AGNC Pummeled Today

TheStreet just today published that American Capital Agency Corp (AGNC) fell on high volume, but it doesn't seem to suggest why.

AGNC, which has a history of issuing shares above NAV to increase the equity behind its outstanding shares, announced on 10/26 that it would issue another 37m shares ("approximately" $1B gross proceeds), which comes to "approximately" just north of $27 per share. There's an over-allotment option for an additional 5.55m shares. Presumably, the proceeds received by AGNC net of fees and commissions will be "approximately" $27. The magic number to look at in evaluating this transaction isn't the trading price of the shares, but the net assets per share prior to the transaction. At the end of the third quarter of 2011, that NAV stood at $26.90 per share. Without knowing what "approximately" means, we can't know whether this is NAV-neutral, or actually raises NAV.

The fact that AGNC has maintained NAV despite worries about the twist suggests that its managers at ACAS are doing an appropriate job of managing rate-related risk. Or in the alternative: it suggests that worry about the twist failed to take into consideration the difference between the short-term rates available to financial institutions borrowing against federally-secured financial instruments, and the rates that were available to individual borrowers when they last refinanced their real-estate-backed mortgages. The spread AGNC needs to accomplish its work isn't the spread between 1-week and 10-year Treasuries, but the spread between the rate AGNC can get in the short term and the rate individual borrowers can get on their home loans.

Given the growth of this movement, it's clear the view isn't in favor of rapid decrease of home loans toward 0%. While the spread survives, so too does AGNC's business model.

With NAV seemingly free from dilution risk in the current issuance, and share prices remaining above NAV, AGNC doesn't seem to be moving in response to factors specific to the long-term prospects for the stock. The "issuance at ~$27.03" news is good for a short-term push toward $27.03, but AGNC has historically traded at a premium to NAV and – barring failure to perform in the manner so long justifying the premium – that premium is likely to return.