Chimera Investment Struggling to Stay Afloat

Chimera Investment Corporation (CIM) is quietly struggling to stay afloat after levering up at just the wrong time. Although the Company had reported leverage of just 0.5 to 1 at 12/31/07, the calculation excluded a $750 million payable for MBS, which was resolved at the end of January, when CIM entered into a $500 million repo facility with CSFB and a $350 million repo facility with Deutsche Bank -- levering up four-fold in the process just as competitor MFA Mortgage (MFA) was selling assets to de-lever its balance sheet.

Just a month later, the agency-backed and AAA markets dislocated again, and Chimera's repos have created a liquidity problem for the newly-formed company. Chimera held cash and cash equivalents of just $6.0 million at December 31, 2007, and warned in its 10-K that:

An increase in prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal paydowns.

Not good news when the AP is reporting that mortgage volumes spiked on refinancing last week.

Chimera has had to amend its repurchase agreement with Deutsche Bank twice since initiating it in January to bring the liquidity covenant down to $40 million from $100 million. For this, it has had to agree to

• Provide daily liquidity reports through April 15, 2008
• Provide mark to market positions and advance rates with respect to all loans and securities

In addition, Chimera agreed to allow DB the right to act as the lead underwriter in connection with the next securitization or other similar public or private pass-through disposition of any Loan sponsored by Seller or an Affiliate thereof, for a market-rate fee.

Although markets may be stablizing, Chimera's first quarter dividend obligation of $9.6 million is looming overhead, and unless markets continue to improve quickly, the Company could be squeezed dry of cash at the end of April.

Disclosure: none

Comments

[Pj568:]

Not a good time to be invested in mortgages period. Thornburg (who also held high quality mortgages) reported they suffered a 10% decrease in asset value since Feb 14th. If the same is true for CIM, sizeable write-down would be expected for the quarter. With DB requiring they serve as lead underwriter on future offerings, I would suspect an offering is now being considered.

2008 Mar 27 08:36 AM

[AG:]

Dividends are a way for management to signal.

Paying a dividend 9x higher than the previous quarter does not signal liquidity problems.

2008 Mar 28 01:34 PM

[Kastle:]

I agree with AG. On March 19th, they announced a Q1 2008 dividend of $0.26 per common share, payable April 30, 2008 to common shareholders of record on March 31, 2008. Now, if they had been anticipating liquidity problems since December 2007, why would they markedly increase the dividend amount? It doesn't make much sense.

2008 Mar 30 08:33 PM

[User 187098:]

initial dividend of .26 was not for 3 months, was reflective of shorter time period

2008 May 02 08:04 AM