furnishes the Fund with office facilities, equipment and clerical, bookkeeping
and record keeping services at such facilities. Under the Administration
Agreement, the Administrator also performs, or oversees the performance of, its
required administrative services, which include, among other things, being
responsible for the financial records which the Fund is required to maintain and
preparing reports to its shareholders. In addition, the Administrator assists
the Fund in determining and publishing its NAV, oversees the preparation and
filing of its tax returns and the printing and dissemination of reports to its
shareholders, and generally oversees the payment of its expenses and the
performance of administrative and professional services rendered to the Fund by
others. Payments under the Administration Agreement are equal to an amount based
upon its allocable portion of the Administrator’s costs and expenses incurred in
performing its obligations and providing personnel (including wages, salaries,
bonuses, benefits, and related payroll expenses) under the Administration
Agreement, including rent, office supplies, the fees and expenses associated
with performing compliance functions, and the Fund’s allocable portion of the
costs of compensation
and
related expenses of the Fund’s Chief Financial Officer, Chief Operating Officer,
and their respective support staff. The Administrator has delegated certain
accounting and administrative services to an unrelated third-party. To the
extent the Administrator outsources any of its functions, the Fund pays the fees
on a direct basis, without profit to the Administrator. The Administration
Agreement may be terminated by the Fund without penalty upon not less than 60
days’ written notice to the Administrator and by the Administrator upon not less
than 90 days’ written notice to the Fund. The Administration Agreement will
remain in effect if approved by the Board, including by a majority of the
Independent Trustees, on an annual basis.
When
considering the approval of the Administration Agreement, the Board considers,
among other factors, (i) the reasonableness of the compensation paid by us to
the Administrator and any third-party service providers in light of the services
provided, the quality of such services, any cost savings to us as a result of
the arrangements and any conflicts of interest, (ii) the methodology employed by
the Administrator in determining how certain expenses are allocated to the Fund,
(iii) the breadth, depth and quality of such administrative services provided,
(iv) certain comparative information on expenses borne by other companies for
somewhat similar services known to be available and (v) the possibility of
obtaining such services from a third-party.
Services
Agreement
The
Adviser, the Administrator, and EMG are parties to a services agreement,
pursuant to which EMG is required to provide the Adviser sufficient personnel,
services, and resources to enable the Adviser to carry out its obligations and
responsibilities under the Advisory Agreement. The Fund is a named third-party
beneficiary to the services agreement and, as a result, has, as a non-exclusive
remedy, a direct right of action against EMG in the event of any breach by the
Adviser of any of its duties, obligations, or agreements under the Advisory
Agreement that arise out of or result from any breach by EMG of its obligations
under the services agreement. The services agreement will terminate upon the
termination of the Advisory Agreement. Pursuant to the services agreement, the
Adviser makes certain payments to EMG in connection with the services provided.
The Adviser and EMG have overlapping ownership and are under common control.
Transactions
with Affiliates and Co-Investments
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 certain 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 trustees. 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.
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. On August 12, 2025, the SEC issued an exemptive
order permitting the Fund, the Adviser, and certain of its affiliates
participate in certain co-investment transactions alongside affiliate persons
that would otherwise be prohibited under the 1940 Act (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 activities. 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 ours. 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.
9.
Income Taxes
As
discussed in Note 2—Significant
Accounting Policies—Income
Taxes,
the Fund intends to operate in a manner so as to qualify to be taxed as a
RIC.
The
Fund has made an election under Section 475(f) of the Code to mark the vast
majority of its investments to market for tax purposes. The Fund crystallizes
its Section 475(f) mark-to-market gains (losses) recognized at the end of the
year by adjusting the tax cost basis of such investments to their fair value.
Therefore, for investments for which the Fund has elected Section 475(f), there
is no difference at the end of the tax year between the tax cost basis and the
fair value of such investments.
The
following table provides a summary of the estimated cost for federal income tax
purposes and cumulative unrealized appreciation (depreciation) on the Fund’s
portfolio of investments at March 31, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| Investments |
| (In
thousands) |
| Election
under Section 475(f) |
| No
election under Section 475(f) |
| Total |
| Cost
(as adjusted) for federal income tax purposes |
| $ |
350,684 |
|
| $ |
18,628 |
|
| $ |
369,312 |
|
| Gross
unrealized appreciation |
| — |
|
| 293 |
|
| 293 |
|
| Gross
unrealized (depreciation) |
| — |
|
| (4,282) |
|
| (4,282) |
|
| Net
unrealized appreciation (depreciation) |
| — |
|
| (3,989) |
|
| (3,989) |
|
| Fair
value of investments |
| $ |
350,684 |
|
| $ |
14,639 |
|
| $ |
365,323 |
|
The
appreciation (depreciation) on the Fund’s investment portfolio is primarily
attributable to investments that are excluded from the scope of the 475(f)
election, including (i) certain CLO equity securities treated as partnership
interests; (ii) non-listed equity securities; and (iii) certain CLO equity
securities treated as Controlled Foreign Corporations (“CFCs”).
The
following table provides details of the estimated tax character of distributions
paid during the year ended March 31, 2026; the ultimate tax character of
distributions will not be known until the Fund files its tax return for such
period.
|
|
|
|
|
|
|
|
| |
|
|
| Amount |
|
|
| (In
thousands) |
| Ordinary
income |
| $ |
— |
|
| Net
long-term capital gains |
| — |
|
| Return
of capital |
| 36,063 |
|
| Total
distributions paid |
| $ |
36,063 |
|
The
following table provides details on the estimated components of total
distributable earnings/(accumulated losses) reported on the Consolidated
Statement of Assets and Liabilities on a tax basis as of March 31,
2026:
|
|
|
|
|
|
|
|
| |
|
|
| Amount |
|
|
| (In
thousands) |
| Distributable
ordinary income |
| $ |
— |
|
| Distributable
long-term capital gain (capital loss carryforward) |
| (637) |
|
| Unrealized
appreciation (depreciation) on investments |
| (3,989) |
|
| Other
timing differences |
| (2,532) |
|
| Qualified
late year loss deferral |
| (32,795) |
|
As
of March 31, 2026, the Fund had a net long-term capital loss carryforward of
$0.6 million, which is available to offset future realized capital gains. A
portion of the net long-term capital loss carry forward will expire in 2029 and
the remainder in 2030.
Net
specified losses (gains) incurred after October 31st
and within the taxable year, are deemed to arise on the first business day of
the Fund’s next taxable year.
Because
U.S. federal income tax regulations differ from U.S. GAAP, characteristics of
the Fund’s distributions may differ for financial reporting and tax purposes.
Permanent differences are reclassified between capital accounts on the
Consolidated Statements of Assets and Liabilities to reflect their tax
character. The Fund reclassified $(170.6) million from Total distributable
earnings/(accumulated losses) to Paid-in capital on the Consolidated Statement
of Assets and Liabilities primarily due to the difference in tax treatment of
accumulated losses in conjunction with the Fund’s election to be taxed as a
regulated investment company; such reclassification had no impact on net
assets.
10.
Commitments and Contingencies
From
time to time, the Fund may become involved in various claims and legal actions
arising in the ordinary course of business. The Fund provides current trustees
and officers with a limited indemnification against liabilities arising in
connection with the performance of their duties to the Fund. As of
March 31, 2026, the Fund is not currently subject to any material legal
proceedings, nor, to the Fund’s knowledge, is any material legal proceeding
threatened against the Fund.
In
the normal course of business the Fund may also enter into contracts that
contain a variety of representations, warranties, and general indemnifications.
The Fund's maximum exposure under these arrangements, including future claims
that may be made against the Fund that have not yet occurred, is unknown. The
Fund has not incurred any costs to defend lawsuits or settle claims related to
these indemnification agreements. The Fund has no liabilities recorded for these
agreements as of March 31, 2026 and management is not aware of any
significant contingencies.
11.
Financial Highlights
|
|
|
|
|
|
|
|
| |
|
|
|
Year
Ended March 31, 2026 |
|
PER
SHARE DATA(1) |
| |
| Net
asset value per share—Beginning of period |
| $ |
6.08 |
|
| Net
increase (decrease) in net assets resulting from operations: |
| |
| Net
investment income |
| 0.74 |
|
| Net
realized gain (loss) and unrealized appreciation (depreciation) |
| (1.77) |
|
| Total
net increase (decrease) in net assets resulting from operations |
| (1.03) |
|
|
Distributions(2): |
| |
| Distributions
to common shareholders—Earnings |
| — |
|
|
|
| |
| Distributions
to common shareholders—Return of capital |
| (0.96) |
|
| Total
distributions |
| (0.96) |
|
| Net
asset value per share—End of period |
| $ |
4.09 |
|
| Per
share market value—Beginning of period |
| $ |
5.41 |
|
| Per
share market value—End of period |
| $ |
4.43 |
|
|
Total
return based on market value(3) |
| (1.26) |
% |
|
Total
return based on net asset value(4) |
| (18.89) |
% |
| Shares
outstanding—End of period |
| 37,579,569 |
|
| RATIOS/SUPPLEMENTAL
DATA |
| |
|
Net
asset value—End of period(5) |
| $ |
153,822 |
|
| Ratio
of expenses to average net assets |
| 11.47 |
% |
| Ratio
of expenses before performance fees to average net assets |
| 8.65 |
% |
| Ratio
of expenses before performance fees and interest expense to average net
assets |
| 4.67 |
% |
| Ratio
of net investment income to average net assets |
| 13.31 |
% |
|
Portfolio
turnover rate(6) |
| 82.40 |
% |
(1)Per
share amounts are calculated based on the average shares outstanding during the
period.
(2)The
Fund monitors its available taxable earnings including expected mark-to-market
gains and losses under Section 475(f) of the Code to determine if a tax return
of capital may occur for the period. To the extent the Fund’s taxable earnings
fall below the total amount of the Fund’s distributions for that fiscal year, a
portion of those distributions may be deemed a tax return of capital to the
Fund’s shareholders. The ultimate tax character of the Fund’s earnings cannot be
determined until tax returns are prepared after the end of the fiscal
year.
(3)Total
return based on market value is calculated assuming that common shares of the
Fund were purchased at the market price as of the beginning of the period, and
distributions paid to common shareholders during the period were reinvested at
prices obtained by the Fund’s DRIP and the total number of shares were sold at
the closing market price per share on the last day of the period. Total return
does not reflect any sales commissions investors may incur in purchasing or
selling shares of the Fund.
(4)Total
return based on NAV is calculated assuming that common shares of the Fund were
purchased at the NAV per share at the beginning of the period, and distributions
paid to common shareholders during the period were reinvested at prices obtained
by the Fund’s DRIP, and the total number of shares were sold at the Fund’s NAV
per share on the last day of the period. Total return does not reflect any sales
commissions investors may incur in purchasing or selling shares of the Fund and
is not annualized for a period of less than one year.
(5)Shown
in thousands.
(6)Portfolio
turnover rate is calculated using the lesser of purchases or sales and
repayments for the year ended March 31, 2026 of investments divided by the
monthly average of the fair value of total investments.
Senior
Securities
The
following table provides additional information about the Fund’s senior
securities as of and for the year ended March 31, 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Senior
Security |
| Total
Amount Outstanding Exclusive of Treasury Securities |
|
Asset
Coverage Per Unit(1) |
| Involuntary
Liquidating Preference Per Unit |
|
Average
Market Value Per Unit(2) |
|
|
| (In
thousands) |
|
|
|
|
| |
| 8.50%
Senior Notes |
| $ |
54,000 |
|
| $ |
6.93 |
|
| n/a |
| $ |
25.00 |
|
(1)Represents
the ratio the Fund’s total assets, less all liabilities and indebtedness not
represented by senior securities, to the aggregate dollar amount of senior
securities, as calculated in accordance with section 18(h) of the 1940 Act.
Excludes reverse repurchase agreements, which the Fund has elected to treat as
derivative transactions under Rule 18f-4 of the 1940
Act.
(2)The Fund’s 8.50% Senior Notes were issued
on March 30, 2026; represents the issuance price at
par.
12.
Subsequent Events
Distributions
On
April 7, 2026, the Board approved a monthly distribution in the amount of $0.08
per share payable on May 29, 2026 to shareholders of record as of April 30,
2026.
On
May 7, 2026, the Board approved a monthly distribution in the amount of $0.08
per share payable on June 30, 2026 to shareholders of record as of May 29,
2026.
Summary
of Risk Factors
The
value of the Fund’s assets, as well as the market price of its securities, will
fluctuate. The Fund’s investments should be considered risky, and investors may
lose all or part of their investment in the Fund. Investors should consider
their financial situation and needs, other investments, investment goals,
investment experience, time horizons, liquidity needs and risk tolerance before
investing in the Fund’s securities. An investment in the Fund’s securities may
be speculative in that it involves a high degree of risk and should not be
considered a complete investment program. The Fund is designed primarily as a
long-term investment vehicle, and its securities are not an appropriate
investment for a short-term trading strategy. There can be no assurance that
returns, if any, on the Fund’s investments will be commensurate with the risk of
investment in the Fund, nor can the Fund provide any assurance that enough
appropriate investments that meet its investment criteria will be
available.
The
following is a summary of certain principal risks of an investment in the Fund.
For a more complete discussion of the risks of investing in the Fund’s
securities, including certain risks not summarized below, see the Fund’s
Registration Statement on Form N-2, previously filed with the SEC.
•Risks
Related to CLO Investments. The Fund primarily invests in corporate CLOs, which
are structured credit securities backed primarily by pools of corporate loans.
CLOs involve multiple layers of risk, including exposure to the creditworthiness
of the underlying corporate borrowers, potential defaults, and subordination
within the CLO capital structure. The Fund’s focus on mezzanine debt and equity
tranches increases its exposure to losses relative to investments in more senior
CLO tranches. In addition, CLO investments involve complex documentation and
accounting considerations, which increase the likelihood of accounting errors or
restatement. The Fund may also invest in corporate loans directly, including
through asset sales or in-kind distributions from CLOs, and such investments
carry incremental risks beyond those associated with CLO debt tranche exposure,
as they do not benefit from CLO structural protections such as credit
enhancement and cash flow diversion tests. A direct investment in a corporate
loan will generally incur principal losses in the event of a default by that
loan's issuer.
•Credit
and Default Risk. The underlying corporate loans in the Fund’s CLO investments
may be issued by highly leveraged borrowers with a heightened risk of default,
particularly in times of economic downturns, rising interest rates, or
sector-specific distress. If the credit performance of these borrowers
deteriorates, the value of the Fund’s CLO investments could decline
significantly, leading to a material adverse impact on the Fund’s financial
condition and ability to make distributions.
•Subordination
Risk. The Fund’s investments in CLO equity and mezzanine debt securities are
structurally subordinated to more senior CLO debt tranches, meaning that cash
flows and recoveries are distributed to senior tranches before reaching
subordinated investors. As a result, CLO equity and mezzanine debt securities
are subject to an increased risk of loss, particularly in the event of defaults
or underperformance in the underlying corporate loans. Additionally, at the time
of issuance, CLO equity securities are typically under-collateralized, as the
total face amount of CLO liabilities plus the issuance price of the CLO equity
securities typically exceeds the value of the CLO’s assets, further increasing
the risk of principal impairment on the CLO’s subordinated debt and equity
securities.
•Liquidity
and Market Volatility. CLO securities are often illiquid and trade in limited
markets with relatively low transparency. Market volatility, particularly in
stressed economic environments, could result in significant price fluctuations
and valuation challenges. If the Fund needs to liquidate assets to meet
obligations, it may be forced to sell holdings at depressed prices, potentially
leading to realized losses.
•Structural
and Managerial Risks of CLOs. The performance of CLO securities depends not only
on the credit performance of the underlying loans but also on the decisions of
the CLO collateral managers. These CLO collateral managers have significant
discretion in selecting, trading, and managing underlying loans, which may not
always align with the interests of CLO investors such as the Fund. Additionally,
certain CLOs are not subject to regulatory oversight, which may limit investors’
rights in instances of mismanagement or conflicts of interest.
•Leverage
and Financing Risks. The Fund employs leverage through reverse repurchase
agreements, credit facilities, and other forms of borrowing, which can magnify
potential losses. Further, the Fund is exposed to leverage indirectly through
its investments, such as CLO equity securities which are structurally
subordinate to the CLO debt tranches, which also magnify the Fund’s risk of
loss. The CLO equity securities in which the Fund invests are highly leveraged,
with debt-to-equity ratios typically ranging from eight to sixteen times.
Additionally, the loan accumulation facilities (“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. Accordingly,
the Fund’s investments in CLO equity and certain other credit investments will
expose it to substantial indirect leverage, which magnifies the risk of
significant or total loss. Market disruptions, margin calls, or increases in
financing costs could force the Fund to sell assets at unfavorable prices,
exacerbating losses. The use of leverage increases the Fund’s volatility and
could lead to liquidity constraints.
•Interest
Rate Risk. The Fund’s investments are sensitive to fluctuations in interest
rates, which may impact the value of its CLO securities and cash flow
distributions. While most CLO mezzanine debt investments have floating-rate
coupons, mismatches between the timing and structure of interest rate resets in
CLO liabilities and underlying corporate loans can reduce excess interest
available for CLO equity and mezzanine debt tranches. Rising interest rates can
also increase funding costs for corporate borrowers, heightening default risks
and negatively affecting CLO collateral performance. Additionally, fixed-rate
assets within CLOs may decline in value as interest rates rise, leading to
potential mark-to-market losses for the Fund.
•Reinvestment
and Prepayment Risk. CLO collateral managers reinvest cash flows from asset
repayments and sales into substitute assets, but if these assets generate lower
yields than the original investments, cash flows available to CLO mezzanine debt
and equity tranches may decline. Additionally, prepayment rates on underlying
loans are influenced by factors beyond the Fund’s control, such as changes in
market conditions. CLO debt investors also face the risk that a majority of CLO
equity holders may direct a call or refinancing, leading to early repayment of
CLO debt securities at par, creating uncertainty around the expected investment
duration and cash flows.
•Loan
Accumulation Facility Risk. The Fund may invest in CLO warehouse facilities,
otherwise known as “LAFs,” by contributing equity capital. LAFs are vehicles
that acquire corporate loans and other similar corporate credit-related assets
in anticipation of ultimately collateralizing a CLO transaction, and LAF
investors generally expect to invest in the equity tranche of the resulting CLO,
assuming it is launched. Investments in LAFs carry risks similar to those
applicable to CLO equity investments. LAFs are also highly leveraged, with
debt-to-equity ratios typically ranging from three to six times prior to a CLO's
pricing, which amplifies the Fund's risk of loss. If the assets accumulated by a
LAF are not purchased by the planned CLO, or if the planned CLO is not issued,
the LAF may be unwound and the accumulated assets liquidated. In such cases, the
Fund may be responsible for holding or disposing of those assets, exposing it to
credit and market risk, particularly if loan prices have declined materially,
even if the underlying loans are still performing. There is also no assurance
that the Fund will invest in the ultimate CLO transaction, and any decision not
to do so may result in the Fund realizing losses from its LAF investment or
forgoing a potentially attractive investment opportunity.
•Risks
Associated with the Implementation of the Conversion. The Fund’s implementation
of the Conversion involved significant changes across its operations,
accounting, legal, compliance, and investment activities, each of which
introduces material risks that could adversely affect the Fund’s business,
financial condition, and ability to make distributions to its shareholders.
These risks include increased operational burdens and counterparty limitations
due to new regulatory requirements such as bank custody rules; unanticipated tax
liabilities or structural inefficiencies arising from the Conversion or future
changes in tax law or IRS guidance; disruptions, compliance issues, or cost
increases from transitioning to investment company accounting and modifying
internal systems and third-party arrangements; and additional legal and
regulatory compliance challenges, including adapting to the requirements of the
1940 Act, new reporting obligations, and implementing its derivatives risk
management program. The Fund’s failure to successfully manage any of these
changes could materially adversely affect the Fund’s business, financial
condition, results, and its operations, including, its NAV, tax status, and
regulatory standing, and could expose it to SEC enforcement actions,
reputational damage, or limitations on future capital raising
•Derivatives
Risk. The Fund may use derivative instruments, including swaps, options,
futures, and reverse repurchase agreements, which can be highly volatile and
present risks different from or greater than those associated with other
investments. These risks include counterparty risk, liquidity risk, leverage
risk, and valuation complexities. Small investments in derivatives may exert
disproportionate influence on the Fund’s performance, creating leveraged
exposure that magnifies losses. In certain transactions, the Fund could lose its
entire investment, while in others, potential losses could be theoretically
unlimited. Additionally, there is no guarantee that the Fund’s use of
derivatives for hedging or risk management will be effective, and in some cases,
these strategies may fail to achieve their intended objectives or may even
increase the Fund’s exposure to certain risks.
•Counterparty
Risk. The Fund is exposed to the risk that counterparties to derivatives,
including reverse repurchase agreements, or other financial instruments may fail
to perform their contractual obligations. A counterparty’s default or financial
deterioration could result in significant losses to the Fund, particularly in
times of market stress when counterparty risk is heightened. Additionally,
certain CLOs in which the Fund invests may rely on counterparties for liquidity
and credit support, and any failure of these counterparties could negatively
impact the Fund’s investments.
•Regulatory
Risks. Changes in U.S. and international regulations, such as risk retention
rules, Volcker Rule provisions, and tax withholding requirements, may affect the
market for CLOs and the Fund’s ability to implement its investment
strategy
•Risks
Relating to the Fund’s RIC Status. The Fund intends to qualify and maintain its
status as a regulated investment company (RIC) under Subchapter M of the Code.
If the Fund qualifies as a RIC, it generally will not be subject to
corporate-level U.S. federal income tax on its distributed income and capital
gains. However, there is no assurance that
the
Fund will meet the income, asset diversification, and distribution requirements
necessary to maintain its RIC status. Failure to qualify as a RIC would subject
the Fund to corporate-level taxation, which could significantly reduce the
Fund’s net returns and the cash available for distributions to shareholders and
significantly impact its share price.
•Conflicts
of Interest and Adviser Management Fee Risk. The Fund is externally managed by
its Adviser, which is entitled to a base management fee and a performance fee
based on the Fund’s income, creating potential conflicts of interest. The base
management fee is calculated based on total equity capital, and the performance
fee would be expected to increase with an increase in total equity capital, so
the Adviser may have an incentive to recommend to the Board (which includes
interested trustees) that the Fund issue additional equity securities. These
offerings of equity securities may, among other things, dilute the common share
holdings of the existing shareholders, and adversely affect the market price of
the Fund’s common shares. The performance fee is calculated quarterly based on
the Fund’s pre-performance fee net investment income, without considering
realized or unrealized capital losses. As a result, the Adviser may have an
incentive to take on higher-risk investments or use leverage to increase income,
potentially leading to greater investment losses, particularly during periods of
market volatility or economic downturns. The Fund’s performance fee structure
does not include a high-water mark or cumulative loss carryforward mechanism,
meaning the Adviser could receive performance-based compensation even if the
Fund experiences net losses over time. Additionally, because the hurdle rate for
performance fees does not adjust with prevailing interest rates, periods of
rising interest rates may make it easier for the Adviser to earn a performance
fee, even if shareholder returns do not improve correspondingly.
•Adviser’s
Discretion and Limited Shareholder Oversight. The Adviser has broad discretion
in managing the Fund’s portfolio, and the Board generally does not review the
Fund’s acquisitions, dispositions or other investment decisions. As a result,
the Adviser’s strategic allocation, use of leverage, or risk-taking decisions
could negatively impact the Fund’s performance, liquidity, and ability to meet
distribution requirements. Shareholders have limited ability to influence the
Adviser’s decision-making and compensation arrangements.
•Key
Personnel Dependency and Potential Adviser Termination. The Fund relies on key
personnel of the Adviser for investment management and operational oversight. If
the Adviser were to terminate its agreement or experience key personnel
departures, the Fund may face challenges in implementing its investment strategy
and could experience disruptions in portfolio management. Additionally, if the
Fund terminates the Advisory Agreement, it may be difficult to secure a
replacement adviser with comparable experience and expertise in managing CLO
investments.
•Operational
and Analytics Model Risks. The Fund relies on its investment adviser and
external service providers for asset selection, risk management, and valuation
processes. Inaccurate asset valuations, cybersecurity breaches, operational
failures, or disruptions at third-party service providers could materially
impact the Fund’s performance. The Fund also depends on analytical models, both
proprietary and third-party, along with external data to evaluate investment
opportunities, measure risk, and value portfolio holdings. These models may be
based on historical data, assumptions, or market inputs that could be incorrect,
misleading, or incomplete, leading to suboptimal investment decisions, asset
mispricing, and failed hedging strategies. Simplified modeling assumptions,
outdated or inconsistent data, and differences in predictive methodologies among
market participants may further exacerbate valuation discrepancies.
Additionally, models that rely on historical market conditions may prove
unreliable during periods of extreme volatility or unprecedented financial
events. Errors in model-based decision-making could cause the Fund to overpay
for assets, sell investments at disadvantageous prices, or miss favorable
opportunities, materially impacting its financial condition and results of
operations. Further, the use of artificial intelligence and other machine
learning tools by the Fund, the Adviser, and third-party service providers
presents additional risks, including the potential for incorrect or biased
outputs, misappropriation of confidential data, and increased cybersecurity
vulnerabilities, any of which could adversely impact the Fund's operations and
financial results.
•Fund
Structure and Trading Risks. The Fund operates as a non-diversified, closed-end
management investment company, meaning it may hold a concentrated portfolio and
invest more heavily in certain CLOs or sectors, increasing exposure to specific
risks. Additionally, shares of closed-end funds often trade at a discount to the
NAV, and there is no guarantee that the Fund’s common shares will maintain
market liquidity or dividend stability.
•Competitive
Market Risk. The Fund operates in a highly competitive market, facing
competition from other closed-end funds, hedge funds, private credit funds,
structured credit funds, investment banks, and other institutional investors.
Many of these competitors have greater financial resources, lower funding costs,
and access to investment opportunities that may not be available to the Fund.
Additionally, some competitors may have higher risk tolerances, allowing them to
pay higher prices or pursue assets that the Fund cannot acquire due to
regulatory, tax, or structural constraints. Increased competition for the Fund’s
targeted assets may drive up prices, limiting its ability to acquire investments
at attractive yields and potentially reducing returns for
shareholders.
•Limited
Operating History Risk. The Fund has a limited track record as an externally
managed, non-diversified, closed-end management investment company, making it
difficult to evaluate its long-term performance. The Fund is subject to
the
risks and uncertainties of a newly structured business, including the potential
failure to achieve its investment objectives.
•Foreign
Currency Risk. Although the Fund primarily invests in CLOs backed by U.S.
assets, it may have exposure to non-U.S. CLO issuers or underlying assets
denominated in foreign currencies. Fluctuations in exchange rates may adversely
affect the value of these investments, and the Fund may be exposed to additional
risks related to currency hedging costs, foreign tax treatment, and the
enforceability of creditor rights in foreign jurisdictions.
•Risks
Related to Market and Economic Conditions. The Fund’s performance is directly
influenced by macroeconomic factors such as inflation, tariffs, credit market
disruptions, and Federal Reserve policy changes. Economic downturns or periods
of financial distress may result in widespread loan defaults, increased funding
costs, and decreased investor confidence, all of which could negatively impact
the Fund’s NAV and ability to generate income.
•Market
Disruption Risks. The Fund’s business, financial condition, and results of
operations may be adversely affected by periods of extreme market volatility,
economic downturns, and disruptions in the credit markets. Factors such as
inflation, tariffs, rising interest rates, Federal Reserve policy changes,
geopolitical tensions, and liquidity shortages in the corporate credit markets
could result in widened credit spreads, reduced market liquidity, and increased
corporate loan defaults, all of which may negatively impact the value of the
Fund’s investments. In times of market stress, the Fund may face higher funding
costs, reduced access to capital, and greater difficulty in liquidating assets
at favorable prices. The rapid development and adoption of artificial
intelligence may also contribute to market dislocations, industry disruptions,
and heightened uncertainty in credit markets, including by adversely affecting
the businesses and financial condition of corporate borrowers underlying the
Fund's CLO investments.
Investors
should carefully review the full “Risk Factors” section of the Fund’s
registration statement on Form N-2, as filed with the SEC for a more detailed
discussion of these and other risks associated with an investment in the Fund.
There is no guarantee that the Fund will achieve its investment objectives, and
investors may lose all or a significant portion of their
investment.
Price
Range of Common Shares
Our
common shares trade on the NYSE under the symbol “EARN.” The following table
lists the high and low closing sale price for our common shares, the high and
low closing sale price as a percentage of net asset value per share, and
distributions declared per common share for each quarter since January 1,
2024.
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| Closing
Sales Price |
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| Period |
|
Net
Asset Value(1) |
| High |
| Low |
|
Premium
(Discount) of High Sales Price to Net Asset Value(2) |
|
Premium
(Discount) of Low Sales Price to Net Asset Value(2) |
|
Distributions
Declared(3) |
|
Fiscal
year ended December 31, 2024(4) |
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| First
quarter |
| $7.21 |
| $6.99 |
| $5.55 |
| (3.1) |
% |
| (23.0) |
% |
| $0.24 |
| Second
quarter |
| $6.91 |
| $7.22 |
| $6.55 |
| 4.5 |
% |
| (5.2) |
% |
| $0.24 |
| Third
quarter |
| $6.85 |
| $7.15 |
| $6.52 |
| 4.4 |
% |
| (4.8) |
% |
| $0.24 |
| Fourth
quarter |
| $6.53 |
| $7.03 |
| $6.33 |
| 7.7 |
% |
| (3.1) |
% |
| $0.24 |
|
Fiscal
year ended March 31, 2025(5) |
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| |
| First
quarter |
| $6.08 |
| $6.82 |
| $5.41 |
| 12.2 |
% |
| (11.0) |
% |
| $0.24 |
|
Fiscal
year ended March 31, 2026(6) |
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| First
quarter |
| $6.12 |
| $5.78 |
| $4.54 |
| (5.6) |
% |
| (25.8) |
% |
| $0.24 |
| Second
quarter |
| $5.99 |
| $6.05 |
| $5.45 |
| 1.0 |
% |
| (9.0) |
% |
| $0.24 |
| Third
quarter |
| $5.19 |
| $5.51 |
| $5.02 |
| 6.2 |
% |
| (3.3) |
% |
| $0.24 |
| Fourth
quarter |
| $4.09 |
| $5.70 |
| $4.34 |
| 39.4 |
% |
| 6.1 |
% |
| $0.24 |
|
Fiscal
year ended March 31, 2027(7) |
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| First
quarter (through May 27, 2026) |
|
n/a(8) |
| $4.93 |
| $4.50 |
|
n/a(8) |
|
n/a(8) |
| $0.16 |
(1)Net
asset value per share is determined as of the final day of the quarter and is
based on outstanding common shares at the end of each period. As such, it does
not reflect the net asset value per share on each of the dates of the high and
low sales prices. For all periods prior to April 1, 2025, “net asset value”
represents a book value per share, which is the available metric for such period
that the Fund believes is most similar to net asset value per
share.
(2)Calculated
as of the respective high or low closing sales price divided by the Net Asset
Value on the final day of the applicable quarter.
(3)Represents
the distributions (including distributions, dividends reinvested, and returns of
capital, if any) per common share declared in the specified quarter. Tax
characteristics of such distributions varied.
(4)For
the fiscal year ending December 31, 2024, as reported on the Fund’s 2024
1099-DIV, distributions made by the Fund consisted, in part, of a return of
capital, as calculated on a per common share basis, of $0.7290 per common
share.
(5)In
connection with the Conversion, the Fund changed its fiscal year end from
December 31 to March 31, resulting in a three-month shortened fiscal year from
January 1, 2025 to March 31, 2025. For the fiscal year ended March 31, 2025,
distributions of $0.24 per common share were declared, all of which consisted of
a return of capital, as calculated on a per common share basis.
(6)For
the fiscal year ended March 31, 2026, distributions of $0.96 per common share
were declared, all of which consisted of a return of capital, as calculated on a
per common share basis.
(7)During
the period April 1, 2026 through May 27, 2026, distributions of $0.16 per common
share were declared, a portion of which may consist, in part, of a return of
capital, as calculated on a per common share basis.
(8)Net
asset value is not available as of the date of the filing of this Form
N-CSR.
Common
shares of closed-end management investment companies may trade at a market price
that is less than the Net Asset Value that is attributable to those common
shares. The possibility that our common shares will trade at a discount to Net
Asset Value or at a premium that is unsustainable over the long term is separate
and distinct from the risk that our Net Asset Value will decrease. It is not
possible to predict whether our common shares will trade at, above or below Net
Asset Value in the future. The midpoint of the range of the Fund’s estimated net
asset value per share at April 30, 2026 was $4.29. The closing sales price for
common shares on the NYSE on May 27, 2026 was $4.93, which represented a 14.9%
premium to the midpoint of the range of our estimated net asset value per share
as of April 30, 2026. As of May 27, 2026, we had 13 holders of record of our
common shares.
If
our common shares trade at a discount to net asset value per share, it will
likely increase the risk of loss for purchasers of our securities. There can be
no assurance that our common shares will not be trading at a discount to our net
asset value per share at any time.
Dividend
Reinvestment Plan
We
operate the DRIP administered by Equiniti Trust Company LLC as plan agent (the
“Plan Agent”). Under the DRIP, our cash dividends and/or distributions
(together, the “Distributions”), net of any applicable U.S. withholding tax, are
reinvested in additional shares of the same class of shares of ours as the
Distributions related to.
Shareholders
automatically participate in the DRIP unless they opt out by notifying the Plan
Agent via telephone, in writing, or through the Plan Agent’s online portal. An
opt-out election must be received by the Plan Agent before the record date of a
Distribution for such election to be effective. Shareholders holding shares
through a nominee (e.g., a broker) must contact their nominee to make such
elections. Shareholders who opt out will receive Distributions in
cash.
Under
the DRIP, whenever we declares a Distribution, the Plan Agent will reinvest such
Distributions in newly issued shares of ours at a price per share equal to 95%
of the market price per share at the close of regular trading on the NYSE on the
Distribution payment date (or, if no sale is reported that day, the average of
the last bid and ask prices reported by the NYSE). While we plan to generally
issue new shares for DRIP purposes, our Board reserves the right to authorize
the purchase of shares in the open market in connection with the implementation
of the DRIP.
The
Plan Agent will maintain all shareholder accounts under the DRIP and furnish
written confirmations of transactions. Shares held under the DRIP will be
maintained in book-entry form under the Plan Agent’s name or nominee. The Plan
Agent will forward all proxy materials and vote shares in accordance with
participant instructions.
Participants
may withdraw some or all of their shares from the DRIP or sell shares through
the Plan Agent by submitting a request. Full withdrawals will be processed in
whole shares, with any fractional shares settled in cash at market value, less
any applicable fees. A transaction fee of $15.00 plus a per-share brokerage fee
of $0.07, borne by the participant, applies to sales of shares conducted through
the Plan Agent. Sales of shares through other brokers will be subject to
different fees and charges.
Neither
we nor the Plan Agent shall have any responsibility or liability beyond the
exercise of ordinary care for any action taken or omitted pursuant to the DRIP,
nor shall we have any duties, responsibilities or liabilities except such as
expressly set forth herein. Neither shall they be liable hereunder for any act
done in good faith or for any good faith omissions to act, including, without
limitation, failure to terminate a participant’s account prior to receipt of
written notice of his or her death or with respect to prices at which shares are
purchased or sold for the participants account and the terms on which such
purchases and sales are made, subject to applicable provisions of the federal
securities laws.
The
automatic reinvestment of Distributions will not relieve participants of any
federal, state or local income tax that may be payable (or required to be
withheld) on such Distributions. See “U.S. Federal Income Tax
Matters.”
We
reserve the right to amend or terminate the DRIP upon 60 days’ notice to
shareholders. There is no direct service charge to participants with regard to
purchases under the DRIP; however, we reserve the right to amend the DRIP to
include a service charge payable by the participants.
All
correspondence concerning the DRIP should be directed to Equiniti at P.O. BOX
10027, Newark NJ 07101. Certain transactions can be effectuated by calling one
of these toll free numbers: (800) 937-5449 or (718) 921-8124.
Additional
Information
Management
Our
Board oversees our management. Our Board currently consists of six members, four
of whom are not “interested persons” within the meaning of such term in Section
2(a)(19) of the 1940 Act. We refer to these individuals as our “independent
trustees.” Our Board elects our officers, who serve at the discretion of the
Board. The responsibilities of each trustee will include, among other things,
the oversight of our investment activity, the quarterly valuation of our assets,
and oversight of our financing arrangements. Our Board has also established an
Audit Committee and a Nominating and Corporate Governance Committee and may
establish additional committees in the future.
Our
trustees and officers and their principal occupations during the past five years
are set forth below. Our prospectus includes additional information about our
trustees and is available without charge, upon request by calling (203)
409-3585, or on the Commission’s website at http://www.sec.gov.
Board
of Trustees and Executive Officers
Information
regarding the Board is as follows:
Independent
Trustees
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| Name
and Year of Birth |
| Positions(s)
With the Fund |
| Term
of Office and Length of Time Served |
| Principal
Occupation(s) During the Past Five Years |
| Number
of Portfolios in the Fund Complex to be Overseen |
| Other
Directorships Held During Past Five Years |
|
Robert
B.
Allardice,
III
1946 |
| Chairman
of the Board |
| Has
served on the Board since May 2013 and has served as Chairman since
January 2021. |
| Private
Investor |
| 1 |
|
Director,
member of the audit committee, and chairman of the finance, investment and
risk management committee of The Hartford Financial Services Group, Inc.
(NYSE: HIG), from September 2008 until June 2023.
Director
of GasLog Partners LP (NYSE: GLOP) from October 2014 until January 2021.
|
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Ronald
I. Simon, Ph.D. 1938 |
| Trustee |
| Has
served on the Board since May 2013. |
| Private
Investor |
| 1 |
|
Director
of Ellington Financial Inc. since 2007. Chairman of the Board of Directors
and Chairman of the Audit Committee since January 2021.
Director
of the successor company of SoftNet, Inc., American Independence Corp.
(“AIC”), from 2002 until August 2016, when AIC was acquired by
Independence Holdings Company (“IHC”).
Director
of IHC from August 2016 until February 2022. Member of the Audit Committee
of IHC from November 2017 until February 2022.
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| Name
and Year of Birth |
| Positions(s)
With the Fund |
| Term
of Office and Length of Time Served |
| Principal
Occupation(s) During the Past Five Years |
| Number
of Portfolios in the Fund Complex to be Overseen |
| Other
Directorships Held During Past Five Years |
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David
J. Miller
1959 |
| Trustee |
| Has
served on the Board since May 2013. |
| Private
Investor |
| 1 |
|
Director
of StoneMor Inc. (NYSE: STON), the public predecessor to Everstory Inc.,
and Chairman of the Compensation, Nominations & Governance Committee
and as a member of the Audit Committee from July 2019 until November 2022.
Director
and member of the Audit and Trust Investment Committees of Everstory Inc.
since November 2022.
Director
of J.G. Wentworth since January 2018. Chairman of the Board from January
2018 until January 2026. Chairman of the Audit Committee since January
2026.
Director
and Chairman of the Risk and Control Committee of Prima Insurance from
July 2018 until December 2025. Director and Chair of the Audit Committee
of Figure Acquisition Corp. (NYSE: FACA) from February 2021 until December
2022.
Director
of Lombard International Assurance from July 2015 until December 2024.
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Mary
McBride
1955 |
| Trustee |
| Has
served on the Board since March 2021. |
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President
of CoBank, ACB from 2013 until 2016
Private
Investor |
| 1 |
|
Director
of Intrepid Potash Inc., a diversified minerals company, since May
2020.
Director
of EnXchange, an energy management technology company, since November
2025.
Director
of CatchMark Timber Trust, Inc., a real estate company that invests in
timberlands, from February 2018 until September 2022. |
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Interested
Trustees
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| Name
and Year of Birth |
| Positions(s)
With the Fund |
| Term
of Office and Length of Time Served |
| Principal
Occupation(s) During the Past Five Years |
| Number
of Portfolios in the Fund Complex to be Overseen |
| Other
Directorships Held During Past Five Years |
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Laurence
E. Penn
1962 |
| Chief
Executive Officer, President & Trustee |
| Has
served on the Board since the Fund’s inception in September
2012. |
|
Chief
Executive Officer and President of the Fund (since October
2012)
Vice
Chairman of EMG (since 1995)
Executive
Vice President of the Adviser and member of EMG’s Investment and Risk
Management Committee (since 1995)
Chief
Executive Officer and President of Ellington Financial Inc. (since August
2007) |
| 2 |
|
Trustee
of Ellington Income Opportunities Fund, a closed-end management investment
company, since October 2018.
Director
of Ellington Financial Inc. since 2007. |
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Michael
W. Vranos
1961 |
| Trustee |
| Has
served on the Board since the Fund’s inception in September
2012. |
| Private
Investor and Financial Consultant |
| 1 |
| N/A |
Information
regarding our Executive Officers is as follows:
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| Name
and Year of Birth |
| Position
Held
With the Fund |
| Term
of Office |
| Principal
Occupation(s) During the Past Five Years |
|
Laurence
E. Penn
1962 |
| President,
Chief Executive Officer |
| Indefinite
Length—since October 2012 |
|
Chief
Executive Officer and President of the Fund (since October 2012); Vice
Chairman of EMG (since 1995); Executive Vice President of the Adviser and
member of EMG’s Investment and Risk Management Committee (since 1995);
Chief Executive Officer and President of Ellington Financial Inc. (since
August 2007) |
|
Michael
W. Vranos
1961 |
| Portfolio
Manager |
| Indefinite
Length—since October 2012 |
| Co-Chief
Investment Officer of the Fund (October 2012-March 2024); Co-Chief
Investment Officer of Ellington Financial Inc. (since June 2009); Founder
and Chief Executive Officer of EMG (since December 1994) |
|
Mark
Tecotzky
1962 |
| Executive
Vice President |
| Indefinite
Length—since October 2012 |
| Co-Chief
Investment Officer of the Fund (October 2012-March 2024); Vice
Chairman—Head of Credit Strategies of EMG (since July 2023); Head
portfolio manager for MBS/ABS credit at EMG (since July 2006); Co-Chief
Investment Officer of Ellington Financial Inc. (since June
2009) |
|
Gregory
Borenstein
1985 |
| Portfolio
Manager |
| Indefinite
Length—since April 2024 |
| Managing
Director, Head of Corporate Structured Credit at EMG (since July 2023);
Head of Corporate Structured Credit (November 2021-October 2023);
Portfolio Manager (November 2012-November 2021) |
|
Christopher
Smernoff
1976 |
| Chief
Financial Officer |
| Indefinite
Length—since April 2018 |
| Chief
Financial Officer of the Fund (since April 2018); Chief Accounting Officer
of Ellington Financial Inc. (since April 2018) |
|
JR
Herlihy
1981 |
| Chief
Operating Officer,
Treasurer |
| Indefinite
Length—since April 2018 and May 2017, respectively |
| Chief
Operating Officer of the Fund (since April 2018); Treasurer of the Fund
(Since May 2017); Chief Financial Officer of Ellington Financial Inc.
(since April 2018); Treasurer of Ellington Financial Inc. (Since May
2017) |
|
Daniel
Margolis
1973 |
| General
Counsel |
| Indefinite
Length—since October 2012 |
| General
Counsel of the Fund (since April 2013); General Counsel of Ellington
Financial Inc. (since August 2013) |
Biographical
Information and Discussion of Experience and Qualifications
Trustees
The
following is a summary of the experience, qualifications, attributes and skills
of each trustee that support the conclusion, as of the date of this prospectus,
that each trustee should serve as a trustee of the Fund.
Independent
Trustees
Robert
B. Allardice, III.
Mr. Allardice has served as a member of the Fund’s Board since May 2013 and was
appointed as Chairman of the Board in January 2021. Mr. Allardice is also a
director, member of the audit committee, and chairman of the finance, investment
and risk management committee of The Hartford Financial Services Group, Inc.
(NYSE: HIG), where he has served since September 2008. Mr. Allardice served as a
director of GasLog Partners LP (NYSE: GLOP) from October 2014 to January 2021.
Mr. Allardice retired in 1999 from his position as regional chief executive
officer of Deutsche Bank Americas Holding Corporation, North and South America,
or “DBAHC.” Prior to joining Deutsche Bank, Mr. Allardice was a consultant to
Smith Barney. Prior to consulting to Smith Barney, Mr. Allardice spent nearly 20
years in positions of increasing responsibility at Morgan Stanley & Co.,
Inc. He founded the company’s Merger Arbitrage Department and later became Chief
Operating Officer of the Equity Department. Mr. Allardice has served as a board
member of Bankers Trust Company, Carlyle Capital Corporation Ltd., DBAHC and
Worldwide Excellerated Leasing Limited. Mr. Allardice earned a B.A., cum laude,
from Yale University and an MBA from Harvard University, where he graduated as a
George F. Baker Scholar.
Ronald
I. Simon, Ph.D.
Dr. Simon is a private investor. Dr. Simon has served as a member of the Board
since May 2013, and is Chairman of the Governance Committee. Dr. Simon has also
served as a member of the Board of Directors of EFC since 2007 and was appointed
as Chairman of the Board of Directors and Chairman of the Audit Committee of EFC
in January 2021. Dr. Simon was a director of WFS Financial, Inc., a
publicly-traded financial services company specializing in automobile finance,
from March 2003 through February 2006, when WFS Financial was acquired by
Wachovia Corp. From 1995 through
2002,
Dr. Simon was a director of SoftNet Systems, Inc. (“SoftNet”), during 2001, he
served as Acting Chairman, Chief Executive Officer, and Chief Financial Officer
for SoftNet, Inc. From 2002 through August 2016 he was a director of its
successor company, American Independence Corp. (“AIC”), a holding company
engaged principally in the health insurance and reinsurance business. AIC was
acquired by Independence Holdings Company (“IHC”), a holding company principally
engaged in the disability, health insurance and pet insurance business, in
August 2016, and he served as a director of IHC from August 2016 to February
2022, and as a member of the Audit Committee from November 2017 to February
2022. Dr. Simon earned a B.A. from Harvard University, an M.A. from Columbia
University, and a Ph.D. from Columbia University Graduate School of
Business.
David
J. Miller.
Mr. Miller is currently a private investor and has served as a member of the
Board since May 2013. Mr. Miller previously served as a member of the board of
Figure Acquisition Corp. (NYSE: FACA), and StoneMor Inc. (NYSE: STON). At FACA
he served as the Chair of the Audit Committee from February 2021 until December
2022. At STON he served as the Chairman of the Compensation, Nominations &
Governance Committee and as a member of the Audit Committee from July 2019 to
November 2022. He continues to serve on the private company board of StoneMor
Inc., as well as several other private company boards including Lombard
International Assurance; J.G. Wentworth; and Prima Insurance. Mr. Miller
previously served as the Chief Executive Officer of JGWPT Holdings, LLC, or its
predecessor J.G. Wentworth, LLC from January 2009 until July 2014. Prior to
joining J.G. Wentworth, LLC, in January 2009, Mr. Miller held various positions
including: Executive Vice-President responsible for Ace Group’s International
Accident and Health Insurance Business, President and Chief Executive Officer of
Kemper Auto and Home Insurance, and Chief Operating Officer of Providian Direct
Insurance. Mr. Miller began his insurance career with Progressive Insurance
where he held various positions over his seven-year career there. Mr. Miller has
a BSEE in electrical engineering from Duke University and an MBA in Finance from
The Wharton School of the University of Pennsylvania. In November 2021 Mr.
Miller was elected to serve a four-year term on the board of supervisors of
Tredyffrin Township. He was previously a member of the New York Stock
Exchange.
Mary
McBride.
Ms. McBride has served as a member of the Board since March 2021. Ms. McBride
was President of CoBank, ACB (“CoBank”), a cooperative bank and member of the
Farm Credit System serving vital industries across rural America, from 2013 to
2016. Ms. McBride joined CoBank in 1993 and served as Vice President, Loan
Policy & Syndications; Senior Vice President and Manager, Corporate Finance
Division; Senior Vice President and Manager, Operations Division; Executive Vice
President, Communications and Energy Banking Group; and Chief Operating Officer
before being appointed Chief Banking Officer in 2010. Ms. McBride has served as
a director of Intrepid Potash Inc., a diversified minerals company, since May
2020 and served as a director of CatchMark Timber Trust, Inc., a real estate
company that invests in timberlands, from February 2018 until September 2022.
Before joining CoBank, Ms. McBride was Senior Vice President and Manager,
Commercial Lending at First Interstate Bank of Denver, N.A., and prior to that
served as Assistant Vice President, Energy & Utilities at First National
Bank of Boston. Ms. McBride served on the Biomass Technical Advisory and
Research Committee of the U.S. Departments of Energy and Agriculture from 2006
to 2012. She also previously served as Chair of Mile High United Way. Ms.
McBride received a Bachelor of Arts in Political Science from Wellesley College,
a Master of Science in European Studies from the London School of Economics and
a Master of Science in Applied Economics and International Management and
Finance from the Sloan School of Management at the Massachusetts Institute of
Technology.
Interested
Trustees
Laurence
Penn.
Mr. Penn is a Founding Partner, Vice Chairman and the Chief Operating Officer of
Ellington, where he helps oversee many functions of the firm. In Ellington’s
earlier years, Mr. Penn was the senior portfolio manager primarily responsible
for investments in Agency RMBS. Mr. Penn currently serves on the Fund’s
Disclosure Committee and its Pricing Committee; additionally, Mr. Penn also
serves on the following committees at Ellington: Executive, Investment and Risk
Management, Valuation, Compliance, Counterparty Review, Technology and
Environmental, Social and Governance. Prior to joining Ellington in 1995 shortly
after its inception, Mr. Penn was at Lehman Brothers, where he was a Managing
Director and co-head of CMO origination and trading, and where he specialized in
the trading of CMO derivatives. Prior to trading CMOs and CMO derivatives, Mr.
Penn was in charge of Lehman Brothers’ structured transaction modeling group
from 1987 to 1990, where he was responsible for the structuring, modeling and
computer system design for MBS and ABS, and where he was the co-creator (with
Jonathan Amsterdam) of “BondTalk”, the first high-level programming language
specifically designed to model Collateralized Mortgage Obligations. Mr. Penn
began his career at Lehman Brothers in 1984, after receiving a Master of
Advanced Study in Mathematics from Cambridge University, where he studied as
both a National Science Foundation Fellow and Winston Churchill Scholar. Mr.
Penn graduated summa cum laude, Phi Beta Kappa with a B.A. in Mathematics from
Harvard University. Mr. Penn was one of five winners nationwide in the 1980
Putnam collegiate mathematics problem-solving competition, and represented the
United States in the 21st International Mathematics Olympiad held in London,
England.
Michael
Vranos.
Mr. Vranos is the Founder and Chief Executive Officer of the Adviser. He
oversees the Adviser’s investment activities, including those of the Fund. Mr.
Vranos holds ultimate responsibility for portfolio construction, including
strategy-level allocation and risk targets, and holds a prominent role in the
implementation of credit and interest rate hedging
strategies
across the Adviser’s constituent funds. He interacts on a regular basis with
members of senior management of the Adviser, including Mr. Borenstein, to
discuss both high-level and trade-specific portfolio management and strategy.
Mr. Vranos founded Ellington in December of 1994 to capitalize on distressed
conditions in the MBS derivatives market. Mr. Vranos currently sits on the
following committees at Ellington: Executive, Investment and Risk Management,
Portfolio Management, Risk Review and European Asset Risk Subcommittee. Prior to
founding Ellington in December 1994, Mr. Vranos was the Senior Managing Director
of Kidder Peabody in charge of RMBS trading. With Mr. Vranos as head trader and
senior manager, Kidder Peabody’s MBS department became a leader on Wall Street
in CMO underwriting for each of the three years between 1991 and 1993. Mr.
Vranos began his Wall Street career in 1983, after graduating magna cum laude
and Phi Beta Kappa with a Bachelor of Arts in Mathematics from Harvard
University. Mr. Vranos also devotes much of his time, energy, and resources to
philanthropic causes, donating to worthy child advocacy, homeless relief,
education, and medical research organizations across the country. A longtime
director of Help for Children and recipient of the organization’s 2007 Lifetime
Award for Caring, he supports the group’s mission to prevent child abuse and
provide assistance for families in need. Mr. Vranos recently established a
research fellowship to sponsor the ongoing work of the Harvard Stem Cell
Institute.
Compensation
of Trustees
The
table below describes the compensation earned by our trustees during the year
ended March 31, 2026. Any member of our Board who is also an employee of our
Adviser, EMG, or their respective affiliates does not receive additional
compensation for serving on our Board.
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| Name |
| Fees
Earned or
Paid in Cash |
|
Restricted
Common Share Awards
(2) |
| All
Other Compensation |
| Total
Compensation |
|
Robert
B. Allardice, III |
| $ |
125,000 |
|
| $ |
— |
|
| $ |
— |
|
| $ |
125,000 |
|
| Ronald
I. Simon, Ph.D. |
| 92,500 |
|
| — |
|
| — |
|
| 92,500 |
|
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David
J. Miller |
| 85,000 |
|
| — |
|
| — |
|
| 85,000 |
|
|
Mary
McBride |
| 85,000 |
|
| — |
|
| — |
|
| 85,000 |
|
|
Laurence
E. Penn |
| — |
|
| — |
|
| — |
|
| — |
|
|
Michael
W. Vranos |
| — |
|
| — |
|
| — |
|
| — |
|
(1)Represents
compensation expense incurred for the year ended March 31, 2026. In connection
with the Conversion, the Fund changed its fiscal year to end on March 31, and,
as a result, had a stub fiscal period from January 1, 2025 to March 31, 2025.
During that period, the Independent Trustees earned a total compensation
(consisting of the fees earned or paid in cash, and all other compensation):
Robert B. Allardice III—$27,963, David J. Miller—$19,838, Ronald I. Simon,
Ph.D.—$19,838, and Mary McBride —$17,963. None of the Independent Trustees were
granted any stock awards or option awards during the three-month period ended
March 31, 2025.
(2)In
accordance with the restrictions in the 1940 Act, we no longer grant restricted
common share awards or any other equity compensation to any trustee, officer, or
other employee and terminated our previously existing 2023 Equity Incentive Plan
with the Conversion.
Compensation
of Chief Executive Officer and Other Executive Officers
We
do not have a compensation committee because our executive officers do not
receive any direct compensation from us. Mr. Penn, our Chief Executive Officer,
Mr. Vranos, a Portfolio Manager, and Mr. Tecotzky, our Executive Vice President,
through their ownership interest in EMG, the ultimate parent of the Adviser, are
entitled to a portion of any profits earned by the Adviser, which includes any
fees payable to the Adviser under the terms of the Advisory Agreement, less
expenses incurred by the Adviser in performing its services under the Advisory
Agreement. Messrs. Penn, Vranos and Tecotzky do not receive any additional
compensation from the Adviser in connection with the management of our
portfolio.
The
compensation of Mr. Smernoff, our Chief Financial Officer, and Mr. Herlihy, our
Chief Operating Officer and Treasurer, is paid by the Administrator, subject to
reimbursement by us of an allocable portion of such compensation for services
rendered by such persons to us.
Ms.
Suzanne Hammer, our Chief Compliance Officer, is a director of Vigilant
Compliance, LLC (“Vigilant”) and performs her functions as our Chief Compliance
Officer under the terms of an agreement between us and Vigilant.
Board
Approval of the Advisory Agreement
On
August 13, 2024, the Board, including a majority of the trustees who are not
“interested persons” as defined in the 1940 Act (the “Independent Trustees” and,
those trustees who are “interested persons,” the “Interested Trustees”),
approved the Advisory Agreement, subject to shareholder approval, which was
obtained a special meeting of shareholders held on January 17, 2025 (the
“Special Meeting”). At the Special Meeting, our shareholders voted in favor of
the Advisory Agreement and related matters enabling us to complete the
Conversion. The Advisory Agreement was executed on the date of the Conversion.
The Board weighed a number of factors in reaching its decision to approve the
Advisory Agreement, including (1) the nature, extent, and quality of services to
be provided by the Adviser; (2) the fees payable and expenses reimbursable to
the Adviser under the terms of the Advisory Agreement; (3) the Adviser’s
projected profitability in advising us and the estimated cost of
services
to be provided; (4) the extent to which economies of scale would be realized as
we grows; and (5) any ancillary or “fall-out” benefits received by the Adviser
or its affiliates as a result of its relationship with us. In approving the
Advisory Agreement, the Board also considered the investment history and
experience of the Adviser and EMG. A more fulsome discussion regarding the basis
for the Board’s approval of the Advisory Agreement is available in the Fund’s
definitive proxy statement on Schedule 14A for the Special Meeting, filed with
the SEC on December 19, 2024.
Administration
Agreement
Ellington
Credit Company Administration LLC, a Delaware limited liability company, serves
as our administrator (the "Administrator"). Pursuant to the Administration
Agreement, the Administrator performs, or arranges for the performance of, our
required administrative services, among other things. Payments under the
Administration Agreement are equal to an amount based upon our allocable portion
of the Administrator's overhead in performing its obligations under the
Administration Agreement, including rent, office supplies, the fees and expenses
associated with performing compliance functions, and our allocable portion of
the costs of compensation of our Chief Financial Officer, Chief Operating
Officer, and their respective support staff. To the extent the Administrator
outsources any of its functions, we pay the fees on a direct basis, without
profit to the Administrator. The Administration Agreement has an initial term of
two years, after which it will remain in effect on an annual basis if approved
by the Board, including by a majority of the Independent Trustees. The
Administration Agreement was most recently approved by the Board on March 19,
2025.
Submission
of Matters to a Vote of Shareholders
The
Fund held its 2025 Annual Meeting of Shareholders (the ‘‘Meeting’’) on May 29,
2025 and submitted two matters to the vote of the shareholders. At the Meeting,
shareholders elected nominees for trustee, to serve for one-year terms to expire
at the 2026 Annual Meeting of Shareholders (the “2026 Meeting”) and voted to
ratify the appointment of PricewaterhouseCoopers LLP as the Fund's independent
registered public accounting firm for the year ending March 31, 2026 based on
the following votes:
Election
of Trustees
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| For |
| Withheld |
| Broker Non-Votes |
| Robert
B. Allardice, III |
| 10,799,227 |
| 487,895 |
| 13,497,694 |
| Mary
McBride |
| 10,892,589 |
| 394,533 |
| 13,497,694 |
| David
J. Miller |
| 10,889,512 |
| 397,610 |
| 13,497,694 |
| Laurence
E. Penn |
| 10,822,644 |
| 464,478 |
| 13,497,694 |
| Ronald
I. Simon, Ph.D. |
| 9,910,227 |
| 1,376,895 |
| 13,497,694 |
| Michael
W. Vranos |
| 10,759,251 |
| 527,871 |
| 13,497,694 |
Ratification
of PwC
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| For |
| Against |
| Abstentions |
| Broker
Non-Votes |
| 24,284,055 |
| 309,951 |
| 190,810 |
| * |
*
No broker non-votes arose in connection with this proposal due to the fact that
the proposal was considered “routine” under New York Stock Exchange
Rules.
We
expect to hold our 2026 Annual Meeting on June 25, 2026. We filed a definitive
proxy statement on Schedule 14A relating to the 2026 Meeting with the SEC on May
4, 2026. A copy of the definitive proxy statement relating to the 2026 Meeting
is available (1) without charge, upon request, by calling (203) 409-3585; and
(2) on the SEC's website (www.sec.gov).
Proxy
Information
We
have delegated our proxy voting responsibility to our Adviser. A description of
these policies and procedures is available (1) without charge, upon request, by
calling (203) 409-3585; and (2) in our registration statement on Form N-2 filed
with the SEC on April 1, 2025, as may be amended, restated, supplemented, or
otherwise modified from time to time and which can be found on the SEC's website
(www.sec.gov).
Information
regarding how we voted any proxies relating to portfolio securities for the
12-month period ending June 30, 2025 is available: (1) without charge, upon
request, by calling (203) 409-3585; and (2) in our Form N-PX filing, which can
be found on the SEC's website (www.sec.gov). Information regarding how we voted
any proxies relating to portfolio securities for the 12-month period ending June
30, 2026 will be available on or before August 31, 2026: (1) without charge,
upon request, by
calling
(203) 409-3585; and (2) in our Form N-PX filing, which can be found on the SEC's
website (www.sec.gov). We also make this information available on our website at
www.ellingtoncredit.com.
Changes
Occurring During the Reporting Period
The
following information in this annual report is a summary of certain changes
during the most recent fiscal year. This information may not reflect all of the
changes that have occurred since you purchased our securities.
During
the applicable period, except as noted below, there have been: (i) no material
changes to our investment objectives and policies that constitute its principal
portfolio emphasis that have not been approved by shareholders; (ii) no changes
to the persons primarily responsible for our day-to-day management; and (iii) no
changes to our charter or by-laws that would delay or prevent a change of
control.
Privacy
Notice
We
are committed to protecting your privacy. This privacy notice explains the
privacy policies of Ellington Credit Company and its affiliated companies. The
terms of this notice apply to both current and former shareholders.
We
will safeguard, according to strict standards of security and confidentiality,
all non-public personal information we receive about you. We have implemented
policies and procedures designed to protect this information in compliance with
Regulation S-P as promulgated by the Securities and Exchange Commission and any
other applicable laws, rules and regulations.
When
you purchase shares of the our common stock and in the course of providing you
with products and services, we and certain of our service providers, such as a
transfer agent, may collect non-public personal information about you, such as
your name, address, social security number or tax identification number, account
balances, account transactions, transaction history, wire transfer instructions,
and checking account information. This information may come from sources such as
account applications and other forms, from other written, electronic or verbal
correspondence, from your transactions, from your brokerage or financial
advisory firm, financial adviser or consultant, and/or information captured on
applicable websites.
We
do not disclose any non-public personal information provided by you or gathered
by us to non-affiliated third parties, except as permitted or required by law or
for our everyday business purposes, such as to process transactions or service
your account. For example, we may share your personal information in order to
send you annual and semi-annual reports, proxy statements and other information
required by law. We may disclose your non-public personal information to
unaffiliated third-party financial service providers (which may include a
custodian, transfer agent, accountant or financial printer) who need to know
that information in order to provide services to you or to us. These companies
are required to protect your information and use it solely for the purpose for
which they received it or as otherwise permitted by law. We may also provide
your non-public personal information to your brokerage or financial advisory
firm and/or to your financial adviser or consultant, as well as to professional
advisors, such as accountants, lawyers and consultants.
We
reserve the right to disclose or report personal or account information to
non-affiliated third parties in limited circumstances where we believe in good
faith that disclosure is required by law, such as in accordance with a court
order or at the request of government regulators or law enforcement authorities
or to protect our rights or property. We may also disclose your personal
information to a non-affiliated third party at your request or if you consent in
writing to the disclosure.
We
maintain a written incident response program reasonably designed to detect,
respond to, and recover from unauthorized access to or use of customer
information. In the event of a security incident that has resulted, or is
reasonably likely to result, in unauthorized access to or use of sensitive
customer information that creates a reasonable risk of substantial harm or
inconvenience, we will notify affected customers as soon as practicable, and in
no event later than 30 days after becoming aware of the incident.
If
you have any questions or concerns about the privacy of your personal
information, please contact us at 203-409-3585.
Risk
Factors
Investors
should carefully consider the risk factors described below before deciding on
whether to make an investment in securities of the Fund. 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 Fund’s 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 Fund’s common shares.
Principal
Risks of the Fund
The
Fund invests in corporate CLOs, which exposes it to certain risks associated
with corporate loans.
Investments
in corporate CLO securities involve certain risks. Corporate CLOs are
securitizations that are typically backed by a pool of corporate loans or
similar corporate credit-related assets that serve as collateral. The assets
underlying the Fund’s CLO investments generally consist of lower-rated
first-lien corporate loans, although certain CLO structures may also allow for
limited exposure to other asset classes including unsecured loans, second-lien
loans, or corporate bonds. To the extent that the assets underlying the Fund’s
CLO investments are rated for creditworthiness by any nationally recognized
statistical ratings organizations, they generally carry lower credit ratings,
and certain assets may not be rated by any nationally recognized statistical
ratings organization. As a result, the assets underlying the Fund’s CLO
investments are considered to bear significant credit risks. Corporate issuers
of lower-rated debt securities may be highly leveraged and may not have access
to more traditional methods of financing. During economic downturns or sustained
periods of rising interest rates, issuers of lower-rated debt securities may be
likely to experience financial stress, especially if such issuers are highly
leveraged, and in such periods the market for lower-rated debt securities could
be severely disrupted, adversely affecting the value of such
securities.
The
risk of loss for lower-rated debt securities is also magnified to the extent
that such securities are unsecured or subordinated to more senior creditors.
Lower-rated debt securities generally have limited liquidity and limited
secondary market support. These risks are further exacerbated in the case of
second-lien loans, as they are subordinated to first-lien loans and have weaker
recovery prospects in the event of borrower distress or default. Further,
ratings downgrades on the Fund’s CLO debt investments may result in its
investments being viewed as riskier than they were previously thought to be.
This perception of increased riskiness resulting from a downgrade can result in
adverse impacts to the market value and liquidity of the Fund’s CLO debt
investments, as well as reduce the availability or increase the cost of
financing for the Fund’s CLO debt investments.
The
CLOs in which the Fund invests, may acquire loans to smaller companies
(“middle-market loans”), which may carry more inherent risks than loans to
larger, publicly traded entities. Compared to larger companies, these
middle-market companies tend to have more limited access to capital, weaker
financial positions, narrower product lines, and tend to be more vulnerable to
competitors’ actions and market conditions, as well as to general economic
downturns. As a result, the securities issued by CLOs that hold significant
investments in middle-market loans are generally considered riskier than
securities issued by CLOs that primarily invest in broadly syndicated
loans.
The
corporate loans that underlie the Fund’s CLO investments may become
nonperforming or impaired for a variety of reasons. Nonperforming or impaired
loans may require substantial workout negotiations or restructurings that may
result in significant delays in repayment, a significant reduction in the
interest rate, and/or a significant write-down of the principal of the loan. A
wide range of factors could adversely affect the ability of an underlying
corporate borrower to make interest or other payments on its loan. The corporate
issuers of the loans or securities underlying the Fund’s CLO investments may be
highly leveraged and may be subject to an increased risk of default depending on
certain micro- or macro-economic conditions, such as economic recessions,
heightened interest rates and/or inflation, tariffs, and other conditions. The
risk of economic recession and declining creditworthiness of corporate borrowers
would be amplified by rising corporate default rates, tightening credit
conditions, and potential credit downgrades in leveraged loan markets.
Accordingly, the subordinated and lower-rated (or unrated) CLO securities in
which the Fund invests may experience significant price and performance
volatility relative to more senior or higher-rated CLO securities, and they are
subject to greater risk of loss than more senior or higher-rated CLO securities
which, if realized, could materially adversely affect the Fund’s business,
financial condition and results of operations, and its ability to make
distributions to its shareholders.
Such
defaults and losses, especially those in excess of the market’s or the Fund’s
expectations, would have a negative impact on the value of the Fund’s CLO
investments, and reduce the cash flows that the Fund receives from its CLO
investments, which could materially adversely affect its business, financial
condition and results of operations, and its ability to make distributions to
its shareholders.
In
addition, if a CLO in which the Fund invests experiences an event of default as
a result of the CLO’s failure to make a payment when due, the erosion of the
CLO’s underlying collateral, or other reasons, the CLO would be subject to the
possibility of liquidation. In such cases, the risks are heightened that the
collateral underlying the CLO may not be able to be readily liquidated, or that
when liquidated, the resulting proceeds would be insufficient to redeem in full
the CLO mezzanine debt and equity tranches that are the focus of the Fund’s
investment strategy. CLO equity tranches often suffer a loss of all of their
value in these circumstances, which could materially adversely affect the Fund’s
business, financial condition and results of operations, and its ability to make
distributions to its shareholders. Furthermore, following an event of default by
a CLO, the holders of CLO mezzanine debt and equity tranches typically have
limited rights regarding decisions made with respect to the underlying
collateral, with the result that such decisions might favor the more senior
tranches of the CLO.
In
the event of a bankruptcy or insolvency of an issuer of a loan or of an
underlying asset held by a CLO in which the Fund invests, a court or other
governmental entity may determine that the related claims held by such CLO are
not valid or are subject to significant modification. In addition, any payments
previously received by such CLO could be subject to avoidance as a “preference”
if made within a certain period of time (which may be as long as one year under
U.S. Federal bankruptcy law or even longer under state laws) before
insolvency.
Further,
“covenant-lite” loans may comprise a significant portion of the underlying
collateral of the CLOs in which the Fund invests. Generally, covenant-lite loans
provide the obligor with more freedom to take actions that could negatively
impact their lenders because the obligor’s covenants are incurrence-based and
not maintenance-based, which means that they are only tested and can only be
breached following an affirmative action of the borrower, rather than by a
deterioration in the borrower’s financial condition. At times, covenant-lite
loans have represented a significant majority of the syndicated corporate loan
market. To the extent that the corporate CLO securities in which the Fund
invests hold covenant-lite loans, the Fund may have a greater risk of loss on
such investments as compared to investments in CLOs holding loans with more
robust covenants.
The
CLOs in which the Fund invests may also acquire interests in corporate loans
indirectly, by way of participations. In a participation, the underlying debt
obligation remains with the institution that has sold the participation, which
typically results in a contractual relationship only with such selling
institution, and not with the corporate obligor directly. As a result, the
holder of a participation assumes the credit risk of both the obligor and the
selling institution and may only have limited rights to influence any decisions
made by the selling institution in connection with the underlying debt
obligation.
The
Fund’s CLO investments are subject to risks related to the financial leverage
employed by the underlying corporate borrowers.
The
corporate borrowers of the underlying assets in a CLO are typically highly
leveraged, and there may be few or no restrictions on the amount of indebtedness
such borrowers can incur. Substantial indebtedness adds additional risk with
respect to a borrower and could (i) limit its ability to borrow money or
otherwise access funds for its working capital, capital expenditures, debt
service requirements, strategic initiatives or other purposes; (ii) require it
to dedicate a substantial portion of its cash flow from operations to the
repayment of its indebtedness, thereby reducing funds available to it for other
purposes; (iii) make it more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage; and/or (iv) subject it to
restrictive financial and operating covenants, which may preclude it from
executing on favorable business activities or from financing future operations
or other capital needs. In some cases, proceeds of indebtedness incurred by a
borrower could be paid as a dividend to its equity holders rather than retained
by the borrowers for its working capital or to pursue favorable opportunities.
Highly leveraged companies are often more sensitive to declines in revenues,
increases in expenses, and adverse business, political, or financial
developments or economic factors such as a significant rise in interest rates, a
severe downturn in the economy, or deterioration in the condition of such
companies or their industries. A leveraged company’s income and net assets will
tend to increase or decrease at a greater rate than if borrowed money were not
used.
If
an underlying borrower is unable to generate sufficient cash flow to meet
principal and/or interest payments on its indebtedness, it may be forced to take
other actions to satisfy its obligations under its indebtedness. These
alternative actions may include reducing or delaying capital expenditures,
selling assets, seeking additional capital, or restructuring or refinancing
indebtedness. Any of these actions could significantly reduce the value of the
related underlying asset held by the CLO, and thus the CLO security held by the
Fund. Furthermore, if the borrower is unable to meet its scheduled debt service
obligations even after taking these actions, the borrower may be forced into
liquidation, dissolution or insolvency, and the value of the related underlying
asset held by the CLO, and thus the CLO security held by the Fund, could decline
significantly or even be rendered worthless. Reductions in the value of the
Fund’s CLO investments may negatively impact the Fund’s financial condition and
cash flows, and could impair the Fund’s ability to make distributions to its
shareholders.
The
CLOs in which the Fund invests may be subject to risks associated with
syndicated loans.
Under
the documentation for syndicated loans, a financial institution or other entity
typically is designated as the administrative agent and/or collateral agent.
This agent is granted a lien on any collateral on behalf of the other lenders
and
distributes
payments on the indebtedness as they are received. The agent is the party
responsible for administering and enforcing the loan and generally may take
actions only in accordance with the instructions of a majority or two-thirds in
commitments and/or principal amount of the associated indebtedness. In most
cases for the Fund’s syndicated loan investments, the Fund does not expect to
hold a sufficient amount of the indebtedness to be able to compel any actions by
the agent. Consequently, the Fund would only be able to direct such actions if
instructions from it were made in conjunction with other holders of associated
indebtedness that together with the Fund compose the requisite percentage of the
related indebtedness then entitled to take action. Conversely, if holders of the
required amount of the associated indebtedness other than the Fund desire to
take certain actions, such actions may be taken even if the Fund did not support
such actions. Furthermore, if a syndicated loan is subordinated to one or more
senior loans made to the applicable obligor, the Fund’s ability to exercise such
rights may be subordinated to the exercise of such rights by the senior lenders.
Whenever the Fund is unable to direct such actions, the parties taking such
actions may not have interests that are aligned with the Fund, and the actions
taken may not be in the Fund’s best interests. Furthermore, in recent years,
“priming” transactions in the distressed debt sector have become more common.
These “priming” arrangements are transactions where a group of debtholders can
move collateral away from existing lenders so that it can serve as the primary
source of secured assets for new money and/or restructuring existing debt. If
the Fund were to hold distressed debt, either directly or indirectly through its
CLO investments, that became “primed” by another group of lenders, it could lose
all or a significant part of such investment, which could negatively impact the
Fund’s financial condition and its ability to make distributions to its
shareholders.
If
an investment is a syndicated revolving loan or delayed drawdown loan, other
lenders may fail to satisfy their full contractual funding commitments for such
loan, which could create a breach of contract, result in a lawsuit by the
obligor against the lenders and adversely affect the value of the Fund’s
investment.
There
is a risk that a loan agent may become bankrupt or insolvent. If the loan agent
becomes bankrupt or insolvent, holders of the related loan may be delayed and
possibly impaired in their ability to access the collateral linked to the
related indebtedness. They may also be limited in their ability to direct the
agent to take actions against the related obligor. In addition, the Fund may be
unable to remove the agent in circumstances in which removal would be in the
Fund’s best interests. Moreover, agented loans typically allow for the agent to
resign with certain advance notice, and the Fund may not find a replacement
agent on a timely basis, or at all, in order to protect its
investment.
The
Fund’s investments in corporate CLOs involve certain structural
risks.
Most
CLOs are issued in multiple tranches, offering investors various maturity and
credit risk characteristics, often categorized as senior, mezzanine and
subordinated/equity according to their relative seniority and degree of risk. If
the relevant collateral defaults or otherwise underperforms, payments to the
more senior tranches of such securitizations take precedence over those of more
junior tranches, such as mezzanine debt and equity tranches, which are the focus
of the Fund’s corporate CLO investment strategy. CLOs present risks similar to
those of other types of credit investments, including credit, interest rate and
prepayment risks. See “—The Fund invests in corporate CLOs, which exposes it to
risks associated with corporate loans.”
Even
though the Fund expects that most of its CLO mezzanine debt investments will
have floating rate coupons, these and other of the Fund’s CLO investments are
still exposed to interest rate risk. There can be significant mismatches between
the timing and frequency of coupon resets on the floating rate CLO debt tranches
and the underlying floating rate assets, and furthermore some of the underlying
assets may bear fixed coupon rates. When interest rates are low but increasing,
variations between interest rate floors on the CLO debt tranches and the
underlying corporate loans can reduce the amount of excess interest available
for payment to the CLO debt and equity tranches. This reduction in excess
interest could adversely impact the Fund’s CLO equity cashflows and valuations,
which could materially adversely affect the Fund’s business, financial condition
and results of operations, and its ability to make distributions to its
shareholders.
CLOs
have at times experienced negative credit events in their constituent loans,
credit rating downgrades of constituent loans and issued debt tranches, and
failures of certain deal metrics. The failure by a CLO in which the Fund invests
to satisfy certain tests, including with respect to adequate collateralization
and/or interest coverage, would generally lead to a reduction in the payments
made to holders of its mezzanine debt and equity
tranches.
The
Fund’s CLO investments are exposed to the misalignment of the interests of CLO
collateral managers with the interests of CLO investors, such as the
Fund.
As
discussed under “—The Fund is subject to the risk of legislative and regulatory
changes impacting its business or the markets in which the Fund invests,” CLO
collateral managers are not securitizers subject to the U.S. Risk Retention
Rules. This may reduce a CLO collateral manager’s incentives to prioritize the
interests of CLO investors, including the Fund, increase the risk of default as
a result of less stringent credit or underwriting standards with respect to the
underlying portfolios, and limit investor confidence in the
CLOs.
The
Fund’s investments in the primary corporate CLO market involve certain
additional risks.
Between
the pricing date and the closing date of a corporate CLO, the collateral manager
generally purchases additional assets for the CLO. During this period, the price
and availability of these assets may be adversely affected by a number of market
factors, including price volatility and availability of investments suitable for
the CLO, which could hamper the ability of the collateral manager to acquire a
portfolio of assets that will satisfy specified concentration limitations and
allow the CLO to reach the target initial principal amount of collateral prior
to the effective date. An inability or delay in reaching the target initial
principal amount of collateral may adversely affect the timing and amount of
payments received by the holders of CLO mezzanine debt securities and equity
securities and could result in early redemptions which could cause significant
principal losses on the CLO mezzanine debt and equity securities, which could
materially adversely affect the Fund’s business, financial condition and results
of operations, and its ability to make distributions to its
shareholders.
The
Fund and its investments are subject to prepayment and reinvestment
risk.
As
part of the ordinary management of its portfolio, a CLO will typically generate
cash flow from asset repayments and sales that is reinvested into substitute
assets, subject to compliance with its investment tests and certain other
conditions. If the CLO collateral manager causes the CLO to purchase substitute
assets at a lower yield than those initially acquired, the excess
interest-related cash flow available for distribution to the CLO equity tranches
would decline. In addition, prepayment rates of the assets underlying a CLO are
driven by a number of factors, including changing interest rates and other
factors that are beyond the Fund’s control. Furthermore, in most CLO
transactions, CLO debt investors are subject to the risk that the holders of a
majority of the equity tranche can direct a call or refinancing of a CLO,
causing such CLO’s outstanding CLO debt securities to be repaid at par earlier
than expected. Such early repayment of CLO debt investments could affect the
Fund’s ability to earn anticipated returns, and could impact the Fund’s cash
flows available to make distributions to its shareholders. This and other
factors can cause considerable uncertainty in the average lives of the CLO
tranches in which the Fund invests.
The
Fund’s portfolio of corporate CLO investments may lack diversification, which
may subject the Fund to a risk of significant loss if one or more of these
corporate CLOs experience a high level of defaults on collateral.
The
Fund operates as a non-diversified investment company under the 1940 Act.
Therefore, other than the limitations imposed by the 1940 Act, the Fund does not
have any limitations on the ability to invest in any one CLO, and its
investments may be concentrated in relatively few CLOs, CLOs that have similar
risk profiles (including by being concentrated in a limited number of
industries), CLOs where there is an overlap of underlying corporate issuers, or
CLOs that are managed by the same collateral manager. The overlap of underlying
corporate issuers is often more prevalent across CLOs of the same year of
origination, as well as across CLOs managed by the same asset manager or
collateral manager.
To
the extent that the Fund’s CLO investments are more concentrated, the Fund is
susceptible to a greater risk of loss if one or more of the CLOs in which the
Fund is invested performs poorly, or in the event a CLO collateral manager were
to fail, experience the loss of key employees or sell its business. To the
extent the Fund invests in CLOs that have a high level of overlap of underlying
corporate obligors, there is a greater likelihood of experiencing multiple
defaults in the Fund’s CLO portfolio. In general, to the extent that the Fund’s
CLO portfolio is less diversified, the Fund may have a greater likelihood of
experiencing large overall losses, which could materially adversely affect the
Fund’s business, financial condition and results of operations, and its ability
to make distributions to its
shareholders.
Failure
by a CLO to satisfy certain tests, including as a result of loan defaults and/or
negative loan ratings migration, may place pressure on the performance of the
Fund’s investments in such CLO.
The
failure by a CLO in which the Fund invests to satisfy certain tests, including
with respect to adequate collateralization and/or interest coverage, would
generally lead to a reduction in the payments made to holders of the Fund’s
mezzanine debt and equity tranches. In a typical corporate CLO, nonperforming
assets, or performing assets rated “CCC+” or lower (or their equivalent) in
excess of applicable limits, typically do not receive full par credit for
purposes of calculation of the CLO’s overcollateralization tests. As a result,
if an asset were to default, or an asset’s credit rating were to decrease to a
lower credit rating level, also known as “negative rating migration,” it could
cause a CLO to move out of compliance with some or all of its
overcollateralization tests. CLOs are also generally subject to interest
coverage tests, under each of which the interest income generated by the
underlying assets is compared to the interest owed to a given CLO tranche and
all tranches more senior to it. To the extent that any overcollateralization
tests or interest coverage tests are breached, cash flows could be diverted away
from the CLO mezzanine debt and equity tranches in favor of the more senior CLO
debt tranches until and unless such breaches are cured, which could materially
adversely affect the Fund’s business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.
CLO
investments involve complex documentation and complex accounting
considerations.
CLOs
are often governed by a complex series of legal documents and contracts. As a
result, the risk of dispute over the interpretation or enforceability of the
documentation may be higher relative to other types of investments. Further, the
complex
structure
of a particular CLO may not be fully understood at the time of investment and
may produce disputes with the issuer or unexpected investment results, which
could materially adversely affect the Fund’s business, financial condition and
results of operations, and its ability to make distributions to its
shareholders.
The
accounting calculations related to the Fund’s CLO investments are complex in
numerous ways. For instance, under GAAP, the Fund calculates its net investment
income—which is used to determine the performance fee payable to the
Adviser—based on effective yield calculations. These calculations involve
significant judgment in projecting expected cash flows. If an investment
underperforms expectations, the Fund may accrue more interest income than it
ultimately realizes on such investment and pay the Adviser a higher performance
fee than it otherwise would have if different projections had been
used.
The
risks associated with the accounting complexities include inaccurate financial
reporting, such as incorrect accruals, reserves and estimates, or the
misapplication of accounting standards. These issues could lead to the
miscalculation of fees, potentially in favor of the Adviser, and could
necessitate a financial restatement. Financial restatements are often costly and
time-consuming, and they may lead to regulatory scrutiny, legal proceedings, or
shareholder litigation. In addition, a restatement could result in a loss of
investor confidence, which would negatively impact the Fund’s reputation in the
marketplace and impair its ability to raise capital on favorable terms in the
future. A financial restatement could also trigger a significant decline in the
price of the Fund’s common shares, eroding shareholder value and potentially
exacerbating financial and reputational damage. These events could materially
adversely affect the Fund’s business, financial condition and results of
operations, as well as its ability to make distributions to its
shareholders.
The
Fund is dependent on the collateral managers of the corporate CLOs in which the
Fund invests, and those corporate CLOs are generally not registered under the
1940 Act.
The
Fund invests in CLO securities issued by CLOs that are managed by collateral
managers unaffiliated with the Fund, and the Fund is dependent on the skill and
expertise of such managers. While the actions of the CLO collateral managers may
significantly affect the return on the Fund’s investments, the Fund typically
does not have any direct contractual relationship with these collateral
managers.
While
the Fund also relies on these collateral managers to act in the best interests
of the CLOs in which the Fund invests, there can be no assurance that such
collateral managers will do so. Moreover, such collateral managers are subject
to fiduciary duties owed to other classes of notes besides those in which the
Fund invests, and they may have other incentives to manage the CLO portfolios in
a manner that disadvantages the particular classes of notes in which the Fund is
invested. Furthermore, since the CLO issuer often provides an indemnity to its
collateral manager, the CLO tranches the Fund holds may ultimately bear the
burden of any legal claims brought against the collateral manager.
In
addition, the CLOs in which the Fund invests are generally not registered as
investment companies under the 1940 Act. As investors in these CLOs, the Fund is
not afforded the protections that shareholders in an investment company
registered under the 1940 Act would have.
The
Fund may only have limited information regarding the underlying assets held by
the CLOs in which it invests, and collateral managers may not identify or report
issues relating to the underlying assets on a timely basis (or at all) to enable
the Fund to take appropriate measures to manage the Fund’s risks. Furthermore,
much of the information furnished to the Fund as an investor in a corporate CLO
is neither audited nor reviewed, nor is an opinion expressed, by an independent
public accountant. Finally, the Fund is not required to disclose to its
shareholders any trustee reports or any other information received concerning
any of its CLO investments. Thus, the Fund’s shareholders will have limited
information on the assets held by, and the performance of, the CLOs in which the
Fund invests.
Collateral
managers are subject to removal or replacement by other holders of CLO
securities without the Fund’s consent and may also voluntarily resign as
collateral manager or assign their role as collateral manager to another entity.
The removal, replacement, resignation, or assignment of any particular CLO
collateral manager’s role could adversely affect the returns on the CLO
securities in which the Fund invests, which could materially adversely affect
the Fund’s business, financial condition and results of operations, and its
ability to make distributions to its
shareholders.
The
Fund’s CLO investments often have limited liquidity.
The
Fund expects to focus its CLO investment activity in mezzanine debt and equity
tranches, which have less liquidity than many other securities, including as a
result of lower or no trading volume, transfer restrictions, and their bespoke
nature. This illiquidity results in price volatility and can make it more
difficult to value or sell these securities if the need arises, which could
require the Fund to realize a greater loss if the Fund is ever required to
liquidate such assets, which could materially adversely affect its business,
financial condition and results of operations, and its ability to make
distributions to its
shareholders.
The
CLOs in which the Fund invests incur significant operating
expenses.
The
CLOs in which the Fund invests incur significant operating fees and expenses,
including but not limited to collateral management fees, administrative
expenses, and other operating expenses, which are all indirectly borne by CLO
investors. CLO collateral management base fees, which typically range from 0.30%
to 0.50% of a CLO’s total assets, are charged on the CLO’s total assets and are
usually paid from residual cash flows after interest payments to senior debt
tranches. Additional CLO operating expenses, estimated at 0.30% to 0.70%, may
also apply, although these are not routinely reported in a standardized manner.
Furthermore, CLO collateral managers may also earn incentive fees tied to equity
cash flows once the equity tranche achieves a cash-on-cash return of capital and
a specified “hurdle” rate. All of these fees and expenses are borne first by the
CLO equity tranche due to its subordinated position. Given that the CLO equity
tranche represents only a fraction of the value of the entire CLO, these fees
and expenses are greatly magnified when expressed as a percentage of the value
of the CLO equity tranche. Both types of CLO tranches in which the Fund invests
(equity tranches and mezzanine debt tranches) may bear these expenses, with the
equity tranche—being the most subordinated—usually shouldering these costs. To
the extent that the CLO equity tranche has suffered or will suffer a total
principal loss, mezzanine debt tranches will then effectively bear these fees
and expenses.
In
addition to the collateral management fees, administrative expenses, and other
operating expenses incurred by the CLOs in which the Fund invests (and therefore
indirectly incurred by the Fund), the Fund will also directly incur the Base
Management Fee and the Performance Fee payable to the Adviser, as well as all
the other operating expenses of the Fund. Therefore, each shareholder bears his
or her share of the Base Management Fee and the Performance Fee of the Adviser,
the Fund’s other operating expenses as well as indirectly bearing the ratable
share of the collateral management fees, administrative expenses, and other
operating expenses of a CLO.
The
Fund and its corporate CLO investments are subject to risks associated with
non-U.S. investing, including in some cases foreign currency risk.
While
the Fund invests primarily in CLOs that hold underlying U.S. assets, the Fund
may also invest in corporate CLOs that hold non-U.S. assets, and the Fund
expects that many of the CLO issuers in which the Fund invests will be domiciled
outside the United States. Investing directly or indirectly in non-U.S. issuers
may expose the Fund to additional risks, including political and social
instability, expropriation, imposition of foreign taxes, less developed
bankruptcy laws, difficulty in enforcing contractual obligations, lack of
uniform accounting and auditing standards, currency fluctuations and greater
price volatility. Further, the Fund, and the CLOs in which the Fund invests, may
have difficulty enforcing creditor’s rights in foreign
jurisdictions.
A
portion of the Fund’s CLO investments (and the income and gains received by the
Fund in respect of such investments) may be denominated in currencies other than
the U.S. dollar, including the Euro. Accordingly, changes in foreign currency
exchange rates may materially adversely affect the value of these investments,
which could, in turn, impair the Fund’s ability to make distributions to its
shareholders.
The
CLOs in which the Fund invests could become subject to U.S. federal income tax
or withholding requirements.
The
CLO issuers in which the Fund invests will generally operate pursuant to
investment guidelines intended to ensure that the CLO is not treated for U.S.
federal income tax purposes as engaged in a U.S. trade or business. If a CLO
issuer fails to comply with the investment guidelines, or if the IRS otherwise
successfully asserts that the CLO should be treated as engaged in a U.S. trade
or business, such CLO could be subject to U.S. federal income tax, which could
reduce the amount available to distribute to mezzanine debt and equity holders
in such CLO, including the Fund, and thereby adversely affect the Fund’s ability
to make distributions to its shareholders.
The
Code imposes a withholding tax of 30% on certain U.S. source periodic payments,
including interest and dividends, to certain non-U.S. entities, including
certain non-U.S. financial institutions and investment funds, unless such
non-U.S. entity complies with certain reporting requirements regarding its U.S.
account holders and its U.S. owners. Most CLOs in which the Fund invests will be
treated as non-U.S. financial entities for this purpose and therefore will be
required to comply with these reporting requirements to avoid the 30%
withholding. If a CLO in which the Fund invests fails to properly comply with
these reporting requirements, certain payments received by such CLO may be
subject to the 30% withholding tax, which could reduce the amount available to
distribute to equity and mezzanine debt holders in such CLO, including the Fund,
and thereby materially adversely affect the Fund’s business, financial condition
and results of operations, and its ability to make distributions to its
shareholders.
The
Adviser has significant latitude in determining the types of assets the Fund
acquires, and there is no specific prohibition in the Fund’s investment
strategy, investment guidelines and/or the RIC qualification requirements
against investing in investments that are not
CLOs.
To
maintain the Fund’s qualification as a RIC and compliance with the 1940 Act, the
Fund is subject to various requirements and tests that impose limits on its
investment strategy. However, other than as described in this prospectus,
neither the broad investment guidelines in its Investment Advisory Agreement,
the RIC qualification requirements, nor the 1940 Act impose any specific limits
on, or prohibitions against, investing its capital in investments that are not
CLOs. Under the terms of the Investment Advisory Agreement, the Adviser has
significant latitude within its broad investment guidelines in determining the
types of assets it may acquire. The Board generally does not review individual
acquisitions, dispositions, or many other management
decisions.
The
Fund is subject to risks associated with loan accumulation
facilities.
The
Fund may invest in CLO warehouse facilities, otherwise known LAFs or Warehouses,
by contributing equity capital to a LAF. LAFs are vehicles that acquire
corporate loans and other similar corporate credit-related assets in
anticipation of ultimately collateralizing a CLO transaction. LAF investors
(including the Fund) generally expect to invest in the equity tranche of the
ultimate CLO transaction (assuming it is launched).
Investments
in LAFs have risks similar to those applicable to investments in CLO equity
securities. The use of leverage, typically ranging from three to six times prior
to a CLO’s pricing, also magnifies the Fund’s risk of loss on such investments.
See “The Fund uses financial leverage in executing its business strategy, which
may adversely affect the return on its assets and may reduce cash available for
distribution to its shareholders, as well as increase losses when economic
conditions are unfavorable.”
Further,
if the assets accumulated by a LAF are ultimately not purchased by the planned
CLO, or if the planned CLO is not issued, the LAF may be unwound and the
accumulated assets liquidated. In such cases, LAF investors, such as the Fund,
may be responsible for either holding or disposing of the assets, exposing them
to credit risk and/or market risk, particularly if loan prices have declined.
This scenario may become more likely in times of economic distress or when the
loans comprising the warehouse collateral, even if still performing, have
declined materially in market value. In such instances, the Fund may suffer a
loss upon the disposition of the assets and may not recover its full investment
in the LAF.
There
can be no assurance that the Fund will invest in the ultimate CLO transaction
(if any), and any decision not to do so may result in the Fund realizing losses
from its LAF investment and/or forgoing a potentially attractive investment
opportunity. The occurrence of any of the foregoing or similar events could
materially adversely affect the Fund’s business, financial condition and results
of operations, and its ability to make distributions to its
shareholders.
The
Fund may invest in corporate loans directly, which not only carry risks similar
to those to which the Fund is indirectly exposed through its CLO investments,
but also carry incremental risks.
In
addition to gaining exposure to corporate loans through investments in CLO
securities, the Fund may also invest in corporate loans directly. In some cases,
these loan investments may result from asset sales or in-kind distributions from
CLOs in which the Fund has invested, but in other cases the Fund may acquire
such loans directly in the open market. To the extent the Fund invests in
corporate loans directly, it will be exposed to all of the risks associated with
corporate loans that CLOs are exposed to, as described herein. See “—The Fund
invests in corporate CLOs, which exposes it to certain risks associated with
corporate loans.”; “—The Fund’s CLO investments are subject to risks related to
the financial leverage employed by the underlying corporate borrowers.” and
“—The CLOs in which the Fund invests may be subject to risks associated with
syndicated loans.”
Direct
investments in corporate loans carry additional risks beyond those associated
with investments in CLO tranches. Individual corporate loans are directly
exposed to idiosyncratic corporate borrower-specific risks, and, as a result,
their valuations may be directly and adversely impacted in the event of isolated
underperformance or borrower-specific distress. Further, corporate loans do not
benefit from CLO structural features such as credit enhancement, cash flow
diversion tests, and excess spread, which are designed to mitigate the impact of
credit losses at the tranche level. As a result, a direct investment in a
corporate loan will generally incur principal losses and realized impairments in
the event of a corporate default by that loan’s
issuer.
Risks
Related to the Fund’s Business
There
are risks associated with the implementation of the Conversion.
The
implementation of the Conversion required the Fund to make several changes to
its day-to-day functions, including a number of complex operational, accounting,
regulatory, and market-related changes. Each of these changes include
significant risks, each of which could materially adversely affect the Fund’s
business, financial condition and results of operations, and its ability to make
distributions to its shareholders. These risks include, but are not limited
to:
•Regulatory
and Compliance Risks Related to Bank Custody Rules—Following the Conversion, the
Fund is subject to new regulatory requirements, including bank custody rules
that were not previously applicable. Compliance with these rules necessitated
changes in the Fund’s operational processes, including its custodial
arrangements and its master trade agreements with its counterparties,
potentially leading to additional costs, operational burdens, or constraints on
its available executing counterparties for certain transactions.
•Tax
and Structural Uncertainties—The Conversion may result in unanticipated tax
liabilities, including potential recognition of taxable gains or other
inefficiencies that could impact the Fund. Additionally, changes in tax laws,
IRS interpretations, or regulatory guidance could further affect the Fund’s tax
treatment and require further adjustments to its structure. See also “—The Fund
may be subject to certain corporate-level taxes, and will be subject to
corporate-level U.S. federal income tax if it is unable to maintain its RIC
status under Subchapter M of the Code, which could substantially reduce the cash
available for distribution to its shareholders.”
•Accounting,
Operational and Systems Transition—Following the Conversion, the Fund
prospectively applied investment company accounting and, accordingly, it has
modified its internal systems, reporting processes, and third-party service
provider arrangements as a result of the Conversion. Any delays, errors, or
other challenges related to the transition to investment company accounting
could result in operational disruptions, compliance issues, or increased
administrative costs.
•Legal
and Regulatory—Upon the Conversion, the Fund became subject to the 1940 Act,
implicating a new regulatory reporting regime, including a new schedule, and new
reporting forms, and additional compliance obligations, including the
implementation of the Derivatives Risk Management Program. Adapting to this new
regime may require enhancements to internal compliance protocols, additional
personnel, and increased oversight, all of which could increase costs and
regulatory risks and there may be delays, errors, or other challenges in
adapting to the rules, regulations and requirements of the 1940
Act.
The
Fund’s ability to achieve its objectives is contingent on the Fund’s ability to
manage and maintain all of these, and other changes, to its business. Any
failure to do so could materially adversely affect the Fund’s business,
financial condition and results of operations, and its ability to make
distributions to its shareholders as well as its ability to comply with the
requirements of the 1940 Act. Any failure on the part of the Fund to comply with
the requirements of the 1940 Act could expose it to SEC enforcement actions,
litigation, reputational damage, and limitations on future capital raising,
which could materially adversely affect the Fund’s regulatory standing, tax
status, business, financial condition and results of operations, and its ability
to make distributions to its
shareholders.
Certain
actions by the Federal Reserve and other central banks could materially
adversely affect the Fund’s business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.
Actions
by the Federal Reserve (and similar actions by other central banks), including
tightening or easing of monetary policy, increases or decreases in short-term
interest rates, balance sheet liquidations or runoff, or other actions, or the
perception that the Federal Reserve or other central banks are failing to take
actions deemed necessary or advisable by the market, could cause elevated market
volatility and adversely impact the value and performance of the Fund’s assets
and the ability of the Fund to borrow money or otherwise access capital to fund
its operations. See also “—Interest rate mismatches between the Fund’s assets
and its liabilities, and the assets and liabilities of the CLOs in which the
Fund invests, may reduce the Fund’s income during periods of changing interest
rates, and volatility in interest rates could adversely affect the value of the
Fund’s assets” for the impact of changing interest rates on the Fund’s
business.
Interest
rate mismatches between the Fund’s assets and its liabilities, and the assets
and liabilities of the CLOs in which the Fund invests, may reduce the Fund’s
income during periods of changing interest rates, and volatility in interest
rates could adversely affect the value of the Fund’s assets.
Although
most of the assets underlying the Fund’s CLO investments carry floating rate
coupons, some may have fixed rate coupons or have a fixed rate component, which
is most apparent when a given CLO is backed by corporate bonds, rather than
loans, since bonds generally are issued with a fixed coupon. The fixed coupons
on assets of this nature present some risk of cashflow mismatch between the
Fund’s liabilities and its assets, since the Fund’s primary short term
liabilities are expected to be reverse repurchase agreements. Reverse repurchase
agreement borrowings typically bear a floating rate, and so are typically
sensitive to changes in short term interest rates, since maturing reverse
repurchase agreements will typically be replaced by new reverse repurchase
agreements bearing interest rates based on short term interest rates at the time
of the replacement transaction. If the income from the Fund’s assets is
insufficient to support the interest payments on its liabilities due to a rise
in short term interest rates, the Fund may be forced to reduce its positions,
potentially during an inopportune time in the market, which could force it to
realize losses or be unable to hold its desired amount of
assets.
The
Fund may also issue fixed rate debt, which could introduce a similar mismatch
between interest owed on liabilities and interest income earned on its assets.
As noted above, the Fund will primarily invest in CLOs that bear a floating rate
coupon. In a falling interest rate environment, the Fund’s assets can be
expected to pay a lower coupon rate, but any fixed-rate debt issued by the Fund
will continue to require fixed payments, which could exceed the interest income
available from its floating rate assets. This, too, could result in the Fund
being forced to sell certain positions in order to meet interest and/or
principal payments on its fixed liabilities.
The
Fund may initiate and maintain derivative and similar positions in order to
address both forms of interest rate mismatch, though the Fund is not required to
do so. There can be no certainty that such positions, if they are initiated,
will be effective at eliminating the Fund’s exposure to interest rate
mismatches. Furthermore, derivative and similar positions come with their own
risks, including liquidity risk, which may impact the Fund’s ability to close or
adjust such positions efficiently. See “—Hedging instruments and other
derivatives, including some credit default swaps, may not, in many cases, be
traded on exchanges, or may not be guaranteed or regulated by any U.S. or
foreign governmental authority and involve risks and costs that could result in
material losses.”
While
increases in interest rates will typically increase the interest income on the
Fund’s CLO debt investments, which are generally floating rate in nature, they
could also place pressure on the ability of the corporate borrowers underlying
the Fund’s CLO investments to cover their interest expenses or to refinance
their debt, potentially resulting in higher credit losses on the Fund’s CLO
investments. When interest rates are low but increasing, variations between
interest rate floors on the CLO debt tranches and the underlying corporate loans
can reduce the amount of excess interest available for payment to the CLO debt
and equity tranches. Finally, assets held directly or indirectly by the Fund
that pay a fixed rate coupon typically decline in value when interest rates
increase, and if interest rates were to increase significantly, not only would
the market value of these assets be expected to decline, but these assets could
lengthen in duration because borrowers would be less likely to prepay their
fixed rate corporate borrowings, both of which would be expected to have an
adverse impact on the Fund’s financial results.
Interest
rates can change quickly and are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic and
political considerations, and other factors beyond the Fund’s control. Moreover,
concerns over the United States’ debt ceiling and budget-deficit increase the
possibility of downgrades by rating agencies to the U.S. government’s credit
rating, which could cause interest rates and borrowing costs to rise. Interest
rate movements are highly uncertain and notoriously difficult to predict. For
example, from February 28, 2022 to October 31, 2023, the lower bound of the
Federal Reserve’s Federal Funds Target Rate rose from 0.00% to 5.25%, while the
yield on the ten-year U.S. Treasury rose from 1.83% to 4.93%. While the Fund may
opportunistically hedge its exposure to changes in interest rates, such hedging
may be limited by the tax rules governing RICs, and the Fund can provide no
assurance that its hedges will be successful or that the Fund will be able to
enter into or maintain such hedges. As a result, interest rate fluctuations can
cause significant losses, reductions in income, and can limit the cash available
to make distributions to its
shareholders.
Difficult
conditions in the corporate sector as well as general market concerns may
adversely affect the value of the assets in which the Fund invests.
The
Fund’s business is materially affected by conditions in the corporate sector,
the financial markets, and the economy, including inflation, interest rates,
energy costs, unemployment, geopolitical issues, concerns over the
creditworthiness of governments worldwide and the stability of the global
banking system. Any deterioration of financial markets or the economy or
investor perception of the risks associated with financial markets or the
economy could materially adversely affect the Fund’s business, financial
condition and results of operations, and its ability to make distributions to
its shareholders.
The
Fund’s investments are concentrated in subordinated and lower-rated securities
that generally have greater risks of loss than senior and higher-rated
securities and are subject to amplified market risks.
The
Fund’s portfolio is concentrated in CLO mezzanine debt and equity tranches.
These tranches are subordinated in cash flow priority to other more “senior”
securities of the same CLO securitization and therefore absorb losses from CLO
asset defaults before senior tranches are at risk. The CLO equity tranche
typically represents less than 15% of the overall principal balance of a CLO,
but it absorbs 100% of the CLO’s credit losses until its principal balance has
been written off, after which the mezzanine debt absorbs all losses. As a
result, the CLO equity and mezzanine securities that the Fund targets are deemed
by rating agencies to have substantial vulnerability to default in payment of
interest and/or principal. Such securities are therefore considered to be highly
speculative investments. When a CLO underlying corporate borrower defaults, the
Fund generally has the right to receive payments only from the CLOs and has no
direct rights against the underlying borrowers or the entity that sponsored the
CLO transaction. In addition, the Fund may have the option in certain CLOs to
contribute additional amounts to the CLO issuer for purposes of acquiring
additional assets or curing coverage tests, thereby increasing the Fund’s
overall exposure and capital at risk to such CLO. The value and performance of
CLO securities are subject to the same types of political and economic factors
and risks that affect corporate issuers and capital markets generally, but, for
all of the foregoing reasons, these risks are amplified in the case of CLO
mezzanine debt and equity
tranches.
To
the extent that due diligence is conducted on potential assets, such due
diligence may not reveal all the risks associated with such assets and may not
reveal other weaknesses in such assets, which could lead to losses.
Before
making an investment, the Adviser may decide to conduct (either directly or
using third parties) certain due diligence on a potential investment. There can
be no assurance that the Adviser will conduct any specific level of due
diligence, or that, among other things, the Adviser’s due diligence processes
will uncover all relevant facts or that any purchase will be successful, which
could result in losses on these assets, which could materially adversely affect
the Fund’s business, financial condition and results of operations, and its
ability to make distributions to its
shareholders.
The
Fund relies on analytical models and other data to analyze potential asset
acquisition and disposition opportunities and to manage its portfolio. Such
models and other data may be incorrect, misleading or incomplete, which could
cause the Fund to purchase assets that do not meet the Fund’s expectations or to
make asset management decisions that are not in line with its
strategy.
The
Fund relies on the Adviser and the Adviser relies on the analytical models used
by Ellington (both proprietary and third-party models) and information and data
supplied by third parties. These models and data may be used to value assets or
potential asset acquisitions and dispositions and also in connection with the
Fund’s asset management activities. If Ellington’s models (including the data
utilized by the models) and/or third party models or data prove to be incorrect,
misleading, or incomplete, any decisions made in reliance thereon could expose
the Fund to potential risks. The Adviser’s reliance on the models and data used
by Ellington may induce it to purchase certain assets at prices that are too
high, to sell certain other assets at prices that are too low, or to miss
favorable opportunities altogether. Similarly, any hedging activities that are
based on faulty models and data may prove to be unsuccessful.
Some
of the risks of relying on analytical models and third-party data include the
following:
•collateral
cash flows and/or liability structures may be incorrectly modeled in all or only
certain scenarios, or may be modeled based on simplifying assumptions that lead
to errors;
•information
about assets or the underlying collateral may be incorrect, incomplete, or
misleading;
•asset,
collateral, or CLO historical performance (such as historical prepayments,
defaults, cash flows, etc.) may be incorrectly reported, or subject to
interpretation (e.g., different CLO issuers may report delinquency and default
statistics based on different definitions of what constitutes a delinquent or
defaulted loan); and
•asset,
collateral, or CLO information may be outdated, in which case the models may
contain incorrect assumptions as to what has occurred since the date information
was last updated.
Some
models, such as prepayment models or default models, may be predictive in
nature. The use of predictive models has inherent risks. For example, such
models may incorrectly forecast future behavior, leading to potential losses. In
addition, the predictive models used by the Adviser may differ substantially
from those models used by other market participants, with the result that
valuations based on these predictive models may be substantially higher or lower
for certain assets than actual market prices. Furthermore, because predictive
models are usually constructed based on historical data supplied by third
parties, the success of relying on such models may depend heavily on the
accuracy and reliability of the supplied historical data, and, in the case of
predicting performance in scenarios with little or no historical precedent (such
as extreme broad-based widening in corporate credit yield spreads or deep
economic recessions or depressions), such models must employ greater degrees of
extrapolation and are therefore more speculative and of more limited
reliability.
All
valuation models rely on correct market data inputs. If incorrect market data is
entered into even a well-founded valuation model, the resulting valuations will
be incorrect. However, even if market data is input correctly, “model prices”
will often differ substantially from market prices, especially for securities
with complex characteristics or whose values are particularly sensitive to
various factors. If the Fund’s market data inputs are incorrect or its model
prices differ substantially from market prices, its business, financial
condition and results of operations, and its ability to make distributions to
its shareholders could be materially adversely
affected.
The
Fund’s investment portfolio is recorded at market value and/or fair value, with
its Board overseeing its Valuation Designee in its determination of fair value
and, as a result, there will be uncertainty as to the value of its portfolio
investments.
Under
the 1940 Act, the Fund is required to carry its portfolio investments at market
value, if such value is readily available, or fair value, if there is no readily
available market value, as determined by the Adviser in good faith, as the
Fund’s valuation designee pursuant to Rule 2a-5 under the 1940 Act, in
accordance with its written valuation policy and subject to the oversight of the
Board. Typically, there will not be a widely visible public market for the type
of investments the Fund targets. As a result, the Fund will value these
securities at fair value based on relevant information compiled by the Adviser
and third-
party
pricing services (when available), and with oversight conducted by the Board.
The values of the Fund’s investments are often not readily
determinable.
The
determination of market value or fair value and, consequently, the amount of
unrealized gains and losses in the Fund’s portfolio, are to a certain degree
subjective and dependent on a valuation process conducted by the Adviser and
overseen by the Board. Because such valuations are inherently uncertain, may
fluctuate over short periods of time, especially during periods of elevated
market volatility, and may be based on estimates, the Adviser’s determinations
of fair value may differ from the values that would have been used if a ready
market for these assets existed or from the prices at which trades occur.
Furthermore, the Fund may not obtain third-party valuations for all of its
assets. Changes in the fair value of the Fund’s assets directly impact its net
income through recording unrealized appreciation or depreciation of its
investments and derivative instruments, and so the determination of fair value
has a material impact on its net income.
While
in many cases the Adviser’s determination of the fair value of its assets is
based on valuations provided by third-party dealers and pricing services, the
Adviser can and does value assets based upon its judgment, and such valuations
may differ from those provided by third-party dealers and pricing services.
Valuations of certain assets are often difficult to obtain or are unreliable,
and many or all of the Fund’s CLO investments may trade infrequently and are
illiquid. In general, dealers and pricing services heavily disclaim their
valuations. Additionally, dealers and pricing services may claim to furnish
valuations only as an accommodation and without special compensation, and they
may disclaim any and all liability for any direct, incidental, or consequential
damages arising out of any inaccuracy or incompleteness in valuations, including
any act of negligence or breach of any warranty. Depending on the complexity and
illiquidity of an asset, valuations of the same asset can vary substantially
from one dealer or pricing service to another. Higher valuations of the Fund’s
assets have the effect of increasing the amount of management fees the Fund pays
to the Adviser. Therefore, conflicts of interest exist because the Adviser is
involved in the determination of the fair value of the Fund’s
assets.
Market-based
inputs are generally the preferred source of values for purposes of measuring
the fair value of the Fund’s assets under U.S. GAAP. However, the markets for
the Fund’s investments have experienced, and could in the future experience,
extreme volatility, reduced transaction volume and liquidity, and disruption as
a result of certain events which has made, and could in the future make, it more
difficult for the Fund’s Adviser, and for third-party dealers and pricing
services that the Fund uses, to rely on market-based inputs in connection with
the valuation of its assets under U.S. GAAP. Furthermore, in determining the
fair value of the Fund’s assets, the Adviser uses proprietary models that
require the use of a significant amount of judgment and the application of
various assumptions including, but not limited to, assumptions concerning future
prepayment rates, interest rates, default rates and loss severities. These
assumptions might be especially difficult to project accurately during periods
of economic disruption. The fair value of certain of the Fund’s investments may
fluctuate over short periods of time, and the Adviser’s determinations of fair
value may differ materially from the values that would have been used if a ready
market for these investments existed. The fair value of the Fund’s investments
has a material impact on its earnings through the recording of unrealized
appreciation or depreciation of investments and may cause its Net Asset Value on
a given date to materially understate or overstate the value that the Fund may
ultimately realize on one or more of its investments. Investors purchasing the
Fund’s securities based on an overstated Net Asset Value may pay a higher price
than the value of its investments might warrant. Conversely, investors selling
shares during a period in which the Net Asset Value understates the value of the
Fund’s investments may receive a lower price for their shares than the value of
its investments might warrant.
The
Fund’s business, financial condition and results of operations, and its ability
to make distributions to its shareholders could be materially adversely affected
if the Adviser’s fair value determinations of these assets were materially
different from the values that would exist if a ready market existed for these
assets.
The
lack of liquidity in the Fund’s assets may materially adversely affect its
business, financial condition and results of operations, and its ability to make
distributions to its shareholders.
Certain
of the assets and other instruments the Fund acquires are not publicly traded.
As such, these assets may be subject to legal and other restrictions on resale,
transfer, pledge or other disposition, or will otherwise be less liquid than
publicly-traded securities. Other assets that the Fund acquires, while publicly
traded, have limited liquidity on account of their complexity, turbulent market
conditions, or other factors. Illiquid assets typically experience greater price
volatility, because a ready market does not exist, and they can be more
difficult to value or sell if the need arises. In addition, if the Fund is
required to liquidate all or a portion of its portfolio quickly, the Fund may
realize significantly less than the value at which the Fund has previously
recorded its assets. The Fund may also face other restrictions on its ability to
liquidate any assets for which the Fund or the Adviser has or could be
attributed with material non-public information. Furthermore, assets that are
illiquid are more difficult to finance, and to the extent that the Fund finances
assets that are or become illiquid, the Fund may lose that financing or have it
reduced. If the Fund is unable to sell its assets at favorable prices or at all,
it could materially adversely affect its business, financial condition and
results of operations, and its ability to make distributions to its
shareholders.
The
Fund is highly dependent on Ellington’s information systems and those of
third-party service providers, and system failures could significantly disrupt
the Fund’s business, which could materially adversely affect its business,
financial condition and results of operations, and its ability to make
distributions to its shareholders.
The
Fund’s business is highly dependent on Ellington’s communications and
information systems and those of third-party service providers. Any failure or
interruption of Ellington’s or certain third-party service providers’ systems or
cyber-attacks or security breaches of their networks or systems could cause
delays or other problems in the Fund’s securities trading activities, could
allow unauthorized access for purposes of misappropriating assets, stealing
proprietary and confidential information, corrupting data or causing operational
disruption, or could prevent the Fund from receiving distributions to which the
Fund is entitled, any of which could materially adversely affect its business,
financial condition and results of operations, and its ability to make
distributions to its shareholders.
Computer
malware, ransomware, viruses, and computer hacking and phishing attacks have
become more prevalent in the financial services industry and may occur on
Ellington’s or certain third party service providers’ systems in the future. The
Fund relies heavily on Ellington’s financial, accounting and other data
processing systems. Financial services institutions have reported breaches of
their systems, some of which have been significant, and Ellington has
experienced a data breach, which was not material to its or the Fund’s
operations. Even with all reasonable security efforts, not every breach can be
prevented or even detected. It is possible that Ellington or certain third-party
service providers have experienced an undetected breach, and it is likely that
other financial institutions have experienced more breaches than have been
detected and reported. There is no assurance that the Fund, Ellington, or
certain of the third parties that facilitate the Fund’s and Ellington’s business
activities, have not or will not experience a breach. It is difficult to
determine what, if any, negative impact may directly result from any specific
interruption or cyber-attacks or security breaches of Ellington’s networks or
systems (or the networks or systems of certain third parties that facilitate the
Fund’s and Ellington’s business activities) or any failure to maintain
performance, reliability and security of Ellington’s or certain third-party
service providers’ technical infrastructure, but such computer malware,
ransomware, viruses, and computer hacking and phishing attacks could materially
adversely affect the Fund’s business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.
Additionally,
operational failures or cyber incidents relating to the Fund’s or Ellington’s
third-party service providers (or their service providers) may negatively impact
the Fund’s business in the future. If a material operational failure or material
breach of the information technology systems of its third-party service
providers occurs, the Fund could be required to expend significant amounts of
money, be delayed in receiving funds (or not receive them at all) or have to
expend significant time and resources to respond to these threats or breaches,
each of which could materially adversely impact the Fund’s business, financial
condition and results of operations, and its ability to make distributions to
its shareholders.
New
technologies also continue to develop, including tools that harness generative
artificial intelligence and other machine learning techniques (collectively,
“AI”). AI is developing at a rapid pace and becoming more accessible. As a
result, the use of such new technologies by the Fund, Ellington, and/or the
Fund’s third-party service providers can present additional known and unknown
risks, including, among others, the risk that confidential information may be
stolen, misappropriated or disclosed and the risk that the Fund, Ellington,
and/or its third-party service providers may rely on incorrect, unclear or
biased outputs generated by such technologies, any of which could have an
adverse impact on the Fund and its business. See “—Artificial intelligence and
other machine learning techniques could increase competitive, operational, legal
and regulatory risks to the Fund’s business in ways that the Fund cannot
predict.”
Risks
Related to the Fund’s Financing, Hedging, and Derivatives
Activities
The
Fund’s access to financing sources may not be available on favorable terms, may
be limited or completely shut off, and its lenders and derivative counterparties
may require the Fund to post additional collateral.
The
Fund’s ability to fund its operations, meet financial obligations, and finance
targeted asset acquisitions may be impacted by an inability to secure and
maintain its financing through reverse repurchase agreements or other types of
borrowings the Fund may enter into from time to time in the future with its
counterparties. Because reverse repurchase agreements are generally short-term
transactions, lenders may respond to adverse market conditions by refusing to
renew or replace, or making it more difficult for the Fund to renew or replace,
the Fund’s maturing short-term borrowings, including imposing more onerous
conditions or offering economically worse terms when renewing (i.e. “rolling”)
such repurchase agreements.
The
Fund’s lenders are primarily large global financial institutions, with exposures
both to global financial markets and to more localized conditions. In addition
to borrowing from large banks, the Fund may also borrow from smaller non-bank
financial institutions. Whether because of a global or local financial crisis or
other circumstances, such as if one or more of the Fund’s lenders experiences
severe financial difficulties, they or other lenders could become unwilling or
unable to provide the Fund with financing, could increase the haircut required
for such financing, or could increase the costs of that
financing.
Moreover,
the Fund is currently party to short-term borrowings (in the form of reverse
repurchase agreements) and there can be no assurance that the Fund will be able
to roll these borrowings as they mature on a continuous basis and it may be more
difficult for the Fund to obtain debt financing on favorable terms, or at all.
If the Fund is not able to renew the Fund’s existing reverse repurchase
agreements or other types of borrowings the Fund may enter into from time to
time or arrange for new financing on terms acceptable to the Fund, or if the
Fund defaults on its financial covenants, is otherwise unable to access funds
under its financing arrangements, or is required to post more collateral or face
larger haircuts, the Fund may have to dispose of assets at significantly
depressed prices and at inopportune times, which could cause significant losses,
and may also force the Fund to curtail its asset acquisition activities.
Similarly, if the Fund were to move a financing from one counterparty to another
that required a higher haircut, the Fund would have to repay more cash to the
original counterparty than the Fund would be able to borrow from the new
counterparty. To the extent that the Fund might be compelled to liquidate
certain assets to repay debts, its compliance with the RIC asset tests, income
tests, and distribution and other requirements could be negatively affected,
which could jeopardize its qualification as a RIC. See “—The Fund may be subject
to certain corporate-level taxes, and will be subject to corporate-level U.S.
federal income tax if it is unable to maintain its RIC status under Subchapter M
of the Code, which could substantially reduce the cash available for
distribution to its shareholders.” Any such forced liquidations could also
materially adversely affect the Fund’s business, financial condition and results
of operations, and its ability to make distributions to its
shareholders.
In
addition, if there is a contraction in the overall availability of financing for
the Fund’s assets, including if the regulatory capital requirements imposed on
its lenders change or its shareholders’ equity decreases to levels that make the
Fund a less attractive financing counterparty, its lenders may significantly
increase the cost of the financing that they provide to the Fund, increase the
amounts of collateral they require as a condition to providing the Fund with
financing, or even cease providing it with financing. The Fund’s lenders also
have revised, and may continue to revise, their eligibility requirements for the
types of assets that they are willing to finance or the terms of such financing
arrangements, including increased haircuts and requiring additional cash
collateral, based on, among other factors, the regulatory environment and their
management of actual and perceived risk, particularly with respect to assignee
liability.
Moreover,
the amount of financing that the Fund receives under its financing agreements
will be directly related to its lenders’ valuation of the financed assets
subject to such agreements. Typically, the master repurchase agreements that
govern the Fund’s borrowings under reverse repurchase agreements grant the
lender the right to reevaluate the value of the financed assets subject to such
reverse repurchase agreements at any time. If a lender determines that the net
decrease in the value of the portfolio of financed assets is greater in
magnitude than any applicable threshold, it will generally initiate a margin
call. In such cases, a lender’s valuations of the financed assets may be
different than the values that the Fund ascribes to these assets and may be
influenced by recent asset sales at distressed levels by forced sellers. A valid
margin call requires the Fund to transfer cash or additional qualifying
collateral to a lender or to repay a portion of the outstanding borrowings. If
the Fund were to dispute the validity of a margin call from a lender under one
of its reverse repurchase agreements and refuse to deliver margin collateral as
a result, a lender could still send the Fund a notice of default. In this
situation, such lender will have possession of the financed assets, and might
still decide to exercise its contractual remedies, despite the margin dispute.
In the event of the Fund’s default, its lenders or derivative counterparties can
accelerate its indebtedness, terminate its derivative contracts (potentially on
unfavorable terms requiring additional payments, including additional fees and
costs), increase its borrowing rates, liquidate its collateral, and terminate
its ability to borrow. In certain cases, a default on one reverse repurchase
agreement or derivative agreement (whether caused by a failure to satisfy margin
calls or another event of default) can trigger “cross defaults” on other such
agreements. Similarly, if the market value of the Fund’s derivative contracts
with a derivative counterparty declines in value, the Fund generally will be
subject to a margin call by the derivative counterparty.
Significant
margin calls and/or increased reverse repurchase agreement haircuts could have a
material adverse effect on the Fund’s results of operations, financial
condition, business, liquidity, and ability to make distributions to its
shareholders, and could cause the value of its common shares to decline. During
March and April of 2020, the Fund observed that many of its financing agreement
counterparties assigned lower valuations to certain of its assets, resulting in
the Fund having to pay cash to satisfy margin calls, which were higher than
historical levels. In addition, during March and April of 2020 the Fund also
experienced an increase in haircuts on reverse repurchase agreements that the
Fund rolled. A sufficiently deep and/or rapid increase in margin calls or
haircuts would have an adverse impact on the Fund’s liquidity. The Fund may have
to sell assets at disadvantageous times or prices to meet such
obligations.
Consequently,
depending on market conditions at the relevant time, the Fund may have to rely
on additional equity issuances to meet its capital and financing needs, which it
may not be able to issue, or which may be dilutive to its shareholders, or the
Fund may have to rely on less efficient forms of debt financing that consume a
larger portion of its cash flow from operations, thereby reducing funds
available for its operations, future business opportunities, cash distributions
to its shareholders, and other purposes. There can be no assurance that the Fund
will have access to such equity or debt capital on favorable terms (including,
without limitation, cost and term) at the desired times, or at all, which may
cause the Fund to curtail
its
asset acquisition activities and/or dispose of assets, which could materially
adversely affect its business, financial condition and results of operations,
and its ability to make distributions to its shareholders, or in the worst case,
cause its insolvency.
The
Fund uses financial leverage in executing its business strategy, which may
adversely affect the return on its assets and may reduce cash available for
distribution to its shareholders, as well as increase losses when economic
conditions are unfavorable.
The
Fund uses borrowed money to fund many of its investment activities and to
enhance its financial returns. These borrowings include short-term reverse
repurchase agreements to finance certain of its CLO assets, and may also include
credit facilities, including term loans and revolving credit facilities,
derivative transactions, issuance of preferred shares and issuance of debt
securities, each in significant amounts and on terms that the Adviser and the
Board deem appropriate, subject to applicable limitations under the 1940 Act.
Such financings may be used for the acquisition and maintenance of its
investments, to pay fees and expenses, and for other purposes. Such leverage may
be secured or unsecured. Any such leverage is in addition to leverage embedded
or inherent in the CLO structures or derivative instruments in which the Fund
may invest. 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, and 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. Accordingly, the CLO equity
tranches and LAFs in which the Fund invests will expose the Fund indirectly to
substantial leverage, which magnifies the risk of significant or total loss on
such investments.
Through
the use of leverage, the Fund may acquire positions with market exposure
significantly greater than the amount of equity capital committed to the
transaction. Leverage can enhance the Fund’s potential returns but can also
exacerbate losses. Even if an asset increases in value, if the asset fails to
earn a return that equals or exceeds its cost of borrowing, the leverage will
diminish the Fund’s returns. Leverage also increases the risk of the Fund’s
being forced to swiftly liquidate its assets. See “—The Fund’s access to
financing sources may not be available on favorable terms, may be limited or
completely shut off, and its lenders and derivative counterparties may require
the Fund to post additional collateral.”
Since
financial leverage increases the amount of the Fund’s assets without a
corresponding increase in the Fund’s common equity, any event that adversely
affects the Fund’s assets would have an amplified effect on the Fund’s common
shares to the extent that leverage is utilized. For instance, any decrease in
the yield of the Fund’s assets would cause the Fund’s net interest income to
decline more sharply than it would have had the Fund not borrowed. Such a
decline could also negatively affect the Fund’s ability to make distributions
and other payments to its securityholders. Similarly, the more leverage that the
Fund employs, the more likely a substantial change will occur in the Fund’s Net
Asset Value. The Fund’s expected use of leverage is generally considered to be a
speculative investment technique. Its ability to service any debt that the Fund
incurs will depend largely on its financial performance and will be subject to
prevailing economic conditions and competitive pressures. In a market that moves
adversely to the Fund’s assets, the use of leverage would be expected to result
in a loss that would be greater than if the Fund’s assets were not
leveraged.
The
Fund currently operates, and intends to continue to operate, as a fully
compliant derivatives fund under the Derivatives Rule, including treating
reverse repurchase agreement borrowings as derivatives transactions and
implementing a Derivatives Risk Management Program. By electing to operate under
the full derivatives framework rather than qualifying as a “limited derivatives
user,” under the Derivatives Rule, the Fund is permitted to take on a
significantly higher level of leverage through the use of derivatives and
reverse repurchase agreement transactions than would be allowed for a limited
derivatives user. This increased leverage may amplify both potential gains and
losses, subjecting the Fund to greater volatility and market risk. While the
Fund’s Derivatives Risk Management Program includes oversight and certain
limits, leveraging the fund to a higher degree increases the potential for
significant losses during periods of market stress or when asset prices move
against its investments. Furthermore, any breach of its leverage or risk limits
could result in forced portfolio adjustments, liquidity constraints, or
regulatory scrutiny. See “Summary—Financing and Hedging Strategy—Derivative
Transactions” and “—The Fund is subject to the risk of legislative and
regulatory changes impacting its business or the markets in which the Fund
invests.”
Additionally,
if the Fund’s asset coverage declines below 300% (or 200%, as applicable), the
Fund would not be able to declare distributions, incur additional debt or issue
additional preferred shares, and could be required by law to sell a portion of
its investments to repay some debt or redeem shares of preferred shares when it
is disadvantageous to do so. As such, the Fund might not be able to make certain
distributions or pay dividends of an amount necessary to continue to qualify for
taxation as a RIC. The amount of leverage that the Fund employs will depend on
the Adviser’s and its Board’s assessment of market and other factors at the time
of any proposed borrowing. There can be no assurance that the Fund will be able
to obtain credit at all or on terms acceptable to the
Fund.
In
addition, any debt facility into which the Fund may enter could impose financial
and operating covenants that restrict its business activities, including
limitations that could hinder its ability to finance additional loans and
investments or to make the distributions required to maintain its qualification
as a RIC.
The
following table is intended to illustrate the effect of the use of direct
leverage on returns from an investment in our common shares assuming various
annual returns, net of expenses. The calculations in the table below are
hypothetical and actual returns may be higher or lower than those appearing in
the table below:
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| Assumed
Return on the Fund’s Portfolio (Net of Expenses) |
(10.00)% |
(5.00)% |
—% |
5.00% |
10.00% |
|
Corresponding
return to common shareholder(1) |
(25.60)% |
(15.60)% |
(5.60)% |
4.40% |
14.40% |
(1)Assumes
that we incur leverage in an amount equal to 50.00% of our total assets (as
determined immediately after the leverage is incurred) and a projected annual
rate of interest on the borrowings of 5.60%.
Based
on our assumed leverage described above, our investment portfolio would have
been required to experience an annual return of at least 2.80% to cover interest
payments on our assumed
indebtedness.
Regulations
governing the Fund’s operation as a registered closed-end management investment
company, including the asset coverage ratio requirements under the 1940 Act,
affect the Fund’s ability to issue debt or preferred equity. The raising of debt
capital may expose the Fund to risks, including the typical risks associated
with leverage.
The
Fund may in the future issue debt securities or preferred shares and/or borrow
money from banks or other financial institutions, which the Fund refers to
collectively as “senior securities,” up to the maximum amount permitted by the
1940 Act. Under the provisions of the 1940 Act, the Fund is permitted, as a
registered closed-end management investment company, to issue senior securities
representing indebtedness so long as its asset coverage ratio with respect
thereto, defined under the 1940 Act as the ratio of the Fund’s gross assets
(less all liabilities and indebtedness not represented by senior securities) to
its outstanding senior securities representing indebtedness, is at least 300%
immediately after each issuance of such senior securities. In addition, the Fund
may also issue preferred shares in the future, so long as its asset coverage
ratio with respect thereto, defined under the 1940 Act as the ratio of its gross
assets (less all liabilities and indebtedness not represented by senior
securities) to its outstanding senior securities representing indebtedness, plus
the aggregate involuntary liquidation preference of its outstanding preferred
shares, is at least 200% after each issuance of such preferred shares. If the
value of its assets declines, the Fund may be unable to satisfy this test. If
that happens, the Fund may be required to sell a portion of its investments and,
depending on the nature of the Fund’s leverage, repay a portion of its
indebtedness or redeem outstanding preferred shares or debt, in each case at a
time when doing so may be disadvantageous. Also, any amounts that the Fund uses
to service its indebtedness or preferred dividends would not be available for
distributions to its common shareholders. Furthermore, as a result of issuing
senior securities, the Fund would also be exposed to typical risks associated
with leverage, including an increased risk of loss. If the Fund issues preferred
shares, the preferred shares would rank “senior” to common shares in its capital
structure, preferred shareholders would have separate voting rights on certain
matters and might have other rights, preferences, or privileges more favorable
than those of its common shareholders, and the issuance of preferred shares
could have the effect of delaying, deferring or preventing a transaction or a
change of control that might otherwise provide a premium price to holders of the
Fund’s common shares or otherwise be in the Fund’s common shareholders’ best
interest.
The
Fund is not generally able to issue and sell its common shares at a price below
its net asset value per share, other than in connection with a rights offering
to its existing shareholders. The Fund may, however, sell its common shares at a
price below the then-current net asset value per share if its Board determines
that such sale is in the Fund’s and its shareholders’ best interests, and the
Fund’s shareholders approve such sale. In any such case, the price at which the
Fund’s securities are to be issued and sold may not be less than a price that,
in the determination of its Board, closely approximates the market value of such
securities (less any distributing commission or discount). If the Fund raises
additional funds by issuing more common shares, then the percentage ownership of
its shareholders at that time will decrease, and existing shareholders may
experience dilution.
The
Fund’s rights under reverse repurchase agreements are subject to the effects of
the bankruptcy laws in the event of the bankruptcy or insolvency of the Fund or
its lenders.
In
the event of the Fund’s insolvency or bankruptcy, certain reverse repurchase
agreements may qualify for special treatment under the U.S. Bankruptcy Code, the
effect of which, among other things, would be to allow the lender to avoid the
automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on and/or
liquidate the collateral pledged under such agreements without delay. In the
event of the insolvency or bankruptcy of a lender during the term of a reverse
repurchase agreement, the lender may be permitted, under applicable insolvency
laws, to repudiate the contract, and the Fund’s claim against the lender for
damages may be treated simply as an unsecured claim. In addition, if the lender
is a broker or dealer subject to the Securities Investor Protection Act of 1970,
or an insured depository institution subject to the Federal Deposit Insurance
Act, the Fund’s ability to exercise its rights to recover its securities under a
reverse repurchase agreement or to be
compensated
for any damages resulting from the lenders’ insolvency may be further limited by
those statutes. These claims would be subject to significant delay and costs to
the Fund and, if and when received, may be substantially less than the damages
the Fund actually incurs.
The
Fund may hedge against changes in corporate credit risks, credit spread widening
risks, interest rates, and other risks, which could materially adversely affect
the Fund’s business, financial condition and results of operations and its
ability to make distributions to its shareholders.
Subject
to maintaining its qualification as a RIC, the Fund may pursue various hedging
strategies to seek to reduce its exposure to adverse changes in corporate credit
spreads and corporate credit default rates (collectively, “corporate credit
risks”) and interest rates. The Fund’s hedging activity is expected to vary in
scope based on the level and volatility of corporate credit spreads and interest
rates, the relative cost of protection against credit defaults, the types of CLO
investments held, and other changing market conditions. Hedging may fail to
protect or could adversely affect the Fund because, among other
things:
•hedging
of corporate credit risks and interest rates can be expensive, particularly
during periods of higher and volatile credit spreads and interest
rates;
•available
corporate credit risk and interest rate hedges may not correspond directly, or
be correlated in the manner desired with, the credit risk and interest rate risk
for which protection is sought;
•many
hedges are structured as over-the-counter contracts with counterparties whose
creditworthiness is not guaranteed, raising the possibility that the hedging
counterparty may default on their obligations;
•to
the extent that the creditworthiness of a hedging counterparty deteriorates, it
may be difficult or impossible to terminate or assign any hedging transactions
with such counterparty to another counterparty;
•the
value of derivatives used for hedging may be adjusted from time to time in
accordance with accounting rules to reflect changes in market value and/or fair
value. Downward adjustments (“mark-to-market losses”) would reduce the Fund’s
earnings and its shareholders’ equity;
•the
Fund may fail to correctly assess the degree of correlation between the
performance of the instruments used in the hedging strategy and the performance
of the assets in the portfolio being hedged;
•the
Adviser may fail to recalculate, re-adjust, and execute hedges in an efficient
and timely manner; and
•the
hedging transactions may actually result in poorer overall performance for the
Fund than if it had not engaged in the hedging transactions.
For
these and other reasons, the Fund’s hedging activity could materially adversely
affect its business, financial condition and results of operations, its ability
to make distributions to its shareholders, and its ability to maintain its
qualification as a RIC.
Hedging
instruments and other derivatives, including some credit default swaps, may not,
in many cases, be traded on exchanges, or may not be guaranteed or regulated by
any U.S. or foreign governmental authority and involve risks and costs that
could result in material losses.
Hedging
instruments and other derivatives, including certain types of credit default
swaps, involve risk because they may not, in many cases, be traded on exchanges
or cleared on a central counterparty clearinghouse (“CCP”). Consequently, for
these instruments there may be less stringent requirements with respect to
record keeping and compliance with applicable statutory and regulatory
requirements and, depending on the identity of the counterparty, applicable
international requirements. The Adviser is not restricted from dealing with any
particular counterparty or from concentrating any or all of its transactions
with one counterparty. Furthermore, the Adviser has only a limited internal
credit function to evaluate the creditworthiness of its counterparties, mainly
relying on its experience with such counterparties and/or their general
reputation as participants in these markets. Under the terms of many of the
Fund’s derivatives transaction contracts, the business failure of a derivatives
transaction counterparty with whom the Fund enters into a derivatives
transaction will most likely result in a default under the governing agreement.
In such an event, the Fund may lose any unrealized gain associated with the
terminated derivative and, if the derivative was used for hedging purposes, the
underlying asset or liability may become unhedged. Default by a party with whom
the Fund enters into a derivatives transaction may result in losses and may
force the Fund to re-initiate similar derivatives transactions with other
counterparties at the then-prevailing market levels. Generally, the Fund will
seek to reserve the right to terminate its derivatives transactions upon a
counterparty’s insolvency, but absent an actual insolvency, the Fund may not be
able to terminate a derivatives transaction without the consent of the
derivatives transaction counterparty, and the Fund may not be able to assign or
otherwise dispose of a derivatives transaction to another counterparty without
the consent of both the original derivatives counterparty and the potential
assignee. If the Fund terminates a derivatives transaction, the Fund may not be
able to enter into a replacement contract in order to cover its risk. There can
be no assurance that a liquid secondary market will exist for derivatives
transactions purchased or sold, and therefore the Fund may be required to
maintain any
derivatives
transaction until exercise or expiration, which could materially adversely
affect its business, financial condition and results of operations, and its
ability to make distributions to its shareholders. In this regard, the Fund may
be required to hold additional cash or sell other investments in order to obtain
cash to close out derivatives to meet the liquidity demands that derivatives can
create to make payments of margin, collateral or settlement payments to
counterparties. See “—The Fund’s access to financing sources may not be
available on favorable terms, may be limited or completely shut off, and its
lenders and derivative counterparties may require the Fund to post additional
collateral.”
In
addition, some portion of the Fund’s derivatives transactions may be cleared
through a CCP, which the Fund accesses through a futures commission merchant
(“FCM”). The Fund’s futures positions also are cleared with a CCP through an
FCM. If an FCM that holds the Fund’s futures or cleared derivatives account were
to become insolvent, the CCP will make an effort to move the Fund’s futures and
cleared derivatives positions to an alternate FCM, though it is possible that no
alternate FCM could be found to accept the Fund’s positions, which could result
in a total cancellation of its positions in the account; in such a case, if the
Fund wished to reinstate such positions, the Fund would have to re-initiate such
positions with an alternate FCM. In addition, in the case of both futures and
cleared derivatives, there could be knock-on effects of the Fund’s FCM’s
insolvency, such as the failure of co-customers of the FCM or other FCMs of the
same CCP. In such cases, there could be a shortfall in the funds available to
the CCP due to such additional insolvencies and/or exhaustion of the CCP’s
guaranty fund that could lead to total loss of the Fund’s positions in the FCM
account. Finally, the Fund faces a risk of loss (including total cancellation)
of positions in the account in the event of fraud by its FCM or other FCMs of
the CCP, where ordinary course remedies would not apply.
Using
derivatives also subjects the Fund to operational and legal risks. Operational
risk generally refers to risk related to potential operational issues, including
documentation issues, settlement issues, systems failures, inadequate controls,
and human error. Legal risk generally refers to insufficient documentation,
insufficient capacity or authority of counterparty, or legality or
enforceability of a contract.
The
U.S. Commodity Futures Trading Commission (the “CFTC”) and certain commodity
exchanges have established limits referred to as speculative position limits or
position limits on the maximum net long or net short position which any person
or group of persons may hold or control in particular futures and options.
Limits on trading in options contracts also have been established by the various
options exchanges. It is possible that trading decisions may have to be modified
and that positions held may have to be liquidated in order to avoid exceeding
such limits. Such modification or liquidation, if required, could materially
adversely affect the Fund’s business, financial condition and results of
operations and its ability to make distributions to its
shareholders.
The
Fund engages in short selling transactions, which may subject it to additional
risks.
Certain
of the Fund’s hedging transactions, and occasionally its investment
transactions, may be short sales or short positions. Short selling may involve
selling securities that are not owned and typically 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. There can be no assurance that securities sold
short will be available for repurchase or borrowing. Market conditions,
including lower liquidity in certain asset classes and derivatives, and
increased short sale restrictions imposed by regulators during periods of
financial stress, could limit the Fund’s ability to execute or maintain short
positions effectively.
Repurchasing
securities to close out a short position can itself cause the price of the
securities to rise further, thereby exacerbating the loss, which could
materially adversely affect the Fund’s business, financial condition and results
of operations, and its ability to make distributions to its
shareholders.
The
Fund’s investments that are denominated in foreign currencies, domiciled outside
the U.S., or that involve non-U.S. assets are subject to risks associated with
non-U.S. investing, including in some cases foreign currency risk, which could
materially adversely affect the Fund’s business, financial condition and results
of operations, and its ability to make distributions to its
shareholders.
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. The Fund’s investments that are denominated in
foreign currencies, including the Euro, subject the Fund to foreign currency
risk arising from fluctuations in exchange rates between such foreign currencies
and the U.S. dollar. While the Fund currently attempts to hedge the vast
majority of its foreign currency exposure, it may not always choose to hedge
such exposure, or it may not be able to hedge such exposure. To the extent that
the Fund is exposed to foreign currency risk, changes in exchange rates of such
foreign currencies to the U.S. dollar could
materially
adversely affect the Fund’s business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.
Further,
the Fund also invests in CLOs that hold non-U.S. assets, and the Fund expect
that many of the CLO issuers in which it invests will be domiciled outside the
United States. Investing directly or indirectly in non-U.S. issuers may expose
the Fund to additional risks, including political and social instability,
expropriation, imposition of foreign taxes, less developed bankruptcy laws,
difficulty in enforcing contractual obligations, lack of uniform accounting and
auditing standards, currency fluctuations and greater price volatility. Further,
the Fund, and the CLOs in which the Fund invests, may have difficulty enforcing
creditor’s rights in foreign jurisdictions.
Other
Business Risks
The
Fund may change certain operating policies, investment criteria and strategy,
hedging strategy, and asset allocation, operational, and management policies
without notice or shareholder consent, which could materially adversely affect
its business, financial condition and results of operations, and its ability to
make distributions to its shareholders.
Other
than a modification or waiver that would be deemed to be fundamental, the Board
will have the authority to modify or waive its current operating policies,
investment criteria and strategy, hedging strategy, and asset allocation,
operational, and management policies at any time without notice to or consent
from its shareholders. As a result, the types or mix of assets, liabilities, or
hedging transactions in the Fund’s portfolio may be different from, and possibly
riskier than, the types or mix of assets, liabilities, and hedging transactions
that the Fund has historically held, or that are otherwise described in this
report. A change in the Fund’s strategy may increase its exposure to corporate
credit asset values, credit spreads, interest rates, and other factors. Changes
in the Fund’s investment strategy may also affect its ability to qualify as a
RIC or cause the Fund to determine that it is not in the best interests of the
Fund and its shareholders for it to continue to qualify as a RIC. The Fund’s
Board determines its investment guidelines and its operational policies, and may
amend or revise the Fund’s policies, including those with respect to its
acquisitions, growth, operations, indebtedness, capitalization, and
distributions and/or dividends or approve transactions that deviate from these
policies without a vote of, or notice to, its shareholders. The Fund cannot
predict the effect of any changes to its current operating policies, its
investment criteria and strategy, hedging strategy, and asset allocation,
operational, and management policies and any such changes could materially
adversely affect its business, financial condition and results of operations,
and its ability to make distributions to its
shareholders.
The
Fund operates in a highly competitive market.
The
Fund’s profitability depends, in large part, on its ability to acquire targeted
assets at favorable prices. The Fund competes with a number of entities when
acquiring its targeted assets, including other closed-end funds, BDCs, hedge
funds, specialty finance companies, banks, insurance companies, mutual funds,
institutional investors, investment banking firms, financial institutions,
governmental bodies, and other entities. Many of the Fund’s competitors are
substantially larger and have considerably more favorable access to capital and
other resources than the Fund does. Furthermore, new companies with significant
amounts of capital have been formed or have raised additional capital, and may
continue to be formed and raise additional capital in the future, and these
companies may have objectives that overlap with the Fund’s, which may create
competition for assets the Fund wishes to acquire. Some competitors may have a
lower cost of funds and access to funding sources that are not available to the
Fund. In addition, some of the Fund’s competitors may have higher risk
tolerances or different risk assessments, which could allow them to consider a
wider variety of assets to acquire or pay higher prices than the Fund can. The
Fund also may have different operating constraints from those of its competitors
including, among others, (i) tax-, legal-, or accounting-driven constraints such
as those arising from its qualification as a RIC, including asset
diversification and distribution requirements, (ii) restraints imposed on the
Fund by the 1940 Act as a registered closed-end fund and (iii) restraints and
additional costs arising from the Fund’s status as a public company.
Furthermore, competition for assets in the Fund’s targeted asset classes may
lead to the price of such assets increasing, which may further limit its ability
to generate desired returns. The competitive pressures the Fund faces could
materially adversely affect its business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.
An
increase in interest rates may cause a decrease in the issuance volumes of
certain of the Fund’s targeted assets, which could adversely affect its ability
to acquire targeted assets that satisfy its investment objectives and to
generate income and make distributions.
Rising
interest rates generally reduce the demand to issue corporate loans due to the
higher cost of borrowing. A reduction in the volume of corporate loans
originated may affect the volume of targeted assets available to the Fund, which
could adversely affect the Fund’s ability to acquire assets that satisfy its
investment objectives. If rising interest rates cause the Fund to be unable to
acquire a sufficient volume of the Fund’s targeted assets with a yield that is
above its borrowing cost, the Fund’s ability to satisfy its investment
objectives and to generate income and make distributions to its shareholders may
be materially and adversely
affected.
The
Fund’s ability to make distributions will depend on its operating results, its
financial condition and other factors, and the Fund may not be able to make
distributions at a fixed rate or at all under certain circumstances. The same
factors will influence the Fund’s ability to make distributions to its
shareholders.
The
Fund intends to make distributions to its shareholders in amounts such that the
Fund distributes all or substantially all of each year’s taxable income (subject
to certain adjustments). This distribution policy will enable the Fund to avoid
being subject to U.S. federal income tax on its RIC taxable income that the Fund
distributes to its shareholders. However, the Fund’s ability to make
distributions will depend on its earnings, its financial condition and such
other factors as its Board may deem relevant from time to time. The Fund will
declare and make distributions only to the extent approved by its Board. In
addition, these same factors will influence the Fund’s ability to make
distributions to its shareholders.
Risks
Related to the Fund’s Relationship with the Adviser and
Ellington
There
are risks and conflicts of interest associated with the Performance Fee the Fund
is obligated to pay the Adviser.
In
addition to its Base Management Fee, the Adviser is entitled to receive the
Performance Fee based, in large part, upon its achievement of targeted levels of
Pre-Performance Fee Net Investment Income. The Performance Fee payable to the
Adviser is based on the Fund’s Pre-Performance Fee Net Investment Income,
without considering any realized or unrealized gains or losses on its
investments. As a result, (i) for quarters in which a Performance Fee is
payable, such Performance Fee will exceed 17.5% of the Fund’s GAAP net income if
the Fund generated net realized and unrealized losses on its investments during
such quarter, (ii) the Adviser could earn a Performance Fee for fiscal quarters
during which the Fund generates a GAAP net loss, and (iii) the Adviser might be
incentivized to manage the Fund’s portfolio using higher risk assets, using
assets with deferred interest features, or using more financial leverage through
indebtedness, to generate more income than would be the case if there were no
Performance Fee, both of which could result in higher investment losses,
especially during economic downturns.
The
Performance Fee is calculated quarterly, treating each quarter in isolation. As
a result, the Hurdle Amount does not accumulate from quarter to quarter, and
decreases in the Fund’s Net Asset Value of Common Equity, such as those due to
unrealized losses, will reduce the Hurdle Amount, potentially making it easier
for the Adviser to earn a Performance Fee. The Fund will not have the ability to
claw back, delay, or adjust the payment of any Performance Fee based on
financial results in prior or subsequent quarters. In addition, over a series of
quarters, if the Fund’s Pre-Performance Fee Net Investment Income is positive in
some quarters but negative in others, it is likely, when viewing the series of
quarters as a whole, for the aggregate Performance Fee payable to the Adviser to
exceed 17.5% of its aggregate Pre-Performance Fee Net Investment
Income.
There
is also a conflict of interest related to management’s involvement in many
accounting determinations (including but not limited to valuations, which affect
the calculation of the Hurdle Amount, and calculations of interest income) that
can affect the Fund’s Performance Fee.
Finally,
because the Hurdle Rate does not float with overall interest rates, an increase
in interest rates will likely make it easier for Pre-Performance Fee Net
Investment Income to exceed the Hurdle Amount. The Performance Fee Catch-Up
feature (which provides that 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 Fund’s
Pre-Performance Fee Net Investment Income that exceeds the Hurdle Amount is
payable to the Adviser with respect to such quarter) may also cause the Fund’s
Adviser to capture a disproportionate share of any increase in the Fund’s
investment income resulting from higher interest
rates.
The
Fund is dependent on the Adviser and certain key personnel of Ellington that are
provided to the Fund through the Adviser and may not find a suitable replacement
if the Adviser terminates the Investment Advisory Agreement or such key
personnel are no longer available to the Fund.
The
Fund does not have any employees of its own. The Fund’s officers are employees
of Ellington or one or more of its affiliates. The Fund has no separate
facilities and are completely reliant on the Adviser, which has significant
discretion as to the implementation of its operating policies and execution of
its business strategies and risk management practices. The Fund also depends on
the Adviser’s access to the professionals of Ellington as well as information
and deal flow generated by Ellington. The employees of Ellington identify,
evaluate, negotiate, structure, close, and monitor the Fund’s portfolio. The
departure of any of the senior officers of the Adviser, or of a significant
number of investment professionals of Ellington or the inability of such
personnel to perform their duties due to acts of God, pandemics such as the
COVID-19 pandemic, war or other geopolitical conflict, terrorism, elevated
inflation, high energy costs, social unrest, or civil disturbances, could have a
material adverse effect on the Fund’s ability to achieve its objectives. The
Fund can offer no assurance that the Adviser will remain investment adviser or
that the Fund will continue to have access to the Adviser’s senior management.
The Fund is subject to the risk that the Adviser will terminate the Investment
Advisory Agreement or that the Fund may deem it necessary to terminate the
Investment Advisory Agreement or prevent certain individuals from performing
services for the Fund and that no suitable replacement will be found to manage
the Fund.
There
are risks and conflicts of interests associated with the Base Management Fee the
Fund is obligated to pay the Adviser.
The
Fund pays the Adviser a Base Management Fee based on the Fund’s Net Asset Value,
regardless of the performance of the Fund’s portfolio. The Adviser’s entitlement
to such non-performance-based compensation might reduce its incentive to devote
the time and effort of its professionals to seeking profitable opportunities for
the Fund’s portfolio, which could result in worse performance for the Fund’s
portfolio and could materially adversely affect the Fund’s business, financial
condition and results of operations, and its ability to make distributions to
its shareholders. Furthermore, the participation of the Adviser (including the
Adviser’s investment professionals) in the Fund’s valuation process, and the
financial interest of the Fund’s Interested Trustees in the Adviser, creates a
conflict of interest as the Base Management Fee payable to the Adviser is based,
in part, on the Fund’s Net Asset
Value.
The
Board has approved a very broad investment strategy and will generally not
review or approve the decisions made by the Adviser to acquire, dispose of, or
otherwise manage an asset.
The
Adviser is authorized to follow a very broad strategy in pursuing the Fund’s
investment objectives. While the Fund’s Board periodically reviews the Fund’s
investment strategy and the Adviser’s portfolio and asset-management decisions,
it generally does not review the Fund’s proposed acquisitions, dispositions, and
other management decisions. In addition, in conducting periodic reviews, the
Board relies primarily on information provided to them by the Adviser.
Furthermore, the Adviser may arrange for the Fund to use complex strategies or
to enter into complex transactions that may be difficult or impossible to unwind
by the time they may be reviewed by the Board. The Adviser has great latitude in
determining the types of assets it may decide are proper for the Fund to
acquire, and in connection with other decisions with respect to the management
of those assets. Poor decisions could materially adversely affect the Fund’s
business, financial condition and results of operations, and its ability to make
distributions to its shareholders.
The
Fund competes with Ellington’s other accounts for access to Ellington and for
opportunities to acquire assets.
Ellington
has sponsored and/or currently manages accounts with a focus that overlaps with
the Fund’s investment focus and expects to continue to do so in the future.
Ellington is not restricted in any way from sponsoring or accepting capital from
new accounts, even for investing in asset classes or strategies that are similar
to, or overlapping with, the Fund’s asset classes or strategies. Therefore, the
Fund competes for access to the benefits that its relationship with the Adviser
and Ellington provides the Fund. For the same reasons, the personnel of
Ellington and the Adviser may be unable to dedicate a substantial portion of
their time to managing the Fund’s assets.
Further,
to the extent that the Fund’s targeted assets are also targeted assets of other
Ellington accounts, the Fund will compete with those accounts for opportunities
to acquire assets. Ellington has no duty to allocate such opportunities in a
manner that preferentially favors the Fund. Ellington makes available to the
Fund all opportunities to acquire assets that it determines, in its reasonable
and good faith judgment, based on the Fund’s objectives, policies and
strategies, and other relevant factors, are appropriate for the Fund in
accordance with Ellington’s written investment allocation policy, it being
understood that the Fund might not participate in each such opportunity, but
will equitably participate with Ellington’s other accounts in such opportunities
on an overall basis.
Since
many of the Fund’s targeted assets are typically available only in specified
quantities and are also targeted assets for other Ellington accounts, Ellington
often is not able to buy as much of any asset or group of assets as would be
required to satisfy the needs of all of Ellington’s accounts. In these cases,
Ellington’s investment allocation procedures and policies typically allocate
such assets to multiple accounts in proportion to their needs and available
capital. As part of these policies, accounts that are in a “start-up” or
“ramp-up” phase may get allocations above their proportion of available capital,
which could work to the Fund’s disadvantage, particularly because there are no
limitations surrounding Ellington’s ability to create new accounts. In addition,
the policies permit departure from proportional allocations under certain
circumstances, for example when such allocation would result in an inefficiently
small amount of the security or assets being purchased for an account, which may
also result in the Fund not participating in certain
allocations.
There
are other conflicts of interest in the Fund’s relationships with the Adviser and
Ellington, which could result in decisions that are not in the best interests of
the Fund’s shareholders.
The
Fund is subject to conflicts of interest arising out of its relationship with
Ellington and the Adviser. Certain of the Fund’s executive officers and trustees
are employees of Ellington or one or more of its affiliates. As a result, the
Adviser and its officers may have conflicts between their duties to the Fund and
their duties to, and interests in, Ellington or the Adviser. For example, Mr.
Penn, the Fund’s President and Chief Executive Officer and one of the Fund’s
trustees, also serves as the President and Chief Executive Officer of, and as a
member of the Board of Directors of Ellington Financial Inc. (“EFC”), and Vice
Chairman and Chief Operating Officer of Ellington. Mr. Vranos, one of the Fund’s
trustees and one of the Fund’s Portfolio Managers, also serves as the Co-Chief
Investment Officer of EFC, and Chairman of Ellington. Mr. Borenstein, one of the
Fund’s Portfolio Managers also serves as a Managing Director and Head of
Corporate Credit at Ellington. Mr. Tecotzky, the
Fund’s
Executive Vice President, also serves as the Co-Chief Investment Officer of EFC,
and as Vice Chairman of Ellington. Mr. Smernoff, the Fund’s Chief Financial
Officer, also serves as the Chief Accounting Officer of EFC. Mr. Herlihy, the
Fund’s Chief Operating Officer, also serves as the Chief Financial Officer of
EFC, and as a Managing Director of Ellington.
The
Fund may acquire or sell assets in which Ellington or its affiliates have or may
have an interest. Similarly, Ellington or its affiliates may acquire or sell
assets in which the Fund has or may have an interest. Although such acquisitions
or dispositions may present conflicts of interest, the Fund nonetheless may
pursue and consummate such transactions. Additionally, the Fund may engage in
transactions directly with Ellington or its affiliates, including the purchase
and sale of all or a portion of a portfolio asset.
Acquisitions
made for entities with similar objectives may be different from those made on
the Fund’s s behalf. Ellington may have economic interests in, or other
relationships with, others in whose obligations or securities the Fund may
acquire. In particular, such persons may make and/or hold an investment in
securities that the Fund acquires that may be pari passu, senior, or junior in
ranking to its interest in the securities or in which partners, security
holders, officers, directors, agents, or employees of such persons serve on
boards of directors or otherwise have ongoing relationships. Each of such
ownership and other relationships may result in securities laws restrictions on
transactions in such securities and otherwise create conflicts of interest. In
such instances, Ellington may, in its sole discretion, make recommendations and
decisions regarding such securities for other entities that may be the same as
or different from those made with respect to such securities and may take
actions (or omit to take actions) in the context of these other economic
interests or relationships the consequences of which may be adverse to the
Fund’s interests.
In
deciding whether to issue additional debt or equity securities, the Fund will
rely in part on recommendations made by the Adviser. While such decisions are
subject to the approval of the Board, two of the Fund’s trustees are Interested
Trustees. Because the Adviser earns Base Management Fees that are based on the
total amount of its equity capital, and because the Adviser earns Performance
Fees that would be expected to increase should the Fund’s equity capital
increase, the Adviser may have an incentive to recommend that the Fund issue
additional equity securities. Future offerings of debt securities, which would
rank senior to the Fund’s common shares upon liquidation, and future offerings
of equity securities which would dilute the common share holdings of its
existing shareholders and may be senior to its common shares for the purposes of
dividend and liquidating distributions, may adversely affect the market price of
the Fund’s common shares.
The
officers of the Adviser and its affiliates devote as much time to the Fund as
the Adviser deems appropriate; however, these officers may have conflicts in
allocating their time and services among the Fund and Ellington and its
affiliates’ accounts. During times where there are turbulent conditions or
distress in the credit markets or other times when the Fund will need focused
support and assistance from the Adviser and Ellington employees, other entities
that Ellington advises or manages will likewise require greater focus and
attention, placing the Adviser and Ellington’s resources in high demand. In such
situations, the Fund may not receive the necessary support and assistance the
Fund requires or would otherwise receive if Ellington or its affiliates did not
act as a manager for other entities.
The
Fund, directly or through Ellington, may obtain confidential information about
the companies or securities in which the Fund has invested or may invest. If the
Fund does possess confidential information about such companies or securities,
there may be restrictions on its ability to dispose of, increase the amount of,
or otherwise take action with respect to the securities of such companies. The
Adviser’s and Ellington’s management of other accounts could create a conflict
of interest to the extent the Adviser or Ellington is aware of material
non-public information concerning potential investment decisions. For example,
an Ellington affiliate’s membership in a loan syndicate or on a loan borrower’s
creditors’ committee could potentially prevent the Adviser from entering into a
transaction involving a CLO that holds the related loan. The Fund has
implemented compliance procedures and practices designed to ensure that
investment decisions are not improperly made while in possession of material
non-public information. There can be no assurance, however, that these
procedures and practices will be effective. In addition, this conflict and these
procedures and practices may limit the freedom of the Adviser to make
potentially profitable investments, which could have an adverse effect on the
Fund’s operations. These limitations imposed by access to confidential
information could materially adversely affect the Fund’s business, financial
condition and results of operations, and its ability to make distributions to
its shareholders.
The
Adviser’s liability is limited under the Investment Advisory Agreement, and the
Fund has agreed to indemnify the Adviser against certain liabilities, which may
lead the Adviser to act in a riskier manner on the Fund’s behalf than it would
when acting for its own account.
Under
the Investment Advisory Agreement, the Adviser does not assume any
responsibility to the Fund other than to render the services called for under
the agreement, and it is not responsible for any action of the Fund’s Board in
following or declining to follow the Adviser’s advice or recommendations. The
Adviser maintains a contractual and fiduciary relationship with the Fund. Under
the terms of the Investment Advisory Agreement, the Adviser, its officers,
managers, members, agents,
employees
and other affiliates are not liable to the Fund for acts or omissions performed
in accordance with and pursuant to the Investment Advisory Agreement, except
those resulting from acts constituting willful misfeasance, bad faith, gross
negligence or reckless disregard of the Adviser’s duties under the Investment
Advisory Agreement. In addition, the Fund has agreed to indemnify the Adviser
and each of its officers, managers, members, agents, employees and other
affiliates from and against all damages, liabilities, costs and expenses
(including reasonable legal fees and other amounts reasonably paid in
settlement) incurred by such persons arising out of or based on performance by
the Adviser of its obligations under the Investment Advisory Agreement, except
where attributable to willful misfeasance, bad faith, gross negligence or
reckless disregard of the Adviser’s duties under the Investment Advisory
Agreement. These protections may lead the Adviser to act in a riskier manner
when acting on the Fund’s behalf than it would when acting for its own
account.
The
Adviser’s failure to identify and acquire assets that meet the Fund’s asset
criteria or perform its responsibilities under the Investment Advisory Agreement
could materially adversely affect the Fund’s business, financial condition and
results of operations, its ability to make distributions to its shareholders,
and its ability to maintain its qualification as a RIC.
The
Fund’s ability to achieve its objectives depends on the Adviser’s ability to
identify and acquire assets that meet the Fund’s asset criteria. Accomplishing
the Fund’s objectives is largely a function of the Adviser’s structuring of the
Fund’s investment process, its access to financing on acceptable terms, and
general market conditions. The Fund’s shareholders do not have input into the
investment decisions. All of these factors increase the uncertainty, and thus
the risk, of investing in the Fund’s common shares. The senior management team
of the Adviser has substantial responsibilities under the Investment Advisory
Agreement. In order to implement certain strategies, the Adviser may need to
hire, train, supervise, and manage new employees successfully. Any failure to
manage the Fund’s future growth effectively could materially adversely affect
its business, financial condition and results of operations, its ability to make
distributions to its shareholders and its ability to maintain its qualification
as a RIC.
If
the Adviser ceases to be the Adviser or one or more of the Adviser’s key
personnel ceases to provide services to the Fund, the Fund’s lenders and its
derivative counterparties may cease doing business with the Fund.
If
the Adviser ceases to be the Adviser, including upon the non-renewal of the
Investment Advisory Agreement, or if one or more of the Adviser’s key personnel
cease to provide services for the Fund, it could constitute an event of default
or early termination event under many of the Fund’s reverse repurchase agreement
financing and derivative hedging agreements, upon which the relevant
counterparties would have the right to terminate their agreements with the Fund.
If the Adviser ceases to be the Adviser for any reason, including upon the
non-renewal of its Investment Advisory Agreement, and the Fund is unable to
obtain or renew financing or enter into or maintain derivative transactions, it
could materially adversely affect the Fund’s business, financial condition and
results of operations, and its ability to make distributions to its
shareholders.
The
Fund does not own the Ellington brand or trademark but may use the brand and
trademark as well as its logo pursuant to the terms of a license granted by
Ellington.
Ellington
has licensed the “Ellington” brand, trademark, and logo to the Fund for so long
as the Adviser or another affiliate of Ellington continues to act as its
investment adviser. The Fund does not own the brand, trademark, or logo that the
Fund will use in its business and may be unable to protect this intellectual
property against infringement from third parties. Ellington retains the right to
continue using the “Ellington” brand and trademark. The Fund will further be
unable to preclude Ellington from licensing or transferring the ownership of the
“Ellington” brand and trademark to third parties, some of whom may compete
against the Fund. Consequently, the Fund will be unable to prevent any damage to
goodwill that may occur as a result of the activities of Ellington or others.
Furthermore, in the event the Adviser or another affiliate of Ellington ceases
to act as the Fund’s investment adviser, or in the event Ellington terminates
the license, the Fund will be required to change its name and trademark. Any of
these events could disrupt the Fund’s recognition in the marketplace, damage any
goodwill the Fund may have generated, and otherwise harm its business. Finally,
the license is a domestic license in the United States only and does not give
the Fund any right to use the “Ellington” brand, trademark, and logo overseas
even though the Fund expects to use the brand, trademark, and logo overseas. The
Fund’s use of the “Ellington” brand, trademark and logo overseas will therefore
be unlicensed and could expose the Fund to a claim of
infringement.
Risks
Related to the Fund’s Common Shares
Common
shares of closed-end management investment companies have historically traded at
discounts to net asset value per share for sustained periods of time, and there
can be no assurance that the market price of the Fund’s common shares will not
decline below the Fund’s net asset value per share.
Common
shares of closed-end management investment companies have historically traded at
discounts to their net asset value per share, and the Fund’s stock may similarly
be so discounted. This characteristic of closed-end management investment
companies is separate and distinct from the risk that the Fund’s net asset value
per share may decline. The Fund cannot predict whether its common shares will
trade above, at, or below their net asset value per share. The risk of loss
associated with this
characteristic
of closed-end management investment companies may be greater for investors who
expected to sell common shares shortly after purchasing them. In addition, if
the Fund’s common shares trade below their net asset value per share, the Fund
will not be able to sell additional common shares at market price except (i) in
connection with a rights offering to the Fund’s existing shareholders, (ii) with
the consent of a majority of the Fund’s shareholders, (iii) upon the conversion
of a convertible security in accordance with its terms, or (iv) under such
circumstances as the SEC may
permit.
The
Fund’s shareholders may not receive distributions, or distributions may decline
over time.
The
declaration, amount, nature, and payment of any future distributions on the
Fund’s common shares is at the sole discretion of the Board. Under Delaware law,
cash distributions on capital stock may only be paid if, after payment, the Fund
will be able to pay its debts as they become due in the ordinary course of
business; and the Fund’s assets will exceed its liabilities, plus, unless the
Fund’s charter otherwise permits, the amount that would be needed, if the
company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
on dissolution are superior to those receiving the distribution. Further, even
if the Fund is permitted to pay a distribution under Delaware law, the Fund may
not have sufficient cash to make distributions to its shareholders. In addition,
in order to preserve the Fund’s liquidity, its Board may not declare a
distribution at all or declare all or any portion of a distribution to be
payable in stock, may delay the record date or payment date for any previously
declared, but unpaid, distribution, convert a previously declared, but unpaid,
cash distribution on the Fund’s common shares to a distribution paid partially
or completely in common shares, or revoke a declared but unpaid
distribution.
The
Fund’s ability to make distributions to its shareholders may be impaired if any
of the risks described here, or any of the Fund’s other periodic or current
reports filed with the SEC, were to occur. Furthermore, payment of distributions
depends upon the Fund’s earnings, liquidity, financial condition, RIC
distribution requirements, applicable financial covenants, and other factors
that the Board may deem relevant from time to time. There can be no assurance
that the Fund will generate sufficient cash flow from operations or that future
borrowings or other capital will be available to the Fund in amounts sufficient
to fund distributions, service indebtedness, or meet other liquidity needs. The
Board will assess the distribution rate on an ongoing basis as market conditions
and the Fund’s financial position evolve. The Board is under no obligation to
declare any distribution, and there can be no assurance that the Fund will be
able to pay a specified level of distributions or sustain distributions from one
period to the next.
An
increase in interest rates may have an adverse effect on the market price of the
Fund’s common shares and its ability to make distributions to its
shareholders.
One
of the factors that investors may consider in deciding whether to buy or sell
the Fund’s common shares is its distribution rate (or expected future
distribution rate) as a percentage of its share price, relative to market
interest rates. If market interest rates increase or remain at current levels,
prospective investors may demand a higher distribution rate or seek alternative
investments paying higher returns. There can be no assurance that the Fund will
be able to increase its distribution rate in response to rising market interest
rates.
Accordingly,
interest rate fluctuations and capital market conditions can affect the market
price of the Fund’s common shares independently of the effects such conditions
may have on the Fund’s portfolio. For instance, if interest rates rise without a
corresponding increase in the Fund’s distribution rate, the market price of the
Fund’s common shares could decrease as potential investors require a higher
distribution yield relative to prevailing rates on interest-bearing instruments
such as bonds. In addition, to the extent the Fund has variable rate debt, such
as under its reverse repurchase agreements, rising interest rates would result
in increased interest expense, thereby adversely affecting the Fund’s cash flow
and its ability to service its indebtedness and make distributions to
shareholders.
Investing
in the Fund’s common shares involves a high degree of risk.
The
assets the Fund acquires in accordance with its investment objectives may entail
a higher amount of risk than other investment options. Such assets may be highly
speculative and aggressive and may be subject to a variety of risks, including
credit risk, prepayment risk, interest rate risk, and market risk. As a result,
an investment in the Fund’s common shares may not be suitable for investors with
a lower risk tolerance.
If
the Fund issues preferred shares, debt securities or convertible debt
securities, its net asset value per share may become more volatile.
The
Fund cannot assure shareholders that the issuance of preferred shares and/or
debt securities would result in a higher yield or return. Such issuances would
likely cause the Fund’s net asset value per share to become more volatile. If
the dividend rate on any preferred shares, or the interest rate on any debt
securities, were to approach the net rate of return on the Fund’s portfolio, the
benefit of leverage to common shareholders would be reduced. If either were to
exceed the net rate of return on the Fund’s portfolio, leverage would result in
a lower rate of return to common shareholders than if the Fund had not issued
such
instruments. Any decline in the value of the Fund’s portfolio would be borne
entirely by common shareholders. Accordingly, if the market value of the Fund’s
portfolio were to decline, leverage would amplify the decrease in the Fund’s net
asset value per share relative to an unleveraged fund.
There
is also a risk that, in the event of a sharp decline in the value of its
portfolio, the Fund could: (i) fail to maintain required asset coverage ratios
under the applicable terms of its preferred shares, debt securities, or
convertible debt or units, or under the 1940 Act; (ii) experience a downgrade of
the ratings of any such instruments, if rated; or (iii) find that its current
investment income is not sufficient to meet dividend or interest obligations
thereon. If the Fund fails to maintain its required asset coverage ratios, it
may not be permitted to declare distributions, which could cause it to fail to
satisfy its distribution requirements and lose its RIC status, thereby becoming
subject to corporate-level taxation. To counteract such an event, the Fund might
need to liquidate investments to fund the redemption of some or all of its
preferred shares, debt securities or convertible securities. The Fund’s common
shares would bear all costs and expenses relating to the issuance and ongoing
maintenance of such instruments. Holders of preferred shares, debt securities or
convertible securities may have interests that differ from those of common
shareholders and may, at times, have disproportionate influence over the Fund’s
affairs.
Holders
of any preferred shares that the Fund may issue would have the right to elect
members of the Board and have class voting rights on certain
matters.
The
1940 Act requires that holders of shares of preferred shares be entitled as a
class to elect two trustees at all times and to elect a majority of the trustees
if preferred dividends are in arrears by two years or more, until such arrearage
is eliminated. Certain matters under the 1940 Act also require the separate vote
of outstanding preferred shareholders, including changes in fundamental
investment restrictions and conversion to open-end status; accordingly,
preferred shareholders could veto any such changes. Restrictions on the
declarations and payment of dividends or other distributions to the holders of
the Fund’s common shares and preferred shares, both under the 1940 Act and under
requirements imposed by rating agencies, might impair the Fund’s ability to
maintain its RIC status.
A
downgrade, suspension or withdrawal of any credit rating assigned to the Fund or
to any preferred shares or debt securities it may issue could cause the
liquidity or market value of such instruments to decline
significantly.
Any
credit rating assigned to the Fund represents an assessment of the Fund’s
ability to pay its debts when due. Accordingly, real or anticipated changes in
such credit ratings will generally affect the market value of any preferred
shares or debt securities. Such credit ratings may not reflect the potential
impact of risks relating to the structure or marketing of such instruments.
Credit ratings are not a recommendation to buy, sell or hold any security, and
may be revised or withdrawn at any time at the sole discretion of the issuing
rating agency, and are dependent on the issuing rating agency maintaining its
status as a nationally recognized statistical rating organization ("NRSRO") as
designated by the SEC; a loss of such designation could affect the regulatory
recognition of, or market reliance on, any ratings so assigned. Neither the Fund
nor any underwriter undertakes any obligations to obtain or maintain credit
ratings or to advise holders of any changes thereto and there can be no
assurance that any credit rating will be assigned, remain in effect for any
given period of time, or not be downgraded or withdrawn if, in the rating
agency’s judgment, circumstances so warrant, or that the rating agency will
maintain its status as an NRSRO with the SEC. Prevailing market conditions and
interest rates have fluctuated in the past and are likely to fluctuate in the
future, which could adversely affect the value of any preferred shares or debt
securities the Fund may issue.
Risks
Related to the Fund’s Organization and Structure
The
Fund has a limited operating history as a closed-end investment
company.
The
Fund was recently reorganized as an externally managed, non-diversified,
closed-end management investment company with a limited prior operating history
as such. As a result, the Fund’s current and historical financial information
may not be suitable for evaluating an investment in the Fund as a closed-end
management investment company. The Fund is subject to all of the business risks
and uncertainties associated with any new business, including the risk that the
Fund will not achieve its investment objectives and that the value of an
investment in the Fund could decline substantially or become worthless. As the
Fund finalizes the rotation of its investment portfolio out of agency
mortgage-backed securities and into CLOs, the Fund could invest some of its
capital in temporary investments, including, but not limited to, cash and cash
equivalents, which the Fund expects will have returns substantially lower than
the returns that the Fund anticipates earning from investments in CLO securities
and related investments.
From
January 1, 2024 through March 31, 2025, the Fund operated as a C-Corporation and
focused on investments in both corporate collateralized loan obligations and
agency mortgage-backed securities. Prior to January 1, 2024, the fund operated
as a real estate investment trust focusing on residential mortgage-backed
securities.
With
only a limited prior history as a closed-end investment company, the Fund has
only a limited prior history of complying with the requirements of the 1940 Act.
The Fund’s failure to comply with the requirements of the 1940 Act could
expose
it to SEC enforcement actions, litigation, reputational damage, and limitations
on future capital raising, which could materially adversely affect the Fund’s
regulatory standing, tax status, business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.
The
Fund’s shareholders’ ability to control the Fund’s operations is severely
limited.
The
Board has approval rights with respect to the Fund’s major strategies, including
strategies regarding investments, financing, growth, debt capitalization,
compliance with the 1940 Act, RIC qualification and distributions. The Board may
amend or revise these and other strategies without a vote of its shareholders,
subject to such amendments or revisions not being
fundamental.
Certain
provisions of the Delaware Statutory Trust Act and the Fund’s Declaration of
Trust and Bylaws could deter takeover attempts and have an adverse impact on the
price of its common shares.
The
Delaware Statutory Trust Act, the Fund’s declaration of trust and its bylaws
contain provisions that may have the effect of discouraging a third party from
making an acquisition proposal for the Fund. The Control Share Statute is a
provision of the Delaware Statutory Trust Act that limits the voting rights of
shares held in excess of certain specified thresholds. See “Description of the
Fund’s Securities—Certain Aspects of the Delaware Control Share Statute.” In
addition, certain provisions in the Declaration of Trust impose limits on the
rights of shareholders with respect to bringing claims against or on behalf of
the Fund. See “Description of the Fund’s Securities—Anti-Takeover Provisions in
the Declaration of Trust.” Further, the Fund’s bylaws contain a provision
requiring advance notice of shareholder nominees for trustee.
Notwithstanding
the foregoing, through the inclusion of Section 10.10 in the Declaration of
Trust, the Fund has categorically exempted all acquisitions of its shares from
the application of the Control Share Statute and therefore effectively
“opted-out” of the Control Share
Statute.
The
Fund’s authorized but unissued common and preferred shares may prevent a change
in its control.
The
Fund’s declaration of trust authorizes the Fund to issue an unlimited number of
shares, including common shares and preferred shares. In addition, the Board,
without shareholder approval, may classify or reclassify any unissued common
shares or preferred shares, may set the preferences, rights and other terms of
the classified or reclassified shares and, with respect to the establishment of
the terms of such preferred shares, may amend the declaration of trust as they
deem necessary or appropriate. As a result, among other things, the Board may
establish a class or series of common shares or preferred shares that could
delay or prevent a transaction or a change in control of the Fund that might
involve a premium price for its common shares or otherwise be in the best
interests of its shareholders.
The
Fund’s rights and the rights of its shareholders to take action against its
trustees and officers or against the Adviser or Ellington are limited, which
could limit shareholders’ recourse in the event actions are taken that are not
in shareholders’ best interests.
The
Fund’s declaration of trust limits the liability of its present and former
trustees and officers to the Fund and its shareholders or any other person or
entity for money damages other than liability arising from (i) willful
misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard
of the duties involved in the conduct of his or her position. The Fund’s
declaration of trust limits the liability of the Fund’s present and former
trustees and officers to the maximum extent permitted under applicable
law.
The
Fund’s declaration of trust requires the Fund to indemnify each of its present
and former trustees and officers against any liabilities and expenses incurred
in connection with actions taken by such trustee or officer in those capacities
except with respect to any matter as to which he or she has not acted in good
faith in the reasonable belief that his or her action was in the best interest
of the Fund or, in the case of any criminal proceeding, as to which he or she
had reasonable cause to believe that the conduct was unlawful and provided that
no trustee or officer shall be indemnified against any liability to any person
or entity or any expense of such trustee or officer arising by reason of (i)
willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless
disregard of the duties involved in the conduct of his or her position. Further,
no indemnification shall be made unless there has been a determination (i) by a
final decision on the merits by a court or other body of competent jurisdiction
that such trustee or officer is entitled to indemnification or, (ii) in the
absence of such a decision, by (1) a majority vote of a quorum of trustees who
are neither “Interested Persons” (as defined in the 1940 Act) of the Trust nor
parties to the proceeding, that such trustee or officer is entitled to
indemnification, or (2) if such quorum is not obtainable or even if obtainable,
if such majority so directs, independent legal counsel in a written opinion
concludes that such trustee or officer should be entitled to indemnification.
The Fund’s declaration of trust requires indemnification of the Fund’s present
and former trustees and officers to the maximum extent permitted under
applicable law. In addition, the Fund is obligated to pay or reimburse the
expenses incurred by its present and former trustees and officers if certain
conditions are satisfied.
As
a result, the Fund and its shareholders may have more limited rights against its
present and former trustees and officers than might otherwise exist absent the
current provisions in its declaration of trust or that might exist with other
companies, which could limit recourse available to shareholders in the event
actions are taken that are not in shareholders’ best
interest.
The
Fund’s declaration of trust contains provisions that make removal of its
trustees difficult, which could make it difficult for its shareholders to effect
changes to its management.
The
Fund’s declaration of trust provides that, subject to the rights of holders of
any series of preferred shares, a trustee may be removed only for cause, and
only by action taken by a majority of the remaining trustees. Vacancies
generally may be filled only by a majority of the remaining trustees in office,
even if less than a quorum, for the full term of the class of trustees in which
the vacancy occurred. These requirements make it more difficult to change the
Fund’s management by removing and replacing trustees and may prevent a change in
its control that is in the best interests of its
shareholders.
The
Fund is subject to the risk of legislative and regulatory changes impacting its
business or the markets in which the Fund invests.
Legal
and regulatory changes.
Legal and regulatory changes could occur and may adversely affect the Fund and
its ability to pursue its investment strategies and/or increase the costs of
implementing such strategies. New or revised laws or regulations that could
adversely affect the Fund may be imposed by the CFTC, the SEC, the U.S. Federal
Reserve and the other Central Banks, other banking regulators, other
governmental regulatory authorities, or self-regulatory organizations that
supervise the financial markets. In particular, these agencies are empowered to
promulgate a variety of new rules pursuant to recently enacted financial reform
legislation in the United States and the countries which they operate in. The
Fund also may be adversely affected by changes in the enforcement or
interpretation of existing statutes and rules by these governmental regulatory
authorities or self-regulatory organizations. Such changes, or uncertainty
regarding any such changes, could adversely affect the strategies and plans set
forth in this prospectus and may result in the Fund’s investment focus shifting
from the areas of expertise of the investment team to other types of investments
in which the investment team may have less expertise or little or no experience.
Thus, any such changes, if they occur, could have a material adverse effect on
the Fund’s results of operations and the value of an investment in the
Fund.
Relief
from Registration as Commodity Pool Operator.
With respect to the Fund’s operation, the Adviser has claimed an exclusion from
the definition of the term “commodity pool operator” pursuant to CFTC Rule 4.5,
which imposes certain commodity interest trading restrictions on the Fund. These
trading restrictions permit the Fund to engage in commodity interest
transactions that include: (i) “bona fide hedging” transactions, as that term is
defined and interpreted by the CFTC and its staff, without regard to the
percentage of the Fund’s assets committed to margin and option premiums; and
(ii) non-bona fide hedging transactions, provided that the Fund does not enter
into such non-bona fide hedging transactions if, immediately thereafter, (a) the
sum of the amount of initial margin and premiums required to establish the
Fund’s commodity interest positions would exceed 5% of its liquidation value,
after taking into account unrealized profits and unrealized losses on any such
transactions, or (b) the aggregate net notional value of the Fund’s commodity
interest positions would exceed 100% of its liquidation value, after taking into
account unrealized profits and unrealized losses on any such positions. In
addition to meeting one of the foregoing trading limitations, interests in the
Fund may not be marketed as or in a commodity pool or otherwise as a vehicle for
trading in the futures, options or swaps markets.
In
the event the Fund fails to qualify the Adviser for the exclusion, and the
Adviser is required to register as a “commodity pool operator” in connection
with serving as its investment adviser and becomes subject to additional
disclosure, recordkeeping and reporting requirements, its expenses may increase.
The Fund currently intends to operate in a manner that would permit the Adviser
to continue to claim such exclusion.
Derivative
Investments.
The derivative investments in which the Fund may invest are subject to
comprehensive statutes, regulations and margin requirements. In particular,
certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, or the “Dodd-Frank Act,” require certain standardized derivatives to be
executed on a regulated market and cleared through a CCP, which may result in
increased margin requirements and costs for the Fund. The Dodd-Frank Act also
established minimum margin requirements on certain uncleared derivatives which
may result in the Fund and its counterparties posting higher margin amounts for
uncleared derivatives.
The
“Derivatives Rule” (i.e., Rule 18f-4 under the 1940 Act) regulates and, in some
cases limits, the use of derivatives, reverse repurchase agreements, and certain
other transactions by funds registered under the 1940 Act. Unless the Fund
qualifies as a “limited derivatives user,” as defined in the Derivatives Rule,
which it does not currently intend to do, the Fund is required to establish a
comprehensive Derivatives Risk Management Program, to comply with certain
value-at-risk based leverage limits and reporting requirements, to appoint a
derivatives risk manager and to provide additional disclosure both publicly and
to the SEC regarding the Fund’s derivatives positions. Even if the Fund did
qualify as a limited derivatives user, the Derivatives Rule would still require
the Fund to have policies and procedures to manage its derivatives risk and
limit its derivatives exposure.
Under
the Derivatives Rule, when the Fund trades reverse repurchase agreements or
similar financing transactions, the Fund needs to aggregate the amount of
indebtedness associated with the reverse repurchase agreements or similar
financing transactions with the aggregate amount of any other senior securities
representing indebtedness when calculating its asset coverage ratio or treat all
such transactions as derivatives transactions. The Derivatives Rule also
provides special treatment for reverse repurchase agreements and similar
financing transactions. 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. The Fund has elected to treat reverse repurchase agreements and similar
financing transactions as “derivatives transactions.” See “Summary—Financing and
Hedging Strategy—Derivative Transactions.”
The
SEC also has provided guidance in connection with the Derivatives Rule regarding
the use of securities lending collateral that may limit the Fund’s securities
lending activities. In addition, the Fund is permitted to invest in a security
on a when-issued or forward-settling basis, or with a non-standard settlement
cycle, and the transaction will be deemed not to involve a senior security,
provided that (i) the Fund intends to physically settle the transaction and (ii)
the transaction will settle within 35 days of its trade date (the
“Delayed-Settlement Securities Provision”). The Fund may otherwise engage in
such transactions that do not meet the conditions of the Delayed-Settlement
Securities Provision so long as the Fund treats any such transaction as a
“derivatives transaction” for purposes of compliance with the Derivatives Rule.
Furthermore, under the Derivatives Rule, the Fund will be permitted 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. These
requirements may increase the cost of the Fund’s investments and cost of doing
business.
European
Credit Derivatives.
Furthermore, the E.U. Regulation No 648/2012 on over the counter (“OTC”)
derivatives, central counterparties and trade repositories (also known as the
European Market Infrastructure Regulation (“EMIR”), which came into force on 16
August 2012, introduced uniform requirements in respect of OTC derivative
transactions by requiring certain “eligible” OTC derivative transactions to be
submitted for clearing to regulated central clearing counterparties and by
mandating the reporting of certain details of derivative transactions to trade
repositories. In addition, EMIR imposes requirements for appropriate procedures
and arrangements to measure, monitor and mitigate operational and counterparty
credit risk in respect of OTC derivatives contracts which are not subject to
mandatory clearing. These requirements include the exchange of margin and, where
initial margin is exchanged, its segregation by the parties, including by the
Fund. While many of the obligations under EMIR have already come into force, the
requirement to submit certain OTC derivative transactions to central clearing
counterparties and the margin requirements for non-cleared OTC derivative
transactions are subject to a staggered implementation timeline. It is not yet
fully clear how the OTC derivatives market will adapt to the new regulatory
regime. Accordingly, it is difficult to predict the full impact of EMIR on the
Fund, which may include an increase in the overall costs of entering into and
maintaining OTC derivative contracts. Prospective investors should be aware that
the regulatory changes arising from EMIR and other similar regulations may in
due course adversely affect the Fund’s ability to adhere to its hedging policy
and achieve its objectives.
Volcker
Rule.
Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,”
generally prohibits, subject to certain exemptions, covered banking entities
from engaging in proprietary trading or sponsoring, or acquiring or retaining an
ownership interest in, a hedge fund or private equity fund (“covered funds”),
which has been broadly defined in a way which could include many CLOs. Although
certain CLOs are exempt from “covered fund” status and amendments to the Volcker
Rule have eased the ability of CLOs to meet those exemptions, any future changes
to the Volcker Rule that further limit banking entities’ ability to invest in
CLOs may adversely affect the market value or liquidity of any or all of the
investments held by the Fund. It is uncertain how any future changes to the
Volcker Rule could impact the Fund.
U.S.
Risk Retention.
In 2014, pursuant to the Dodd-Frank Act, U.S. federal regulators adopted joint
final rules (the “U.S. Risk Retention Rules”) implementing certain credit risk
retention requirements which generally require the “securitizer” of an
asset-backed security to retain an exposure to certain credit risk in the
securitization for a certain period of time. However, in 2018, a federal court
of appeals interpreting the credit risk retention requirements in the Dodd-Frank
Act held that open market CLO collateral managers are not securitizers subject
to the U.S. Risk Retention Rules. Therefore, CLO collateral managers of open
market CLOs are not required to hold retained interests in those CLOs, and they
may dispose of any retained interest they may hold at any time. This could
reduce the alignment of interests between managers and noteholders, including
the Fund, potentially influencing management decisions in ways that are adverse
to the Fund. See “—The Fund’s CLO investments are exposed to the misalignment of
the interests of CLO collateral managers with the interests of CLO investors,
such as the Fund.”
EU/UK
Risk Retention.
Regulators in the European Union (EU) and the United Kingdom (UK) have imposed
significant securitization-related regulations (collectively, the
“Securitization Regulations”).
Pursuant
to the Securitization Regulations, sponsors of CLOs issued in the EU or UK
(collectively, “European CLOs”) are required to retain a material net economic
interest in such securitizations (“risk retention”), and such sponsors are also
subject to various disclosure-related obligations. To the extent that the
Securitization Regulations relating to CLO sponsors or managers (including risk
retention requirements) are made less stringent or rescinded, the sponsors or
managers of European CLOs may have reduced incentives to prioritize the
interests of CLO investors, which may increase the risk of poor performance or
default because of less careful construction or management of the underlying
loan portfolios; this could also limit investor confidence in such CLOs. To the
extent that the Securitization Regulations relating to sponsors or managers are
made more stringent, sponsors could be dissuaded from sponsoring new European
CLOs, which could limit the available supply of such CLOs. Pursuant to the
Securitization Regulations, EU-based or UK-based investors purchasing certain
securitizations (including CLOs) are required, prior to purchasing interests in
such securitizations, to carry out due diligence assessments relating to the
credit risks and other material risks of such interests (including verifying
that such securitizations comply with risk retention), and such investors are
also subject to various monitoring obligations related to the ongoing
performance and risks of such interests. To the extent that the Securitization
Regulations relating to EU-based or UK-based investors are made more stringent,
such investors may be dissuaded from investing in (or maintaining their
investments in) CLOs, which could adversely affect the price and liquidity of
such CLOs.
European
CLOs are generally structured in compliance with the Securitization Regulations
so that prospective investors subject to the Securitization Regulations can
invest in compliance with such requirements. To the extent the Fund invests in
CLO securities that have not been structured to comply with the Securitization
Regulations, the price and liquidity of such securities may be adversely
affected.
The
SEC staff could modify its position on certain non-traditional investments,
including investments in CLO securities.
The
staff of the SEC (and other regulators, including the European Securities and
Markets Authority (“ESMA”)) from time to time has undertaken a broad review of
the potential risks associated with different asset management activities,
focusing on, among other things, liquidity risk and leverage risk. The staff of
the Division of Investment Management of the SEC has, in correspondence with
registered management investment companies, previously raised questions about
the level of, and special risks associated with, investments in CLO securities.
While it is not possible to predict what conclusions, if any, the staff may
reach in these areas, or what recommendations, if any, the staff might make to
the SEC, the imposition of limitations on investments by registered management
investment companies in CLO securities by the SEC or ESMA, as applicable, could
adversely impact the Fund’s ability to implement its investment strategy and/or
its ability to raise capital through public offerings, or could cause the Fund
to take certain actions that may result in an adverse impact on the Fund’s
shareholders, its financial condition and/or its results of operations. The Fund
is unable at this time to assess the likelihood or timing of any such regulatory
development.
The
Fund may experience fluctuations in its Net Asset Value and quarterly operating
results.
The
Fund could experience fluctuations in its Net Asset Value from month to month
and in its quarterly operating results due to a number of factors, including the
timing of distributions to its shareholders, fluctuations in the value of the
CLO securities that the Fund holds, its ability or inability to make investments
that meet its investment criteria, the interest and other income earned on its
investments, the level of its expenses (including the interest or dividend rate
payable on the debt securities or preferred shares the Fund issues), variations
in and the timing of the recognition of realized and unrealized gains or losses,
the degree to which the Fund encounters competition in its markets and general
economic conditions. As a result of these factors, the Fund’s Net Asset Value
and results for any period should not be relied upon as being indicative of its
Net Asset Value and results in future periods.
U.S.
Federal Income Tax Risks
Investment
in the Fund has various U.S. federal, state, and local income tax
risks.
The
Fund strongly urges investors to consult their own tax advisors concerning the
effects of U.S. federal, state, and local income tax law on an investment in the
Fund’s common shares.
The
Fund may be subject to certain corporate-level taxes, and will be subject to
corporate-level U.S. federal income tax if it is unable to maintain its RIC
status under Subchapter M of the Code, which could substantially reduce the cash
available for distribution to its shareholders.
The
U.S. federal income tax laws governing RICs are complex, and interpretations of
the U.S. federal income tax laws governing qualification as a RIC are limited.
Qualifying as a RIC requires the Fund to meet various tests regarding the nature
of its assets, its income and the amount of its distributions on an ongoing
basis. The Fund’s ability to satisfy the RIC asset and income tests depends upon
the characterization and fair market values of its assets, many of which are not
precisely determinable, and for which the Fund may not obtain independent
appraisals. The Fund’s compliance with the RIC asset and income tests and the
accuracy of its tax reporting to shareholders also depend upon its ability to
successfully manage the
calculation
and composition of its taxable income and its assets on an ongoing basis. Even a
technical or inadvertent mistake could jeopardize the Fund’s RIC status. Under
certain circumstances, the Fund may be able to cure a failure to meet the RIC
asset and income tests if such failure was due to reasonable cause and not
willful neglect, but in order to do so the Fund may incur significant fund-level
taxes, which would effectively reduce (and could eliminate) the Fund’s returns.
Although the Fund intends to elect to be treated as a RIC under Subchapter M of
the Code, no assurance can be given that it will be able to qualify for and
maintain RIC status. If the Fund qualifies as a RIC under the Code, it generally
will not be subject to corporate-level federal income taxes on its income and
capital gains that are timely distributed (or deemed distributed) as dividends
for U.S. federal income tax purposes to its shareholders. To qualify as a RIC
under the Code and to be relieved of federal taxes on income and gains
distributed as dividends for U.S. federal income tax purposes to its
shareholders, the Fund must, among other things, meet certain source-of-income,
asset diversification and distribution requirements. The distribution
requirement for a RIC is satisfied if it distributes dividends each tax year for
U.S. federal income tax purposes of an amount generally at least equal to 90% of
the sum of its net ordinary income and net short-term capital gains in excess of
net long-term capital losses, if any, to its shareholders. The Fund may,
nonetheless, be subject to certain corporate-level taxes regardless of whether
it continues to qualify as a RIC. Additionally, if the Fund fails to qualify or
to maintain its qualification as a RIC in any calendar year, it would be
required to pay U.S. federal income tax (and any applicable state and local
taxes) on its taxable income at regular corporate rates, and dividends paid to
its shareholders would not be deductible by the Fund in computing its taxable
income (although such dividends received by certain non-corporate U.S. taxpayers
generally would be subject to a preferential rate of taxation). Further, if the
Fund fails to maintain its qualification as a RIC, it might need to borrow money
or sell assets in order to pay any resulting tax. The Fund’s payment of income
tax would decrease the amount of its income available for distribution to its
shareholders and could adversely affect the value of its common shares.
Furthermore, if the Fund fails to maintain its qualification as a RIC, it no
longer would be required under U.S. federal tax laws to distribute substantially
all of its taxable income to its
shareholders.
The
Fund’s investments may result in the Fund incurring tax or recognizing taxable
income prior to receiving cash distributions related to such
income.
The
tax implications of the corporate CLOs in which the Fund invests are complex
and, in some circumstances, unclear. In particular, the Fund may recognize
taxable income on certain of its CLO investments without the concurrent receipt
of cash.
The
Fund expects that most of its investments in securities will be marked to market
for tax purposes pursuant to its election under Section 475(f) of the Code (see
“—The Fund has made a mark-to-market election under Section 475(f) of the
Code.”), regardless of whether the investments are generating cash flow. This
could cause the Fund to recognize taxable income on such investments without the
concurrent receipt of cash. For any of the Fund’s investments that are not
marked to market for tax purposes, such as certain CLO equity investments, the
tax implications of such investments are often complex and, in some
circumstances, unclear, which could also cause the Fund to recognize taxable
income on such investments without the concurrent receipt of cash. If the Fund
holds 10% or more (by vote or value) of the interests treated as equity for U.S.
federal income tax purposes in a foreign corporation that is treated as a
controlled foreign corporation (“CFC”) (including equity tranche investments and
certain debt tranche investments in a CLO treated as a CFC), the Fund may be
treated as receiving a deemed distribution (taxable as ordinary income) each tax
year from such foreign corporation in an amount equal to its pro rata share of
the corporation’s “subpart F income” for the tax year (including both ordinary
earnings and capital gains). Treasury Regulations generally treat the Fund’s
income inclusion with respect to a CFC as qualifying income for purposes of
determining its ability to be subject to tax as a RIC if either (i) there is a
current distribution out of the earnings and profits of the CFC that are
attributable to such income inclusion or (ii) such inclusion is derived with
respect to the Fund’s business of investing in stock, securities, or currencies.
If the Fund fails to qualify or maintain its qualification for tax treatment as
a RIC under Subchapter M of the Code for any reason, the Fund would be required
to pay U.S. federal income tax on its taxable income at regular corporate rates,
which could substantially reduce the Fund’s net assets, as well as the amount of
income available for distributions, and the amount of such distributions, to the
Fund’s shareholders and for payments to the holders of the Fund’s other equity
securities or obligations. See “—The Fund may be subject to certain
corporate-level taxes, and will be subject to corporate-level U.S. federal
income tax if it is unable to maintain its RIC status under Subchapter M of the
Code, which could substantially reduce the cash available for distribution to
its shareholders.” Because the annual RIC distribution requirements are based on
the RIC’s taxable income as opposed to the cash flow received by the RIC, if the
Fund recognizes taxable income on its investments in excess of the cash either
received from such investments or otherwise maintained on hand by the Fund, the
Fund may have to sell some of its investments at times and/or at prices the Fund
would not consider advantageous, raise additional debt or equity capital or
forgo new investment opportunities to satisfy the RIC distribution requirements.
If the Fund is not able to obtain cash from other sources, the Fund may fail to
qualify for RIC tax treatment and thus become subject to corporate-level income
tax.
The
Fund has made a mark-to-market election under Section 475(f) of the
Code.
The
Fund has made an election under Section 475(f) of the Code to mark its
securities to market. There are limited authorities under Section 475(f) of the
Code as to what constitutes a trader for U.S. federal income tax purposes. Under
other sections of the Code, the status of a trader in securities depends on all
of the facts and circumstances, including the nature of the income derived from
the taxpayer’s activities, the frequency, extent and regularity of the
taxpayer’s securities transactions, and the taxpayer’s investment intent. There
can be no assurance that the Fund will continue to qualify as a trader in
securities eligible to make a mark-to-market election. The Fund has not
received, nor is it seeking, an opinion from counsel or a ruling from the IRS
regarding its qualification as a trader. If the qualification for, or the Fund’s
application of, such election were successfully challenged by the IRS, in whole
or in part, it could, depending on the circumstances, result in retroactive (or
prospective) changes in the amount or timing of recognized gross income, and
potentially jeopardize its RIC qualification. If the IRS were to successfully
challenge the treatment or timing of recognition of income from its securities,
the Fund could fail to maintain its qualification as a RIC. Finally,
mark-to-market gains and losses could cause volatility in the amount of its
taxable income. For instance, the mark-to-market election could generate losses
in one taxable year that the Fund is unable to use to offset taxable income,
followed by mark-to-market gains in a subsequent taxable year that force the
Fund to make additional distributions to its shareholders. Hence, the
mark-to-market gains and losses could cause the Fund to distribute more
dividends to its shareholders in a particular period than would otherwise be
desirable from a business
perspective.
Complying
with RIC requirements may cause the Fund to forgo or liquidate otherwise
attractive investments.
To
maintain its qualification as a RIC, the Fund must continually satisfy various
tests regarding the sources of its income, the nature and diversification of its
assets and the amounts it distributes to its shareholders. In order to meet
these tests, the Fund may be required to forgo investments it might otherwise
make. It may be required to make distributions to shareholders at
disadvantageous times or when it does not have funds readily available for
distribution and may be unable to pursue investments that would be otherwise
advantageous to the Fund in order to satisfy the source of income or asset
diversification requirements for qualifying as a RIC. Thus, compliance with the
RIC requirements may hinder the Fund’s investment
performance.
FATCA
withholding may apply to payments to certain foreign entities.
Payments
made under the Fund’s securities to a foreign financial institution (“FFI”), or
non-financial foreign entity (“NFFE”) (including such an institution or entity
acting as an intermediary), may be subject to a U.S. withholding tax of 30%
under legislation generally known as “FATCA” (the Foreign Account Tax Compliance
Act). This withholding tax may apply to certain payments of interest on the
Fund’s debt securities or dividends on its shares unless the FFI or NFFE
complies with certain information reporting, withholding, identification,
certification and related requirements imposed by FATCA. Depending upon the
status of a holder and the status of an intermediary through which any of the
Fund’s debt securities or shares are held, the holder could be subject to this
30% withholding tax in respect of any interest paid on its debt securities or
dividends on its shares. Investors should consult their own tax advisors
regarding FATCA and how it may affect an investment in the Fund’s
securities.
General
Risk Factors
The
Fund, Ellington, or its affiliates may be subject to adverse legislative,
regulatory or public policy changes.
At
any time, U.S. federal, state, local, or foreign laws or regulations that impact
the Fund’s business, or the administrative interpretations of those laws or
regulations, may be enacted or amended.
The
Fund cannot predict when or if any new law, regulation, or administrative
interpretation, or any amendment to or repeal of any existing law, regulation,
or administrative interpretation, will be adopted or promulgated or will become
effective. Additionally, the adoption or implementation of any new law,
regulation, or administrative interpretation, or any revisions in or repeals of
these laws, regulations, or administrative interpretations, could cause the Fund
to change its portfolio, could constrain its strategy, or increase its costs.
The Fund could be adversely affected by any change in or any promulgation of new
law, regulation, or administrative interpretation.
In
addition, political leaders in the U.S. and certain foreign countries have
recently been elected on protectionist platforms, fueling doubts about the
future of global free trade. The U.S. government has indicated its intent to
alter its approach to international trade policy and in some cases to
renegotiate certain existing trade agreements with foreign countries. In
addition, the U.S. government has recently imposed tariffs on certain foreign
goods and has indicated a willingness to impose tariffs on imports of other
products. Some foreign governments have instituted retaliatory tariffs on
certain U.S. goods and have indicated a willingness to impose additional tariffs
on U.S. products. Global trade disruption, significant introductions of trade
barriers and bilateral trade frictions, together with any future downturns in
the global economy resulting therefrom, could adversely affect the Fund’s
performance.
Changes
in U.S. federal policy, including tax policies, and at regulatory agencies occur
over time through policy and personnel changes following elections and
otherwise, which lead to changes involving the level of oversight and focus on
the financial services industry or the tax rates paid by corporate entities. The
Fund cannot predict the ultimate impact of the foregoing on it, its business and
investments, or the industries in which it invests generally, and any prolonged
uncertainty could also have an adverse impact on the Fund and its investment
objectives. Future changes may adversely affect the Fund’s operating
environment, including through increasing competition, and therefore its
business, operating costs, financial condition and results of operations.
Further, an extended federal government shutdown resulting from failing to pass
budget appropriations, adopt continuing funding resolutions, or raise the debt
ceiling, and other budgetary decisions limiting or delaying government spending,
may negatively impact U.S. or global economic conditions, including corporate
and consumer spending, and liquidity of capital
markets.
The
Fund’s failure to procure adequate funding and capital would adversely affect
the Fund’s results and may, in turn, negatively affect the value of its common
shares and its ability to make distributions to its shareholders.
The
Fund depends upon the availability of adequate funding and capital for its
operations. To maintain its status as a RIC, the Fund is required to distribute
to its shareholders at least 90% of its RIC taxable income annually, which
generally includes ordinary income (e.g. dividends and interest) and net
short-term capital gains. As a result, the Fund is not able to retain much or
any of its earnings for new investments. There can be no assurance that any, or
sufficient, funding or capital will be available to the Fund in the future on
terms that are acceptable to the Fund. The Fund’s access to external capital
will depend upon a number of factors, including the market price of its common
shares, the market’s perception of its financial condition and potential future
earnings, and general market conditions. In the event that the Fund cannot
obtain sufficient funding and capital on acceptable terms, there may be a
negative impact on the value of its common shares and the Fund’s ability to make
distributions to its shareholders.
The
Fund, Ellington, or its affiliates may be subject to regulatory inquiries and
proceedings, or other legal proceedings.
At
any time, industry-wide or company-specific regulatory or tax inquiries or
proceedings can be initiated, and the Fund cannot predict when or if any such
regulatory inquiries or proceedings will be initiated that involve the Fund or
Ellington or its affiliates, including the Adviser. The Fund believes that the
heightened scrutiny of the financial services industry increases the risk of
inquiries and requests from regulatory or enforcement agencies. For example, as
discussed under the caption “Investment Objective, Opportunities and Principal
Strategies—Legal Proceedings”, over the years, Ellington and its affiliates have
received, and the Fund expects in the future that the Fund and they may receive,
inquiries and requests for documents and information from various federal,
state, and foreign regulators.
The
Fund can give no assurances that, whether the result of regulatory inquiries or
otherwise, neither the Fund nor Ellington nor its affiliates will become subject
to investigations, enforcement actions, fines, penalties or the assertion of
private litigation claims. If any such events were to occur, the Fund, or the
Adviser’s ability to perform its obligations to the Fund under the Investment
Advisory Agreement between the Fund and the Adviser, or Ellington’s ability to
perform its obligations to the Adviser under the services agreement between
Ellington and the Adviser, could be materially adversely impacted, which could
materially adversely affect the Fund’s business, financial condition and results
of operations, and its ability to make distributions to its
shareholders.
The
market for the Fund’s common shares may be limited, and the price and trading
volume of its common shares may be volatile.
While
the Fund’s common shares are listed on the NYSE, such listing does not ensure
that the market price reflects the Fund’s actual financial performance, nor does
it ensure the liquidity of the Fund’s common shares or a holder’s ability to
sell them at any particular price. Market prices for the Fund’s common shares
may be volatile and subject to wide fluctuations, including as a result of
changes in trading volume. There can be no assurance that the market price of
the Fund’s common shares will not fluctuate or decline significantly in the
future. Factors that could negatively affect the market price of the Fund’s
common shares, or result in fluctuations in the price or trading volume, of its
common shares include, without limitation:
•actual
or anticipated variations in the Fund’s distributions or operating
results;
•changes
in the Fund’s earnings estimates, the failure to meet the earnings or operating
expectations of analysts and investors, or the publication of research reports
about the Fund or the CLO industry;
•increases
in market interest rates that lead investors to demand a higher yield on the
Fund’s common shares;
•share
repurchases or issuances of common shares by the Fund;
•the
passage of legislation, changes in applicable law, court rulings, enforcement
actions or other regulatory developments that adversely affect the Fund or its
industry;
•changes
in government policies or the timing of their implementation;
•changes
in market valuations of similar funds;
•adverse
market reactions to any additional indebtedness the Fund incurs;
•additions
or departures of key personnel;
•shareholder
actions;
•speculation
in the press or the investment community;
•adverse
changes in global, national, regional and local economic or market conditions,
including those arising from pandemics, elevated unemployment, inflation,
interest rate volatility, volatile and/or elevated credit spreads, concerns
regarding recessions, geopolitical conflicts, social unrest, or civil
disturbances, or concerns regarding leveraged loan defaults or credit
losses;
•the
Fund’s inclusion in, or exclusion from, various stock indices;
•the
Fund’s absolute operating performance, and relative to that of comparable
companies; and
•changes
in accounting standards or principles.
Stock
markets in general have experienced volatility that has often been unrelated to
the operating performance of a particular company. These broad market
fluctuations may also adversely affect the market price of the Fund’s common
shares.
Future
offerings of debt securities, which would rank senior to the Fund’s common
shares upon its bankruptcy liquidation, and future offerings of equity
securities which could dilute the common share holdings of the Fund’s existing
shareholders and may be senior to the Fund’s common shares for the purposes of
dividend and liquidating distributions, may adversely affect the market price of
the Fund’s common shares.
In
the future, the Fund may seek to increase its capital by offering debt
securities or additional equity securities. Upon a bankruptcy or liquidation,
holders of the Fund’s debt securities and preferred shares, if any, and other
lenders, would receive distributions of the Fund’s available assets prior to
common shareholders. The Fund’s preferred shares, if issued, could have a
preference on liquidating distributions or a preference on dividend payments or
both that could limit the Fund’s ability to make distributions to the holders of
its common shares. Because the Fund’s decision to offer securities will depend
on market conditions and other factors beyond its control, the Fund cannot
predict the amount, timing or nature of any future offerings. Common
shareholders therefore bear the risk that any future securities offerings reduce
the market price of the Fund’s common shares or dilute their
holdings.
Future
sales of the Fund’s common shares or other securities convertible into common
shares could cause the market value of the common shares to decline and could
result in dilution.
Sales
of substantial amounts of the Fund’s common shares or of other securities
convertible into common shares could cause the market price of the Fund’s common
shares to decrease significantly. The Fund cannot predict the effect, if any, of
future sales of such securities, or their availability for future sale, on the
market price of the Fund’s common shares. Such sales, or the perception that
they could occur, may adversely affect the market price of the Fund’s common
shares.
Shareholders
who do not participate in the dividend reinvestment plan will experience
dilution in their ownership percentage.
All
cash distributions payable to shareholders who participated in the Fund’s
dividend reinvestment plan are automatically reinvested in common shares. As a
result, shareholders who do not participate will experience dilution in their
ownership percentage of the Fund’s common shares over
time.
The
Fund is subject to risks related to corporate social
responsibility.
The
Fund’s business faces public scrutiny related to environmental, social and
governance (“ESG”) activities. The Fund may risk damage to its reputation if the
Fund or affiliates of the Adviser are viewed as failing to act responsibly in a
number of areas, such as diversity and inclusion, environmental stewardship,
support for local communities, corporate governance and transparency and
considering ESG factors in the Fund’s investment processes. Some investors have
become more focused on ESG factors, including climate risks, in determining
whether to invest in companies. However, regional and investor specific
sentiment often differ in what constitutes a material positive or negative ESG
corporate practice. The Fund’s corporate social responsibility practices will
not uniformly fit investors’ definitions, particularly across geographies and
investor types, of best practices for ESG considerations. Adverse incidents with
respect to ESG activities could impact the cost of the Fund’s operations and
relationships with investors, all of which could adversely affect its business
and results of operations.
There
is a growing regulatory interest across jurisdictions in improving transparency
regarding the definition, measurement and disclosure of ESG factors to enable
investors to validate and better understand sustainability claims, including an
increased regulatory focused on the accuracy of those claims. As a result, the
Fund is subject to evolving rules and regulations promulgated by various
governmental and self-regulatory organizations, including the SEC, the NYSE and
the Financial Accounting Standards Board. These rules continue to expand in
scope and complexity, with new requirements potentially increasing compliance
challenges and uncertainty. If the Fund is perceived as, or accused of,
“greenwashing” or overstating the extent of its sustainability-related
practices, such allegations could damage the Fund’s reputation, result in
litigation or regulatory actions, and negatively impact its ability to raise
capital.
At
the same time, so-called “anti-ESG” sentiment has also gained momentum across
the U.S., with several states having enacted or proposed “anti-ESG” policies,
legislation, or issued related legal opinions. For example, certain states now
require that relevant state entities or managers/administrators of state
investments make investments based solely on pecuniary factors without
consideration of ESG factors or have enacted “boycott bills.” If investors
subject to such legislation viewed the Fund, its policies, or its practices, as
being in contradiction of such “anti-ESG” policies, legislation or legal
opinions, such investors may not invest in the Fund, which could negatively
affect its financial performance.
If
the Fund fails or is perceived to fail to comply with or meet applicable rules,
regulations and stakeholder expectations, it could negatively impact the Fund’s
reputation and its business results. Further, the Fund’s business could become
subject to additional regulations, penalties and/or risks of regulatory scrutiny
and enforcement in the future. Moreover, the requirements of various regulations
the Fund may become subject to may not be consistent with each other. There can
be no assurance that the Fund’s current ESG practices will meet future
regulatory requirements, reporting frameworks or best practices, increasing the
risk of related enforcement. Compliance with new requirements may lead to
increased management burdens and
costs.
Climate
change has the potential to impact the Fund’s investments.
Currently,
it is not possible to predict how legislation or new regulations that may be
adopted to address greenhouse gas emissions will impact the assets underlying
the Fund’s investments. However, any such future laws and regulations imposing
reporting obligations, limitations on greenhouse gas emissions, or additional
taxation of energy use could negatively affect the businesses of the underlying
borrowers on the CLOs in which the Fund invests, including, for example by
requiring an underlying borrower to make significant expenditures to attain and
maintain compliance. Any new legislative or regulatory initiatives related to
climate change could adversely affect the assets underlying the Fund’s
investments and, therefore, the Fund’s business.
The
physical impact of climate change could also have a material adverse effect on
the assets underlying the Fund’s investments. Physical effects of climate change
such as increases in temperature, sea levels, the severity of weather events and
the frequency of natural disasters, such as hurricanes, tropical storms,
tornadoes, wildfires, droughts, floods and earthquakes, among other effects,
could reduce the value of the assets underlying the Fund’s investments and,
therefore, the Fund’s investments.
Periods
of heightened inflation could adversely impact the Fund’s financial
results.
High
inflation, whether caused by low unemployment, high corporate demand,
supply-chain issues, geopolitical conflicts, quantitative easing, imposition of
tariffs by the federal government, or a combination of these or other factors,
may undermine the performance of the Fund’s investments by reducing the value of
such investments and/or the income received from such investments. Inflation and
rapid fluctuations in inflation rates have had in the past, and may in the
future have, significant effects on interest rates and negative effects on
economies and financial markets.
Inflation
and rapid fluctuations in inflation rates have in the past had, and may in the
future have, negative effects on economies and financial markets, particularly
in emerging economies and particularly for some of the corporate sectors in
which the Fund’s underlying obligors operate. For example, if a corporate
borrower under an asset held by one of the Fund’s CLO investments is unable to
increase its revenue in times of higher inflation, its profitability may be
adversely affected. As inflation rises, an underlying obligor may earn more
revenue but may incur higher expenses, as wages and prices of inputs increase
during periods of inflation. Thus, heightened inflationary pressures could
increase the risk of default by the underlying borrowers in CLOs. In addition,
during any periods of rising inflation, interest rates would be expected to
rise, which could create a mismatch between the Fund’s assets and liabilities.
See “—Interest rate mismatches between the Fund’s assets and its liabilities,
and between the assets and liabilities of the CLOs in which the Fund invests,
the Fund’s CLO investments and their underlying corporate credit assets may
reduce the Fund’s income during periods of changing interest rates, and
volatility in interest rates could adversely affect the value of the Fund’s
assets.” Conversely, as inflation declines, the Fund and any CLO in which the
Fund invests and any underlying corporate borrower of its CLO investments may
not be able to reduce expenses commensurate with any resulting reduction in
revenue.
In
addition, actions that the Federal Reserve has taken, and could continue to take
in response to changes in inflation, could have an adverse impact on the economy
broadly and/or on the Fund’s financial results specifically. See “Certain
actions by the Federal Reserve and other central banks could materially
adversely affect the Fund’s business, financial condition and results of
operations, and its ability to make distributions to its
shareholders.”
Artificial
intelligence and other machine learning techniques could increase competitive,
operational, legal and regulatory risks to the Fund’s business in ways that the
Fund cannot predict.
The
use of AI by the Fund and others, and the overall adoption of AI throughout
society, may exacerbate or create new and unpredictable competitive,
operational, legal and regulatory risks to the Fund’s business. There is
substantial uncertainty about the extent to which AI will result in dramatic
changes throughout the world, and the Fund may not be able to anticipate,
prevent, mitigate or remediate all of the potential risks, challenges or impacts
of such changes. These changes could potentially disrupt, among other things,
the Fund’s business model, investment strategies and operational processes. Some
of the Fund’s competitors may be more successful than it in the development and
implementation of new technologies, including services and platforms based on
AI, to improve their operations. If the Fund is unable to adequately advance its
capabilities in these areas, or do so at a slower pace than others in its
industry, the Fund may be at a competitive disadvantage.
If
the data the Fund, or third parties whose services the Fund relies on, use in
connection with the possible development or deployment of AI is incomplete,
inadequate or biased in some way, the performance of the Fund’s business could
suffer. In addition, recent technological advances in AI both present
opportunities and pose risks to the Fund. Data in technology that uses AI may
contain a degree of inaccuracy and error, which could result in flawed
algorithms in various models used in the Fund’s business. The volume and
reliance on data and algorithms also make AI more susceptible to cybersecurity
threats, including data poisoning and the compromise of underlying models,
training data or other intellectual property. The personnel provided to the Fund
by the Adviser, and/or its third-party service providers could, without being
known to the Fund, improperly utilize AI and machine learning-technology while
carrying out their responsibilities. This could reduce the effectiveness of AI
technologies and adversely impact the Fund and its operations to the extent that
it relies on the AI’s work product.
There
is also a risk that AI may be misused or misappropriated by the Fund’s third
party service providers. For example, a user may input confidential information,
including material non-public information, into AI applications, resulting in
the information becoming a part of a dataset that is accessible by third-party
technology applications and users, including the Fund’s competitors. Further,
the Fund may not be able to control how third-party AI that it chooses to use is
developed or maintained, or how data the Fund inputs is used or disclosed. The
misuse or misappropriation of the Fund’s data could have an adverse impact on
its reputation and could subject it to legal and regulatory investigations or
actions or create competitive
risk.
In addition, the use of AI by the Fund or
others may require compliance with legal or regulatory frameworks that are not
fully developed or tested, and the Fund may face litigation and regulatory
actions related to its use of AI. There has been increased scrutiny, including
from global regulators, regarding the use of “big data,” diligence of data sets
and oversight of data vendors. The Fund’s ability to use data to gain insights
into and manage its business may be limited in the future by regulatory scrutiny
and legal developments.
