Ellington Credit (EARN) risk factors, FY2025 10-K

Other

1. 01The Fund invests in corporate CLOs, which exposes it to certain risks associated with corporate loans
2. 02investments, which could materially adversely affect its business, financial condition and results of operations, and its ability to pay dividends to its shareholders
3. 03The Fund’s CLO investments are subject to risks related to the financial leverage employed by the underlying corporate borrowers
4. 04The CLOs in which the Fund invests may be subject to risks associated with syndicated loans
5. 05If an investment is a syndicated revolving loan or delayed drawdown loan, other lenders may fail to satisfy their full contractual funding commitments for such loan, which could create a breach of contract, result in a lawsuit by the obligor against the lenders and adversely affect the value of the Fund’s investment
6. 06The Fund's investments in corporate CLOs involve certain structural risks
7. 07The 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
8. 08The Fund’s investments in the primary corporate CLO market involve certain additional risks
9. 09The Fund and its investments are subject to prepayment and reinvestment risk
10. 10The Fund’s portfolio of corporate CLO investments may lack diversification, which may subject the Fund to a risk of significant loss if one or more of these corporate CLOs experience a high level of defaults on collateral
11. 11Failure by a CLO to satisfy certain tests, including as a result of loan defaults and/or negative loan ratings migration, may place pressure on the performance of the Fund’s investments in such CLO
12. 12CLO investments involve complex documentation and complex accounting considerations
13. 13The Fund is dependent on the collateral managers of the corporate CLOs in which the Fund invests, and those corporate CLOs are generally not registered under the 1940 Act
14. 14In addition, the CLOs in which the Fund invests are generally not registered as investment companies under the 1940 Act. As investors in these CLOs, the Fund is not afforded the protections that shareholders in an investment company registered under the 1940 Act would have
15. 15The Fund’s CLO investments often have limited liquidity
16. 16The CLOs in which the Fund invests incur significant operating expenses
17. 17The Fund and its corporate CLO investments are subject to risks associated with non-U.S. investing, including in some cases foreign currency risk
18. 18CLOs in which the Fund invests could become subject to U.S. federal income tax or withholding requirements
19. 19The 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
20. 20The Fund is subject to risks associated with loan accumulation facilities
21. 21The Fund may invest in corporate loans directly

Risks Related to the Fund's Business

1. 22There are risks associated with the implementation of the Conversion
2. 23Certain 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
3. 24Interest 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
4. 25Difficult conditions in the corporate sector as well as general market concerns may adversely affect the value of the assets in which the Fund invests
5. 26The 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
6. 27To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses
7. 28The 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
8. 29net income through recording unrealized appreciation or depreciation of its investments and derivative instruments, and so the determination of fair value has a material impact on its net income
9. 30The lack of liquidity in the Fund’s assets may materially adversely affect its business, financial condition and results of operations, and its ability to pay dividends to its shareholders
10. 31entitled, any of which could materially adversely affect its business, financial condition and results of operations, and its ability to pay dividends to its shareholders

Risks Related to the Fund's Financing, Hedging, and Derivatives Activities

1. 32The 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
2. 33The 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
3. 34Based on the Fund’s assumed leverage described above, its investment portfolio would have been required to experience an annual return of at least 1.81% to cover interest payments on its assumed indebtedness
4. 35The 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
5. 36The 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
6. 37Hedging instruments and other derivatives, including some credit default swaps, may not, in many cases, be traded on exchanges, or may not be guaranteed or regulated by any U.S. or foreign governmental authority and involve risks and costs that could result in material losses
7. 38The Fund engages in short selling transactions, which may subject it to additional risks
8. 39Repurchasing securities to close out a short position can itself cause the price of the securities to rise further, thereby exacerbating the loss, which could materially adversely affect the Fund’s business, financial condition and results of operations, and its ability to pay dividends to its shareholders

Other Business Risks

1. 40The Fund operates in a highly competitive market
2. 41An increase in interest rates may cause a decrease in the issuance volumes of certain of the Fund’s targeted assets, which could adversely affect its ability to acquire targeted assets that satisfy its investment objectives and to generate income and pay dividends
3. 42The Fund’s ability to pay dividends will depend on its operating results, its financial condition and other factors, and the Fund may not be able to pay dividends at a fixed rate or at all under certain circumstances

Risks Related to the Fund's Relationship with the Adviser and Ellington

1. 43There are risks and conflicts of interests associated with the Performance Fee the Fund is obligated to pay the Adviser
2. 44There is also a conflict of interest related to management’s involvement in many accounting determinations (including but not limited to valuations, which affect the calculation of the Hurdle Amount, and calculations of interest income) that can affect the Fund’s Performance Fee
3. 45The 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
4. 46There are risks and conflicts of interests associated with the Base Management Fee the Fund is obligated to pay the Adviser
5. 47The Board has approved a very broad investment strategy and will generally not review or approve the decisions made by the Adviser to acquire, dispose of, or otherwise manage an asset
6. 48The Fund competes with Ellington’s other accounts for access to Ellington and for opportunities to acquire assets
7. 49There are other conflicts of interest in the Fund’s relationships with the Adviser and Ellington, which could result in decisions that are not in the best interests of the Fund’s shareholders
8. 50The 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
9. 51If the Adviser ceases to be the Adviser or one or more of the Adviser's key personnel ceases to provide services to the Fund, the Fund’s lenders and its derivative counterparties may cease doing business with the Fund
10. 52The Fund does not own the Ellington brand or trademark but may use the brand and trademark as well as its logo pursuant to the terms of a license granted by Ellington

Risks Related to the Fund's Common Shares

1. 53Common 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
2. 54The Fund’s shareholders may not receive dividends or dividends may decline over time
3. 55An increase in interest rates may have an adverse effect on the market price of the Fund’s common shares and its ability to pay dividends to its shareholders
4. 56Investing in the Fund’s common shares involves a high degree of risk
5. 57If the Fund issues preferred shares, debt securities or convertible debt securities, its net asset value per common share may become more volatile
6. 58Holders 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

Risks Related to the Fund's Organization and Structure

1. 59The Fund has a limited prior operating history as a closed-end investment company
2. 60The Fund’s shareholders’ ability to control the Fund’s operations is severely limited
3. 61Certain 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
4. 62The Fund’s authorized but unissued common and preferred shares may prevent a change in its control
5. 63The Fund’s rights and the rights of its shareholders to take action against its trustees and officers or against the Adviser or Ellington are limited, which could limit shareholders’ recourse in the event actions are taken that are not in shareholders’ best interests
6. 64The Fund’s declaration of trust contains provisions that make removal of its trustees difficult, which could make it difficult for its shareholders to effect changes to its management
7. 65The Fund is subject to the risk of legislative and regulatory changes impacting its business or the markets in which the Fund invests
8. 66EU/UK Risk Retention. Regulators in the European Union (EU) and the United Kingdom (UK) have imposed significant securitization-related regulations (collectively, the “Securitization Regulations”)
9. 67The SEC staff could modify its position on certain non-traditional investments, including investments in CLO securities
10. 68The Fund may experience fluctuations in its Net Asset Value and quarterly operating results
11. 69The 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
12. 70The tax implications of the corporate CLOs in which the Fund invests are complex and, in some circumstances, unclear. In particular, the Fund may recognize taxable income on certain of its CLO investments without the concurrent receipt of cash
13. 71The Fund has made a mark-to-market election under Section 475(f) of the Code
14. 72Complying with RIC requirements may cause the Fund to forgo or liquidate otherwise attractive investments
15. 73FATCA withholding may apply to payments to certain foreign entities
16. 74At any time, U.S. federal, state, local, or foreign laws or regulations that impact the Fund’s business, or the administrative interpretations of those laws or regulations, may be enacted or amended
17. 75The Fund’s failure to procure adequate funding and capital would adversely affect the Fund’s results and may, in turn, negatively affect the value of its common shares and its ability to pay dividends to its shareholders
18. 76The Fund, Ellington, or its affiliates may be subject to regulatory inquiries and proceedings, or other legal proceedings
19. 77The market for the Fund’s common shares may be limited, and the price and trading volume of its common shares may be volatile
20. 78Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may also adversely affect the market price of the Fund’s common shares
21. 79Future 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
22. 80Shareholders will experience dilution in their ownership percentage if they do not participate in the dividend reinvestment plan
23. 81The Fund is subject to risks related to corporate social responsibility
24. 82Climate change has the potential to impact the Fund’s investments
25. 83Periods of heightened inflation could adversely impact the Fund’s financial results
26. 84Artificial intelligence and other machine learning techniques could increase competitive, operational, legal and regulatory risks to the Fund’s business in ways that the Fund cannot predict