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Summary

  • AGNC is issuing $100mm of a new Series B perpetual preferred stock.
  • Dividend rate range is 7.75% to 7.875%.
  • Dividend rate at 7.875% is acceptable, below this doesn't make sense.

American Capital Agency Corp (NASDAQ:AGNC) is in the market with a new Series B cumulative perpetual preferred. Details of the offering are:

The prospectus can be found here. Covenants included in the deal include (from the prospectus):

  • Upon the occurrence of a Change of Control, the company may, at their option, redeem the Series B Preferred Stock underlying the depositary shares, in whole or in part, within 120 days after the first date on which such Change of Control occurred, for cash at a redemption price of $25,000 per share of Series B Preferred Stock (or $25.00 per depositary share), plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption.
  • Upon the occurrence of a Change of Control, each holder of depositary shares representing interests in the Series B Preferred Stock will have the right, subject to the company's election to redeem the Series B Preferred Stock in whole or in part prior to the Change of Control Conversion Date, to direct the depositary, on such holder's behalf, to convert some or all of the Series B Preferred Stock underlying the depositary shares held by such holder on the Change of Control Conversion Date into a number of shares of AGNC common stock per depositary share.

American Capital Agency Corp is a mortgage REIT which earns income primarily from investing on a leveraged basis in agency MBS. These investments consist of residential mortgage pass-through securities and CMOs for which the principal and interest payments are guaranteed by a government-sponsored enterprise, such as Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) or by a U.S. government agency such as Ginnie Mae. We may also invest in agency debenture securities issued by Freddie Mac, Fannie Mae or the Federal Home Loan Bank and in other assets reasonably related to agency securities.

As per usual, the determination of value should be viewed versus the company's preferred shares and then their peers preferred shares. Let's begin with the company's shares:

(click to enlarge)

You'll notice that I included the new issue at the top of the range. The reason for this is that at the bottom of the range - 7.75% - there is no value versus the stripped yield of the existing preferreds. Why buy into a new deal if there is no concession at all? Yes, there is a yield-to-call pick-up, but there should be some concession on a stripped basis.

Next, we move on to value versus peers. Peers in this analysis are Annaly Capital (NYSE:NLY), Armour Residential (NYSE:ARR), Hatteras Financial (NYSE:HTS) and MFA Financial (NYSE:MFA).

(click to enlarge)

As the table above shows, even at the top of the "price talk" range, it is hard to make the case that the new issue is anything but "okay". The smaller mREITs - Armour and Hatteras - trade cheap to AGNC, as they should. The new deal looks to be pricing on top of MFA and a couple cheap to NLY.

For purpose of comparison, a brief look at the fundamentals of the peer group should be looked at to see if they are truly "peers":

(click to enlarge)

Aside from the obvious market cap differences, the only real outlier is Armour (troubles of its own), so the peer group is a good fit.

Finally, a look at the equity prices of the peer group to see if they have, more or less, been following the same path:

(click to enlarge)

AGNC data by YCharts

The price chart shows the peer group is appropriate as well.

Bottom line: The new issue Series B cumulative perpetual preferred from American Capital Agency is really only attractive (marginally so) at the top end of the rate range. Should it price near the tight end of the range, I would not be a buyer and/or reposition my holdings into it. MFA continues to be an attractive alternative given the nature of their portfolio (adjustable rate) and the yield on the preferred.

Disclosure: I am long AGNC, NRF, TWO, WMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.