Annaly's Secondary Offering Not That Exciting

I recently came across Thomas Kelly's article on Annaly's (NLY). I don't mean to pick on the author, as his misunderstanding is fairly common.

In the article, the author discusses Annaly's recent secondary offering that should close this week. He's particularly excited because "Annaly's capital raise is a brilliant move here, as it gives the company a huge chunk of cash to buy distressed mortgage backed securities."

However, Annaly's entire portfolio consists of GSE-sponsored MBS, which have remained relatively liquid and maintained their pricing visibility throughout the current credit crunch. These securities aren't distressed at all.

Annaly doesn't invest in private-label RMBS, which are the potentially undervalued securities in the marketplace. Annaly is simply taking advantage of the fact that they are trading at about 1.5x book value right now, so any offering they complete is immediately accretive to book value.

It's probably a good time for Annaly to raise additional capital, but it's not the opportunity of a lifetime that so many market participants are thinking. Annaly will simply take the proceeds, plow it into fixed-rate agency RMBS, and keep on hoping for more interest rate cuts to improve their liability-sensitive position.

Disclosure: none