Basically, they said NLY had issued these notes to take advantages of volatility end March when Fed pulls out of market. The shares ARE dilutive, but just by 5 cents a year, as the divi is to be accounted for, till they notes convert.
Either way, this is NLY at its best, preparing for the future, or this is a massive ponzi scheme. I will go with the most transparent MREIT on the planet.
unfortunately the market is selling MREITs because of FED comments, fortunately they are 9 months too early. I see $3.00 in div till Dec 2010 with erosion of book value.
Our biggest concern should be a failure of one of NLY lenders overnight because of some unforeseen situation. They will be forced to sell their agency holdings at discounts, further eroding their book value. At 6 times leverage and solid management, I believe they have a plan B.
It would be very interesting to hear an explanation from NLY as to why this is such a great deal structure. We could agree with them or disagree, but at least there would be a better understanding of what they believe the advantage to be.
Somewhat like the Higher leverage / Lower leverage analysis at any particular time. I believe I understand the components of that debate. I just don't understand what they expected the advantage of this financing to be.
The fact that leverage is low and that redemptions will lower it somemore (which apparently managment saw coming to some extent or other)does not contradict managments statement about the purpose of raising more capital. It simply means that the opportunity they anticipate is large enough that they think they can utilize all of it effectively. They have plainly kept leverage low, even past the liquidity crunch, because they hold the view that the fed is artificially holding rates on MBS down with the intervention. When that ends and rates rise the desirability of these securities (and the spreads) will widen and it will make sense to load up. They issued the covertible instead of stock because it mitigates the short run dilution that would otherwise occur from taking on new equity and not employing it right away - long run dilutioin will be addressed simply by putting the money to work. Doubtless they have had this in mind for some time and pulled the trigger on the issuance as late as they felt they could. They may issue more if the situation presents itself.
All the analyis are thinking earnings have peaked. If MBS yields bump up thirty five or fifty basis points that goes straight to the bottom line unless repo rates rise, which may not occur until much later. Add in more leverage and earnings may not have peaked and may not until the fed finally bumps up short rates, third or fourth quarter at the earliest. In fact spreads may still be where they were last quarter over a year from now as the inital moves by the fed to start normalizing rates will have been offset by higher MBS yields.
More capital and increased leverage will allow them to capture a larger portion of thier portfolio in higher yielding bonds when yields rise.
In the conference call someone asked a question about increasing leverage, and Wellington stated pretty clearly that they wanted to hold off for now and take a wait and see approach because they don't know for sure what will happen when the Fed discontinues mbs purchases. But she also said that the team welcomes volatility in the mbs space because of opportunities that may emerge. So, it appears to me they were looking for a way to increase buying power without increasing leverage.
"sock" - I thought it obvious that I was referring to forced redemptions of delinquent loans due the the GSE buyouts.
As to your comment that the 6x leverage being lost - I doubt that is the ultimate impact. NLY likely has some unpledged mbs assets that it can use as substitute collateral for any loans that get pulled - but they do realize a real LOSS on any unamortized premiums paid for loans that are redeemed at PAR.
My point about there being an infusion of CASH from the GSE buyouts - is correct - whatever $$ nly receives from the GSE buyouts can/could be used to purchase new mbs in the same way that the funds from the convertible offering can be used for that purpose. In addition, with leverage already so low - why was there a perceived need to go out and get fresh CAPITAL - why not just use the proceeds from the GSE redemptions and otherwise lever up the portion of the portfolio that isn't being called by the GSEs.
If NLY was already at 8 or 10x leverage, I could see not wanting to increase leverage, but at the end of Q1 NLY was at 5.8x leverage - which MF said was their lowest leverage level since inception.
The IR rep didn't provide me with a satisfactory explanation to the last question - other than to suggest that we all just need to 'trust mike' .
to the point of cash infusion by GSE buyouts, you are incorrect.
NLY will be forced to 'sell' their delinquent holdings. In affect, these holdings are not sitting with NLY. They sit somewhere with NLY repo lenders, as collateral for the leverage.
When NLY pulls them back from the lender, the 6x leverage is lost and NLY takes a small loss. Therein lies the loss of a little capital.
NLY isn't adding more leverage because of this event, and that is a good thing.
consider, nly portfolio $100
delinquent arm loans $3
expected loss 0.07 * $3 = $0.2
currently leveraged at $600
remove $3 capital from $100 = $97.
Bottom line is that these events don't seem to be correlated. It was bad timing in the announcement. They need more capital to take advantage of the fed pullout and volatility.
rest easy, all is well. $0.70 cent divy coming soon.
just heard back from IR. She confirmed your summary of the conversion formula, i.e., the # of shares increases over time by slightly more than the amount of each divvy.
Though the IR rep mouthed the party line about this offering being good for existing shareholders she couldn't explain (at least to my satisfaction) why the offering was necessary NOW - given nly's low leverage, or when the offering will be accretive (i.e. - certainly won't be accretive till it's put to work and levered up and it doesn't seem that the funds will be put to work till NEXT qtr at the earliest).
The fact that NLY and all the mreits are also getting an UNWANTED infusion of cash by way of the GSE buyouts - puts the wisdom/ timing of this offering even further in doubt as far as I'm concerned.
I don't think you will see erosion in book value per share. Despite the feds attempts to refinance upside down homeowners, many have not yet taken advantage of it. So the attractive rate spread will continue here until homeowners get the message.