Description
Each share of Anworth Mortgage is backed by $6.51 of baby and $0-$2.75 of bathwater. The baby is the parent company’s mortgage REIT portfolio of 98% agency MBS and 2% AAA MBS. The bathwater is Belvedere Trust, a non-guaranteed subsidiary that has not met margin calls on its repo-financed portfolio of mostly A and BBB RMBS. Anworth stopped supporting Belvedere last week and the repo counterparties sent notices of default.
The investment thesis is that Anworth is highly likely to abandon Belvedere as a total loss. Anworth will remain in business as an agency RMBS investor comparable to Capstead, Annaly, and MFA.
Financial Statements
This pro-forma financial statement breaks out the main assets, and liabilities between Anworth and Belvedere. For simplicity I left all miscellaneous assets and liabilities with the parent. An exact allocation would not affect the net equity at each level.
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Anworth Mortgage Asset Corporation |
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Numbers in $000s as of 6/30/07 |
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Anworth Estimated |
Belvedere Estimated |
Combined As Reported |
Comments |
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Agency MBS |
4907022 |
0 |
4907022 |
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Non-Agency MBS |
111827 |
0 |
111827 |
AA or better |
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Other MBS |
0 |
200736 |
200736 |
$42mm A, $145mm BBB, $6mm lower |
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Loans |
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1355935 |
1355935 |
2004+2005 vintage |
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Other Assets |
58076 |
0 |
58076 |
Cash & Receivables |
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Intercompany Loan |
-42800 |
42800 |
0 |
8/16 PR |
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Total Assets |
5034125 |
1599471 |
6633596 |
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Repo agreements |
4548277 |
288358 |
4836635 |
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Other Liabilities |
70000 |
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70000 |
Payables & Expenses |
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Junior Notes |
37380 |
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37380 |
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MBS Issued |
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1190552 |
1190552 |
$165mm net equity |
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Preferred B |
28750 |
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28750 |
Liquidation Preference |
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Preferred A |
46888 |
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46888 |
Liquidation Preference |
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Minority Interest |
91 |
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91 |
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Common Equity |
340300 |
83000 |
423300 |
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Intercompany Loan |
-42800 |
42800 |
0 |
8/16 PR |
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Net Common Equity |
297500 |
125800 |
423300 |
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Total Liabs & Equity |
5028795 |
1604710 |
6633596 |
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Share O/S |
45670 |
45670 |
45670 |
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Common Equity/Share |
$6.51 |
$2.75 |
$9.27 |
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Leverage |
12.2 |
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Assets/(Equity+Notes) |
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Key Points for Anworth:
- 98% agency portfolio. My understanding is that companies are not having any trouble financing these securities, but haircuts have risen from 2-3% to 4-5%.
- Anworth is well capitalized. In addition to common equity, the company has $75mm of preferred and $37mm of junior notes.
- Anworth reports that the market value of its agency securities has risen since June 30th.
- Anworth has been getting about $100mm per month in cash flow from prepayments.
- Anworth’s exposure to Belvedere is limited to equity investment of $83mm and intercompany loan of $42.8mm
- Anworth has no bank debt or any debt with covenants.
Key Points for Belvedere
- Assets aren’t bad, but can’t be funded with repos in the current market
- Anworth is not a party to Belvedere’s repo facilities. Anworth has not provided any guarantees to Belvedere counterparties.
- Belvedere has been generating about $5mm of cash flow per month from net interest + prepayments.
- Belvedere is likely to be worthless because it cannot finance its assets in the current market
Default Status
On August 6th Anworth filed an 8-k explaining that Belvedere had received margin calls from repo counterparties and that Anworth would not provide any additional cash from the parent company. On August 13th Anworth filed another 8-k disclosing that Belvedere has received additional default notices. My understanding is that the counterparties have not yet liquidated the collateral and there has been some discussion with Anworth about what’s going to happen next. On August 16th Anworth issued a press release stating:
The amount of intercompany loans totaling $42.8 million that Anworth had provided to Belvedere Trust has not increased and Anworth does not intend to increase this amount. Anworth has not provided any guarantee with respect to Belvedere Trust's repurchase agreement borrowings. While Belvedere Trust continues to pursue all of its options to satisfy its borrowing obligations to its Master Repurchase Agreement lenders, the Company's current expectation is that any recovery above the repurchase agreement liabilities would be minimal if any.
Comparable Valuations
Agency MBS investment REITs generally trade around book value. When spreads are favorable, current income and dividends increase and shares move to a premium valuation. When spreads are unfavorable, income and dividends decrease and valuations move to a discount.
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Agency MBS Investment REITs |
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numbers in $mm at 6/30/07 |
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Pro-forma |
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Company |
Capstead |
Annaly |
MFA |
Anworth |
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Ticker |
CMO |
NLY |
MFA |
ANH |
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Agency MBS |
5441 |
38603 |
6085 |
4907 |
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Non Agency MBS |
49 |
0 |
911 |
112 |
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Agency % |
99% |
100% |
87% |
98% |
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Other Assets |
96 |
584 |
1038 |
15 |
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Repurchase Agreements |
5115 |
35094 |
6379 |
4548 |
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Debt |
103 |
0 |
0 |
37 |
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Other Liabilities |
23 |
972 |
39 |
70 |
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Preferred |
183 |
288 |
96 |
76 |
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Common Equity |
161 |
2833 |
608 |
298 |
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Shares O/S |
19 |
269 |
83 |
45.7 |
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Common Equity/Share |
$8.47 |
$10.53 |
$7.33 |
$6.52 |
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Market Price (8/16/07) |
$8.69 |
$14.03 |
$6.47 |
$4.10 |
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Premium/(Discount) |
2.6% |
33.2% |
-11.7% |
-37.1% |
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Leverage |
12.5 |
12.6 |
11.4 |
12.2 |
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Common Equity Leverage |
34.7 |
13.8 |
13.2 |
16.9 |
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Catalyst
1. Collapse of non-guaranteed subsidiary