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American Capital Agency Corp. Message Board

  • taymere_lane taymere_lane Feb 7, 2013 5:23 PM Flag

    help jdg: BV effects off balance sheet TBA's

    I'm a little confused about the off balance sheet TBA's effect on BV. They report that on balance sheet effect is only a $0.1B M2M gain. I with the leverage and attractive financing I assume that they only had to use ~$2B of cash to buy that $14B TBA portfolio. Forgive my ignorance here, but how did using ~$2B of previously on balance sheet cash to buy TBAs affect the balance sheet, versus the hypothetical effect had they used that same ~$2B to buy MBS instead? In the latter case it appears to my that using the cash to buy MBS instead doesn't adversely effect the balance sheet because both the cash and the MBS are assets, whereas using the cash to buy the off balance sheet TBA's like they did in 4q12 might be part of why BV decreased in 4q12. If that's so then BV will be restored as these forwards settle over time. Does it work they way I am think or am I way off?

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    • Hey taymere, good to see you!

      I have to admit, I was pretty stumped by your question until I got a better feel for what a TBA "dollar roll" really is - from Investopedia:
      A type of repurchase transaction in the mortgage pass-through securities market in which the buy side trade counterparty of a "to be announced" (TBA) trade agrees to a sell off the same TBA trade in the current month and to a buy back the same trade in a future month at a lower price.

      In a dollar roll, the buy side trade counterparty gets to invest the funds that otherwise would have been required to settle the buy trade in the current month until the agreed upon future buy-back. The sell side trade counterparty benefits by not having to deliver the pass-through securities (which they might otherwise have shorted or committed to another trade) in the current month.

      Investopedia explains 'Dollar Roll'
      The price difference between months is known as the drop. When the drop becomes very large, the dollar roll is said to be "on special". This might happen for several reasons, including large collateralized mortgage obligation deals that increase the demand for mortgage pass-through securities, or unexpected fallout of mortgage closings in a mortgage originator's pipeline. In both cases, financial institutions might have more sell trades in the current month than they are able to deliver securities into, forcing them to "roll" those trades into a future month. The greater the shortage of available securities in the current month, the larger the drop becomes.

      Going back to your numbers, they didn't outlay $2B in cash (balance sheet item) to control the $13B in TBA mortgage positions (non balance item), so there is no immediate impact on book value. The maximum cash they would theoretically have to outlay would be the amount of price change in the contracts month to month. Even then, both the price would have to move against them and they have to choose not to roll the entire position back another month.

      The $100M price change is recorded as both income/loss & asset/liability, so that would be the extent of the impact on BV for the Q.

      Hope that helps!

    • It's "off-balance sheet financing", meaning the money they paid for it isn't on the balance sheet, either. What they may be doing is using the balance sheet assets as collateral to borrow money into another account (possibly under another corporation), i.e that account is pure debt, with zero assets to figure as the denominator in a leverage ratio. Then they buy the TBAs and keep them as assets in that account. But the TBAs fluctuate, and the difference between TBAs current value and their cost basis gets treated as an asset in the company's regular accounts, while the other account only ever has the original asset value in it and thus has zero net value when the debt is considered.

      If you look at the leverage mentioned in the press release, it's 6.7X considering only company debt vs equity, but 7.8X considering the TBAs. That difference reflects that there's no equity being leveraged for the TBAs themselves*. Doing the extra borrowing off the balance sheet makes the on-balance-sheet leverage (or debt-to-equity ratio) look lower. I'm not sure at all why AGNC has to do it, because 7.8X is not extraordinary at all. Must be some tax or REIT-classification dodge.

      • 2 Replies to yourbestfriendintheworld
      • Thanks mybestfriend, I didn't realize that off balance sheet meant that no balance sheet cash was used either. Knowing that helps a lot.

        This sounds like a quite tame SIV, but God help us when the banksters start using the massive reserves that they hold at Fed as margin collateral for leveraged bets against equities. And they will. The nature of the SIV's mean that public will never know whodunnit after the next 1987 style crash.

        Free drinks and no limit tables for all high rollers, no jail, no fail, no investigation. Step right up, the muppets got your back.

      • Off balance sheet financing as it relates to TBAs means they are using dollar rolls. Instead of purchasing current month settlements, they are purchasing forward month settlements. The way TBAs trade, there is a discount to forward month settlements. Therefore, what is happening is that essentially you are financing the purchase by using the discount instead of say borrowing actual money...

        Sentiment: Strong Buy

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