The problem with AGNC is that the debt facilities they have are variable rate based on the LIBOR interest rate +/- some spread.
With Libor way way up (try doing google a news search on Libor), what are the chances they can keep up the current dividend rate? AGNC fully discloses that increases in the rate at which they borrow will hurt them badly.
Add to this the likely disruption to the MBS market that will occur with the Paulson bail out and you can see why AGNC is trading the way it is.
The way I see it, there is indeed a lot of risk here.
Anybody else have a different view on the risks associated with Libor? (Yes I know some people think AGNC is a "great value" etc. but what mitigates the risk?)
one of the countermeasures agnc has over other reits at least in the short term is not using sawps insurance as part of their financing costs I think that will more than offset their exposure to libor + spread borrowing
Don't be silly - Their swaps convert their floating rate finance rates to a fixed rate. If they had been 100% hedged in June they would be sitting pretty now. As it is they only had 35% protected at the time of the their conf. call.
Look at the yield on this stock! It is because LIBOR is pegged. If you look at the Fed open market operations on agency securities (which AGNC does not have access to since they are not a primary dealer) even those rates have been spiking.
Have you ever heard the expression, "there is no such thing as a free lunch". With the current climate we may well see most finance companies (borrow short term and finance long term) that are not primary dealers (or banks) with access to Fed facilities become history once the Fed starts giving them better deals than the finance companies can.
This of course helps the banks and primary dealers - but hurts all the lesser players.
Probably the best thing for AGNC would be for ACAS to buy a controlling stake in a bank (using the recently relaxed ownership rules) in order to guarantee them access to the fed programs.
You are correct:
"Agency securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead, agency securities provide for a monthly payment, which consists of both interest and principal. In effect, these payments are a "pass-through" of the monthly interest and scheduled and prepaid principal payments made by the individual borrower on the mortgage loans, net of any fees paid to the issuer, servicer or guarantor of the securities."
If I understand their buisness right, I think that they not only get interest but principal and prepayment in the repayments. So therefore they can reinvest in higher yeilding mortgages as time goes on. Here is the link --- http://www.agnc.com/our_portfolio/index.html
In order to get the rates that AGNC has gotten, 2.39%, they must be dealing with those who have direct access with those who can borrow from the fed. And since their mortgages are guaranteed by the federal government I do not see how they would lose this ability to borrow at this rate. If fed funds rates rise then that would lower earnings. I listened to the conferrance call and what I understood them to say is that they felt that interest rates would remain low and in a year or more they may begin to rise. But at that time they would have purchased mortgages that are higher in their interest rates, thus maintaining their earnings stream. Try listening to the conferance call and doing a little reasearch before making stupid statements, shorty. http://www.agnc.com/
I have been through the AGNC 10-Q and listened to the most recent conference call.
It is true they can be smart about hedging the value of the portfolio.
But it is not the issue I am asking about - they had to borrow money to buy their current portfolio, and they have to pay a *variable* rate of interest it. The rate paid is based on the Repo market (which is essentially pegged to LIBOR +/- some constant).
When AGNC said they could borrow "below LIBOR" they meant that were paying an interest rate of something like LIBOR - .25 in the Repo market.
So, the two main risks are
1) they have to start paying more interest on the money they used to buy their portfolio. Once they have to pay more for their financing they can get from their holdings, their interest rate spread goes to zero, and their business model ends.
2) The value of their MBS portfolio declines (at 8x leverage it doesn't take much to wipe out the principal).
According to Joel Houck at American Capital / AGNC (I spoke with him this morning) due to market conditions the pricing in the Repo market for agency backed MBS has been in the 3.5 to 4% range and has gone as high as 5% (versus the 2.39% AGNC enjoyed in June). Joel also indicated that, as disclosed in June, AGNC does hedge some of its interest rate exposure via swaps.
Unfortunately, whatever hedging strategy is used, at some point the borrowing costs will go up if the liquidity crisis continues (i.e. LIBOR stays up).
I do not hold a position in AGNC or ACAS and I am torn between whether I should invest (go long liquidity) or continue to sit on the edge of the pool.
"must be dealing with those who have direct access with those who can borrow from the fed"
maybe that someone is John Koskinenappointed, the new Chairman of the Board at FRE: