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Old 05-29-2007, 03:36 PM   #1
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ANH discussion

I've got another pick for you guys: ANH-B - Anworth Mtge Asset 6.25%'B'Cv - Google Finance

The security in question is a convertible preferred stock issued by a mortgage REIT, Anworth Mortgage Asset Corp. (ANH).

The security: trades like a stock, listed on an exchange. $25 par value, and currently trading a bit over par. Pays a fixed 6.25% coupon and is callable 1/25/12. More importantly, the preferred can be converted to ANH common stock with an effective conversion price of $10.50 a share for the underlying ANH stock. The conversion price can be adjusted (in the preferred holder's favor) if ANH pays out too high a dividend.

The mortgage REIT: ANH is a relatively simple animal. It borrows money and uses it to buy a portfolio of very high grade, mostly Aaa-rated, govt agency issued mortgage backed securities. These securities have essentially no credit risk. Instead, the risk and reward relate to the intentional interest rate bet that ANH makes with shareholders' money. Specifically, ANH borrows short term and "lends long", buying MBS with a much longer maturity than the borrowings. If the yield curve un-inverts, ANH will make lots of money. If the curve stays inverted, they will limp along as they have for a while now. There are also opportunities to make some extra money by trading MBS, but its minor.

ANH currently trades around $9.40 a share and has a book value of $9.75 a share, at least as of 3/31/07.

Why this thing is attractive to me: If rates stay more-or-less, the preferred will pay its (fully-taxable) 6.25% coupon pretty much forever. Not real exciting, but not too shabby, either. If rates drop or simply de-invert, the underlying stock will go on a nice ride. Right now they borrow at 5.5% lend at 5.5% and that's not great. If you borrow at 3% and lend at 5% and lever it 7X, woo-hoo (almost 20% return on equity). When the underlying stock rises, the preferred will go with it because the preferred can be converted into ANH common. The circumstances in which the good things happen for ANH generally mean that the US economy is in trouble (Fed easing), so this is potentially a nice counter-cyclical play.

The risks: biggest one is that rates stay deeply and persistently inverted for a long time and ANH eventually craters. I don't think that's too likely, but it is possible.

The other issue with the preferred is that it does not trade a whole lot of volume, so you have to be patient if you want to buy or sell.
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Old 05-29-2007, 03:47 PM   #2
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If the yield curve un-inverts, ANH will make lots of money.

The risks: biggest one is that rates stay deeply and persistently inverted for a long time and ANH eventually craters. I don't think that's too likely, but it is possible.
Isn't the biggest risk that short-term rates rise above the 5.5% ANH is earning on its long MBS, regardless of whether the yield curve is inverted or normal?
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Old 05-29-2007, 04:00 PM   #3
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Isn't the biggest risk that short-term rates rise above the 5.5% ANH is earning on its long MBS, regardless of whether the yield curve is inverted or normal?
Its a risk, but the inversion would have to be both large and persistent (years) and management would have to ignore it and keep plodding along doing nothing different. The MBS ANH holds actually is mostly 3/1 and 5/1 ARM type structures (fixed for 3 or 5 years, then floast) with a dollop of floaters and fixed, so after a couple years or so of painful inversion, the assets would float or pay off in cash, which limits the risk of yield-curve-based implosion.
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Anworth convertible preferred ANH+B
Old 05-29-2007, 04:15 PM   #4
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Anworth convertible preferred ANH+B

To kick off the new board:

I've got another pick for you guys: ANH-B - Anworth Mtge Asset 6.25%'B'Cv - Google Finance

The security in question is a convertible preferred stock issued by a mortgage REIT, Anworth Mortgage Asset Corp. (ANH).

The security: trades like a stock, listed on an exchange. $25 par value, and currently trading a bit over par. Pays a fixed 6.25% coupon and is callable 1/25/12. More importantly, the preferred can be converted to ANH common stock with an effective conversion price of $10.50 a share for the underlying ANH stock. The conversion price can be adjusted (in the preferred holder's favor) if ANH pays out too high a dividend.

The mortgage REIT: ANH is a relatively simple animal. It borrows money and uses it to buy a portfolio of very high grade, mostly Aaa-rated, govt agency issued mortgage backed securities. These securities have essentially no credit risk. Instead, the risk and reward relate to the intentional interest rate bet that ANH makes with shareholders' money. Specifically, ANH borrows short term and "lends long", buying MBS with a much longer maturity than the borrowings. If the yield curve un-inverts, ANH will make lots of money. If the curve stays inverted, they will limp along as they have for a while now. There are also opportunities to make some extra money by trading MBS, but its minor.

ANH currently trades around $9.40 a share and has a book value of $9.75 a share, at least as of 3/31/07.

Why this thing is attractive to me: If rates stay more-or-less, the preferred will pay its (fully-taxable) 6.25% coupon pretty much forever. Not real exciting, but not too shabby, either. If rates drop or simply de-invert, the underlying stock will go on a nice ride. Right now they borrow at 5.5% lend at 5.5% and that's not great. If you borrow at 3% and lend at 5% and lever it 7X, woo-hoo (almost 20% return on equity). When the underlying stock rises, the preferred will go with it because the preferred can be converted into ANH common. The circumstances in which the good things happen for ANH generally mean that the US economy is in trouble (Fed easing), so this is potentially a nice counter-cyclical play.

The risks: biggest one is that rates stay deeply and persistently inverted for a long time and ANH eventually craters. I don't think that's too likely, but it is possible.

The other issue with the preferred is that it does not trade a whole lot of volume, so you have to be patient if you want to buy or sell.
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Old 05-29-2007, 04:19 PM   #5
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Its a risk, but the inversion would have to be both large and persistent (years) and management would have to ignore it and keep plodding along doing nothing different. The MBS ANH holds actually is mostly 3/1 and 5/1 ARM type structures (fixed for 3 or 5 years, then floast) with a dollop of floaters and fixed, so after a couple years or so of painful inversion, the assets would float or pay off in cash, which limits the risk of yield-curve-based implosion.
I may not be stating my question clearly. Let's say the total MBS portfolio is yielding X%. If short rates rise above X% the income from the MBS doesn't cover the borrowing costs, so earnings would be negative. Even if the yield curve went back to normal.

I understand that the carry on future loans would benefit from the normal yield curve. But wouldn't the leveraged duration mis-match on the current MBS portfolio cause significant (perhaps lethal) problems.
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Old 05-29-2007, 04:37 PM   #6
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I may not be stating my question clearly. Let's say the total MBS portfolio is yielding X%. If short rates rise above X% the income from the MBS doesn't cover the borrowing costs, so earnings would be negative. Even if the yield curve went back to normal.

I understand that the carry on future loans would benefit from the normal yield curve. But wouldn't the leveraged duration mis-match on the current MBS portfolio cause significant (perhaps lethal) problems.
No, you stated your question clearly. Obviously a significantly inverted yield curve would be painful to ANH, and you can see that in the last few quarters' earnings (eking out a gain at best). But a few quarters of losses wouldn't be enough to ruin the company, since ANH has more than ample capital to stay afloat and cover the preferreds (who come ahead of common shareholders in a liquidation), even if they have some losses.

You also have to compare ANH to ,say, a bank. Banks that mostly hold prime mortgages and squeaky clean MBS (AF, for example), are often 16 to 18X levered, vs. roughly 7X for ANH. You can blow yourself up much quicker if you are leverd like a bank vs. what ANH does.

Finally, ANH's portfolio duration mismatch isn't that big. Portfolio at 3/31 was 27% floaters, 55% hybrid ARMs (average time till reset of 29 months), and 18% fixed rate MBS. Their portfolio duration is usually around 3 years. Borrowings had an average maturity of 1 year. So there is a mismatch, but it isn't huge and the assets are liquid enough to trade out of a persistently bad situation if necessary. Plus MBS goves you some spread over comparable treasuries.
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Old 05-30-2007, 08:54 AM   #7
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No, you stated your question clearly. Obviously a significantly inverted yield curve would be painful to ANH, and you can see that in the last few quarters' earnings (eking out a gain at best). But a few quarters of losses wouldn't be enough to ruin the company, since ANH has more than ample capital to stay afloat and cover the preferreds (who come ahead of common shareholders in a liquidation), even if they have some losses.

You also have to compare ANH to ,say, a bank. Banks that mostly hold prime mortgages and squeaky clean MBS (AF, for example), are often 16 to 18X levered, vs. roughly 7X for ANH. You can blow yourself up much quicker if you are leverd like a bank vs. what ANH does.

Finally, ANH's portfolio duration mismatch isn't that big. Portfolio at 3/31 was 27% floaters, 55% hybrid ARMs (average time till reset of 29 months), and 18% fixed rate MBS. Their portfolio duration is usually around 3 years. Borrowings had an average maturity of 1 year. So there is a mismatch, but it isn't huge and the assets are liquid enough to trade out of a persistently bad situation if necessary. Plus MBS goves you some spread over comparable treasuries.
Nice sig....wherever did you get that from??
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Old 06-05-2007, 08:33 PM   #8
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Brewer I noticed that ANH also has another prefered stock ANH-A, which is has a 8.625% coupon also trades slightly above par and is callable in 09.

After doing the math of subtracting the difference between the coupons. It looks likes we are paying about $.25/year to hold a call option on ANH at price of $10.5.

Since I can purchase a Jan 2008 LEAP with a strike price of $10 for .45, aren't I better off purchasing the higher coupon prefered and using the additional income to purchase the LEAP?
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Old 06-06-2007, 07:24 AM   #9
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Brewer I noticed that ANH also has another prefered stock ANH-A, which is has a 8.625% coupon also trades slightly above par and is callable in 09.

After doing the math of subtracting the difference between the coupons. It looks likes we are paying about $.25/year to hold a call option on ANH at price of $10.5.

Since I can purchase a Jan 2008 LEAP with a strike price of $10 for .45, aren't I better off purchasing the higher coupon prefered and using the additional income to purchase the LEAP?
You can certainly do so if you wish. I would do the math and include transaction costs and headaches to make sure you are coming out ahead. The terms of the convertible preferred also include a special provision that the LEAPs do not: if the common dividend rises above the preferred coupon, the preferred option strike price gets reduced to compensate. So you aren't comparing apples to apples.
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Old 06-19-2007, 08:21 AM   #10
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Looks like two lots traded yesterday
500 at $25
100 at $25.15

Anyone claiming responsibility, anyone? anyone?

You know who you are.
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Old 06-19-2007, 08:29 AM   #11
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Looks like two lots traded yesterday
500 at $25
100 at $25.15

Anyone claiming responsibility, anyone? anyone?

You know who you are.
Not me. But the yield curve has uninverted, albeit in a manner less favorable than I would have hoped (so-called "bear steepening" where the long end of the curve goes up).
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Old 06-19-2007, 04:42 PM   #12
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I wasn't watching today but WOW about 38,000 shares. I would have liked to seen how many trades were made.
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Old 06-20-2007, 06:32 AM   #13
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Not me. But the yield curve has uninverted, albeit in a manner less favorable than I would have hoped (so-called "bear steepening" where the long end of the curve goes up).


Do wha?

I had a hard time comprehending this (sometimes the obvious escapes me). But this animated chart, showing the relationship between interest rates and stocks over time brightened up my otherwise dim bulb.

Dynamic Yield Curve - StockCharts.com

Now, how to work "bear steepening" into my vocabulary? Can't just say B.S. Thanks brew
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Old 08-16-2007, 11:04 AM   #14
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DCA day. Anybody picking up some common shares to go with that?
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