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Ellington Financial LLC Message Board

  • tprecent tprecent Aug 6, 2011 10:22 AM Flag

    Downgrade Impact per reit execs

    AGNC Gary Kain:
    That being said, there is a risk of a downgrade of U.S. debt below its historical AAA rating. However, we believe the
    impact on government and agency debt of a downgrade will be limited.
    The markets are clearly aware of this risk, and U.S. Treasuries actually rallied with prices higher and yields dropping
    yesterday. Additionally, agency mortgages are also holding up reasonably well given the headlines and prices of all
    generic mortgages were higher yesterday.
    Lastly, I want to address some misconceptions that seem to be floating around with respect to agency repo. First of all,
    the agency repo market is functioning normally and we have not seen pressure on haircuts. Agency repo is readily
    available and rates remain extremely attractive. Furthermore, even in the unlikely event that at some point in the future
    we saw a 1% or 2% increase in haircuts to something like 5% to 6% on agency MBS, from the current levels of near
    4% this would not impact our comfort level with our leverage.
    To demonstrate why we are not concerned, remember in early 2009 when the equity market was at its lows, agency
    repo haircuts averaged around 7% to 8%. Why is that significant? Because at that time, the average leverage in the
    REIT space was very close where our leverage currently is. In other words, we would be comfortable running our
    current business and could fully fund our positions with ample cushions, even if haircuts increased 2% or more.
    To further provide comfort here at the depths of the market in the second half of 2008, agency REITs with 8 or more
    times leverage were able to make it through the worst liquidity period we have witnessed.
    In conclusion, we continued to repo at terms consistent with or better than where we were earlier in the year. And our
    business model can handle any reasonable increase in haircuts.

    IVR Richard King
    potential downgrade of sovereign debt. Do you think it could have an impact on the repo markets? And I'm fairly curious also more about the non-agency side, do you think either side of that could be
    impacted?

    Yeah, that's an interesting question because all the talks have really been about what happens
    in agency haircuts and so forth. And I'll just go through kind of the whole repo market. On the agency side, broadly
    supply-demand in the repo market is still favorable. We have seen increasing supply, and we've expanded the number
    of counterparties in the last quarter. And I will say like this week we've seen our financing rates on repo rolls go up like
    a basis point or two, but no change in haircuts.
    If there is a rating downgrade, our view is we'd probably see the guys who are at the lower end of haircuts raise them.
    So there are some guys who are at three, some at four, some at five right now. And from what our discussions, the guys
    at five broadly may not move at all. The guys at three probably move, but not a lot. And really what drives it more than
    ratings are really price-vol, and capital ratios are important and obviously in the repo markets and there is no difference
    there, so it's really the price-vol that's in focus. So that's what we see there.
    On the non-agency side, obviously the haircuts are much, much bigger already. We have got stuff anywhere from 10%
    like on those -- the best senior Re-REMIC stuff to all the way to 50%. And we haven't heard anybody contemplating
    raising those. And when you think about it I mean the – we are not really focused on buying stuff with AAA ratings
    that could get downgraded where most of our senior Re-REMICS we're buying are unrated. So we really don't see a lot
    of risk in that space.

 
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