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American Capital Agency Corp. Message Board

  • terroir2 terroir2 Feb 6, 2012 5:46 PM Flag

    Core spread income

    Reported at .99 cents.

    Of that 16 BPS seem suspect as it was offset by a decline in ratio of interest rate swaps to repurchase agreements:

    "The Company's average cost of funds (comprised of repurchase agreements ("repos") and interest rate swaps) increased 16 bps to 1.16% for the fourth quarter, from 1.00% for the third quarter, due to higher year-end repo rates (40 bps as of December 31, 2011 compared to 28 bps as of September 30, 2011) and a higher intra-quarter ratio of interest rate swaps to repurchase agreements outstanding during the fourth quarter compared to the third quarter. However, despite higher year-end repo rates, the Company's average cost of funds as of December 31, 2011 decreased 11 bps to 1.13%, from 1.24% as of September 30, 2011, due to a decline in the ratio of interest rate swaps to repurchase agreements as of year-end.

    The Company's net spread income for the quarter was also impacted by the timing of the Company's fourth quarter equity raise, which closed on November 1, 2011, and a longer than average deployment period of the offering proceeds into interest earning assets compared to the Company's prior equity raises." (This says that comparatively they had a better spread effect from the spo than typical due to timing)

    Company is hoping to maintain $1.25 by gradually eating into 80 cent cushion. But with real spread is closer to 85 cents the 80 cents won't last long and further cuts will be necessary in a couple of quarters.

    Also, other income was negative this quarter and they will have to talk about losses on that front. This was offset by what looks like sale of assets that increased in value due to interest rate decreases. Not good, prop up present by mortgaging future. Net spread under even more pressure if this is the case.

    Conference call has lots to answer.

    SPO???????????? Anyone's guess but unlikely until after March 7.


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    • I hope you got in on MTGE this morning, lol.

      I check on it once in a while, but I think those waters may still be a bit shallow for my taste. Only about 215 open contracts in the heaviest trading options as far as I can tell.


    • Thanks jdg, 2x baggers on AGNC are getting harder and harder to come by as market cap grows and it is now highly liquid and highly scrutinized by analyst and pros. I just took 24% gains on some AGNC calls that I bought a month ago yesterday and was happy to get that.

      If you want 2x baggers trade MTGE instead. Much less liquid and much less attention. At the comparative point in temporal corporate history I was scoring 5x baggers on AGNC calls. Perhaps you'll catch an individual investor who forgot to cancel his GTC call sell order at the open. That's what I'll be fishing for in the AM.

    • dderringer311 Feb 7, 2012 10:50 PM Flag

      Ahh, I see what I am missing. Thanks

    • dderringer311 Feb 7, 2012 10:18 PM Flag

      Sorry, I said that wrong, GAAP does include unrealized gains.

    • dderringer311 Feb 7, 2012 10:07 PM Flag

      <<Taxable earnings were 1.61. Assuming core earnings were approximately equal for GAAP & Tax, that leaves .62 taxable income from non core activities (like trading and hedging).

      That .62 would have to fall by .36 (more than 50%) to put taxable income below 1.25 for Q1. If you don't want to look at it that way, than total taxable income has to fall from 1.61 to below 1.25 (over a 20% drop).>>

      The 0.62 is from unrealized gains, not from realized gains from trading or hedging. It is mainly from the rates dropping and their higher rate MBS' becoming more valuable. The problem with including that "gain" is two-fold. 1) They are selling their higher rate MBS to realize enough gains to pay the divi 2) with the sale of the higher rate MBS they are lowering their average rates for MBS, so these unrealized gains will turn into unrealized losses at a faster rate when/if the rates begin to rise (ie if rates go back to where they were a few months ago that gave the unrealized gains the unrealized loss will be higher).

      I think basing a dividend on unrealized gains is very risky. There is a reason we have GAAP and they are displaying non-GAAP figures.

    • Terr,

      I just wanted to add that I fully realize any confusion on your part is my fault. I used the term GAAP net income when I was really thinking of the Comprehensive Income number.

      It must be hard for you to help me understand your position if can't read my mind, haha.


    • If that's what he meant, it sure didn't come through that way from his post. Their "net spread" has been dropping Qtr over Qtr for some time, and will likely continue until their "net spread" = current market spread. At that point, any growth will have to come from investment activities, which exceeded primary earnings in 4th Qtr 2011.

      The pressure point for management is to be able to maintain higly profitable investments. Not easy to do Qtr after Qtr for any length of time.

    • Exactly so ephort, at pain of thrashing a dead dog, premium value securities will typically have a higher coupon than current rates, and have a market value greater than purchase cost. Once gone from the portfolio, the average gross interest income would be reduced as replacement securities would typically have a lower coupon rate (ignoring duration and quality.

    • "(This says that comparatively they had a better spread effect from the spo than typical due to timing)"

      Actually, I think the spread effect would have been worse because the funds took longer to deploy into assets than normal. Undeployed funds earn 0%, so taking longer to deploy them lowers the average spread.

      Also, I'm seeing a lot of projections that they need the undistributed earnings account to maintain the dividend, and I'm not sure I follow that logic. Not unless they do a late Q offering or once again have trouble placing the funds.

      That account actually grew from 156M to 180M on the quarter. The per share numbers went down because the share count increased at a faster rate. Barring a Q1 offering, there is no reason to think this account will shrink on a real or per share basis in Q1.

      Q4 taxable income was $1.61 and the dividend was $1.40. The excess of taxable income over the dividend increased the undistributed earnings account. It didn't increase by .21 per share because the earnings are on a weighted average share basis and the dividend is on the share count at the end of Q4 (the denominators are different).

      Q1 earnings are expected to fall, but they'd have to dip below 1.25 per share to begin eating into that reserve (again, absent an SPO). That's certainly possible. Is that what you guys are betting on?

      As far as them selling the crown jewels (higher rate MBS), they may not have had much choice. Prepayment rates would be higher on the higher rate MBS and that may have forced the issue. Hopefully that comes up on the conference call tomorrow.

      • 2 Replies to jdg8002
      • dderringer311 Feb 7, 2012 9:44 PM Flag

        Check out the notes about taxable income:

        Estimated taxable income for the fourth quarter was $1.61 per share, or $0.62 higher than GAAP net income per share. The primary differences between tax and GAAP net income are (i) unrealized gains and losses associated with interest rate swaps and other derivatives and securities marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to the amortization of premiums paid on investments and (iii) timing differences in the recognition of certain realized gains and losses. "

        So $0.62/eps is just from unrealized gains, so that wasn't monies used to pay the divi and according to GAAP it wasn't actually earned, the $0.99/share is the real earnings number.

      • Good points Jdg

        There is a nuance to how you read the statement about the impact of timing. It says "a longer than average deployment period of the offering proceeds into interest earning assets" I take it to mean that they deployed for a longer period.

        The $180 mil at end of Q4 corresponds to the 80 cents per share that will be deployed to maintain a $1.25 going forward. I believe it came from Kain's commentary.

        I am making the argument that core earnings are below $1.25(which is why they have to eat into the 80 cents) and I see that they could be lower than the 99 cent core of Q3.

        The call will be interesting

    • Hit it on the head. The core earnings is all they have left. The company is in run off and a few more quarters and the undistributed is gone. Kain said he didnt need it before, now he puts it in play.

      I thought it was something else, but is you think about the idea of a comany not growing, you first sale the high rate loans into a low rate market, you then dstribute .25 of .80 in undistributed earnings, then the rest for a few quarters till you get to .99 per quarter, like the rest of the sector. They had a few great years.

      If they dont do an spo, what does that say about the prospects gooing forward. Is it the same business model?

      The analysts who are holdingbprice targets of 30+ and buy ratings will be weighing in, TWO will report tomorrow and next week we get hts and nly on the 21st,

      This is not over, and yes there is a lot to answer for. Generally, the market has to decide what premium to give these dividends. Most trade at 13%. The best investors willl sell off first until the sector is normalised overbthe next two weeks. No SPOs will worsen the outlook.

      • 2 Replies to ben9471
      • Maybe there won't be an SPO this year. What do you think they will do with the $1.28 of investment income --- the piece that NOBODY estimated prior to earnings announcement --- they made in addition to their basic interest income of $0.99?

      • Yea, the business model is the same, just the fundamentals are dramatically different. It was a nicety that new issues could be made accretively while meeting managements prime objective of growing management fees by growing net assets. What it really meant to them was that the next SPO was easier to make etc. In reality that fact that the SPO was accretive to BVPS made little difference to their management fee as it based on gross book value and any new issue increases gross.

        It was also a nicety that high spread income plus fairly consistent gains in "other income" meant for a "walk on water" stature and excellent ROE. This has been hit by a major dose of present reality, so while the bottom of the curve is anchored until 2014, the top has squeezed down and is under increasing downward pressure. Add to this the refi program effects on repayment speed. I suspect that 99 cents will look good in a few quarters.

        Don't get me wrong I would love to find a new normal with the similar patterns. After all it was the pattern we played, not the where they were on the page. I just don't know what that is any more with enough certainty. But for sure $24 would get me buying $25 calls after an spo in anticipation of a dividend run.


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