Monday, February 13, 2012

Loving American Capital Before Valentine's Day

The new ACAS article is now live at Seeking Alpha.



scottmba09 said...

Easily the best blog post about ACAS that I've ever read, and I've been following this company for quite some time. Thank you for the effort. Even the equity analyst research I have read never seems to capture the essence of what is going on here.

Jaded Consumer said...

Thanks for the comment. I try to get things straight, and I appreciate your taking the time to remark.

Anonymous said...

Jaded thank you for your insight as always. If you can take a look at the quarter just reported and have some comments they would be appreciated. I find the numbers reported quite confusing. It seems to me that a dividend is YEARS away now. They have no revolver and cant generate meaningful (relatively speaking) new business. For he first time in two years I am thinking of just getting out of ACAS and owning a real growth story. Thanks

Jaded Consumer said...

Have a listen to the earnings call. Both the revolver and the dividend are expressly addressed in the Q&A.

If the NAV discount and share buybacks don't show you enough prospect for share growth, may I ask what stocks you view as presenting potential for "real growth"?

Other than Apple -- I already am overweight Apple :-)

Anonymous said...

It looks to me a dividend isnt in the cards for 3 or 4 years? How will it close the NAV gap?

Jaded Consumer said...

Looks like I'll have to write another article :-)

Will post link here when it's up.

Jaded Consumer said...

A new post links to the Seeking Alpha article addressing this.

In short, share buybacks should push share price toward NAV and if they don't, all the better for shareholders able to obtain the benefit of ACAS' below-NAV reinvestment and its concentration of its non-asset-based earnings into fewer shares. Some discussion of tax efficiency and the advantage of the buyback vs the dividend, and a comparison to Berkshire Hathaway's buyback policy.


steven menkin said...

Thanks TJC for the most concise and understandable article on both ACAS and AGNC. My question; In the Feb 13th article on AGNC there was no mention of the other potential threat to AGNC share price and dividends that we've been hearing about;CPR's, the repayment of current mortgages that are underwater and the Fed Govt's. proposed policy to enable these refi's on a grand scale. Waht are your thoughts and how this might or will affect AGNC?
steve menkin

Jaded Consumer said...

AGNC's management of repayment rates has historically been good, and though I've heard talk of government programs to enable refinancing of deeply-underwater mortgages I'm not certain that such a thing is financially (and therefore politically) plausible. (Who will make lenders whole for "forgiven" debt or guarantee the amount of debt beyond the value of the collateral? How, consistent with the Fifth Amendment's prohibition against the taking of property, could the federal government deprive lenders of their full security without compensating them?) The other thing I'm hazy on is why deeply-underwater mortgages would be thought to be a special risk for AGNC.

The idea that AGNC is subject to risk associated with some gift-from-above government program to save otherwise solvent borrowers from their high-interest underwater loans seems far-fetched. Everyone I know who can pay their mortgages is infuriated about help being given to those who entered deals they couldn't keep. Since defaulting mortgages are being prepaid under the guarantees, those are clearly not the place AGNC could be "winning" on its mortgage investments. Their strategy must be to find mortgages that are still being paid.

Looking at the yield spread AGNC has published (<2%), I don't see its portfolio as full of high-interest old loans. AGNC's President and CIO, Gary Kain, discussed his management of prepayment risk at a JP Morgan presentation.

From my perspective, the only people in a position to refinance have good credit. The number who can refinance a home with only a 15-year duration has got to be fairly modest at fixed rates, because they have to be people who can tolerate a much larger note. I thought people were struggling to keep the lights on in the recession aftermath. There's got to be a substantial population of people who are not in a position to refinance because (a) their credit doesn't support a refi under post-crash lending standards, (b) their remaining loan is so small that the transaction fees make the economics unfavorable, (c) they are solvent but their collateral no longer supports the size of the loan, or (d) they've been through a federal loan modification plan once and don't qualify to do it again.

The other thing to think about is AGNC's success with hedges. It seems that we should have good notice of problems as hedge-generated income spikes, to allow flight before the business model implodes. Frankly, I think AGNC's ability to borrow short term is likely to remain so much better than its target borrowers' ability to borrow long-term (which may be based on the borrowers' credit risk rather than the yield curve) that we can expect a usable yield spread for some time yet.

The problems of other mREITs in this area are a reason to expect flight-to-quality, as unsuccessful managers lose investors as their results head into the toilet. In this space, I think AGNC and MTGE are the quality acts. The quality comes, I believe, from selecting the right mortgages and hedging appropriately to protect the fund from external factors.

Another thing: ACAS has $40m invested in MTGE, which has just begun trading at a NAV premium. I plan watching what ACAS does with this investment.