CLO Redeployment Will Expand Alternative Credit Opportunities

Key Takeaways

• Redeployment into high-yield CLO strategies and new fund structures positions Ellington for stronger recurring fee income, operational leverage, and improved margins.
  
• Market innovation and retreat of traditional lenders enable Ellington to gain share and outperform peers by leveraging expertise in alternative credit and CLOs.
  
• Concentration in risky CLO equity, active trading, increasing leverage, competitive pressures, and regulatory burdens threaten Ellington Credit's revenue stability, profitability, and long-term growth.

Catalysts

A closed-end management investment company, focuses on generating current yields and risk-adjusted total returns by investing primarily in collateralized loan obligations.

• The company's rapid redeployment of capital into CLOs after exiting mortgage positions, combined with its active trading and focus on high-yielding CLO equity and mezzanine tranches, positions Ellington to capitalize on growing institutional demand for alternative credit-which should support higher AUM, recurring management fees, and boosted net investment income as the remaining "dry powder" is put to work in the coming months.
  
• Continued innovations and structural complexity in the CLO and securitized credit markets allow Ellington to generate excess returns (alpha) through opportunistic trading, secondary market focus, and risk management, potentially leading to above-average revenue growth and superior net margins versus more traditional fixed income peers.
  
• The new closed-end fund structure enhances tax efficiency and provides permanent capital, enabling operational leverage and earnings accretion from the fund's ability to deploy additional capital and issue long-term unsecured debt-expanding the investment portfolio, lowering per-unit costs, and driving improved bottom-line earnings.
  
• As heightened regulatory standards and bank retrenchment from lending continue to reshape the broader credit landscape, Ellington's expertise and focus on high-quality, well-diversified, floating-rate CLO portfolios could capture a greater share of investor flows, grow AUM, and generate stable management fees.
  
• Persistent low interest rates and secular investor appetite for non-traditional, yield-oriented products are likely to bolster ongoing demand for Ellington's CLO strategies, facilitating stable or rising net investment income and management fee revenues even in the face of episodic market volatility.

Ellington Credit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ellington Credit's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -14.6% today to 74.1% in 3 years time.
• Analysts expect earnings to reach $40.7 million (and earnings per share of $1.08) by about September 2028, up from $-5.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from -40.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Ellington Credit Future Earnings Per Share Growth

Risks

• Ellington Credit's heavy focus on CLO equity and mezzanine investments-particularly CLO equity, which is a first-loss position-exposes the company to higher risk during periods of economic stress or sector-specific volatility (such as from new tariffs or credit market shocks), increasing the likelihood of larger mark-to-market losses and impairing net investment income and NAV.
  
• The active trading strategy and opportunistic rebalancing between secondary and primary markets may lead to inconsistent investment performance, especially if market liquidity deteriorates or volatility increases, thereby elevating revenue and earnings volatility over time.
  
• The plan to issue long-term unsecured debt and deploy leverage to grow the CLO portfolio heightens vulnerability to rising funding costs in a persistently higher or volatile interest rate environment, which could compress net margins and exacerbate drawdowns during credit stress.
  
• Intense competition within the CLO and structured credit market, combined with evolving market dynamics (e.g., lagging demand for AAA CLO tranches and alternative lending innovations), could result in compressed spreads, lower reinvestment opportunities, and fee pressure, thereby weakening revenue growth and net interest margins in the long term.
  
• Increased regulatory oversight, compliance burdens, and transparency requirements-especially with cross-border exposure (e.g., European CLOs)-could escalate operating costs, complicate portfolio management, and reduce Ellington Credit's profitability and long-term earnings potential.

Valuation

• The analysts have a consensus price target of $6.125 for Ellington Credit based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $55.0 million, earnings will come to $40.7 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 12.3%.
• Given the current share price of $5.64, the analyst price target of $6.12 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.