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News Investor’s Corner
‘In 2023, we announced EARN would buy CLOs’
Creditflux: EARN is the latest CLO closed-ended fund in the market. Tell me about EARN’s beginnings?
Gregory Borenstein: Ellington Credit Company began as an agency mortgage REIT more than a decade ago and had solid relative performance. However, given Ellington’s existing presence in structured products, expertise investing in CLOs, and successful history in public markets via another mortgage REIT with scale, EFC, we believed there was an opportunity to refocus EARN and find better risk-adjusted returns. Specifically, to be a complementary vehicle to EFC investing in CLO investments.
And so, in 2023, we announced that EARN would start buying CLOs. Then in 2024, we announced our intention to de-REIT with the goal of converting EARN into a CLO closed-end fund. The conversion was finalised on 1 April this year. Of course, 2 April was Liberation Day. So actually, there’s the CNBC clip of us ringing the closing bell at the New York Stock Exchange and then immediately cutting over to President Trump in the garden announcing the new tariffs. That timing of Liberation Day worked out well because we had a lot of dry powder to deploy coming out of the conversion. I also believe the fact that EARN was able to grow quite a bit through ATM (at-the-market) issuances at attractive price levels has served us well.
Technically, leveraged loans are just very well supported
Gregory Borenstein
Head of corporate credit
Ellington Management Group
CF: What is EARN’s investing strategy?
GB: EARN focuses on buying, selling and trading in the secondary market, but we will also use financing, buy both mezz and equity, and credit hedge. For example, EARN can have mezzanine paper in the fund with financing applied to it, and then hedge the downside.
If you take a look at why EARN has outperformed so far this year, it’s because we were very concerned when we looked at rates being a little elevated and took caution when investing in CLO equity. We focused much more on mezz as we ramped the portfolio because we wanted the subordination, and we ramped up our credit hedges. We had a concern about CLO equity being an underperformer versus other areas of CLOs.
EARN still bought some equity, but we felt constructing a new issue was unattractive. I think EARN only did one new issue this year. We thought it was a year to trade more.
I actually don’t think we’ve necessarily seen the full effect of this year’s dispersion play out yet. There’s still uncertainty. There are still rates that are supposed to come down a bit. It seems like every few weeks, we see another name experience an idiosyncratic problem. You also have a large cohort of the loan universe that was trading above par, now prepaying and refinancing itself. And I believe you’re going to see more of the same at the start of 2026.
CF: It’s now December. Will you share with me your outlook for CLOs and leveraged loans?
GB: Looking ahead, I think we’re seeing opportunities in both the primary and secondary markets. We are currently still seeing more opportunities in the secondary market as the primary market still struggles in terms of economics. We remain concerned about dispersion, but I think it’s a ‘no bad bonds, only bad prices’ type of market where we’re active in both and are going to continue on that trajectory.
We’ve also continued to see record new issuance of CLOs and leveraged loans. That type of supply keeps liabilities from coming in too much. And once again, not enough to compensate you for what’s going on the asset side if you’re holding CLO equity. I’ve heard the theory that loans can widen out because of additional supply. I have yet to see that. CLOs are such a big portion of the loan market now.
Technically, leveraged loans are just very well supported. So, if you’re going to make the argument that the loan market grows and it puts us back to wider spreads, just understand on the other side that means more pain has to come first.
