OLD GREENWICH, Conn. - Ellington Credit Company (NYSE:EARN) has announced the adoption of a Tax Asset Preservation Plan aimed at safeguarding the company's net operating loss carryforwards (NOLs) and other tax benefits. This move is designed to maintain shareholder value as the company operates as a taxable C-Corporation.
The plan was implemented on Tuesday and will expire at the earliest of three events: the company's conversion to a closed-end fund/regulated investment company (RIC), April 23, 2025, or the occurrence of specific events outlined in the Rights Plan. Ellington Credit's conversion to a RIC is pending, contingent on shareholder approval of certain matters later in the year.
The Tax Asset Preservation Plan seeks to prevent an "ownership change" as defined by Section 382 of the Internal Revenue Code, which could significantly limit the company's use of NOLs. An ownership change occurs when shareholders owning more than 5% of the company increase their ownership by more than 50 percentage points over a three-year period. The plan aims to deter any person or group from gaining beneficial ownership of 4.9% or more of Ellington Credit's outstanding common stock.
If the rights under the plan become exercisable, all rights holders—excluding the triggering person—will be entitled to purchase additional shares at a 50% discount, or the company may exchange each right for one share of common stock. Current shareholders owning 4.9% or more may maintain their shares but cannot acquire more than an additional 0.5% without activating the plan.
The Board of Trustees believes the adoption of this plan aligns with the best interests of the company and its shareholders due to the potential value of the NOLs. The plan is similar to those adopted by other public companies with significant NOLs.
Ellington Credit, which recently shifted its investment strategy from residential mortgage-backed securities to corporate CLOs, particularly mezzanine debt and equity tranches, is managed by Ellington Credit Company Management LLC. The company revoked its REIT status as of January 1, 2024, and is transitioning to a CLO-focused entity.
Additional details regarding the Tax Asset Preservation Plan will be disclosed in a Form 8-K filing with the U.S. Securities and Exchange Commission. This announcement is based on a press release statement and does not constitute an offer of securities or a solicitation for votes.
InvestingPro Insights
As Ellington Credit Company (NYSE:EARN) navigates its strategic shift and tax asset preservation, investors are closely monitoring its financial health and market performance. Here are some key insights based on real-time data from InvestingPro:
- The company has a market capitalization of $133.58 million, indicating a relatively small size in the financial market, which might affect its liquidity and volatility.
- With a dividend yield of 14.39%, Ellington Credit stands out as a potentially attractive option for income-focused investors, especially considering the significant dividend it pays to shareholders.
- The stock has experienced a considerable price uptick over the last six months, with a 39.16% return, suggesting a strong recent performance that could catch the eye of momentum investors.
InvestingPro Tips highlight that the company is expected to be profitable this year, which could reassure investors of its financial stability during the transition. Additionally, the company's P/E ratio of 22.06 suggests it is trading at a low price relative to near-term earnings growth, which might be appealing for value investors looking for underpriced opportunities.
For those interested in a deeper analysis, InvestingPro offers a total of 10 InvestingPro Tips for Ellington Credit Company, which can provide further guidance on investment decisions. To access these tips and more detailed metrics, visit https://www.investing.com/pro/EARN. Remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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