One New Bit of Data on Prime Agency Collateral

Well, it looks like the collateral haircut for repo financing of agency mortgages has gone up, from 3%, to somewhere between 4 and 5%.? That may account for some of the panic, especially regarding Carlyle.? It also may mean that Deerfield Capital is kaput.? I am presently long, but I may sell next week.? This company would be my personal biggest blunder ever, and my apologies to those who were influenced by me to own the company.

full disclosure: long DFR

7 thoughts on “One New Bit of Data on Prime Agency Collateral

  1. David – In my view of the result there is a difference between a terrible result and a blunder.

    There are many businesses right now that have operated responsibly, in the same way they have for many years. Now there is a rule change that seriously affects their business model. It is happening with a speed that does not permit time to adjust.

    Perhaps a business model is inherently flawed. If so, then perhaps an analyst who does not identify this has in fact made an error.

    We are now seeing effects in all sorts of little companies and startups, those that will fuel our technology and growth in a few years — if they make it. They have nothing to do with sub-prime or any other sort of financial activity. More collateral damage (oops).

    Anyway, if this was a blunder, you have millions of people in thousands of businesses for company.

  2. NO worries David; we are all adults here. DFR has to find private money to build capital cushion to stay in business. Anyone that survives this will make money when risk tolerance returns tolending institutions. Look at the student loan business; tons of demand and no capital!

  3. Hi David,

    I’ve been trying to find the post in which you first mentioned what you liked about Deerfield, but cannot find it. Do you have any idea when it was made?

    Thanks,

    Chris

  4. I don’t think I was reading alephblog yet when DFR was discussed in detail, but I’d also be interested in some post-mortem on the do’s and don’ts of leveraged finance and investments. CapitalSource (CSE) is another name in this area that was pumped hard by Motley Fool – it is way down but hasn’t completely blown up yet. The only opinion I can share is the view that most of the time it is a mistake to consider market cap rather than enterprise value in valuation.

  5. Regarding the agency margin collateral. Am I correct in reading that the leverage is being lowered from a max of 33x to 20-25x?

    If so, wow, I can see where that might hurt a hedgefund or two. Seems Carlyle was at 32x. I wonder what Thornburg and Annaly were/are at.

  6. I think Annaly was at about 9x at the end of the last quarter. I’m pretty sure Thornburg was much higher.

  7. David — or anyone else

    My question is how will owning the investment manager play into this situation? I agree it is inevitable that the REIT portfolio goes insolvent (unless they get a lot more capital) but does that also bankrupt the investment manager? Any guesses as to its worth?

    Unless I am mistaken they are still earning fees on almost all of their products at similar asset values. They might not be earning incentive fees but just the management fees equals close to $60 million per year.

    They just did the deal in December — seems to me they would have structured it in such a way as to ensure survival of the management firm even if the REIT went under — otherwise why would the management firm and Triarc agree to the deal?

    any thoughts?

    thanks
    Kyle

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