I hear ya...its called negative convexity isn't it ? I wonder however if this time its different for a different reason. As housing prices have increased less borrowers are underwater which should stimulate sales activity which would tend to increase CPR. ANH might actually welcome this CPR increase with the recent increase in spreads. OTOH someone who was underwater may have a mortgage rate that is already greater than 5%.
I hear ya on the 15% discount to book-I also bought some on the 10th. Pulled the trigger a little to early obviously. My concern is do we have to look at these in place hedges as a reduction in future book value if prepayments cannot be reinvested with sufficient spread.
You have discussed tax rules but not the specific taxability of the ORI dividend. When a company has distributed all of its "earnings and profits"(a tax accounting term that is similar to retained earnings) any further dividends are considered Nondividend Distributions (aka return of capital). I checked with Charles Schwab and the ORI dividend in 2011 was considered qualified. What I am trying to figure out is when will ORI run out of earnings and profits such that the dividend will be considered a return of capital. If and when that happens you don't report the dividend as current income and instead you reduce your cost basis and report a larger gain(hopefully) when the stock is sold.
Does anyone know the tax status of their ORI dividends. I see the consolidated statements showing a loss which would lead me to believe that they would be characterized as return of capital(Nondividend Distributions) on a 1099. On the other hand from the 10K parent only statements it shows a considerable amount of retained earnings which would lead me to believe that they are Qualified Dividends. Has anyone out there owned this stock in 2011 and could check to see if their dividends were classed as a Qualified Dividend or as a Nondividend distribution on their 2011 1099.
Agreed...man its nice to have an intelligent discussion with somebody on these boards. I look forward to 1st qtr conference call to see how much these guys will "batten down the hatches". Any Capex that doesn't generate cash flow 3.5 times its cost and present value 1.5 times its cost at $2 gas will only put further stress on these covenant requirements.
Thanks for the info. I went to the 8-K filed 10-11-11 which has details of the bank credit agreement. Section 2.20 indicates the inital present value is equal to 4.552 Bln. Section 6.09 of the agreement states that the present value to funded indebtedness ratio should not be less than 1.5 to 1. The debt at 9/30/11 was approximately 1.8 Bln making the ratio approximately 2.5. The bigger question is what was the price of natural gas used to determine that present value of 4.552 Bln. There is room here but probably not as much as you would think.
Section 6.09 also has a consolidated leverage ratio requirement to be less than 3.5 to 1.
The Senior Notes also a leverage ratio requirement but I don't know what it is. I am trying to find out if there is a public filing similar to the bank agreement filing covering the specific details.
Taking the 2011 production of 236,832,000 MCF with $1.00 cash margin and using $70 Mil in interest expense you get a ratio of 3.38 times.
Again I'm trying to point out that this thing is tighter than you realize if these $2 prices persist.
If prices stay low and things get tight and they can get out of the bank debt then they only have to to be concerned with the Senior Notes covenants.
I am still doing some DD on UPL. If you go to the 10-K report you will find that there are present value and consolidated leverage ratio covenants on the bank line. They also mention a consolidated debt ratio covenant for the Senior Notes.
With little hedges in place for 2013 and no rebound in sight for natural gas prices I am concerned about UPL's ability to comply with these benchmarks in 2013. I don't see them cash flowing to the point where they are out of the bank line by yearend 2012.
If the haircut on repos is increased does it only apply to new repo contracts or does it filter into all existing unmatured repo contracts? In other words does the haircut PERCENTAGE survive the life of the contract or can it be changed before maturity? I realize if the value of the collateral declines a margin call can happen and therefore more collateral must be pledged.
In this environment there appears to be two different risks...the first being a change in haircuts; the second being the change in value of the MBS securities.
"if the total (prepayment hit) for 2010 were only 14 cents, and with 4 cents left undistributed from Q4, why would NLY cut the dividend 10 cents? it would only make sense if they were already having difficulty making the existing dividend (and the additional 2.5 cent hit/quarter was a bridge-too-far."
I know its possible to have a carryover from 2009 that can be paid in 2010 before the 2009 tax return is filed. My question to you is where did you get the undistributed 4 cent number...inquiring minds want to know. Knowledge is power!
"this however would make their raising of the dividend last quarter to $.27 from $.25 a very questionable decision."
Remember that 4th quarter dividend is a tax trueup for the 2009 tax year...not necessarily a statement of an ongoing payout.
Thanks for these numbers. Can I get these numbers somewhere? I presume the average life is lower than 100 divided by the CPR because of monthly principal amortization. I also want to be able to look up MBS market prices and swap rates to learn. Thanks again.
"If I remember right MFA bought the AAA tranches, which means there are four or so subordinate trances providing credit enhancement to the AAA. Think of cascading waterfalls of principal and cascading waterfalls of interest."
I read the PP presentation as you sugessted. MFA indicated at year end they had 10% in credit enhancements. That could be 10% of par or 10% of their basis(which would equate to approx 6.3% of par). Either way that isn't much cushion to bring them up to a AAA tranche. Of course I don't know anything about the relative sizes of the various tranches.
Thanks for the excellent reply! Its not surprising I guess that they would do something so uneconomic for appearance sake. So now in the future MBS investors will be more concerned about the quality of their holdings because prepayment speeds will become more sensitive to non performing loans.
I've got another question for you and forgive me for trying to take advantage of your insight/knowledge. MFA indicates that their non agency holdings have "structural credit enhancements". What do they mean by structural credit enhancements? Is that the PMI payoff for the remaining unpaid balance over 80% of original appraised value or do they mean there are tranches in the MBS pool that are subordinate to MFA's position? Thanks again.
Most of us here know about the recently announced GSE buyback of loans that are 120 days or more delinquent. From what I understand they have the OPTION to buy back these loans after 120 days and the REQUIREMENT to buy them back within 24 months.
My question to the board...Is this a one time event or this a change in policy that will be repeated every month? If its going to be repeated every month then investors in MBS would have to model in higher prepayment speeds for delinquent loans over 120 days. In the past the investor could ride the government's guarantee on these loans for up to 20 more months. In the recent past were these delinquent loans typically not paid back until month 24 or were they paid back on average much sooner than this?
Corrections also welcome!
I don't have an estimate at this point about taxable income...its way to early in the year and too many unknowns. I wouldn't argue however with your $.90 to $1.00+ estimate.
Your reply got me to thinking that the market value of GSE mortgages could be futher impaired beyond the effects of this one time prepayment notice.
If the GSE's continue to flush out the past due loans after 120 days instead of 24 months investors won't be able to ride those 20 months of government support and higher CPR's would have to be modeled for non performing loans. It would make investors pay more attention to substandard pools due to much higher prepayment speeds.
Thanks...I didn't realize it was that long. So on average we probably have an extra 10 months(24-4)/2 of hedging expenses that could potentially be lost if the funds can't be properly & promptly reinvested.
"would you say this calculation is correct according to your numbers"
No you can't add up these numbers to come up with this. Book value is a function of:
(1) the market value of the mortgages
(2) interest income (-) expenses and dividend payments.
(3) gains or losses from the sale of mortgages
After the GSE announcement last week the market value of all GSE mortgages dropped on the open market due to the expected early prepayment to par or 100 for the percentage of those loans(my estimate of 7.5%) that were 120 days past due. So if those mortgages had a value of 105 they dropped to say 104.5(uncalculated number) to account for ON AVERAGE the early repayment of those to be prepaid at par. MFA's book value dropped right then and there because now their mortgages on average are not worth as much in the open market. MFA lost market value equal to the difference between the 105 and the 100 they will receive on those mortgages(estimated at 7.5%) that will be repurchased early...this is the $.10 per share number I referred to. MFA still paid 101.3 for these mortgages regardless of this prepayment announcement.
When MFA gets paid at 100 for the loans that are past due they will have to writeoff 1.3% of those prepaid loans which is the $.025(not $.25) per share that I referred to. This is a taxable event and their dividend will be adjusted accordingly either in the second quarter or spread throughout the rest of the year so as to not payout more than REIT taxable income for the year 2010. Now we may not see the effect of the entire $.025 in 2010 because they projected some prepay at some point in time either in the remainder of 2010 or later years. So in the end its a timing issue when do I get prepaid for my past due loans...now or in the next few quarters. If its later than now I get to earn my spread after hedging expenses during those quarters. If its now then I loose my spread and I still have my hedging expenses. This is my estimate in LOST INCOME of $.02 per quarter if the funds can't be immediately reinvested.
So in this example MFA lost $.10 per share in book value...$.075 was a loss of unrealized capital gain that went away(105 down to 101.3) and $.025 was a realized taxable loss (101.3 down to 100).