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  • Western Asset Mortgage: Are You Ready For The 20% Dividend Yield? [View article]
    My "accounting" is admittedly spit-ball compared to your work on the hedges, but yes, my thoughts on the divvy take this migration into account.

    Even retrospectively, you can already see the spread contraction, or shrinking NIM, in the last Q as they made this move. They only covered the .70 (barely) with TBA drop income, and the attractiveness of that strategy rests on how the market was pricing "specialness." Assuming what you conjecture is correct, and the game plan is to move even further into credit-sensitive MBS, the difficulty for maintaining the divvy is twofold. (a) it costs more to finance these credit-sensitive mbs via repo than to finance agency mbs; (b) you can't leverage credit-sensitive mbs as many turns as you can agencies. So assuming the earlier trajectory continues, the NIM is likely to contract modestly as the cost of funds increases slightly and the leverage naturally comes down. On the plus side, insofar as some of the credit-sensitive instruments have negative duration, they may save a little money on the hedges going forward.

    Bottom line--in order to generate >20% net returns with a yield curve this flat, you'd need to run a big duration gap (scrimp on hedges) and use an irresponsible amount of leverage. "Earning" .70 this Q is going to require some capital gains.

    Given that's where we are right now, for better or worse, I'd personally prefer that they dialed it back a bit, cut the divvy by .5 to .10 cents, and content themselves with still sporting one of the highest divvies in the mreit space.
    Feb 5, 2015. 04:03 PM | 2 Likes Like |Link to Comment
  • Western Asset Mortgage: Are You Ready For The 20% Dividend Yield? [View article]
    Tend to agree, willytrd.

    These guys (though WMC was no worse an offender than AGNC et. al.) were running big duration gaps at exactly the wrong moment going into early 2013, backed up the truck on hedges at the top of the market (in terms of implied vol of IR) in late 2013 and early 2014, and thus captured too little of the rebound in TSY/MBS prices. Once bitten, twice shy.

    Good point also about basis risk. The neg convexity of mbs (and prepay fears at these ridiculously low rates) has kept agency mbs from participating to the same degree in the rally. That being said, the non-agency and cmbs markets (where WMC now also plays) have been strong.

    I still think they book some modest gains to NAV.
    Feb 5, 2015. 01:03 PM | 1 Like Like |Link to Comment
  • Western Asset Mortgage: Are You Ready For The 20% Dividend Yield? [View article]
    This analysis is great, but you're only looking at 1 side of the equation. Let's assume you're correct that their fixed pay swaps in the short and long buckets will have declined in value as of end of Q. Granted. But the flip-side of this is, obviously, that the book value of their MBS portfolio (which the swaps are hedging, at least in part) will have risen commensurately.

    The only way to reach any conclusions about the NET effects of their swaps on book value is to have some sense of the duration gap they were running during the Q. That is, how much of the market value of the mbs portfolio did leave leave unhedged? In the previous qtr, they were running a slightly negative duration (i.e. overhedged)--which prevented them from picking up much in the way of gains to book. I would guess (though have no way of knowing) that they added some duration during the course of the last qtr, in which case there's the potential for some book value appreciation that's not yet baked into the price in the $13 range.

    And parenthetically, as much as I love WMC, I really don't see how they're going to be able to keep the .70 divvy UNLESS they open up a significant duration gap and supplement the spread income with some cap gains. Loading up on the risk-sharing, CMBS, and whole loans is great, but not only are financing costs higher, but you just can't responsibly leverage this stuff 8 times over.

    Added a bit in the low $13s yesterday.
    Feb 5, 2015. 09:07 AM | 1 Like Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Exactly what I was thinking re. this being a pure derivative of crude oil, where I've got too much distressed exposure already. We've had a nice run, and while I don't fault others for sticking around, I'll bank a 75% profit for a 1-2 month investment any day of the week.

    Good luck to you guys who are sticking it out. I'm on to Atlantic City--the impending Ch. 9 filing, not the casinos ;)
    Feb 4, 2015. 10:20 AM | 1 Like Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Out at 16 today on the C's. Probably got some more room left to run, but I'll happily take that low hanging fruit and move on down the road. Good luck to you guys, and nice find!
    Feb 3, 2015. 03:22 PM | 1 Like Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    No prob. In addition to the usual earnings announcements, most comps will typically file copies of major agreements with lenders, prospectuses (including covenants) for publicly traded debt, etc. Especially if you're getting involved with preferreds, you've gotta be aware of what's happening above you in the capital structure.

    This is one of the reasons I typically shy away from prefs, FWIW. Their upside is capped in most instances, and they're subordinated to all the debt with very little in the way of security for divvy or recoveries in a BK. Even so-called "cumulative" prefs are vulnerable. Miller is an unusual capital structure, though, with all these prefs rather than bonds, but I still consider these extremely speculative...
    Feb 3, 2015. 10:10 AM | 1 Like Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    Try WWW.SEC.GOV, which should be double-bookmarked on your browser and your first stop for shopping. I think the amendments were reported as an 8-K.
    Feb 2, 2015. 10:36 AM | Likes Like |Link to Comment
  • Should You Be Worried About Western Asset Mortgage? [View article]
    Wouldn't be surprised to see a modest cut to the divvy. They were covering the .70 only with drop income from TBAs, and with the contraction in spreads you mention, and the inability to use as much leverage on the credit sensitive non-agency bonds they've been buying, I think there could be a .05 to .10 cut. Book value could be up slightly to materially as of 12/31 depending on how they managed their hedges. The whole mreit sector is facing headwinds, but I'd add a little here in the low $13 range, and trim some back if we get a surprise bump into the low to mid $15 range with earnings. Steady as she goes...
    Feb 1, 2015. 10:43 AM | Likes Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    Look at the amended agreements recently filed with the lenders for the revolver and the 2nd lien. They've already run through the original covenants when they made the last payment on the prefs. There's no question that the senior secured lenders can mandate a suspension of payments on preferreds. Preferreds are equity--not debt--and their payments are optional (albeit cumulative in this case). That's why they have to be declared every qtr by the company. The question isn't whether the lenders have a right to shut these off, it's whether they'll choose to exercise this stopper clause at some point in the future.

    So far, so good, as they just declared, but if things get tighter, the divvy is gone (though accumulating). Also, NB, there's nothing preventing them from layering more secured debt in front of the prefs, thereby pushing them out of the money in the case of a BK.

    Darren M does an admirable job of surveying these risks in his previous SA post on the Mill Prefs.

    I take no heart whatsoever from someone declaring something "sacrosanct." The fact that someone felt obliged say that is a negative indicator. And it's not the company's call any longer. They'll pay as long as the senior lenders allow them to pay. Now the fact that mgmt is actually BUYING the prefs, that's another story...

    Disclosure: I'm long a very small (.5% AUM) position in the prefs...
    Jan 31, 2015. 05:07 PM | 6 Likes Like |Link to Comment
  • BreitBurn Energy Partners: Making Sense Of The 20%+ Rally [View article]
    @ JohnInFLA

    I tend to think you're on to something that the move had something to do with the repositioning of bets across their capital structure. If you were initiating a short on the senior unsecured bonds (in anticipation of more secured debt issuance, and not a dumb move) the logical step would be to go long the equity units as a hedge.

    Just a theory, but the big discount that has opened up on the 2020 and 2022 notes is alarming. Someone is very bearish on BBEP's liquidity situation.
    Jan 27, 2015. 10:21 AM | 4 Likes Like |Link to Comment
  • BreitBurn Energy Partners Investment Thesis [View article]
    I've got a small position in the 2022s (though I wish I'd waited longer to nibble).

    Here's the problem with the senior unsecureds: with the April revaluation they're going to get whacked on the credit facility, and will need to raise considerable cash. The senior unsecured market is closed to them, and so there are only two possibilities: a secured 2nd lien term loan at usurious rates (probably 10% or more) or a dilutive equity issuance. From the vantage of the senior unsecureds, I'd love to see them sell more units beneath me, but the most likely scenario is that they'll layer some more secured debt in front of the bonds. In an extended period of low oil prices, the senior unsecureds are probably going to end up out of the money--meaning that if they declare BK, you're not looking at much in the way of recoveries.

    By my very rough numbers, they can cover the interest on the revolver and bonds for a while--prob into 2017--but if they falter or the senior secured lenders play hardball and pull out the rug in 12-18 months, the 2020 and 2022 bonds could be a total loss. Nice yield; safer than the common divvy; but also very dicey...

    Be careful with all these senior unsecureds. They may look fine now, but looking two moves ahead, there's going to be more debt layered on above them in the capital stack.
    Jan 26, 2015. 03:11 PM | 1 Like Like |Link to Comment
  • Ocwen: Outsider-Like CEO, Undervalued Shares, And Recent Buy By Klarman [View article]
    I tend to think the Blue Mountain suit on the technical default is bs, but the other suit from the mbs holders could be material. It's not inconceivable that Pimco, Blackrock, et. al. could own enough of some individual deals to vote out OCN as the servicer. But then the question is: replace them with whom? Buy some popcorn, settle down in the easy chair, and let the courts sort this all out!

    Stepping back, though, and putting aside this as an investment thesis, OCN's been put in a no-win situation. On the one hand, they were trying to do right by the trustees and bondholders (and themselves) by giving deadbeat homeowners the quick heave-ho and keeping the cash flowing. They were obviously too sloppy and aggressive and get spanked by the regulators. On the other hand, now the mbs holders are kvetching that they haven't been zealous enough in protecting their interests and maximizing recoveries. Can't win...

    But hey, that's why it's on sale for $6 and change.
    Jan 25, 2015. 08:52 AM | 1 Like Like |Link to Comment
  • mREIT Owners: Buy MSRs As A Way To Naturally Balance Out Interest Rates Rising [View article]
    Fair enough, and good luck to you!
    Jan 25, 2015. 08:34 AM | Likes Like |Link to Comment
  • mREIT Owners: Buy MSRs As A Way To Naturally Balance Out Interest Rates Rising [View article]
    Like you, I have no crystal ball. Maybe rates go up, and maybe they go down. I have a strong view, but best to be positioned for either scenario (which this hedging strategy doesn't accomplish, BTW).

    Nothing I can cite in terms of data points (tanking commodity prices, disinflation, mounting $US, European rates negative to midway out the curve, record short positions in TSY10, potential EM defaults, eurodollar future forward pricing, etc.) is going to convince you one way or another if you've made up your mind that rates are destined to rise. But the claim that they are "ridiculously low now" (compared to what?) and that the Fed is hankering to raise short term rates by 50bps is no evidence that the long bond is bound to move up any time soon.

    Mreits may have 99 problems (I'm not a buyer here), but rising long term rates ain't the big one. In fact, if the fed were to tighten, and the long end of the curve were to blow out (given all the excess liquidity in the system, this wouldn't be the logical effect of hiking the Fed Funds rate, but whatever...), this would arguably be *good* for mreits as they could reload at higher spreads. In a flattening environment like we're facing, they're unexciting as their earnings power slowly rolls down. Aside from the fact that MSRs have cheapened considerably, and have better positive carry than IOs, buying MSRs doesn't address these problems.
    Jan 24, 2015. 03:34 PM | 2 Likes Like |Link to Comment
  • mREIT Owners: Buy MSRs As A Way To Naturally Balance Out Interest Rates Rising [View article]
    In theory, this should work--which is why the PMs are doing it themselves. But the problem (and why this is probably a very bad idea as a hedge) is that the hedge is asymmetrical (it only works in one direction). Yes, if and when rates should rise, the negative duration of the MSRs should in principle hedge out some of the positive duration of the mbs. However, if rates should fall further (as they're manifestly likely to do), the MSRs suffer from exactly the same problem as mbs: namely, they're hurt by prepays and run-off. So rather than hedging yourself, you've only magnified the problem.

    Also, there's a big assumption that the market price of exchange traded vehicles will beahve rationally
    Jan 24, 2015. 10:41 AM | 1 Like Like |Link to Comment