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Resource Capital Corp. Message Board

  • brucelat9 brucelat9 Oct 6, 2010 11:04 AM Flag

    Re: AG & exdiviy --I have an idea --

    Perhaps you could both return to this board
    under new alises and start all over again.
    That way maybe we could all again benefit
    from your opinions and observations. A
    permanent truce, with no loss of face for anyone, no admissions, and no more distractions to the other posters. May
    be worth a looksee anyway. Nothing to lose.

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    • When I get a chance I will try to find the answer.

      GKK used that strategy to enhance their cash flow to the financial division during the worst part of the credit crisis. Since they purchased the CDO AAA bonds at a deep discount, they were also "guaranteed" to receive more principal back than they paid out. Ultimately, they used the securities to exchange for their remaining recourse debt, which left the company without any recourse debt.

      If that is RSO's strategy, they are obtaining future capital, as the AAA principal is repaid, at a discount to par (pay out 65 cents receive $1 principal back). Meanwhile, they receive some interest from the CDO.

    • SJ,

      You are not being referred to as a hater. No worries. I believe that term is reserved for people who have issued personal insults and death wishes.


      That is a good question. The Company always talks about the repurchased notes as if they are retired. But it would seem to make sense to leave them outstanding and to pay the interest out of the CDO to RSO as note holder (especially on the AAA notes). In theory, the equity positions for the CDOs could get shut off due to failure of overcollateralization tests, but the AAA notes could still pay interest and make principal repayments.

      However, I don't know the answer.

    • Ag,

      I've been away and out of touch for a while, and, ran across this thread on my return. Did RSO repurchase debt issued by the CDOs, and extinguish it, or, did it buy the debt and leave it outstanding, since it was issued by a subsidiary? If the latter, for consolidation purposes it has been "extinguished", but in fact the bonds remain outstanding on the books of the subsidiary and should provide principal repayments and interest to RSO, so the principal and interest earnings on it will still flow indirectly to RSO. The underlying collateral securities providing the cash flow to the CDOs to pay the CDO bondholders is the source of your new capital. If the collateral failures are low, RSO will obtain the par amount back as well as interest on the "debt" it repurchased.

    • <Always good posting with you, I have no idea what the haters are talking about.>

      I have no idea who you are referring to when you talk about "haters". If you are referring to me, I beg to differ. All I've done is challenge your premise that RSO is a dead business, and pointed out that it makes no sense for you to invest in such a business if you really believed what you are saying.

      To wit: You continually imply that RSO is a dying business, that it will not survive beyond 2012-2014 -- ostensibly because it is a "file cabinet buried somewhere at REXI" -- without pointing out to readers the moves Mgmt is making to diversify the revenue stream (Such as the new leasing platform). OK, the stock raises were not well timed, and people are upset they had to sell stock below market. Whoppee. Many REITs are doing that these days.

      I read through the 2Q transcipt very thoroughly, multiple times. While I agree the traditional CDO market is dead, Mgmt did talk about ways to stratify and fully leverage the platform to make it more long lasting. I don't know if they will be successful, but they are not just sitting there waiting to turn to mush and wither away as you continually suggest. All I was doing was trying to reconcile your "RSO is going away in a few years" mantra with recent Mgmt actions to keep the business going beyond the next few years.

    • Just for grins I went back and calculated the total amount of CDO debt repurchases that we know about to date from the quarter (4th,) in which the first of the two equity issuances occurred, until now. This also includes the stated 3rd quarter repurchases that were mentioned in the 2nd quarter report. So, this includes 4 quarters. As I calculate it the total amount is 66.7 million actual cost (not par amount). The total proceeds from the two equity offerings were 86.2 million. Now this is completely arbitrary regarding sources and uses, but you could say that most of the equity offerings were used for debt repurchases. The point being that when you have a moderate to large amount of debt repurchases at around 1% current operations savings funded by equity offerings that require 20% returns to fund new dividends, it does get dilutive. Beyond that is the 32.5 million gained from the DRIP.

      I know this is late in the discussion and no need to respond. As I have said earlier, I'm not that upset about the dilution as my return is still quite good on basis or even current yield. But, I do hope that they refrain from too many more dilutive offerings. I will bet that their ongoing strategy is to raise equity capital thru the DRIP which does require pretty good returns on the capital.

      Oh, AG or Ruby, are the capital gains earned on the debt repurchases able to be offset by any capital losses thus minimizing taxable income for payout in the future? It is true, I think, that the future income payout from the debt repurchases does eventually increase the return on the equity offerings.

    • Likewise. Appreciate your reminders regarding the flubbed offerings. It will be interesting to see whether any more shares were sold via DRIP during Q3 . . . where they put cash during Q3 . . . and all the other usual data points like NPLs etc.

      Personally, I'm expecting a new DRIP registration any day now, along with an announcement that the old one has been used up. Of course, I could be mistaken.

    • Yeah, I think we're talking at cross purposes, I agree with all that. Probably we've pretty much beat this one to death, I think we understand each other's points. Always good posting with you, I have no idea what the haters are talking about.

    • >>The effect on RSO stockholders is indirect, that money doesn't belong to us.<<

      Yes, it is certainly correct that the debt comes before the equity. However, I think you are overstating this.

      Compare RSO's 5 CDOs to a less complex structure like SFI.

      At SFI, there is only 1 company, but the billions in debt are all at the parent company level. All the debt comes before the common equity, regardless of the fact that there is only 1 pool of assets at the parent company level.

      At RSO, there are 5 different indirect pools of assets and 5 different indirect, limited recourse pools of debt. The advantage is that if one pool blows up, it doesn't impact the other 4. What you call a third party is actually more like a subsidiary.

      The use of debt is central to the business of lending money (whether through a bank with deposits as debt, through a simple mREIT like SFI with notes, or with 5 pools of debts and assets like RSO.)

      The segration of the assets into 5 separate pools, each of which is independent of the debts of the other 4 pools, actually makes the assets in each pool closer to the RSO common stock equity position than you find with less complex structures where all the debt comes first.

      (For purposes of this post I'm ignoring the lease bussinesses at both RSO and SFI.)

    • Not complaining, when it worked it was a very profitable structure for the host, using opm to generate profits and management fees. I'm just pointing out that securitization funds invested in the securitizations are happening to a third party. The effect on RSO stockholders is indirect, that money doesn't belong to us.

    • >>we RSO stockholders own so little of the CDO/CLO's. They're like limited partnerships in which we hold the GP interest (and some of the LP, given buybacks).<<

      This is a criticism of how RSO was first structured. (And also NRF and many other mREITS built on CDOs / CLOs). To complain about RSO's CDOs and CLOs is like complaining about GM's exposure to the auto business: that's what you signed up for when you first considered the investment.

      Regarding the offerings - I tend to agree - I don't like them fundamentally, but since I made some money buying on the dips, I guess I'm less critical.

      If I were only a long-term holder, I would be very upset.

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