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Cypress Sharpridge Investments, Inc. (CYS)

Q2 2010 Earnings Call Transcript

July 22, 2010 9:00 am ET

Executives

Rick Cleary – COO

Kevin Grant – Chairman, President and CEO

Frances Spark – CFO

Bill Shean – Managing Director, Investments

Analysts

Mike Widner – Stifel Nicolaus

Steve Delaney – JMP Securities

Gabe Poggi – FBR

Kevin Casey – Casey Capital

Bruce Harting – Barclays Capital

Eugene Fox – Cardinal Capital Management

Robert Grunewald – Cicero Capital

Operator

Good morning and welcome to the Cypress Sharpridge Investments, Inc. second quarter 2010 earnings conference call. During management’s presentation your line will be in a listen-only mode. At the conclusion of management’s remarks there will be a question-and-answer session. (Operations instructions)

Management has asked me to remind you that certain information presented and certain statements made during management’s presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements indicate or are based on management’s beliefs, assumptions and expectations of CYS future performance taking into account information currently in the Company’s possession. Beliefs, assumptions and expectations are subject to change, risk and uncertainty as a result of possible events or factors, not all of which are known to management or within its control.

If management’s underlying beliefs, assumptions and expectations prove incorrect or change than the company’s performance and its business, financial condition, liquidity and result of operations may vary materially from those expressed, anticipated or contemplated in any of our forward-looking statements. In any events actual results may differ.

Management invites you to refer to the forward-looking statements disclaimer contained in the Company’s annual report on Form 10-K filed with the SEC, which provides the description of some of the factors that could have material impact on the Company’s performance and could cause actual results to differ from those that maybe expressed in forward-looking statements.

Also the content of this call contain time-sensitive information that is accurate only of today, Thursday, July 22, 2010. The company does not intend to and undertake no duty to update the information to reflect future events or circumstances.

For opening remarks and introductions I’ll now turn the call over to Rick Cleary, CYS’s Chief Operating Officer. Please go ahead, Mr. Cleary.

Rick Cleary

Thank you, Sania. Good morning and welcome to CYS’s 2010 Second Quarter Earnings Conference Call. Today’s call is being recorded and access to the recording will be available on the Company’s Web site at www.cysinv.com starting at 3:00 P.M. this afternoon.

With me here this morning are Kevin Grant, the Company’s Chairman and CEO, Frances Spark, the company’s CFO and Bill Shean, Managing Director of Investments.

To better understand today’s discussion, it’ll be helpful to have the earnings release that we issued last night. The release is available with the investor relations section of our Web site and as in past releases. This release includes information regarding non-GAAP financial measures including reconciliation of those measures to GAAP measures which will be discussed on this call.

I’m now pleased to turn the call over to Kevin.

Kevin Grant

Thank you, Rick, and good morning, everyone. Welcome to our Second Quarter 2010 Earnings Conference Call. This was a very busy quarter for us. We’re pleased to report a good quarter for CYS. The existing portfolio is performing well and we were not meaningfully impacted by Fannie Mae and Freddie Mac’s buyout program.

Indeed, CYS’s prepayments continue to slow through the quarter. The cash flows are very stable owing to the stability of the 15-year mortgages and this should produce a fairly stable NIM for many quarters to come.

We spent a lot of time during the quarter on liability management. We took advantage of the market and reset from hedges at lower rate and we extended their maturity. Rebalancing the hedges with something that we need to do anyway but we were fortunate this quarter to see good opportunities during the quarter to actually improve our net interest margin and reduce interest rate risk.

In summary, during the quarter, the yield on the portfolio went up, the NIM went up, the expense ratio went down and will go down more this quarter and the NAV went up and we were able to feel very confident raising the dividend.

As you know we did a follow-on offering in late June, the three principle motivations for the transaction were first to take advantage of the investing environment, second, to make a meaningful impact on our expense ratio, and third, to improve the liquidity of our stock. The transaction settled on June 30 and we wasted no time putting a new capital for it.

Hybrid ARMs had lagged the overall RMBS market during the quarter so that was the first place we focused and executed that portion of the targeted asset strategy immediately.

As we have been saying for some time, we still like the 15-year market. In early July, there was a small back-up in prices and we jumped on it and took advantage. All the meaningful trades are now executed for the new capital and the purchases will settle mostly in September and October and a little bit in November. We feel very good about the execution and timing. The new capital will help lower our expense ratio quite a bit further.

We continue to benefit from the interest rate environment and the spread present in our market. The U.S. economy appears to be in a very weak recovery with little or no inflationary pressures and a growing possibility of the U.S. entering a self-reinforcing deflationary environment.

This has continued very low interest rate environment with the U.S. Fed funds target rate still varied to 0% to 25 basis points with no change all the way back going to mid-December 2008.

There is a little sign of an increase in the near future and everything we heard in the past few weeks, in particular, with fin reg continues to support the very low rate, very steep curve environment for a long time.

We give you a lot of specific detail on the earnings release along with some summary table so I’m not going to go through them here that there’s a lot of transparency in our release.

In the financing markets, borrowing availability remain good in Q2, the availability of repurchases agreement financing is stable with financing cost at around 32 basis points right now.

Swap rates posted a very sharp railing over the past few months as the deflation story has begun to become more widely accepted. Three years swap rates are now below 1.19% as of this morning to its lowest level ever. It is tempting to over-hedge here with three years swap rates in Japan are 47 basis points, so we plan to stick to a discipline because we don’t know how far this could go.

Now, I would like to turn it over to Frances to touch on a few second quarter highlights.

Frances Spark

Thank you, Kevin. I’m pleased to report that our second quarter 2010 was highlighted by the following

Net asset value $13.15 per share after declaring a $0.60 dividend per share on June 14 and taking into account the impact of new shares in our follow-on offering.

GAAP net income was $27.6 million or $1.46 per diluted share. Core earnings of $11 million or $0.58 per diluted share. We received $1.8 million as distributions from CLOs, of which $1.1 million were accounted for reduction with the cost stages thereby excluded from our interest income and core earnings.

We had the interest rate spread net of hedge is 2.83%, and the weighted-average amortized cost of Agency RMBS is $101.7.

Non-investment expenses as a percentage of net assets was 3.21%. As of June 30, 2010, the company had net assets with approximately $391 million.

As you know, we finance our Agency RMBS investment, and as of June 30, our Agency portfolio was approximately $2.3 billion with the leverage of approximately 5.3 to 1. The leverage ratio at June is reduced to compared to leverage at the end of the first quarter (inaudible) in the follow-on offering.

At the end of the second quarter, our liquidity position was approximately $276 million of unpaid Agency RMBS cash and cash equivalents.

Lastly, I like to note that as a result of the Company’s rebalancing of its hedges during the second quarter the company realized $17.2 million of swap losses. These losses will be amortized over three years to four years the tax purposes in line with the remaining lives of the swaps of the terminated.

I would now like to turn the call over to Bill to discuss the Portfolio.

Bill Shean

Thanks, Frances, and good morning, everyone. We continue to strive to have a well-diversified portfolio of Short Reset ARMs Hybrid and fixed rate bonds. We believe that it’s highly advantageous to have a flexible and opportunity-driven approach to the portfolio mix. We are now roughly evenly waited in Hybrid ARMs and fixed rate mortgages principally 15 years.

We have now completed all the meaningful purchases for the new capital plus the normal run-off we expect during Q3. At June 30, the Company had financed its portfolio with approximately $1.4 billion of borrowings under repurchase agreements with a weighted-average rate of 32 basis points and a weighted average maturity of approximately 42 days.

Our borrowings at quarter-end were with an aggregate of 18 counterparties, and we continue to spread that business amongst our Repo counterparties, so we do not have a substantial portion of borrowings with any one counterparty.

Haircuts were generally 5% in the second quarter and availability of government Repo continues to be good and competitive. For us, the prepayment story also continues to be good. Prepayments actually fell further for the CYS in Q2.

Looking forward, at the current level of rate, we should expect refinancing activity to pick up some. However, the monthly payment on a 15-year mortgage does not drop much for a 50 basis points rate mode.

In addition, there are lots of signs with the mortgage application process is still very slow since everything is now a government mortgage and subject to the GSE’s underwriting parameters and capacity constraints. We do expect a pickup in prepayments fees but nothing like the prior refi cycle and 15-year sector should once again be pretty well protected.

Regarding a non-agency legacy assets, the CLOs continued to improve in cash flow distributions and marks. We had one power payoff during the last quarter. The corporate credit environment seems to be continuing in its overall improvement. The residential credit environment continues to worsen however, and although one reset [ph] security has been extinguished, that bond is market 69,000, we thought it’d be gone by now. So, overall, the operating environment continues to be good for our business.

With that I would like to turn the call back over to Kevin.

Kevin Grant

Thanks, Frances and Bill. Before we open it up for questions, I would like to talk about fin reg and the dividend. As you know the new law has numerous new corp on the financial industry broadly. Most do not directly target our business model. We do think the several of the new rules are highly contractionary to credit availability to consumers and this continues to support our economic thesis.

We do use derivates for hedging purposes, but I think most of the reforms will likely to be implemented and serve to strengthen the system. I think the more important issue is simply now that the administration can move on to GSE reform. It is an election year and the discussions and debates and sound biting will likely be deafening.

Congress will need to address a few core questions first. Number one, will there be a government supported mortgage product? We think the answer is, of course. But if not, how will they address the deflation and depression that the adjustment process would create?

Second, how will third year fixed rate mortgages remain a viable product with the natural holders out of the market? Those natural holders are the Fed, they were Fannie Mae and Freddie Mac in their portfolio, and in prior decade, it was the S&L industry. They are no longer absolving the interest rate risk of these products. The private sector has very little aggregate desire or capacity for the risks of a 30-year fixed rate mortgage and the hedging costs are high with 30 years of counterparty and prepayment risks.

Third, how do we restart competition in mortgage origination? With GSE is now driving 97% of origination, the government is actually crowding out private capital and prolonging the mortgage application process, creating yet another deterrent to credit availability for consumers, kind of (inaudible)

We should all expect a lot of noise in GSE reform and other financial factors in the next several quarters but especially going into November. We think CYS is very well positioned to take advantage.

Now, on to the dividend. When we first began considering raising the dividend in June, the Board’s first question was can we sustain it even if we grow the capital? Our answer to the Board was that the investing environment was good with spreads similar to the in-place portfolio, and as long as market conditions continue to be in the boundaries of our expectations, we felt very confident. Since now all the meaningful trades for the new capital are already done. The return on equity is now fully in place.

Knowing what we know right now we feel good about recommending maintaining the dividends to the Board when it is time to make a decision, probably, in September as normal. Of course, this is all subject to the operating conditions over the rest of the quarter, which could change tomorrow, but right now, we feel very, very good.

Now, I’d like to open it up for questions. We’re pleased to discuss and answer any questions that you got. And with that I’ll turn it over to the operator to build the queue. It takes a few moments for the queue to build up. Operator?

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from the line of Mike Widner with Stifel Nicolaus. Please proceed.

Mike Widner – Stifel Nicolaus

Hey, good morning, guys, and congrats on a solid quarter. Just looking at some things about the portfolio here, what you guys talk about with the forward purchases, just first question, are all of the things you talk about in the forward purchases basically comprehensive of the purchases, in other words, is it to do any kind of in the market purchases at all?

Kevin Grant

In terms of settlement, you mean?

Mike Widner – Stifel Nicolaus

Yes, I mean, you’ve got a list, at the end of the quarter, you had 583 million payable for forward settles and you mentioned you had another 966 million that you did subsequent to the quarter. Basically, I’m just looking at those adding them together with what’s in the current portfolio, and basically, trying to coming out with what do you think the portfolio side is going to be? In bottom-line what I’m driving at here is if I add all those together you end up with sub six times leverage. I’m just wondering if there is other purchases you’re planning on making should we expect the portfolio to be larger than that or should we kind of figure on you guys continuing to run somewhere in the mid-five to upper-five range in terms of leverage?

Kevin Grant

I’m not following your math. If you add it all up, you should get leverage of a little bit above seven and we pre-invested the paydowns that we’re expecting over the quarter, that’s to me is by the end of September or so, all out equal, the leverage should be around 6.75 quarters that can enable us.

Mike Widner – Stifel Nicolaus

Okay. Fairly, I’m doing something that in my math but the forward settles that up to about 1.55 billion, is that right? I’m just taking a stuff that you listed in the Q or I saw in the press release.

Kevin Grant

If you add it all up, you’ll get a little above 3 billion in total.

Mike Widner – Stifel Nicolaus

And in terms of the forward settles or in terms of the total portfolio size?

Kevin Grant

The total portfolio size.

Mike Widner – Stifel Nicolaus

I must be missing something similar. And then just on the additional, the 9.65 that you guys did, the 470 you mention is fixed rate which we assume that’s mostly 15-year fixed?

Kevin Grant

Yes, it’s mostly 15 years or 20 years, 20 years are originally identical to 15 years, its similar kind of borrower and stuff like.

Mike Widner – Stifel Nicolaus

And what kind of yield do you figuring on and that sort of stuff or…?

Kevin Grant

Typical coupon for, Bill?

Bill Shean Yes.

Kevin Grant

So haircut that a little bit by prepayments. When they knew they’re going to be very slow. So, we’re going to keep most of the coupons through the first couple of quarters.

Mike Widner – Stifel Nicolaus

Somewhere in kind of the high threes and then if I’m doing the math on the 30-year hybrid that you bought outcome I assume we’re around 3% expected yields on those maybe 3 and change?

Bill Shean

That surrounds about right, Mike.

Mike Widner – Stifel Nicolaus

Great, thanks guys.

Operator

And your next question comes from the line of Steve Delaney with JMP Securities. Please proceed.

Steve Delaney – JMP Securities

Thank you. Good morning, everyone. And thanks, Frances for the level of disclosure on the forward purchases is excellent. Very helpful to us. We appreciate that. On your leverage at 5.3, if I’m reading that probably, it includes the 580 million payable, as of June 30, but it certainly does not reflect yet the 960-some million of additional purchases in July. Just pass kind of your $3 billion target portfolio cadet I mean it looks like if we take Repo in the payable and 95% of the July purchases we get somewhere 2.9 to 3 on total liabilities in which your (inaudible) at 3.90, that would work out to about 7.5 times forward fully invested leverage level, does that seem accurate to your thinking?

Kevin Grant

Maybe that’s a touch high but you might be rounding.

Steve Delaney – JMP Securities

Maybe we should assume like 7.0 to 7.5 would might be a good target range on leverage?

Kevin Grant

I think (inaudible) that I mentioned and I’ll just repeat because it’s a little quirky. When we’re in the market we thought the opportunity was good. So we did a little forecast on paydown for the rest of Q3. As long as we’re in the market, let’s pre-invest this capital now. So if you take a snapshot of leverage right now and what you see in the press release you got to kind of account for runoff during the quarter.

Steve Delaney – JMP Securities

Yes, that’s a good point, excellent, exactly. Could you always walk forward, you always kind of anticipated would capitals coming back I mean over the next two months or three months trying to get ahead of that?

Kevin Grant

Exactly.

Steve Delaney – JMP Securities

So my last question, Kevin, is I was a little surprised just knowing your affinity for the 15-year product and the track has prepaid characteristics there. I was a little surprised that early on with the capital you jumped into the five ones and it looked to us just watching the limited pricing data we have available, but it looks like most of the fixed coupons, we’re kind of screaming in June and July, but it did definitely look like hybrids were lagging a bit, and I was wondering if maybe the bank bid was just not that great with quarter end coming up, so could you comment on sort of why you saw the relative value in fab ones or was it all about balancing portfolio duration or did those bonds just look more attractive to you and Bill, rather than the 15s?

Kevin Grant

The hybrid market really has lagged a lot and it’s a little bit of tale of two cities. The existing universe of hybrid tends to have pretty high coupon and it’s kind of hit a ceiling in the marketplace on where the prices can go. And of course, it’s been a big rally in rate here. So hybrid is really a lag. We buy because of their forward purchases is the new production hybrid, they do have lower coupons, mid-three and they really lagged because the existing universe of the higher coupon, higher business has lagged.

So, we look at that product and just said especially in the forward market, this is really good relative value here and hedges are simpler. So we did jumped on the hybrid market first and waited on the fixed. We thought we might be getting a little bit 2Q waiting on the fixed and thinking that there would be a bigger back up in rate, but just looking at the ten-year treasury, Steve, is ten-year treasury back up to 3/10, and it stayed there for nano second.

Steve Delaney – JMP Securities

Right back to 2.85 or 2.90.

Kevin Grant

And that’s pretty much where we executed. We feel pretty good that we’re (inaudible), pretty good just go around.

Steve Delaney – JMP Securities

Thanks for the color, appreciate.

Kevin Grant

Sure.

Operator

And your next question comes from the line of Gabe Poggi with FBR. Please proceed.

Gabe Poggi – FBR

Hey, good morning. Two quick questions. One, Frances, if I missed I apologize. Did you talk about your prepay speeds quarter-to-date?

Frances Spark

I’m going to hand that question over to Bill, Gabe.

Gabe Poggi – FBR

Okay.

Bill Shean

We did not. You’re talking about the July number?

Gabe Poggi – FBR

Yes, yes.

Bill Shean

No, we haven’t (inaudible) anything on that.

Gabe Poggi – FBR

And then second question about the dividend, Kevin, you said you’re going to recommend to maintain it for 3Q, do you guys have a chunk of excess earnings you could ease if need be?

Kevin Grant

It’s just new core earnings just as a passing through taxable earning. We paid 60 in Q2 and the $0.58 plus $0.06 from the CLOs, so, you could look at it that way. But I don’t think we’re going to get 2Q for the Q3 dividend, I think if we maintain that we’ll all be pretty pleased.

Gabe Poggi – FBR

Fair enough, thank you.

Operator

And your next question comes from the line of Kevin Casey with Casey Capital. Please proceed.

Kevin Casey – Casey Capital

Hi, congratulations (inaudible) to work so quickly from the deal. You kind of talked about this, but can you talk about like your range of leverage, what do you feel comfortable and when would you would be at the high end of that range and when would you be at the low end?

Kevin Grant

The leverage is really driven by liquidity, number one, and opportunities in the marketplace, number two. I think where we are right now just targeting just shy of seven times is really good, it gives us a lot of flexibility to take it up if there’s a real opportunity. I don’t know what’s going to come out of fin reg. I think it’s a very big deal and what they do with the GSE in the noise it’s going to be present in the marketplace in the next early this quarter, probably through year-end, could create some just phenomenal opportunities. So that’s from an asset pricing perspective, that’s another takeaway.

The other thing is for hedging, and swaps, the implementation is all left to the regulators and we don’t know what sort of initial margins are going to be required, so we need to be careful about liquidity there too. So we have a lot of excess liquidity, but I think that’s going to be a very good thing to have over the next couple of quarters. So we’re comfortable here and the returns at this level leveraging are very nice.

Kevin Casey – Casey Capital

Okay, great, thanks.

Operator

(Operator instructions). And your next question comes from the line of Bruce Harting with Barclays Capital. Please proceed.

Bruce Harting – Barclays Capital

Kevin, do you have any idea on the timing of the GSE reform. I agree with you on everything you’re saying. I’m just wondering what’s your sense, what you’re hearing through your channels and the thesis is kind of a year ago that in the marketplace when the Fed stops buying mortgages, spreads might open up a little bit, but they’ve gotten even tighter I guess because the fear of the economy double dipping, so as an investor said yesterday, which financial asset would you prefer right now, cash earning zero government bonds yielding 2.9 or a bunch of stocks selling at 12 times, the yield is 4% and you would think it would be the stocks at 4% and certainly, yours even more so, so it seems like you are really well positioned here.

I’m just wondering what’s caused this incredible tightening, is it just the fact that GSE that the mortgages are government-guaranteed and the spear has moved more money into them despite the Fed pulling back, combine them and then in terms of your outlook on GSE reform, you said I think in the last question it could be a huge opportunity, are you talking fourth quarter this year or fourth quarter 2011?

Kevin Grant

Well, the background environment is kind of odd and I just give a present market example. If you just monitor the asset-backed securities market generally, as of yesterday, the government effectively shutdown the asset-backed securities market. And it could be that asset-backed again issued and something that should be in a AAA risk to get issued as a private security, but nobody can finance that. So if you are a financial institution and you buy AAA, you might look at this private placement and you say, okay, its AAA risk but it doesn’t have a rating so I can’t finance it, so, yes, I love to buy it, but I can’t finance it, I’m not going to buy it. So effectively, the government has shutdown the AAA market here and it shutdown the capital market.

So where does the capital flow? It flows down to our world. So this is why we’re pretty happy we got the money to work very quickly. And once again, it’s highly contractionary credit. Washington (inaudible) it just has responded to financial catastrophe out of anger and revenge and not rationality.

In terms of GSE reform I don’t see that emotion in Washington even recognized or resolved and it is an election year, so it’s going to be a spectacle. In terms of timing, this is a very complex issue. It involves obviously, a consumer, it involves the Fed and the ABC mortgages are used as collateral for open market operation because they are accepted as good collateral. Foreign central banks own a lot of mortgage-backed securities here in the US.

Number one, I think it will be obvious that this countries has to have a government-sponsored mortgage product. But the exact form, I think it’s such a complex issue. I do not see them resolving it this year but I do think the chit chat in the marketplace is the thing is going to create the opportunity, assuming you got a valid underlying thesis and you heard my thesis.

Bruce Harting

Thanks.

Operator

Your next question is a follow up question from Mike Widener with Stifel Nicolaus. Please proceed.

Mike Widener – Stifel Nicolaus

Hey, thanks. Yes, it will definitely be interesting to see how the GSE reform plays out and I agree with most of what you said there, but on a different question, just wanted to go back to the new swaps that you added. Is it safe to assume that there’s a pretty much the same basic stats on the other ones in terms of duration and in terms of weighted average pays.

Kevin Grant

Yes, we provide the full detail so you will be able to model it one-by-one.

Mike Widener – Stifel Nicolaus

Okay, great. You had indicated that it’s tempting to further swap out, just based on where swap rates are and spreads and all that sort of stuff. You guys had been running right around 50% of your funding hedged. What’s your thought process now going forward, is that number likely to go up or –?.

Kevin Grant

It’s really driven by opportunities present in the marketplace. In my mind I kind of assigning probably an 80% probability of a Japan style scenario and a 20% probability kind of a longer-term inflation spike. So what that does to me is if you want a hedge you absolutely want a hedge, but you do not want to go crazy with the hedge because you do not want to give up the upside if you get your 80% scenario. So that says to me that we are to kind of sit tight, but if there is a strange opportunity to set some more hedge at some really ridiculous rate then we’re probably going to jump on that.

Mike Widener – Stifel Nicolaus

I don’t know if I completely agree with your probabilities, but certainly I think that Japan style scenario is probably more likely than the inflation spike, which is why I was a little curious to see that you added the additional 550 million in the two weeks post quarter which takes you, at least by my math somewhere north of 60% hedged, which is a sizeable increase from where you were. I’m just wondering if I’m doing the math wrong, if there’s an implication you’re probably going to grow the portfolio more than I expect, you really do at this point, just feel comfortable being more hedged than you had been in the prior several quarters.

Kevin Grant

Well, I think part of the motivation for that is the 15-year, the cash flows have come in even more stable than ever thought they’re going to be. So it gives you a lot of comfort that if you set a head you can still stable cash flows and you are really locking up the net interest margin on those assets and they really are. So I think that’s probably part of the motivation of what you’re observing.

Mike Widener – Stifel Nicolaus

Got you. Sounds good, thanks guys.

Operator

And your next question comes from the line of Eugene Fox with Cardinal Capital Management. Please proceed.

Kevin Grant

Hi, Gene.

Eugene Fox – Cardinal Capital Management

Hi Kevin. I just wanted to flush out a comment you made earlier about the asset-backed markets being effectively shutdown. Kevin, could you elaborate a little bit on that, I think I know what you are referring to but I just want to make sure I understand it.

Kevin Grant

Well, as of yesterday, the rating agencies have lost their protection from being sued. So now the rating agencies have an idle plan to reaction (inaudible) securities, but the rating agencies right now, if their rating is included in an offering circular, then they are exposed to being sued by the investor, if they are too optimistic in their rating, but cost still exposed to being sued by the issuer if they’re too conservative.

So the rating agencies are really stuck and their reaction is to basically not allow their ratings to be used in any offering circular and so many people are constrained, they can only buy rated securities. So the net outcome is the asset-backed securities market is effectively shutdown right now. We do not follow the market closely, but I just happened to see the paper this morning, it’s been afforded forward deal is basically because of this. So this is going to have to get resolved pretty quickly.

Eugene Fox – Cardinal Capital Management

Since we’ve discussed that, how do you think it gets resolved, Kevin, what’s your view?

Kevin Grant

It’s Washington, I can’t even go there, I don’t know.

Eugene Fox – Cardinal Capital Management

Okay, all right, last question. In working at the additional sort of restructuring of your swaps you could have just layered additional swaps on but you actually chose to essentially unwind some and layered new ones on, can you just elaborate a little bit as to why you did it that way?

Kevin Grant

It’s really just simpler, and they’re easier to track and follow and so forth. We could have set a forward starting swap, but the strike on that would be at a forward rate which is much higher, so we just preferred to do it this way. I think it’s a little tough to figure out in the quarter that you do it, but next quarter it’s going to look a lot clearer.

Eugene Fox – Cardinal Capital Management

Thanks, Kevin

Operator

(Operator instructions). And your next question comes from the line of Robert Grunewald with Cicero Capital. Please proceed.

Kevin Grant

Hey, Bob.

Robert Grunewald – Cicero Capital

Hey, good morning, Kevin. You talked about the positive fee payments on the 15-year, can you give us a sense of where fee payments are pending right now on the new issue 51 [ph] on?

Kevin Grant

This is post buyout, we just come out of the buyout period, Bill, do you have any observations?.

Bill Shean

They’re running probably overall in the high teens to low 20s, but they certainly start out a little slower than that, but certainly going forward, as Kevin mentioned, you got to expect a little bit of a pickup given where rates are.

Operator

There are no further questions in queue. I will turn the call back over to Mr. Cleary for closing remarks.

Rick Cleary

Thank you, everyone for taking the time to participate this morning. Have a good rest of the day.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect, have a good day.

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