Newcastle Investments' Tsunamic Write-Downs of Non-Performing Assets

Newcastle Investment Corp (NCT) operates as a REIT holding company, and is operated by the Fortress Investment Group (FIG) to take advantage of yield differences between securities of percieved similar risk levels. The non-recurring expenses during the last two quarters of 307MM and 2.35B reflect the mark-to-market valuation of securities, many of them the toxic sub-prime mortgage securities so well documented in the media, turning out to be quite toxic indeed. The below chart comes from the 2008 annual report reflecting the performance of their subprime loans.

The mark-to-market acounting has turned a healthy, albeit highly leveraged balence sheet, into one with -2.5B in assets and poised to feel the cost of the recession in the form of delinquencies at levels which continue to rise precipitously, year-over-year.

While many of these subprime borrowings were B rated, NCT's investment in them at inflated valuations to personal and corporate tenents who find themselves with little option other than having to default, the collective problem falls into the hands of NCT of how to deal with such debt. Their mission statement in "our objective is the maximize the difference between the yield on our investments and the cost of financing these investments while hedging interest rate risk" worked fine for a while with their near 3% borrowing costs but in this economy the level of prosperity driven by easy credit standards and lax underwriting is leveling multibillion dollars corporations bearing the brunt of the tsunami of defaults across the country.

Disclosure: no positions

Comments

[KirbyJF1:]

Bob

Do you ever read a 10Q & really understand a company before you write some half truths?? How about the conference call? I think you have done some real shabby report on NCT.
Here is from the 10Q
((((We have also eliminated corporate level equity and leverage covenants from our debt agreements.))))

((((Today we have $40 million of unrestricted cash, the remaining $111 million of recourse debt on our non-agency investments has a fixed pay down schedule over the next 15 months. And we have $50 million of debt on liquid Fannie Mae and Freddie Mac securities.)))))
((((With respect to our fourth quarter results, our GAAP operating results were negatively impacted by the $2.6 billion impairment which Brian Sigman, our CFO will review in greater detail. I would like to mention though that this impairment is a non-cash charge and has no current impact on our cash flow or ability to meet debt covenants.In fact, the $2.6 billion impairment -- of the $2.6 billion impairment, we can only economically lose up to $262 million, since most of the assets are financed with non-recourse debt and our exposure to loss is limited to the aggregate amount of our investment in these assets less any related non-recourse debt. Also changing our intent to hold the assets to maturity allows us to retain the flexibility to sell assets, which is an important tool to have during these difficult markets.)))))
((((( Since the third quarter of 2007, we are focused on strengthening our balance sheet and liquidity.))))

((((( Our goal has been to reduce recourse debt exposure to minimize mark-to-market and margin call risks, manage debt maturities and manage the credit risk in our underlying portfolio. These areas are focused with the right priorities.)))))
(((((As of today, we have eliminated all debt subject to margin calls on our non-agency investments.)))))

(((((At the peak, we had $833 million of recourse financings on our non-agency portfolio. Today we have $111 million of non-agency recourse debt without any mark-to-market provisions or requirements to make margin calls if the value of the assets were to decline further.))))))

Kirby

Jun 12 08:51 PM