Anworth Mortgage Asset ANH
August 17, 2007 - 9:23am EST by
john771
2007 2008
Price: 4.06 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 187 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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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.
 
Anworth Mortgage  Asset Corporation
 
 
 
 
 
Numbers in $000s as of 6/30/07
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anworth Estimated
 
Belvedere Estimated
Combined As Reported
 
 
Comments
 
 
 
Agency MBS
4907022
0
4907022
 
 
 
 
Non-Agency MBS
111827
0
111827
AA or better
 
 
Other MBS
0
200736
200736
$42mm A, $145mm BBB, $6mm lower
 
 
 
 
 
 
 
 
Loans
 
1355935
1355935
2004+2005 vintage
 
 
 
 
 
 
 
 
 
 
Other Assets
58076
0
58076
Cash & Receivables
 
 
Intercompany Loan
-42800
42800
0
8/16 PR
 
 
 
 
 
 
 
 
 
 
 
Total Assets
5034125
1599471
6633596
 
 
 
 
 
 
 
 
 
 
 
 
Repo agreements
4548277
288358
4836635
 
 
 
 
 
 
 
 
 
 
 
 
Other Liabilities
70000
 
70000
Payables & Expenses
 
 
Junior Notes
37380
 
37380
 
 
 
 
MBS Issued
 
1190552
1190552
$165mm net equity
 
 
Preferred B
28750
 
28750
Liquidation Preference
 
 
Preferred A
46888
 
46888
Liquidation Preference
 
 
Minority Interest
91
 
91
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity
340300
83000
423300
 
 
 
 
Intercompany Loan
-42800
42800
0
8/16 PR
 
 
 
Net Common Equity
297500
125800
423300
 
 
 
 
 
 
 
 
 
 
 
 
Total Liabs & Equity
5028795
1604710
6633596
 
 
 
 
 
 
 
 
 
 
 
 
Share O/S
45670
45670
45670
 
 
 
 
Common Equity/Share
$6.51
$2.75
$9.27
 
 
 
 
Leverage
12.2
 
 
Assets/(Equity+Notes)
 
 
 
 
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.
 
Agency MBS Investment REITs
 
 
 
numbers in $mm at 6/30/07
 
 
 
 
 
 
 
 
 
 
 
 
Pro-forma
Company
Capstead
Annaly
MFA
Anworth
Ticker
CMO
NLY
MFA
ANH
 
 
 
 
 
Agency MBS
5441
38603
6085
4907
Non Agency MBS
49
0
911
112
Agency %
99%
100%
87%
98%
 
 
 
 
 
Other Assets
96
584
1038
15
 
 
 
 
 
Repurchase Agreements
5115
35094
6379
4548
Debt
103
0
0
37
Other Liabilities
23
972
39
70
Preferred
183
288
96
76
 
 
 
 
 
Common Equity
161
2833
608
298
 
 
 
 
 
Shares O/S
19
269
83
45.7
 
 
 
 
 
Common Equity/Share
$8.47
$10.53
$7.33
$6.52
Market Price (8/16/07)
$8.69
$14.03
$6.47
$4.10
Premium/(Discount)
2.6%
33.2%
-11.7%
-37.1%
Leverage
12.5
12.6
11.4
12.2
Common Equity Leverage
34.7
13.8
13.2
16.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Catalyst

1. Collapse of non-guaranteed subsidiary
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