EARN 10-K & 10-Q changes, risk factors and insider trading
Ellington Credit Co (also ELLA) · NYSE · Real Estate Investment Trusts · CIK 1560672 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
New heading “Principal Risks of the Fund”
New heading “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.”
New heading “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.”
New heading “Risks Related to the Fund's Business”
New heading “There are risks associated with the implementation of the Conversion.”
New heading “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 pay dividends to its shareholders.”
New heading “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.”
New heading “The Fund’s investments are expected to be 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.”
New heading “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.”
New heading “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 pay dividends to its shareholders.”
New heading “Risks Related to the Fund's Financing, Hedging, and Derivatives Activities”
New heading “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.”
New heading “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.”
New heading “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.”
New heading “The Fund’s rights under repos are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of the Fund or its lenders.”
New heading “The Fund may hedge against changes in corporate credit 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 pay dividends to its shareholders.”
New heading “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 Advisory Agreement or such key personnel are no longer available to the Fund.”
New heading “There are risks and conflicts of interests associated with the Base Management Fee the Fund is obligated to pay the Adviser.”
New heading “The Adviser’s liability is limited under the 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.”
New heading “Common shares of closed-end management investment companies have in the past traded at discounts to their net asset values per common 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 common share.”
New heading “If the Fund issues preferred shares, debt securities or convertible debt securities, its net asset value per common share may become more volatile.”
New heading “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.”
New heading “A downgrade, suspension or withdrawal of any future credit rating assigned by a rating agency to the Fund or any future issuances of preferred shares or debt securities, if any, or change in the debt markets could cause the liquidity or market value of the Fund’s preferred shares or debt securities to decline significantly.”
New heading “The Fund has a limited prior operating history as a closed-end investment company.”
New heading “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.”
New heading “The Fund is subject to the risk of legislative and regulatory changes impacting its business or the markets in which the Fund invests.”
New heading “The SEC staff could modify its position on certain non-traditional investments, including investments in CLO securities.”
New heading “The Fund may experience fluctuations in its Net Asset Value and quarterly operating results.”
New heading “The Fund 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 adversely affect the value of its common shares and could substantially reduce the cash available for distribution to its shareholders.”
New heading “The Fund has made a mark-to-market election under Section 475(f) of the Code.”
New heading “Complying with RIC requirements may cause the Fund to forgo or liquidate otherwise attractive investments.”
New heading “FATCA withholding may apply to payments to certain foreign entities.”
New heading “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.”
New heading “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.”
New heading “Shareholders will experience dilution in their ownership percentage if they do not participate in the dividend reinvestment plan.”
New heading “Climate change has the potential to impact the Fund’s investments.”
Removed heading “Risks Related to our CLO Investments and CLO Investment Activities”
Removed heading “Risks Related to our Agency RMBS Investments and Agency RMBS Investment Activities”
Removed heading “General Risks Related to our Investments and Investment Activities”
Removed heading “Risks Related to our Financing, Hedging and Derivative Activities”
Removed heading “Other Business Risks”
Removed heading “Risks Related to our Relationship with our Manager and Ellington”
Removed heading “Risks Related to our Common Shares”
Removed heading “Risks Related to our Organization and Structure”
Removed heading “Risks Related to our Intention to Convert to a Registered Closed-End Fund / RIC”
Removed heading “U.S. Federal Income Tax Risks”
Removed heading “General Risk Factors”
Removed heading “Risks Related to our CLO Investments and CLO Investment Activities”
Removed heading “If a CLO in which we invest is treated as engaged in a U.S. trade or business for U.S. federal income tax purposes, such CLO could be subject to U.S. federal income tax on a net basis, which could affect our operating results and cash flows.”
Removed heading “If a CLO in which we invest fails to comply with certain U.S. tax reporting requirements, such CLO may be subject to withholding requirements that could materially and adversely affect its operating results and cash flows.”
Removed heading “Risks Related to our Agency RMBS Investments and Agency RMBS Investment Activities”
Removed heading “The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae, Freddie Mac, and Ginnie Mae and the U.S. Government, could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.”
Removed heading “Prepayment rates can change, adversely affecting the performance of our assets.”
Removed heading “Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets.”
Removed heading “Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our targeted assets.”
Removed heading “General Risks Related to our Investments and Investment Activities”
Removed heading “Valuations of many of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time, and may differ from the values that would have been used if a ready market for these assets existed.”
Removed heading “Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to shareholders.”
Removed heading “Risks Related to our Financing, Hedging, and Derivative Activities”
Removed heading “We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders, as well as increase losses when economic conditions are unfavorable.”
Removed heading “Our rights under repo agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders.”
Removed heading “Our access to financing sources may not be available on favorable terms, or may be limited or completely shut off, and our lenders and derivative counterparties may require us to post additional collateral. These circumstances may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.”
Removed heading “Our use of derivatives may expose us to counterparty risk.”
Removed heading “Lack of diversification in the number or types of assets we acquire would increase our dependence on relatively few individual assets or asset types.”
Removed heading “We are highly dependent on Ellington's information systems and those of third-party service providers, and system failures could significantly disrupt our business, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.”
Removed heading “The lack of liquidity in our assets may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.”
Removed heading “We are dependent on our Manager and certain key personnel of Ellington that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates the management agreement or such key personnel are no longer available to us.”
Removed heading “There are risks and conflicts of interest associated with the base management fee we are obligated to pay our Manager.”
Removed heading “The management agreement with our Manager was not negotiated on an arm's-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.”
Removed heading “Maintenance of our exclusion from registration as an investment company under the 1940 Act imposes significant limitations on our operations. If we were required to register as an investment company under the 1940 Act, we would be subject to the restrictions imposed by the 1940 Act, which would require us to make material changes to our strategy.”
Removed heading “Certain provisions of Maryland law could inhibit a change in our control.”
Removed heading “Risks Related to our Intention To Convert to a Registered Closed-End Fund / RIC”
Removed heading “We may not be able to obtain the necessary approvals to convert to a registered closed-end fund to be treated as a RIC.”
Removed heading “We are no longer taxed as a REIT.”
Removed heading “Failure to qualify as a REIT in prior years would subject us to federal income tax.”
Removed heading “Our ability to utilize our net operating losses ("NOLs") and other carryforwards may be limited.”
Removed heading “We have made a mark-to-market election under Section 475(f) of the Code.”
Removed heading “Our recognition of "phantom" income may reduce a shareholder's after-tax return on an investment in our common shares.”
Removed heading “The Rights Agreement that we entered into to protect our tax attributes could hinder the market for our Common Shares.”
Removed heading “Future offerings of debt securities, which would rank senior to our common shares upon our bankruptcy liquidation, and future offerings of equity securities which could dilute the common share holdings of our existing shareholders and may be senior to our common shares for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common shares.”
Removed heading “Future sales of our common shares or other securities convertible into our common shares could cause the market value of our common shares to decline and could result in dilution of shares held by shareholders.”
Removed heading “Climate change has the potential to impact our investments.”
Removed heading “We may experience significant fluctuations in our book value per share and quarterly operating results.”
Removed heading “We are largely dependent on external sources of capital in order to grow.”
Largest changes
“•CLOs are backed by pools of corporate loans, which are typically below investment grade and may be unsecured or second-lien in nature. Borrowers of these loans are often highly leveraged and more sensitive to rising interest rates, inflation, or recessionary conditions. Defaults, covenant breaches, or restructurings among these borrowers could significantly impair CLO cash flows and valuations, especially in mezzanine and equity tranches.”see in full comparison
“•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. …”see in full comparison
“A downgrade, suspension or withdrawal of any future credit rating assigned by a rating agency to the Fund or any future issuances of preferred shares or debt securities, if any, or change in the debt markets could cause the liquidity or market value of the Fund’s preferred shares or debt securities to decline significantly.”see in full comparison
“Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to shareholders.”see in full comparison
see in full comparisonOurThe Fund’s business is materially affected by conditions in theresidentialcorporatemortgage market, the residential real estate market,sector, the financial markets, and the economy, including inflation, interest rates, energy costs, unemployment, geopolitical issues,tariffs,concerns over the creditworthiness of governments worldwide and the stability of the global banking system.InAnyparticular,deterioration of financial markets or theresidentialeconomymortgage market in the U.S. has experienced a variety of difficulties and challenging economic conditions in the past, including defaults, credit losses, and liquidity concerns. Certain commercial banks, investment banks, insurance companies, loan origination companies and mortgage-related investment vehicles incurred extensive losses from exposure to the residential mortgage market as a result of these difficulties and conditions. These factors have impacted, and may in the future impact,or investor perception of the risks associated withAgencyfinancialRMBS,marketsother real estate-related securities and various other asset classes in which we may invest. As a result, values for Agency RMBS, and various other asset classes in which we may invest have experienced, and may inor thefuture experience, significant volatility. Any deterioration of the mortgage market and investor perception of the risks associated with Agency RMBS, and various other assets that we acquireeconomy could materially adversely affectourthe Fund’s business, financial condition and results of operations, andourits ability to pay dividends toourits shareholders.
“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. …”see in full comparison
Full comparison: every changed paragraph (485)
•Risks Related to CLO Investments. The Fund primarily invests in corporate CLOs, which are structured credit securities backed 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.
•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 distribute dividends.
•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 exceeds the value of the CLO’s assets, further increasing the risk of principal impairment for holders of subordinated CLO securities like the Fund.
•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 repos, credit facilities, and other forms of borrowing, which can magnify potential losses. Further, the Fund uses leverage indirectly through its investments, such as CLO equity securities which are structurally subordinate to the CLO debt tranches, which also magnifies 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 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 interest rate changes. 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 LAFs, which are short- to medium-term financing vehicles used to acquire corporate loans prior to the issuance of a CLO. These facilities are subject to market, credit, and structural risks, including the risk that the accumulated loans may not be successfully securitized into a CLO, leaving the Fund exposed to direct credit and market risks associated with holding such assets. Additionally, LAFs are highly leveraged, and have debt-to-equity ratios typically ranging from three to six times prior to a CLO's pricing, which amplifies losses on the underlying loans.
•Risks Associated with the Implementation of the Conversion. The Fund’s preparation for and 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 pay dividends. These risks include increased operational burdens and counterparty limitations due to new regulatory requirements such as bank custody rules; uncertainty surrounding the change in the Fund’s tax year, which could delay its qualification as a RIC and require continued operation as a taxable C-Corporation; 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 the 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 Net Asset Value, tax status, and regulatory standing, and 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 repos, 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 repos, 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 Internal Revenue 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 significant 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 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 does not review each individual investment decision. 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.
•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 Net Asset Value, 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, 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 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. As the Fund transitions its portfolio from Agency RMBS to CLO securities, it may temporarily hold lower-yielding investments such as cash and cash equivalents, which could reduce near-term returns.
•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 Net Asset Value 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.
Risks Related to our CLO Investments and CLO Investment Activities
•Our investments in CLO securities, particularly in mezzanine debt and equity tranches, are highly subordinated and exposed to first loss in the capital structure. These tranches are subject to the risk of total or partial write-downs in the event that underlying collateral defaults increase or deal performance deteriorates. CLO equity tranches may experience complete loss of value if coverage tests are breached or excess interest is materially reduced.
•CLOs are backed by pools of corporate loans, which are typically below investment grade and may be unsecured or second-lien in nature. Borrowers of these loans are often highly leveraged and more sensitive to rising interest rates, inflation, or recessionary conditions. Defaults, covenant breaches, or restructurings among these borrowers could significantly impair CLO cash flows and valuations, especially in mezzanine and equity tranches.
•The CLOs in which we invest may include exposure to middle-market loans, which are generally issued by smaller, less capitalized companies with limited financial flexibility and access to capital markets. These borrowers may be particularly vulnerable to economic downturns or industry-specific stress, and loans to these companies tend to be less liquid and more volatile than broadly syndicated loans.
•Many of the loans held in CLO portfolios are covenant-lite, meaning they lack traditional maintenance covenants. This limits the ability of CLO managers and lenders to intervene early when a borrower’s credit quality deteriorates, increasing the risk of sudden or severe losses.
•CLO equity and mezzanine debt tranches rely on the generation of excess spread, which may be adversely affected by mismatches in interest rate terms between underlying floating rate assets and liabilities, the presence of interest rate floors, or fixed-rate collateral. Rising rates may also reduce the cushion between CLO tranche coupons and asset yields, compressing returns and impairing equity cash flows.
•We are dependent on the collateral managers of the CLOs in which we invest. These managers are unaffiliated with us and may have interests that diverge from ours. CLO documentation often limits our ability to influence or remove a manager, even in cases of underperformance. CLO managers may be incentivized to maximize management fees rather than equity returns, and their investment decisions, including loan selection, trading activity, and reinvestment, may adversely affect deal performance.
•CLOs are highly structured and complex vehicles. Each transaction is governed by a series of tests, including overcollateralization and interest coverage thresholds, which, if breached, can redirect cash flows away from the mezzanine and equity tranches to pay more senior classes. CLOs with excess exposure to CCC-rated assets or defaulted loans are at greater risk of breaching these tests, potentially resulting in extended periods of cash flow diversion and impaired valuations.
•We generally do not have direct access to the underlying loan obligors, and our rights as CLO debt or equity investors are limited by the governing indentures. In the event of borrower default or CLO liquidation, recoveries may be minimal or nonexistent, particularly for junior tranches. Bankruptcy courts may also disallow or recharacterize CLO claims, further limiting recoveries.
•CLO securities are subject to limited liquidity and infrequent trading. Market disruptions or reduced investor demand may impair our ability to sell positions at expected prices, or at all. Valuations for CLO securities can be volatile and may diverge from underlying fundamentals, especially during periods of broader credit market stress.
•We may also invest in CLO warehouse facilities, which involve leveraging our capital during the accumulation phase prior to a CLO's issuance. If a CLO is not successfully priced and closed, or if market conditions deteriorate during the warehousing period, we may be forced to absorb losses on accumulated assets or experience significant mark-to-market volatility.
•Many of the CLOs in which we invest are domiciled outside of the U.S. or include non-U.S. borrowers, creating potential legal, regulatory, currency, and tax exposure. These CLOs may also be subject to withholding requirements or limitations on enforcement of creditor rights in certain jurisdictions.
Risks Related to our Agency RMBS Investments and Agency RMBS Investment Activities
•Regulatory changes affecting Fannie Mae, Freddie Mac, and Ginnie Mae could materially impact mortgage market liquidity and valuations. Any changes in their government backing, capital requirements, or underwriting guidelines could disrupt the market for Agency RMBS and impact the pricing of our mortgage-related assets.
•Prepayment behavior can meaningfully affect the yield and performance of Agency RMBS. Volatility in interest rates, housing turnover, borrower refinancing, and servicing practices can all impact prepayment speeds, potentially resulting in the accelerated amortization of premiums or reduced interest income.
•Interest rate mismatches between our fixed-rate assets and variable-rate borrowings, as well as rising interest rates, can compress or even eliminate our net interest margin, reduce asset values, and materially adversely impact our business, financial condition, and ability to pay dividends.
•Government actions, including Federal Reserve policy shifts and mortgage loan modification programs, as well as future legislative or regulatory changes, may negatively affect the performance and value of our assets, potentially resulting in lower returns and reduced cash available for dividends.
General Risks Related to our Investments and Investment Activities
•Due diligence conducted by our Manager may be limited or may fail to uncover all material risks or weaknesses in potential investments, which could result in losses and materially adversely impact our business, financial condition, and ability to pay dividends.
•We rely heavily on models and third-party data to evaluate and manage investments. These models incorporate assumptions that may prove to be incorrect, particularly during periods of volatility or when market conditions deviate from historical norms.
•Asset valuations are inherently subjective for many of our holdings and may differ materially from observable market prices. Differences in methodology among dealers, pricing services, and internal estimates can result in inconsistent valuations, which directly impact our reported financial results and fee calculations.
Risks Related to our Financing, Hedging and Derivative Activities
•We use leverage to enhance returns, but this approach increases the magnitude of potential losses during adverse market conditions. Rising interest rates or liquidity constraints could limit our ability to obtain financing on favorable terms, forcing us to sell assets at inopportune times or reduce our investment activity.
•Our access to financing depends on the creditworthiness of our collateral and the willingness of lenders to provide credit. Disruptions in capital markets or changes in repo financing terms could restrict our ability to fund investments, subject us to margin calls, or force deleveraging at unfavorable prices.
•Hedging strategies, including interest rate swaps and other derivatives, may not fully protect us from market fluctuations. These instruments carry counterparty risk, and regulatory changes could impact their availability, cost, or effectiveness, potentially increasing our exposure to interest rate and credit risk.
Other Business Risks
•We may change our investment strategy, investment guidelines, hedging strategy, and asset allocation, operational, and management policies at any time without shareholder approval, which could impact our business model and future distributions.
•We operate in a competitive market for our targeted assets. Competition for attractive investment opportunities may limit our ability to deploy capital efficiently or generate expected returns.
•We rely heavily on Ellington’s and third-party service providers’ information systems, and any cyber-attacks, system failures, or breaches, including those involving AI-generated outputs, could disrupt operations, compromise sensitive data, and materially adversely affect our business, financial condition, and ability to pay dividends.
•A lack of liquidity in our assets, including certain corporate debt, equity investments, and CLOs, could make it difficult to sell holdings, accurately value our portfolio, or secure financing, which may negatively impact our financial condition and ability to pay dividends.
Risks Related to our Relationship with our Manager and Ellington
•We are dependent on Ellington and its personnel for investment management. The loss of key personnel or termination of our management agreement could materially impact operations and financial performance.
•There are potential conflicts of interest inherent in our structure. Our Manager earns fees based on our net assets and performance, which may incentivize greater leverage, increased risk-taking, or asset selection decisions that prioritize near-term income. Our Manager and Ellington may also allocate investment opportunities among multiple clients, and we may not be allocated our desired share of certain assets.
•Our Manager and Ellington manage multiple investment accounts, which may create conflicts of interest in allocating investment opportunities and resources.
Risks Related to our Common Shares
•Our ability to pay dividends depends on our earnings, liquidity, and access to financing. Market conditions, regulatory changes, or investment losses could impair our ability to maintain our current dividend level, or to pay dividends at all.
Management's Discussion & Analysis (MD&A)
New heading “Results of Operations for the Three-Month Periods Ended March 31, 2025 and 2024”
New heading “Net Income (Loss)”
New heading “Interest Income”
New heading “Interest Expense”
New heading “Adjusted Cost of Funds”
New heading “Management Fees”
New heading “Other Operating Expenses”
New heading “Income Tax Expense (Benefit)”
New heading “Adjusted Distributable Earnings”
New heading “Three-Month Period Ended March 31, 2025:”
Removed heading “Non-Agency Performance”
Removed heading “Other Income (Loss)”
Largest changes
“Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives. For the three-month period ended March 31, 2025, Other income (loss) was $(14.5) million, consisting primarily of net realized and unrealized losses of $(7.9) million on our financial derivatives and $(7.6) million on our securities. …”see in full comparison
“For the three-month period ended March 31, 2024, Other income (loss) was $5.6 million, consisting primarily of net realized and unrealized gains of $13.7 million on our financial derivatives, which were partially offset by net realized and unrealized losses of $(8.1) million on our securities. Net realized and unrealized gains of $13.7 million on our financial derivatives consisted of net realized and unrealized gains of $15.7 million on our interest rate swaps and $0.4 million on our TBAs, partially offset primarily by net realized and unrealized losses of $(2.2) million on our U.S. …”see in full comparison
“U.S. CLO equity performance, while positive in 2024, was mixed relative to CLO mezzanine performance. While declining default rates contributed to demand for CLO equity tranches and alleviated credit losses, rapid prepayment rates in the loan market led to both price declines for loans trading above par and compression in loan floating rate spreads. …”see in full comparison
“In both the U.S. and Europe, declining default rates contributed to strong demand for CLO debt and equity tranches, and along with limited net CLO issuance, drove CLO mezzanine and equity credit spreads tighter over the course of 2024. Additionally, high prepayment rates in the U.S. drove substantial deleveraging in many seasoned CLOs, contributing to incremental credit spread tightening in many mezzanine tranches. …”see in full comparison
“For the three-month period ended March 31, 2025, CLO markets started on a constructive note, supported by sustained demand for leveraged loans, improving fundamentals for corporate borrowers, and strong capital inflows into floating-rate leveraged loan funds as investors positioned for a “higher for longer” interest rate environment. However, volatility increased as the quarter progressed—particularly in March—driven by growing investor concerns over proposed tariffs and the associated risk of an economic slowdown. …”see in full comparison
“In 2024, the U.S. CLO market benefited from strengthening loan fundamentals and robust demand for leveraged loans, as well as from spread tightening across credit risk assets broadly. The trailing-twelve-month payment default rate for the Morningstar LSTA U.S. Leveraged Loan Index (the "U.S. LL Index") declined to 91 basis points at the end of 2024, which was 62 basis points lower year over year, while the balance of loans in the U.S. LL Index rated CCC+ or below declined to 5.3%, the lowest level since October 2022. The U.S. …”see in full comparison
Full comparison: every changed paragraph (164)
We were initially formed in August 2012 as a Maryland company and havehad historically specialized in acquiring, investing in, and managing residential mortgage- and real estate-related assets, while electing to be taxed as a REIT under the Code.
On March 29, 2024, our Board of Trustees approved a strategic transformation,transformation (the "CLO Strategic Transformation,Transformation") of our investment strategy to focus on corporate collateralized loan obligations,obligations or ("CLOs.CLOs"). In connection with the CLO Strategic Transformation, we revoked our election to be taxed as a REIT forbeginning with tax year 2024, rebranded as Ellington Credit Company, and began operatingoperated as a taxable C-Corp.C-Corporation during the interim period from January 1, 2024 through March 31, 2025. As a taxable C-Corp,C-Corporation, we continued to conduct our operations so that neither we nor any of our subsidiaries arewere required to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act.Act"). This includesincluded holding a core portfolio of liquid Agency MBSRMBS pools in order to maintain our exemption from the 1940 Act. During this time,period, we also plansought to take advantage of our significant existing net operating loss carryforwards to offset the majority of our U.S. federal taxable income.
On April 1, 2025,2025 (the "Conversion Date"), we intend to convertconverted to a Delaware closed-end fund registered under the 1940 Act that has applied and will elect to be treated as a regulated investment company (a "RIC") under the Internal Revenue Code of 1986, as amended (the "Code") (such actions, collectively, the "Conversion"). We obtained shareholder approval of certain matters related to the Conversion at a special meeting of shareholders held on January 17, 2025 (the "Special Meeting"). In conjunction with the Conversion, we intend to liquidate the vast majority of our remaining mortgage- and real estate-related assets and, upon the effectiveness of the Conversion, we intend to operate so as to qualify to be taxed as a RIC under subchapter M of the Code. After the Conversion, we would generally not be subject to corporate tax.
Our primary investment objectives are to generate attractive current yields and risk-adjusted total returns for our shareholders. We seek to achieve these objectives by acquiring and managing a portfolio of corporate CLOs, with an emphasis on CLO mezzanine debt and equity tranches, and related investments, and opportunistically mitigating its credit risk, foreign currency risk, and interest rate risk, by using a variety of hedging instruments.
Our acquisition and management decisions will depend on prevailing market conditions and our targeted asset classes may vary over time in response to market conditions. We are advised by an affiliate of Ellington, Ellington Credit Company Management LLC (the "Adviser").
Our primary objective is to generate attractive current yields and risk-adjusted total returns for our shareholders by making investments that we believe compensate us appropriately for the associated risks. Following the CLO Strategic Transformation, we now seek to attain this objective by constructing 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. CLOs are a form of asset-backed security collateralized by syndicated corporate loans which receive interest and principal cash flows from these underlying loans. Senior debt tranches are paid first, then mezzanine debt tranches, and finally, equity. Additionally, we 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.
We are externally managed and advised by our Manager, an affiliate of Ellington. Ellington has a longstanding record of investing in the CLO sector. In connection with the CLO Strategic Transformation, on June 25, 2024, our Board of Trustees unanimously approved the Management Agreement where, in addition to carrying over the removal of certain provisions related to the maintenance of our REIT status (which had been made in the prior amendment), our Board of Trustees determined to more closely align the management fee arrangement between us and our Manager with the advisory fee structures of CLO-focused registered closed-end funds.
We currently use leverage in our strategies and to date have financed our assets exclusively through repurchase agreements, which we account for as collateralized borrowings. As of DecemberMarch 31, 2024,2025, we had outstanding borrowings under repurchase agreements in the amount of $563.0$517.5 million with 1413 counterparties; 89%87% of such borrowings were collateralized by Agency RMBS and 11%13% were collateralized by CLOs. As part of the Conversion, we intend to sell our remaining liquid Agency MBS pools and operate in compliance with 1940 Act requirements.
Following the Conversion, we liquidated our remaining mortgage-related assets, and we intend to operate so as to qualify to be taxed as a RIC under subchapter M of the Code moving forward. As a RIC, we generally do not have to pay corporate-level federal income tax on any net ordinary income or capital gain that we distribute to our stockholders as dividends if we meet certain source-of-income, distribution, and asset diversification requirements.
As of DecemberMarch 31, 2024,2025, our book value per share was $6.53$6.08 as compared to $6.53 and $7.32 as of December 31, 2024 and 2023, respectively.
•After lowering its target range for the federal funds rate by a full percentage point to 4.25%–4.50% in the second half of 2024, the U.S. Federal Reserve (the "Federal Reserve") maintained that range at its January and March 2025 meetings. In its March announcement, the Federal Reserve noted that “uncertainty around the economic outlook has increased.”
•In 2024, the U.S. Federal Reserve maintained its federal funds rate target range of 5.25%–5.50% across its first five meetings. At the September meeting, the Federal Reserve cut rates for the first time in four years, reducing the target range by 50 basis points to 4.75%–5.00%. The Federal Reserve cited a balance in risks to its employment and inflation goals.
•Subsequent meetings in November and December brought additional 25-basis-point cuts, bringing the range to 4.25%–4.50%. However, the December Summary of Economic Projections signaled a slower pace of rate cuts in 2025, with only two 25-basis-point reductions anticipated. Chair Powell noted further progress lowering inflation as a prerequisite for additional cuts.
•In June, theThe Federal Reserve reducedannounced that it would further reduce the pace of its balance sheet contractioncontraction, beginning in April, by lowering the cap on portfolio runoff of U.S. Treasury securities from $60$25 billion to $25$5 billion, while maintaining the $35 billion cap on Agency RMBS.RMBS runoff.
Tariff Policy
•During the first quarter of 2025, the administration announced a new round of tariffs, primarily on imports from China, Canada, and Mexico, along with additional tariffs on certain goods and sectors. The administration also announced plans for broad “reciprocal” tariffs aimed at matching the tariff rates that other countries impose on U.S. exports.
These announcements caused volatility to increase in financial markets, contributing to notable declines in major equity indices during the final weeks of the first quarter.
•FollowingAfter sharprising declinessharply in the fourth quarter of 2023,2024, interest rates rosedeclined significantly in the first quarter of 20242025, aswith expectationsyields for Federal Reserve rate cuts shifted later inon the year.2- The 2-year U.S. Treasury yield increased by 37 basis points to 4.62%, while theand 10-year U.S. Treasury yieldsecurities rosefalling by 3236 basis points toquarter 4.20%.over Interestquarter, ending at 3.88% and 4.21%, respectively. Meanwhile, interest rate volatility—as declined,measured withby the MOVE Index—declined reachingin athe two-yearearly lowpart byof quarter-end.the quarter before reversing course and finishing slightly higher overall.
•Mortgage rates rose at the beginning of the first quarter of 2025, with the Freddie Mac survey 30-year mortgage rate increasing from 6.85% at the start of the year to 7.04% by mid-January. However, mortgage rates subsequently declined, with the 30-year mortgage rate falling to 6.65% by the end of the quarter.
•Secured Overnight Financing Rates (“SOFR”) were largely unchanged over the first quarter of 2025. The one-month SOFR rate declined by 1 basis point to 4.32%, while the three-month SOFR rate declined by 2 basis points to 4.29% at quarter end. SOFR rates drive many of our financing costs.
In the second quarter, interest rates rose in April before declining in May and June, ending slightly higher overall. The 2-year U.S. Treasury yield increased by 13 basis points to 4.75%, and the 10-year U.S. Treasury yield rose by 20 basis points to 4.40%. Volatility spiked in mid-April but fell through the quarter's end.
The third quarter saw significant declines in interest rates, particularly short-term rates. The 10-year U.S. Treasury yield exceeded the 2-year yield for the first time since July 2022. The 2-year yield dropped by 111 basis points to 3.64%, and the 10-year yield fell by 62 basis points to 3.78%. Volatility spiked in early August and September before subsiding.
In the fourth quarter, interest rates reversed course again, with the 2-year U.S. Treasury yield rising 60 basis points to 4.24% and the 10-year U.S. Treasury yield increasing 79 basis points to 4.57%. The MOVE Index peaked ahead of the U.S. presidential election but declined by year-end.
For 2024 as a whole, the 2-year U.S. Treasury yield decreased by 1 basis point, while the 10-year yield rose by 69 basis points.
•Mortgage rates closely tracked long-term interest rate movements. The Freddie Mac survey 30-year mortgage rate rose to 7.22% in May before declining to 6.08% by late September. Mortgage rates spiked again in the fourth quarter, ending the year at 6.85%.
•SOFR rates were stable in the first half of 2024 but fell sharply in the second half, reflecting the Federal Reserve rate cuts. For the full year, one-month SOFR decreased 102 basis points to 4.33%, while three-month SOFR fell 103 basis points to 4.31%. SOFR rates drive many of our financing costs.
•HousingFollowing pricea metrics3.9% showedincrease modestin gains for2024, the full year. The S&P CoreLogic Case-SchillerCase-Shiller US National Home Price NSA Index increasedrose by 3.9%,1.3% whileover the first three months of 2025. Meanwhile, the National Association of Realtors Housing Affordability Index roseincreased 0.2%.by 2.3% during the first three months of 2025, reflecting a modest improvement in affordability with lower mortgage rates.
•The Mortgage Bankers Association'sAssociation’s Refinance Index, althoughwhile still low on anby historical basis,standards, rose significantlyby 80% quarter over quarter, indicating a pickup in therefinancing firstactivity three quarters of 2024, tripling between the start of the year and September 27th. However, the index declined sharply in the fourth quarter, ending 2024 onlyamid slightly higherlower year-over-year.mortgage rates.
•Mortgage prepayment speeds also increased but remained low overall, with Fannie Mae 30-year MBS registering CPRs of 5.2 in January, 5.1 in February, and 6.6 in March.
•Similarly, mortgage prepayment speeds increased during the year but remained at relatively low levels. Prepayment speeds for Fannie Mae 30-year RMBS started at 4.4 CPR in January 2024 and trended upward for most of the year, reaching a peak of 8.3 CPR in October. Prepayment speeds then declined towards year-end, with Fannie Mae 30-year RMBS registering 6.0 CPR in December.
•U.S. real GDP grewcontracted at an estimated annualized ratesrate of 1.6%0.3% in the first quarter,quarter 3.0%of 2025, after growing by 2.4% in the secondprior quarter,quarter. andMeanwhile, 3.1%the unemployment rate edged higher, rising from 4.0% in the third quarter, with an estimated growth rate of 2.3% in the fourth quarter. Unemployment edged up from 3.8%January to 4.1% byin year-end.February and 4.2% in March.
•InflationInflation, trendedas lower,measured withby the 12-month percentage change in the Consumer Price Index for All Urban Consumers,Consumers (“CPI-U"), not seasonally adjusted, fallingregistered from 3.1%3.0% in JanuaryJanuary, to2.8% ain lowFebruary, ofand 2.4% in SeptemberMarch before2025. endingThis thecompares yearto at12-month 2.9%.changes of 2.6% in October, 2.7% in November, and 2.9% in December 2024.
•MBSFor returnsthe werefirst mixed,quarter withof 2025, the Bloomberg U.S. MBS Index postingposted a full-year positive return of 1.20%3.06% andbut a positivenegative excess return (on a duration-adjusted basis) of 0.37%(0.07%) relative to the Bloomberg U.S. Treasury Index. The performance of both indices was volatile, particularly in the fourth quarter, when returns were sharply negative overall.
•Corporate bonds fared better. The Bloomberg U.S. Corporate Bond Index returnedgenerated 2.13%a withpositive anreturn of 2.31% but a negative excess return of 2.46%,(0.85%), while the Bloomberg U.S. Corporate High Yield Bond Index postedgenerated ana 8.19%positive return andof 5.02%1.00% but a negative excess return.return of (1.13%), for the first quarter of 2025. Corporate credit spreads tightened,widened during the quarter, with spreads on the Markit CDX North America Investment Grade and High Yield Indices narrowingrising by 765 and 4512 basis points,points quarter-over-quarter, respectively.
•IncludingAfter $800reaching billionrecord highs in repricings,2024, U.S. leveraged loan and CLO issuance reachedremained a record $1.5 trillionstrong in 2024,the perfirst quarter of 2025. Including nearly $200 million in repricings, U.S leveraged loan issuance totaled $387 billion, according to PitchBook|LCD. Meanwhile, U.S. CLO newissuance issueapproached volume also hit a record, exceeding $200$133 billion, including $90 billion in refinancings and resets, according to BofA Global Research.
•DefaultAfter declining in 2024, default rates on U.S. leveraged loans declined further in 2024.the first quarter of 2025. According to PitchBookPitchbook|LCDLCD, the twelve-month trailing default rate on the Morningstar LSTA Leveraged Loan Index felldecreased to 0.80% as of September 30th, compared to 1.53%0.82% at thequarter startend, ofdown the year. Default rates rose slightly tofrom 0.91% byat December 31st, but remained well below the 10-year historical average of 1.62%.31st.
•Additionally,Leveraged loan prices onalso leveragedmoved loans increased,lower, with the Morningstar LSTA US Leveraged Loan Index risingfalling by $1.10$1.02 overto the year, reaching $97.33$96.31 as of DecemberMarch 31st.
•European leveraged loans followedmirrored athese similartrends, trend, withas default rates decliningdeclined significantlyto year0.29% from 0.42% quarter over year, to 0.42% from 1.62%.quarter. Prices increasedalso as well,fell, with the Morningstar LSTA EU Leveraged Loan Index risingdropping by €1.960.38 to €98.01.97.63.
•After strong gains in 2024, U.S. equity markets declined in the first quarter of 2025, with some indices recording their worst quarterly performance since 2022, driven largely by growing uncertainty around trade policy. In the first quarter, the NASDAQ fell by 10.4%, the S&P 500 fell by 4.6%, and the Dow Jones Industrial Average fell by 1.3%. In contrast, London's FTSE 100 index rose by 5.0%, while the MSCI World global equity index fell by 2.1%.
•U.S. equities posted another strong year in 2024: the Dow Jones rose 12.9%, the S&P 500 gained 23.3%, and the NASDAQ climbed 28.6%. The FTSE 100 and MSCI World Indexes also posted gains of 5.7% and 17.0%, respectively.
•Equity volatility spiked at several pointsrose during 2024,the first quarter of 2025, with the VIX reaching,spiking in earlymid-March August,amid itsheightened highestinvestor level since October 2020.concerns.
Our CLO portfolio expandedgrew nearlyby tenfold year over year46% to $249.9 million as of March 31, 2025, from $171.1 million as of December 31, 2024, from $17.4 million, as we rotatedpurchased investment capital intoadditional CLOs in conjunction with the CLO Strategic Transformation. As of DecemberMarch 31, 2024,2025, our CLO portfolio consisted of $99.1$164.4 million of CLO equity tranches, ($91.8$151.3 million dollar-denominated, $7.3$13.1 million non-dollar denominated) and $72.0$85.5 million of CLO notes, specifically mezzanine debt tranches ($55.2$64.0 million dollar-denominated, $16.8$21.5 million non-dollar denominated).
In conjunction with the Conversion, we intend to liquidate the vast majority of our remaining mortgage- and real estate-related assets and rotate all investment capital into CLOs. Moving forward, weWe expect our CLO holdings to continue to be a blend of CLO equity and CLO debt investments, with the capital allocations fluctuating over time based on market opportunities. In addition, we intend to continue to invest in both dollar-denominated and non-dollar denominated CLO investments, based on relative value opportunities, but expect the majority of our CLO investments will continue to be dollar-denominated.
The size of our Agency RMBS holdings decreased slightly to $503.9 million as of March 31, 2025, compared to $512.3 million as of December 31, 2024. While we continued to hold a core portfolio of liquid Agency RMBS in order to maintain our exemption from the 1940 Act (prior to the Conversion), we substantially increased our net short TBA position, which by March 31st almost entirely offset our Agency RMBS holdings. Shortly after the Conversion, we sold our remaining Agency RMBS and liquidated our remaining TBA positions.
The size of our Agency RMBS holdings decreased by 30% to $512.3 million as of December 31, 2024, compared to $728.0 million as of December 31, 2023, primarily driven by net sales in conjunction with the CLO Strategic Transformation, as well as paydowns. Meanwhile, we sold our remaining non-Agency RMBS and interest only securities throughout the year and held only a de minimis amount at year end.
As of DecemberMarch 31, 2024,2025, our mortgage-backed securities portfolio consisted almost entirely of $512.3$503.9 million of fixed-rate Agency "specified pools," and a de minimis amount of Agency interest-only securities, or "Agency IOs." Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through government-sponsored refinancing programs, and mortgages with various other characteristics.
Our debt-to-equity ratio, adjusted for unsettled trades, decreased to 2.2:1 as of March 31, 2025, as compared to 2.9:1 as of December 31, 2024, as compared to 5.3:1 as of December 31, 2023. The decline was driven by significantly higher shareholder'sshareholders’ equity and the use of significantly less leverage onin our CLO investments relative to Agency investments.RMBS portfolio. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions. As of DecemberMarch 31, 2024,2025, 89%87% of our borrowings were secured by Agency RMBS and 11%13% were secured by CLOs.
In addition to using short positions in TBAs, we also hedged our interest rate risk during the period using interest rate swaps, U.S. Treasury securities, and futures. At March 31, 2025, all of our interest rate hedges were in short TBA positions. We also maintained small credit hedge and foreign currency hedge portfolios during the period and at March 31, 2025.
During the year, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in U.S. Treasury securities and futures. We ended the year with a net short TBA position on a notional basis, but a net long TBA position as measured by 10-year equivalents. 10-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates. We also maintained modest credit hedge and currency hedge portfolios at year end.
As of DecemberMarch 31, 2024,2025, we had cash and cash equivalents of $31.8$17.4 million, in addition to other unencumbered assets of $79.2$151.5 million. This compares to cash and cash equivalents of $38.5$31.8 million, and other unencumbered assets of $22.9$79.2 million, as of December 31, 2023.2024.
For the three-month period ended March 31, 2025, CLO markets started on a constructive note, supported by sustained demand for leveraged loans, improving fundamentals for corporate borrowers, and strong capital inflows into floating-rate leveraged loan funds as investors positioned for a “higher for longer” interest rate environment. However, volatility increased as the quarter progressed—particularly in March—driven by growing investor concerns over proposed tariffs and the associated risk of an economic slowdown. This heightened volatility, coupled with elevated CLO issuance throughout the quarter, negatively pressured CLO prices in both the U.S. and Europe.
U.S. leveraged loan prices declined in the first calendar quarter of 2025, largely due to a sharp drop in March driven by weakness in lower-quality loans, particularly those more sensitive to higher tariff rates. This decompression within the loan index weighed on CLO mezzanine tranches, particularly those with elevated exposure to riskier assets. Meanwhile, U.S. loan prepayment rates, though still high by historical standards, declined quarter over quarter, resulting in reduced deleveraging for seasoned CLOs which adversely impacted mezzanine tranches priced at discounts.
While lower quarter over quarter, prepayment activity remained brisk in January and February, which pressured U.S. CLO equity tranches as net interest margin compression continued. This occurred as many floating-rate loans, typically those with higher coupon spreads, were refinanced and replaced with lower-coupon spreads. While this refinancing activity also led to a quarter-over-quarter decline in CLO equity NAVs, which presented a headwind to CLO equity tranche valuations, it also should limit future refinancing opportunities—a potential tailwind for CLO equity. Furthermore, CLO equity tranches with exposure to lower-quality loans, particularly those with exposure to higher tariffs, also underperformed.
In Europe, declining leveraged loan prices also pressured credit spreads, though European CLOs outperformed their U.S. counterparts, supported by rising prepayment rates which boosted deal deleveraging, and relatively low default rates.
Against this backdrop, our CLO strategy generated negative results for the three-month period ended March 31, 2025, with mark-to-market losses exceeding net interest income and modest gains on our credit hedges.
In 2024, the U.S. CLO market benefited from strengthening loan fundamentals and robust demand for leveraged loans, as well as from spread tightening across credit risk assets broadly. The trailing-twelve-month payment default rate for the Morningstar LSTA U.S. Leveraged Loan Index (the "U.S. LL Index") declined to 91 basis points at the end of 2024, which was 62 basis points lower year over year, while the balance of loans in the U.S. LL Index rated CCC+ or below declined to 5.3%, the lowest level since October 2022. The U.S. LL Index price rose $1.10 to $97.33 at year-end, which combined with interest payments drove a total return for the year of nearly 9%.
Leveraged loan prepayment and repricing rates surged in 2024, with prepayment rates on the U.S. LL Index increasing to 28% from 18% on a trailing-twelve-month basis, as borrowers took advantage of highly accessible capital markets to refinance debt at lower spreads, extend maturities, and increase liquidity. As a result, the broadly syndicated loan market saw gross issuance of nearly $1.5 trillion for the year, the largest annual issuance amount on record, split between $650 billion of new loan issuance and refinancings, and more than $800 billion in repricings. The wave of issuance was met by significant demand for the asset class, driven by a record year of CLO new issuance as well (over $200 billion in 2024), in addition to nearly $9 billion of net capital inflows into leveraged loan retail funds. On balance, the U.S. LL Index experienced net issuance of only $21 billion year-over-year. Net issuance in the U.S. CLO market was similarly limited in 2024.
The European CLO market also enjoyed strengthening loan fundamentals in 2024, benefiting from a full year default rate of just 42 basis points—120 basis points lower than 2023's default rate. However, loan prepayment rates rose less than in the U.S., increasing to 13.1 CPR (+2.6 CPR year over year). As a result of lower loan prepayment rates, the amount outstanding underlying the European leveraged loan index grew by 11%, compared to 2% in the U.S.
In both the U.S. and Europe, declining default rates contributed to strong demand for CLO debt and equity tranches, and along with limited net CLO issuance, drove CLO mezzanine and equity credit spreads tighter over the course of 2024. Additionally, high prepayment rates in the U.S. drove substantial deleveraging in many seasoned CLOs, contributing to incremental credit spread tightening in many mezzanine tranches. However, investors remained wary of credit dispersion and lower-quality loan portfolios in the U.S., driving debt spreads modestly wider for certain CLOs with elevated exposure to such assets. In Europe, while CLO mezzanine tranches did not benefit as much from elevated prepayment rates and rapid deal deleveraging, they were aided by reduced credit dispersion in their underlying loan portfolios relative to U.S. CLOs.
U.S. CLO equity performance, while positive in 2024, was mixed relative to CLO mezzanine performance. While declining default rates contributed to demand for CLO equity tranches and alleviated credit losses, rapid prepayment rates in the loan market led to both price declines for loans trading above par and compression in loan floating rate spreads. This occurred as a result of large volumes of loans trading at premiums to par being refinanced at par and replaced with lower-spread loans, triggering mark-to-market losses in some CLO equity profiles as both their interest payments (due to lower excess interest in the CLO) and underlying asset values declined in tandem. Loan repayment rate effects were somewhat mitigated by tightening CLO debt spreads, which allowed some deals to refinance their debt or reset their debt (which also included reinvestment period extension in addition to debt cost reduction). Deals that were able to exercise refinancing or reset options, typically those with higher existing costs of debt and better-performing portfolios, delivered stronger equity returns in 2024. In Europe, CLO equity performance was generally stronger as a result of slower prepayment speeds, rendering the negative impact of the repayment of premium loans less pronounced, as well as low default rates.
What changed in the latest 10-Q
Risk Factors
For information regarding factors that could affect our results of operations, financial condition, and liquidity, see the risk factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 12, 2024 (the "Form 10-K"), in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 filed with the SEC on May 15, 2024 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 filed with the SEC on August 14, 2024. See also "Special Note Regarding Forward-Looking Statements," included in Part I, Item 2 of this Quarterly Report on Form 10-Q.
Removed heading “Risks Related to the Performance Fee”
Removed heading “There are risks and conflicts of interests associated with the Performance Fee we are obligated to pay our Manager.”
Largest changes
“There are risks and conflicts of interests associated with the Performance Fee we are obligated to pay our Manager.”see in full comparison
“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. …”see in full comparison
“In addition to its Base Management Fee, our Manager is entitled to receive the Performance Fee based, in large part, upon our achievement of targeted levels of Pre-Performance Fee Net Investment Income. The Performance Fee payable to our Manager is based on our Pre-Performance Fee Net Investment Income, without considering any realized or unrealized gains or losses on our investments. …”see in full comparison
“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 our Net Asset Value of Common Equity, such as those due to unrealized losses, will reduce the Hurdle Amount, potentially making it easier for our Manager to earn a Performance Fee. We 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. …”see in full comparison
For information regarding factors that could affect our results of operations, financial condition, and liquidity, see the risk factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 12, 2024 (the "Form 10-K")see in full comparisonand, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 filed with the SEC on May 15, 2024(and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the"FirstquarterQuarterended10-Q").JuneAlso30,see2024 filed with the SEC on August 14, 2024. See also "Special Note Regarding Forward-Looking Statements," included in Part I, Item 2 of this Quarterly Report on Form 10-Q.Except as set forth below, as of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in the Form 10-K and the First Quarter 10-Q. The risks and uncertainties described below, in the Form 10-K and in the First Quarter 10-Q are not the only ones we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.
Full comparison: every changed paragraph (7)
For information regarding factors that could affect our results of operations, financial condition, and liquidity, see the risk factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 12, 2024 (the "Form 10-K") and, in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 filed with the SEC on May 15, 2024 (and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the "Firstquarter Quarterended 10-Q").June Also30, see2024 filed with the SEC on August 14, 2024. See also "Special Note Regarding Forward-Looking Statements," included in Part I, Item 2 of this Quarterly Report on Form 10-Q. Except as set forth below, as of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in the Form 10-K and the First Quarter 10-Q. The risks and uncertainties described below, in the Form 10-K and in the First Quarter 10-Q are not the only ones we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.
Risks Related to the Performance Fee
There are risks and conflicts of interests associated with the Performance Fee we are obligated to pay our Manager.
In addition to its Base Management Fee, our Manager is entitled to receive the Performance Fee based, in large part, upon our achievement of targeted levels of Pre-Performance Fee Net Investment Income. The Performance Fee payable to our Manager is based on our Pre-Performance Fee Net Investment Income, without considering any realized or unrealized gains or losses on our investments. As a result, (i) for quarters in which a Performance Fee is payable, such Performance Fee will exceed 17.5% of our GAAP net income if we generated net realized and unrealized losses on our investments during such quarter, (ii) our Manager could earn a Performance Fee for fiscal quarters during which we generate a GAAP net loss, and (iii) our Manager might be incentivized to manage our 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 our Net Asset Value of Common Equity, such as those due to unrealized losses, will reduce the Hurdle Amount, potentially making it easier for our Manager to earn a Performance Fee. We 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 our 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 our Manager to exceed 17.5% of our 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 and calculations of interest income) that can affect our 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 Company’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 Company’s Pre-Performance Fee Net Investment Income that exceeds the Hurdle Amount is payable to the Manager with respect to such quarter) may also cause our Manager to capture a disproportionate share of any increase in our investment income resulting from higher interest rates.
Management's Discussion & Analysis (MD&A)
Largest changes
“In the third quarter, the U.S. CLO market benefited from strengthening loan fundamentals, robust demand for leveraged loans, and the anticipation of an interest rate cutting cycle. The trailing-twelve-month default rate for the Morningstar LSTA U.S. Leveraged Loan Index declined to 78 basis points in August, its lowest level since December 2022, and finished the quarter at just 80 basis points; meanwhile, prepayment rates continued to increase during the quarter. Tightening credit spreads and lower interest rates supported strong corporate loan issuance during the quarter. …”see in full comparison
“In addition to the Base Management Fee, pursuant to the New Management Agreement, we will pay our Manager a performance fee (the "Performance Fee"), calculated and payable quarterly in arrears based upon our Pre-Performance Fee Net Investment Income, with respect to each fiscal quarter. …”see in full comparison
Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives. For the three-month period endedsee in full comparisonJuneSeptember 30, 2024, Other income (loss) was$(2.6)$3.9 million, consisting primarily of net realized and unrealizedlossesgains of$(6.8)$14.7 million on our securities, which were partially offset by net realized and unrealizedgainslosses of$4.2$(11.4) million on our financial derivatives. Net realized and unrealizedlossesgains of$(6.8)$14.7 million on our securities consisted primarily of net realized and unrealizedlossesgains of$(5.0)$15.5 million on our Agency RMBS and $0.5 million on our non-Agency RMBS, partially offset by the net realized and unrealized losses of $(2.20.8) million on our corporateCLOs,CLOs and $(0.10.5) million on our U.S. Treasurysecurities, partially offset by net realized and unrealized gains of $0.5 million on our non-Agency RMBS.securities. The netlossgain on our securities was primarily due tolowerhigher Agency RMBS prices quarter over quarter driven byhigherlower interestratesrates,and,and to a lesser degree by tighter yield spreads, and in the case of ourcorporatenon-AgencyCLOs,RMBS,elevatedrealizedloangainsprepaymentassociatedrateswithwhichseveraldroveprofitablemark-to-market losses on certain of our CLO equity positions.sales. Net realized and unrealizedgainslosses of$4.2$(11.4) million on our financial derivatives consisted of net realized and unrealizedgainslosses of$5.1$(17.5) million on our interest rateswapsswaps,and $0.1$(0.5) million on our Euro FX futures, and $(0.2) million on our credit default swaps, partially offset primarily by net realized and unrealizedlossesgains of$(0.7)$3.9 million on our TBAs, and$(0.3)$3.0 million on our U.S. Treasury futures. The netgainloss on our financial derivatives was primarily the result ofhigherlower interest rates during the quarter.
“In the second quarter, the CLO market continued to benefit from strengthening fundamentals, robust demand for leveraged loans, and continued capital inflows, despite periods of elevated market volatility. Net demand for leveraged loans remained strong as a result of strong capital inflows into retail loan funds, significant primary CLO issuance volumes, and rapid repayments of existing leveraged loan facilities as corporate borrowers continued to lower their financing costs. …”see in full comparison
“In the U.S., the declining default rates contributed to higher demand for CLO debt and equity, and along with the negative net issuance, drove CLO mezzanine spreads generally tighter during the quarter. In addition, high prepayment rates continued to drive deleveraging in seasoned CLOs. On the other hand, with investors wary of lower-quality loan portfolios, debt spreads widened for certain CLOs with greater exposure to such assets. …”see in full comparison
“•Similar to U.S leveraged loans, default rates on EU leveraged loans also declined. The twelve-month trailing default rate on the Morningstar LSTA EU Leveraged Loan Index decreased to 0.79% at quarter end, as compared to 1.29% at June 30th, and below the 10-year historical average of 1.44%, per PitchBook|LCD. However, the Morningstar LSTA EU Leveraged Loan Index declined modestly in the third quarter to $97.58 at September 30th, compared to $97.61 at June 30th.”see in full comparison
Full comparison: every changed paragraph (118)
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 or from our beliefs, expectations, estimates and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. 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 securities or our investments; our use of and dependence on leverage; future changes with respect to the Federal National Mortgage Association, or "Fannie Mae," and Federal Home Loan Mortgage Corporation, or "Freddie Mac," and related events, including the lack of certainty as to the future roles of these entities and the U.S. Government in the mortgage market and changes to legislation and regulations affecting these entities; market volatility; our ability to pivot our investment strategy to focus on CLOs; a deterioration in the CLO market, our ability to utilize our NOLs; our ability to convert to a closed end fund/RIC, including our ability to obtain shareholder approval of our conversion to a closed end fund/RIC; our ability to exit investments in a timely manner; changes in our investment objectives and strategy; changes in the prepayment rates on the mortgage loans underlying the securities we own; changes in rates of default and/or recovery rates; our ability to borrow to finance our assets and the available terms for such borrowings; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; risks associated with investing in real estate assets, including changes in business conditions; and other changes in markets conditions and trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, the risk factors described under Part II Item 1A of our each of our Quarterly ReportReports on Form 10-Q for the quarter ended March 31, 2024 and June 30, 2024, and the risk factors described under Part II, Item 1A of this Quarterly Report on Form 10-Q, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
On July 2, 2024, weWe filed oura preliminarydefinitive proxy statement with the SEC on August 16, 2024, and amended that definitive proxy statement with Amendment No. 1 filed on October 1, 2024 and Amendment No. 2 filed on October 23, 2024 (collectively, as may have been further amended, supplemented, or otherwise modified from time to time, the "Proxy Statement") in anticipation of a shareholder vote at our annual meeting later this year. WeSubject to shareholder approval of certain matters included in the Proxy Statement, we intend to convert to a closed-end fund to be treated as a regulated investment company, or "RIC," subject to shareholder approval of certain matters. In the interim, we intend to continue gradually liquidating our portfolio of mortgage-related assets and invest the proceeds in CLOs. Just prior to the conversion, we intend to liquidate the vast majority of our remaining mortgage- and real estate-related assets and upon the effectiveness of the conversion we would intend to operate so as to qualify to be taxed as a RIC under subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for federal income tax purposes. After our conversion to a closed-end fund/RIC, we would generally not be subject to corporate tax.
Under the terms of the New Management Agreement, which became effective July 1, 2024, our Manager will receive an annual management fee in an amount equal to 1.50% per annum of our Net Asset Value, calculated as our total assets minus our total liabilities (the "Base Management Fee").
In addition to the Base Management Fee, pursuant to the New Management Agreement, we will pay our Manager a performance fee (the "Performance Fee"), calculated and payable quarterly in arrears based upon our 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 us during such fiscal quarter, minus our 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 we 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 us 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 our Pre-Performance Fee Net Investment Income for a fiscal quarter does not exceed the result obtained by multiplying our Net Asset Value attributable to our 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 our Manager with respect to such quarter;
•If our 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 our Pre-Performance Fee Net Investment Income that exceeds the Hurdle Amount (the “Catch-Up”) is payable to our Manager as the Performance Fee with respect to such quarter. Therefore, once our Pre-Performance Fee Net Investment Income for such quarter exactly reaches 121.21% of the Hurdle Amount, our Manager 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 our Manager 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 our 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 our Pre-Performance Fee Net Investment Income is payable to our Manager 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.
Our Manager has agreed to waive all of the Performance Fees payable under the New Management Agreement for all fiscal periods through December 31, 2024.
The New Management Agreement has an initial term expiring on June 25, 2025, unless terminated earlier in accordance with its terms and, thereafter, will continue to renew automatically each year for an additional one-year period, unless we or our Manager exercise our respective termination rights.
We currently use leverage in our strategies and to date have financed our assets exclusively through repurchase agreements, which we account for as collateralized borrowings. As of JuneSeptember 30, 2024, we had outstanding borrowings under repurchase agreements in the amount of $578.5$486.9 million with 18 counterparties; 93%90% of such borrowings were collateralized by Agency RMBS. Just prior to conversion to a RIC, we intend to reduce our leverage to levels permitted under the Investment Company Act, and expect the vast majority of our borrowings to be collateralized by CLOs.
As of JuneSeptember 30, 2024, our book value per share was $6.91$6.85 as compared to $7.21$6.91 and $7.32 as of MarchJune 31,30, 2024 and December 31, 2023, respectively.
•After maintaining its target range for the federal funds rate in July, the U.S. Federal Reserve, or the "Federal Reserve," reduced the range by 50 basis points to 4.75%–5.00% in September. In cutting rates for the first time in four years, the Federal Reserve "judges that the risks to achieving its employment and inflation goals are roughly in balance." The Summary of Economic Projections released in September implied another 50 basis points of interest rate cuts in 2024.
In the third quarter, the Federal Reserve continued to reinvest only principal payments that exceeded $35 billion on Agency RMBS and $25 billion on U.S. Treasury securities, thus maintaining the reduced monthly reinvestment cap on U.S. Treasury securities announced at its May meeting.
•After rising during the first half of the year, interest rates fell significantly in the third quarter, particularly short-term interest rates, and the yield on the 10-year U.S. Treasury exceeded that of the 2-year U.S. Treasury for the first time since July 2022. Quarter over quarter, the 2-year U.S. Treasury yield decreased by 111 basis points to 3.64%, and the 10-year U.S. Treasury yield declined by 62 basis points to 3.78%. Meanwhile, interest rate volatility, as measured by the MOVE index, spiked in early August and again in early September, before declining into quarter end.
•The U.S. Federal Reserve, or the "Federal Reserve," maintained its target range for the federal funds rate of 5.25%–5.50% at both its April/May and June 2024 meetings. In its June press release, the Federal Reserve observed that "there has been some further progress toward the Committee's 2 percent inflation objective," but also noted that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." The Summary of Economic Projections released by the Federal Reserve in June implied just one interest rate cut by the end of 2024, as compared to three cuts in the previously released projections in March.
In addition, as announced in May and implemented in June, the Federal Reserve slowed the pace of decline of its securities holdings by reducing the monthly reinvestment cap on U.S. Treasury securities from $60 billion to $25 billion (meaning the Federal Reserve will reinvest principal payments that exceed $25 billion per month, rather than $60 billion per month), while maintaining the monthly cap of $35 billion on Agency RMBS.
•After rising in the prior quarter, interest rates continued to increase in April, with the yield on the 2-year U.S. Treasury increasing by 42 basis points and the 10-year U.S. Treasury up 48 basis points on the month. Interest rates then declined for much of May and June, but finished up slightly overall for the quarter—the yield on the 2-year U.S. Treasury increased by 13 basis points quarter over quarter to 4.75%, while the yield on the 10-year U.S. Treasury increased by 20 basis points to 4.40%. Meanwhile, interest rate volatility, as measured by the MOVE index, increased in mid-April before declining over the remainder of the second quarter.
•In the third quarter, Secured Overnight Financing Rates, or "SOFR" rates, rosefell modestlysharply following the decline in the secondfederal quarterfunds rate, with one-month SOFR increasingdecreasing by 149 basis pointpoints to 5.34%4.85% and three-month SOFR risingdecreasing by 373 basis points to 5.32%.4.59%. SOFR rates drive many of our financing costs.
•Mortgage rates moved in sympathy with long-term interest rates during the secondthird quarter. The Freddie Mac survey 30-year mortgage rate increaseddecreased from 6.79%6.86% at the end of MarchJune to 7.22%6.08% on MaySeptember 2nd,26th. beforeWhile decliningstill tolow 6.86%on atan Junehistorical 27th.basis, Thethe Mortgage Bankers Association's Refinance Index increasedmore bythan 20%doubled overduring the course of thethird quarter, but remained at depressed levels on an historical basis, with current mortgage rates stilllower. much higher than the rates on the vast majority of outstanding Agency mortgages. Similarly, overallOverall prepayment speeds remainedticked low,up in July and August and then fell in September, with Fannie Mae 30-year RMBS registering CPRs of 6.0 in April, 6.6 in May,July, 6.7 in August, and 6.06.4 in June.September.
AfterYear-to-date risingthrough 5.5% in 2023,August, the S&P CoreLogic Case-Shiller US National Home Price NSA Index increased by another4.5% 4.1% year-to-date through May 2024. Meanwhile, after decreasing by 6.5% in 2023,and the National Association of Realtors Housing Affordability Index declined by an additional 8.9% year-to-date through May 2024, as high mortgage rates and elevated home prices continued to stress housing affordability.1.9%.
•U.S. real GDP increased at an estimated annualized rate of 2.8% in the secondthird quarter of 2024,quarter, as compared to 1.4%3.0% in the prior quarter. Meanwhile, the unemployment rate increaseddecreased moderately during the quarter, registering 3.9%4.3% in April,July, 4.0%4.2% in May,August, and 4.1% in June.September.
•AfterInflation increasingcontinued its modest decline in the firstthird quarter, inflationreaching reverseda coursethree-year and moderately declinedlow in the second quarter.September. The 12-month percentage change in the Consumer Price Index for All Urban Consumers (“CPI-U"), not seasonally adjusted, registeredwas 2.9% in July, 2.5% in August, and 2.4% in September 2024. This compares to 12-month percentage changes of 3.4% in April, 3.3% in May, and 3.0% in June 2024. This compared to 12-month percentage changes of 3.1% in January, 3.2% in February, and 3.5% in March 2024.
•For the secondthird quarter, the Bloomberg U.S. MBS Index posted a positive return of 0.07%5.48% butand a negativean excess return (on a duration-adjusted basis) of (0.09%)0.76% relative to the Bloomberg U.S. Treasury Index, driven by underperformance of the mortgage basis in April.Index. Meanwhile, the Bloomberg U.S. Corporate Bond Index generated a negative return of (0.09%)5.81% and a negativean excess return of (0.04%),0.80%, whileand the Bloomberg U.S. Corporate High Yield Bond Index generated a positive return of 1.11%5.42% and an excess return of 0.38%,1.83%, for the quarter.
•Corporate credit spreads widenedgenerally tightened during the secondthird quarter, with spreads on the Markit CDX North America Investment Grade and High Yield Indices increasingdecreasing by 21 and 1415 basis points quarter over quarter, respectively. Additionally, according to PitchBook/LCD, defaultDefault rates on U.S. leveraged loans declined further, with the twelve-month trailing default rate on the Morningstar LSTA Leveraged Loan Index decreasing to 0.92%0.80% at quarter end, as compared to 1.14%0.92% at MarchJune 31st,30th, and well below the 10-year historical average of 1.76%.1.68%, Afterper risingPitchBook|LCD. forAdditionally, six consecutive quarters,the Morningstar LSTA US Leveraged Loan Index prices fell slightlyrose in the secondthird quarter to $96.50$96.71 at JuneSeptember 30th, compared to $96.70$96.59 at theJune end of the first quarter.30th.
•Similar to U.S leveraged loans, default rates on EU leveraged loans also declined. The twelve-month trailing default rate on the Morningstar LSTA EU Leveraged Loan Index decreased to 0.79% at quarter end, as compared to 1.29% at June 30th, and below the 10-year historical average of 1.44%, per PitchBook|LCD. However, the Morningstar LSTA EU Leveraged Loan Index declined modestly in the third quarter to $97.58 at September 30th, compared to $97.61 at June 30th.
•U.S. CLO issuance activityactivity, remainedwhile still elevated duringon an historical basis, declined in the secondthird quarter. According to PitchBook/|LCD, the U.S. CLO market saw $53$41 billion of new CLO issuance in the secondthird quarter, which was the second highest quarter of CLO issuance dating backcompared to 2011, and up from $49$53 billion in the firstsecond quarter.
•InU.S. equity markets performed well in the secondthird quarter,quarter. theThe NASDAQDow roseJones Industrial Average increased by 8.3%8.2% and the S&P 500 increasedrose by 3.9%,5.5%, with both indices settingending the quarter at record highshighs. duringMeanwhile, the quarter.NASDAQ The Dow Jones Industrial Average, on the other hand, fellrose by 1.7%2.6% quarterand over quarter, despite also reachingreached a record high intra-quarter. TheMeanwhile, the VIX volatility index spiked in mid-Aprilearly beforeAugust reversingto courseits andhighest endinglevel since January 2021; the VIX subsequently moderated, but remained relatively elevated through quarter modestlyend. lower overall. Meanwhile,Finally, London's FTSE 100 index increased by 2.7%0.9%, and the MSCI World global equity index rose by 2.2%,6.0% quarter over quarter.
As of JuneSeptember 30, 2024, our CLO portfolio consisted of $45.1$74.8 million of CLO equity tranches, of which $66.5 million were dollar-denominated and $8.3 million were non-dollar denominated; and $69.7 million of CLO notes, specifically mezzanine debt tranches, of which $37.2$52.9 million were dollar-denominated and $7.9 million were non-dollar denominated; and $40.0 million of CLO equity, of which $33.2 million were dollar-denominated and $6.8$16.8 million were non-dollar denominated. We expect our CLO holdings to continue to be a blend of CLO equity and CLO debt investments, with the capital allocations fluctuating over time based on market opportunities. In addition, we intend to continue to invest in both dollar-denominated and non-dollar denominated CLO investments, based on relative value opportunities, but expect the large majority of our CLO investments will continue to be dollar-denominated.
During the second quarter, the size of our CLO portfolio increased to $85.1 million as of June 30, 2024, compared to $45.1 million as of March 31, 2024, driven primarily by a larger CLO equity portfolio, and to a lesser degree, a larger CLO mezzanine portfolio. During the quarter, rising CLO prepayment rates and tightening mezzanine spreads had a few notable impacts on our holdings. First, several of our CLO mezzanine positions were called, which contributed positively to earnings but removed these positions from our holdings. Second, we capitalized on trading opportunities by selling several CLO mezzanine positions at net gains, further decreasing our holdings. And third, tighter new issue CLO debt spreads enhanced the attractiveness of new issue CLO equity due to lower implied financing costs, prompting new purchases by us. Tighter new issue CLO debt spreads also enabled certain CLO equity holders to refinance existing deals, thereby further increasing the relative appeal of CLO equity. While we also added attractive incremental CLO mezzanine investments in the quarter, the size of our CLO equity holdings increased disproportionately as a result of these effects. Going forward, we expect to continue increasing the size of our CLO portfolio in conjunction with the CLO Strategic Transformation.
As of June 30, 2024, our mortgage-backed securities portfolio consisted of $531.1 million of fixed-rate Agency "specified pools," $33 thousand of Agency reverse mortgage pools, $2.4 million of Agency interest-only securities, or "Agency IOs", $9.5 million of non-Agency RMBS, and $8.3 million of non-Agency interest-only securities, or "non-Agency IOs". Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through government-sponsored refinancing programs, and mortgages with various other characteristics.
TheDuring the third quarter, the size of our Agency RMBSCLO holdings decreasedincreased by 28%70% to $531.1$144.5 million as of September 30, 2024, compared to $85.1 million as of June 30, 2024, compared to $739.3 million as of March 31, 2024, as we continued to net sell Agency RMBS and rotate the investment capital into CLOs. Costs to liquidate our Agency RMBS continue to be low. Meanwhile, our aggregate holdings of interest-only securities and non-Agency RMBS decreased by 27% quarter over quarter. Going forward, we intendexpect to continue to decreaseincreasing the size of our mortgage-backedCLO securities portfolio, alsoportfolio in conjunction with the CLO Strategic Transformation.
As of September 30, 2024, our mortgage-backed securities portfolio consisted of $462.1 million of fixed-rate Agency "specified pools," $34 thousand of Agency reverse mortgage pools, $1.9 million of Agency interest-only securities, or "Agency IOs", and $9.4 million of non-Agency RMBS. Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through government-sponsored refinancing programs, and mortgages with various other characteristics.
The size of our Agency RMBS holdings decreased by 13% to $462.1 million as of September 30, 2024, compared to $531.1 million as of June 30, 2024, as we continued to net sell Agency RMBS. Costs to liquidate our Agency RMBS continue to be low. Meanwhile, our aggregate holdings of interest-only securities and non-Agency RMBS decreased by 44% quarter over quarter to $11.3 million. Going forward, we intend to continue to decrease the size of our mortgage-backed securities portfolio, also in conjunction with the CLO Strategic Transformation.
Our debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 2.5:1 as of September 30, 2024, as compared to 3.7:1 as of June 30, 2024, as compared to 4.9:1 as of March 31, 2024. The decline was driven by higher shareholder's equity and less leverage on our CLO investments, which constituted a significantly larger proportion of our overall portfolio as of JuneSeptember 30, 2024, compared to MarchJune 31,30, 2024. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions. As of JuneSeptember 30, 2024, 93%90% of our borrowings were secured by Agency RMBS.
During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in U.S. Treasury securities and futures. We ended the quarter with a net long TBA position. We also selectively hedge the credit risk of our corporate CLO and non-Agency RMBS investments; as of JuneSeptember 30, 2024, our credit hedge portfolio was relatively small.
As of JuneSeptember 30, 2024, we had cash and cash equivalents of $25.7 million, in addition to other unencumbered assets of $95.8 million. This compares to cash and cash equivalents of $118.8 million, which included $89.9 million of U.S. Treasury Bills held on margin, in addition to other unencumbered assets of $43.9 million.million, as of June 30, 2024. Excluding such U.S. Treasury Bills, cash and cash equivalents were $28.8 million. This compares to cash and cash equivalents of $22.4 million and other unencumbered assets of $57.1 million as of MarchJune 31,30, 2024.
In the third quarter, the U.S. CLO market benefited from strengthening loan fundamentals, robust demand for leveraged loans, and the anticipation of an interest rate cutting cycle. The trailing-twelve-month default rate for the Morningstar LSTA U.S. Leveraged Loan Index declined to 78 basis points in August, its lowest level since December 2022, and finished the quarter at just 80 basis points; meanwhile, prepayment rates continued to increase during the quarter. Tightening credit spreads and lower interest rates supported strong corporate loan issuance during the quarter. However, net CLO issuance in the U.S. was negative overall for the quarter as a result of the combined impact of elevated refinancing and reset volumes and many seasoned CLOs being called. Similarly in Europe, the default rate for the Morningstar LSTA EU Leveraged Loan Index also declined to 78 basis points in August, its lowest level since May 2023, and finished the quarter at just 79 basis points. However, in contrast with U.S leveraged loans, prepayment rates on the Morningstar LSTA EU Leveraged Loan Index decreased slightly quarter over quarter.
In the U.S., the declining default rates contributed to higher demand for CLO debt and equity, and along with the negative net issuance, drove CLO mezzanine spreads generally tighter during the quarter. In addition, high prepayment rates continued to drive deleveraging in seasoned CLOs. On the other hand, with investors wary of lower-quality loan portfolios, debt spreads widened for certain CLOs with greater exposure to such assets. In Europe, elevated demand and lower default rates also drove CLO mezzanine spreads tighter; however, with prepayment rates on European leveraged loans declining, seasoned European CLO mezzanine tranches experienced less deal deleveraging relative to U.S. CLOs.
In the second quarter, the CLO market continued to benefit from strengthening fundamentals, robust demand for leveraged loans, and continued capital inflows, despite periods of elevated market volatility. Net demand for leveraged loans remained strong as a result of strong capital inflows into retail loan funds, significant primary CLO issuance volumes, and rapid repayments of existing leveraged loan facilities as corporate borrowers continued to lower their financing costs. Loan prepayment rates increased further, reaching their highest level on a trailing-twelve-month basis since February 2022. These higher prepayments, and generally broader access to capital markets, contributed to a lower trailing-twelve-month default rate for the Morningstar LSTA US Leveraged Loan Index, and led to substantial deleveraging in seasoned CLOs.
Investment-grade CLO spreads generally tightened throughout the quarter, while CLO mezzanine tranches showed mixed performance, with higher-quality tranches tightening and lower-quality tranches widening. The European CLO market also experienced tightening spreads, particularly in high-quality tranches.
ForSimilar to the prior quarter, performance for U.S. CLO equity,equity was mixed during the third quarter. On the one hand, tightening debt spreads allowed some deals to refinance their debt or reset their debt (which also includesincluded an extensionextensions of reinvestment periodperiods), which drove strong returns for CLO equity in deals with more optionality (namely, those with better-performing portfolios and higher debt costs).costs. However, higher prepayment speeds in the loan market led to both overallprice declines infor loanloans pricestrading above par and compression in loan floating rate spreads, as large volumes of loans trading at premiums to par were refinanced at par and replaced with lower-spread loans; these effects triggered mark-to-market losses in some CLO equity profiles as both their interest payments (due to lower excess interest in the CLO) and underlying asset values declined in tandem. We saw a similar dynamic in Europe, although with slower prepayment speeds, the negative impact of the prepayment of premium loans was less pronounced.
Our CLO strategy had strong results for the quarter, led by higher net interest income quarter over quarter and net gains in our U.S. and European CLO debt portfolios, supported by both opportunistic sales and tighter credit spreads on held positions.
We also benefited from positive performance from our U.S. and European CLO equity portfolios, where net interest income exceeded net realized and unrealized losses.
Our CLO strategy had positive performance for the quarter, led by strong interest income, which increased sequentially due to the resolution of several discounted positions. Further, net gains on our CLO mezzanine portfolio were supported by both opportunistic sales and discount positions being called. These gains were partially offset by mark-to-market losses on certain CLO equity positions, where rapid prepayments drove mark-to-market losses and reduced floating rate spreads on the underlying loan collateral as described above.
Our non-Agency RMBS portfolio and interest-only securities generated strongpositive results for the quarter, driven by net interest income and net gains associated with several profitable sales.
In the third quarter, interest rates fell, the yield curve steepened, and Agency MBS yield spreads tightened as the market anticipated the beginning of the Federal Reserve's interest rate cutting cycle. In September the Federal Reserve reduced the target range for the federal funds rate by 50 basis points and also released updated economic projections that implied another 50 basis points of interest rate cuts later in 2024. Overall for the third quarter, the U.S. Agency MBS Index generated an excess return of 0.76%. Against this backdrop, our remaining Agency portfolio generated positive results for the quarter, as net gains on our Agency RMBS exceeded net losses on our interest rate hedges, which were driven by declining interest rates.
In April, interest rates and volatility increased over renewed concerns about inflation and a more hawkish Federal Reserve, which pushed Agency RMBS yield spreads wider. In May and June, however, interest rates and volatility generally declined, and Agency RMBS yield spreads reversed most of their April widening. Overall for the second quarter, the U.S. Agency MBS Index generated a negative excess return of (0.09)%. Against this backdrop, EARN’s Agency portfolio generated a small net loss for the quarter, as net losses on our Agency RMBS exceeded net gains on our interest rate hedges.
Average pay-ups on our specified pool portfolio decreased to 0.63%0.25% as of JuneSeptember 30, 2024, as compared to 0.85%0.63% as of MarchJune 31,30, 2024.
Our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity —declined during the quarter. The decrease was driven by an increase in shareholders' equity and a smaller Agency RMBS portfolio, partially offset by a larger net long TBA position as of JuneSeptember 30, 2024 as compared to a net short TBA position as of March 31, 2024. From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio in relation to the portion of our overall shareholders' equity employed in our mortgage-related strategies. The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for the last five quarters, to illustrate this fluctuation.
The following table summarizes prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods ended September 30, 2024, June 30, 2024, March 31, 2024, December 31, 2023, and September 30, 2023, and June 30, 2023.
The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of JuneSeptember 30, 2024 and MarchJune 31,30, 2024.
For the three-month period ended JuneSeptember 30, 2024, we had total net realized and unrealized lossesgains on our Agency securities of $(5.0)$15.5 million, or $(0.24)$0.60 per share. Our Agency portfolio turnover was approximately 49%37% for the three-month period ended JuneSeptember 30, 2024 and we recognized net realized losses of $(9.93.7) million.
For the three-month period ended JuneSeptember 30, 2024, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities, and futures. We had total net realized and unrealized gainslosses of $4.8$(18.4) million, or $0.23$(0.72) per share, on our interest rate hedging portfolio, driven by the increasedecrease in interest rates quarter over quarter. These gainslosses exclude net realized and unrealized lossesgains of $(0.7)$7.2 million, or $(0.04)$0.28 per share, on our long TBAs held for investment.
We ended the quarter with a net long TBA position on a notional basis and as measured by 10-year equivalents. Ten-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates. The relative makeup of our interest rate hedging portfolio can change materially from period to period. We also selectively hedge our corporate CLO and non- Agencynon-Agency RMBS investments; as of JuneSeptember 30, 2024, we had a small credit hedge position in place. We may also enter into foreign currency forward and futures contracts in order to hedge risks associated with foreign currency fluctuations.
After giving effect to dividends declared during the three-month period ended JuneSeptember 30, 2024 of $0.24 per share, our book value per share decreased to $6.85 as of September 30, 2024, from $6.91 as of June 30, 2024, from $7.21 as of March 31, 2024, and we had a negativean economic return of (0.8)%2.6% for the three-month period ended JuneSeptember 30, 2024. Economic return for a period is computed by adding back dividends declared during the period to ending book value per share, and comparing that amount to book value per share as of the beginning of the period.
For each of the three-month periods ended JuneSeptember 30, 2024 and MarchJune 31,30, 2024, our average repo borrowing cost was 5.60%.5.59% and 5.60%, respectively. As of JuneSeptember 30, 2024 and MarchJune 31,30, 2024, the weighted average borrowing rate on our repurchase agreements was 5.54%5.37% and 5.47%,5.54%, respectively.
Our debt-to-equity ratio was 2.5:1 as of September 30, 2024, as compared to 4.0:1 as of June 30, 2024, as compared to 4.8:1 as of March 31, 2024. Adjusted for unsettled purchases and sales, our debt-to equity ratio was also 2.5:1 as of September 30, 2024, as compared to 3.7:1 as of June 30, 2024, as compared to 4.9:1 as of March 31, 2024. The quarter over quarter decline was driven by higher shareholders' equity and less leverage on our CLO investments, which constituted a significantly larger proportion of our overall portfolio as of JuneSeptember 30, 2024, compared to MarchJune 31,30, 2024. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.
The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments. Future prepayment rates are difficult to predict. We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors. We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase. When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment, or "Catch-up Amortization Adjustment," is made to interest income to reflect the cumulative impact of the changes in effective yields. For the three-month periods ended JuneSeptember 30, 2024 and 2023, we recognized a Catch-up Amortization Adjustment of $0.2 million and $(0.4)$46 million,thousand, respectively. For each of the six-monthnine-month periods ended JuneSeptember 30, 2024 and 2023, we recognized a Catch-up Amortization Adjustment of $(0.70.5) million.million and $(0.6) million, respectively. The Catch-up Amortization Adjustment is reflected as an increase (decrease) to interest income on the Consolidated Statement of Operations. Our accretion of discounts and amortization of premiums on securities for U.S. federal and other tax purposes is likely to differ from the accounting treatment under U.S. GAAP of these items as described above. See Note 2 of the notes to our consolidated financial statements for more information on the assumptions and methods that we use to amortize purchase premiums and accrete purchase discounts.
The following tables summarize our securities portfolio as of JuneSeptember 30, 2024 and December 31, 2023:
EARN insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 0 Form 4 filings and open-market sales in 0 filings. Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
No Form 4 stock transactions in this period.
Well-known investors holding EARN (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| Renaissance Technologies | 2026-06-30 | 16,298 | $72.0K | 0.0% | New position |