DEFA14A: ISS Backs Ellington Credit's Strategic Transformation Plan, Urges Shareholders to Vote FOR Conversion

Ellington Credit Company (EARN) announces that ISS has joined Glass Lewis in recommending shareholders vote in favor of proposals to convert to a closed-end investment company.

Summary

• Ellington Credit Company (EARN) is seeking shareholder approval to convert to a registered closed-end fund/RIC focused on corporate CLOs.
• ISS and Glass Lewis, leading independent proxy advisory firms, recommend shareholders vote FOR the conversion proposals.
• The conversion aims to provide greater risk-adjusted returns and a more favorable cost of capital.
• If the conversion fails, EARN will operate as a taxable C-Corporation and be subject to corporate income tax.
• The annual meeting to vote on the conversion proposals will be held on October 30, 2024.
• Shareholders are encouraged to vote by October 28, 2024.
• The company was formerly Ellington Residential Mortgage REIT, initially focused on residential mortgage-backed securities (MBS).
• In March 2024, the company approved a strategic shift to focus on corporate CLOs.
• The company revoked its REIT election effective January 1, 2024, and rebranded to Ellington Credit Company.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to the support from ISS and Glass Lewis, which increases the likelihood of the conversion being approved. The strategic shift towards CLOs is also viewed favorably, but there are risks associated with the transition and market conditions.

Positives

• Support from ISS and Glass Lewis increases the likelihood of shareholder approval for the conversion.
• Conversion to a RIC could result in a more favorable cost of capital.
• The company anticipates greater risk-adjusted returns over the long term as a RIC.
• As a RIC, the company would generally not be subject to corporate income tax.

Negatives

• If the conversion is not approved, the company will operate as a taxable C-Corporation and be subject to corporate income tax.
• Failure to convert would prevent the company from fully transitioning its investment portfolio to corporate CLOs.

Risks

• Shareholder approval of the conversion is not guaranteed.
• Changes in interest rates and market volatility could impact the company's investments.
• Deterioration in the CLO market could negatively affect the company's performance.
• The company's ability to borrow to finance its assets is subject to risk.
• Changes in government regulations could affect the company's business.

Future Outlook

The company intends, subject to shareholder approval of the Conversion Proposals, to convert to a closed-end fund and complete its transition from an MBS-focused company to a CLO-focused company later in 2024.

Management Comments

• I am pleased that ISS and Glass Lewis recognize the benefits to EARN's shareholders of our planned conversion to a registered closed-end fund/RIC focused on corporate CLOs, and are supportive of our Board of Trustees recommendation to vote FOR the Conversion Proposals, said Laurence Penn, Chief Executive Officer and President of the Company.
• The RIC conversion would enable us to complete our strategic transformation, which we believe will provide for greater risk-adjusted returns over the long term, while also affording shareholders with the additional protections provided by the 1940 Act.
• We recommend that you enter your vote by Monday October 28, 2024, in order to ensure adequate time for tabulation prior to the Annual Meeting, added Mr. Penn.

Industry Context

The move towards CLOs reflects a broader trend in the investment management industry to seek higher yields in alternative credit markets. Other companies in the financial sector are also exploring similar strategies to optimize their capital structure and investment portfolios.

Comparison to Industry Standards

• Other REITs, such as Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC), primarily focus on agency mortgage-backed securities, while Ellington is shifting towards CLOs.
• Companies like Blackstone (BX) and Apollo Global Management (APO) are major players in the CLO market, and Ellington's transition positions it to compete in this space.
• The conversion to a RIC is a strategic move to align with investment companies like BlackRock (BLK) and PIMCO, which operate under the Investment Company Act of 1940.

Stakeholder Impact

• Shareholders are expected to benefit from greater risk-adjusted returns and a more favorable cost of capital if the conversion is approved.
• Employees may experience changes related to the shift in investment strategy.
• The company's relationships with suppliers and creditors may be affected by the transition to CLOs.

Next Steps

• Shareholders to vote on the Conversion Proposals by October 28, 2024.
• The Company's 2024 annual meeting of shareholders will be held on October 30, 2024.
• The company intends to complete its transition from an MBS-focused company to a CLO-focused company later in 2024, subject to shareholder approval.

Key Dates

Keywords

Ellington Credit Company, EARN, Conversion, Closed-end fund, RIC, CLOs, Shareholder vote, ISS, Glass Lewis, Strategic transformation