Anthracite Capital AHRPRD
August 06, 2007 - 9:30am EST by
bowd57
2007 2008
Price: 13.67 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 47 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description



Introduction

In a fast moving market, you sometimes don't have all the answers, let alone all the questions, and that's definitely the case here; I owned AHR coming out of the '98 credit crisis, but haven't followed the company in years and didn't start looking at it until this weekend, so this is a bit of a FIRE! AIM! READY! idea.

AHR is a mortgage REIT investing in sub-prime CMBS. For those of you who are still reading after that, they also make mezzanine commercial real estate(CRE) loans, and invest in CRE equity through some partnerships with Blackrock, their external manager.

The D shares were issued in February. The coupon is 2.0625; at $13.67, that's a 15% yield. Liquidation preference is $25. They're perpetual, cumulative and callable in 2012, pari passu with the C issue, and get to elect two directors if in arrears for more than 6 quarters.

GAAP book is ~$750MM. The current market value of the two preferred issues is $87MM, so in theory you have to chew through a lot of equity to lose money here.

Why This Is Not AHM (sorry, David101!)

1: Minimal Liquidity Risk.

Yahoo! will tell that D/E 5.5:1. Given what's happened with spreads lately, you'd think they'd be a zero. But GAAP D/E is misleading because they resecuritize their CMBS on balance sheet, keeping the bottom 20-25%. So a lot of the "debt" is stuff that they've sold, it's gone, there is no actual claim on the company.

As of Dec. 31, recourse debt-to-equity was 1.7. As of March 31, they had $683MM in repo, collaterized by $743MM in assets, and $156MM outstanding on their credit facilities, collateralized by $252MM in assets. I'd imagine that the repo is used mostly to finance $690MM in _agency_ securities, which they seem to be required to own for regulatory/REIT reasons and should (I haven't checked) be holding up well, and the LOC to finance the loans and other junk.

Since the balance sheet date, they've raised $50MM in equity, and $87.5MM in long term unsecured debt -- most recently, $37.5MM on June 15th at 8.13%. I just don't see how or why liquidity will be a problem. If it turns out that they do have a liquidity issues, I think there's a good chance that Blackstone steps in. Blackstone should be willing to _give_ them ~$35MM; $10MM to keep "Blackstone, sub-prime, blow-up" out of the headlines, and 1x the ~$25MM in management fees they're getting. But Blackstone doesn't need to give them any money. Say they buy 20MM shares at $5. The risk factor is to CRE defaults. Blackstone's a freaking hedge fund. Transaction fees on making $100MM of CRE risk go away would be, I don't know, $2MM?

Remember, these guys made it through 1998, and it's not like they haven't been able to see the storm clouds coming.

2: First-Loss Exposure to CRE Defaults has value until it doesn't.

Let's grossly over-simplify the AHM situation. Say they had a boat load of AAA paper financed at LIBOR paying LIBOR+20, but then it turns out that "AAA" is actually "AA". That's just game-over. Nobody's going to finance that at LIBOR.

I don't know what a bid on AHR's paper would be, if there'd be one at all, but screw the market, these sub-prime securitizations are going to throw of some cash for some period of time -- they're worth _something_. If they throw off $87MM over the next couple of years (AHR reported $80MM net income in '06), then in theory you walk away whole.

Miscellaneous


1: I don't claim to fully understand the accounting, but suspect that it's extremely conservative. AHR owns junior CMBS with vintages going back to '98. Defaults have been essentially nil over the last few years. Net income and the common dividend should be going through the roof, but from '03 to now they've only raised it from $0.28 to $0.30. From Blackrock's point of view this is completely reasonable, because for them AHR is a way to generate fees from managing the company _and_ the CDOs.

2: I've looked at their CDOs. No defaults It's going to take a lot before any triggers get hit. I _haven't_ looked at Blackrock's fees; it's possible that these deals are structured so AHR only does OK while Blackrock makes out like a bandit.

3: This is extremely complicated. Re-securitizations, taxes, REIT status ... given book to market value of the preferred, this should be close to a no-brainer, but in reality there are a lot of ways for preferred holders to get screwed. It's possible that things could go sour and Blackstone could jigger things so the common does better than the preferred.

4: Obviously CRE default exposure is eminently hedgable. One might want to look at some of the equity REITs. As I suggested above, it's possible that a straight capital structure arb could underperform.

5: Price targets -- assets are around BB, so assuming no blow-ups the common should be trading at 11-13%, and the preferred at 9%-11%. If things settle down, further appreciation might be possible.

6: I don't know how things are going to work out going forward, but one could argue that AHR should be raising capital right now to take advantage of all the great opportunities that are going to be popping up.There's a real limited universe of qualified buyers for this stuff -- GMAC (I think?) LNR, Allied Capital used to have a unit but sold it -- of course lately there have been plenty of "unqualified" buyers, but I imagine they'll be exiting the market. The common could well be a buy too, but if things work out the preferred offers high equity returns, too.

7: They're reporting earnings on Wednesday.

8: You can access their June 20th presentation at the Jeffries conference here:

http://www.wsw.com/webcast/jeff17/

Summary:

I don't think they're going to blow up over the next month. If CRE defaults stay at a reasonable level, this could trade back close to par over the next 5 years.


Catalyst

Earnings on Wednesday
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    Description



    Introduction

    In a fast moving market, you sometimes don't have all the answers, let alone all the questions, and that's definitely the case here; I owned AHR coming out of the '98 credit crisis, but haven't followed the company in years and didn't start looking at it until this weekend, so this is a bit of a FIRE! AIM! READY! idea.

    AHR is a mortgage REIT investing in sub-prime CMBS. For those of you who are still reading after that, they also make mezzanine commercial real estate(CRE) loans, and invest in CRE equity through some partnerships with Blackrock, their external manager.

    The D shares were issued in February. The coupon is 2.0625; at $13.67, that's a 15% yield. Liquidation preference is $25. They're perpetual, cumulative and callable in 2012, pari passu with the C issue, and get to elect two directors if in arrears for more than 6 quarters.

    GAAP book is ~$750MM. The current market value of the two preferred issues is $87MM, so in theory you have to chew through a lot of equity to lose money here.

    Why This Is Not AHM (sorry, David101!)

    1: Minimal Liquidity Risk.

    Yahoo! will tell that D/E 5.5:1. Given what's happened with spreads lately, you'd think they'd be a zero. But GAAP D/E is misleading because they resecuritize their CMBS on balance sheet, keeping the bottom 20-25%. So a lot of the "debt" is stuff that they've sold, it's gone, there is no actual claim on the company.

    As of Dec. 31, recourse debt-to-equity was 1.7. As of March 31, they had $683MM in repo, collaterized by $743MM in assets, and $156MM outstanding on their credit facilities, collateralized by $252MM in assets. I'd imagine that the repo is used mostly to finance $690MM in _agency_ securities, which they seem to be required to own for regulatory/REIT reasons and should (I haven't checked) be holding up well, and the LOC to finance the loans and other junk.

    Since the balance sheet date, they've raised $50MM in equity, and $87.5MM in long term unsecured debt -- most recently, $37.5MM on June 15th at 8.13%. I just don't see how or why liquidity will be a problem. If it turns out that they do have a liquidity issues, I think there's a good chance that Blackstone steps in. Blackstone should be willing to _give_ them ~$35MM; $10MM to keep "Blackstone, sub-prime, blow-up" out of the headlines, and 1x the ~$25MM in management fees they're getting. But Blackstone doesn't need to give them any money. Say they buy 20MM shares at $5. The risk factor is to CRE defaults. Blackstone's a freaking hedge fund. Transaction fees on making $100MM of CRE risk go away would be, I don't know, $2MM?

    Remember, these guys made it through 1998, and it's not like they haven't been able to see the storm clouds coming.

    2: First-Loss Exposure to CRE Defaults has value until it doesn't.

    Let's grossly over-simplify the AHM situation. Say they had a boat load of AAA paper financed at LIBOR paying LIBOR+20, but then it turns out that "AAA" is actually "AA". That's just game-over. Nobody's going to finance that at LIBOR.

    I don't know what a bid on AHR's paper would be, if there'd be one at all, but screw the market, these sub-prime securitizations are going to throw of some cash for some period of time -- they're worth _something_. If they throw off $87MM over the next couple of years (AHR reported $80MM net income in '06), then in theory you walk away whole.

    Miscellaneous


    1: I don't claim to fully understand the accounting, but suspect that it's extremely conservative. AHR owns junior CMBS with vintages going back to '98. Defaults have been essentially nil over the last few years. Net income and the common dividend should be going through the roof, but from '03 to now they've only raised it from $0.28 to $0.30. From Blackrock's point of view this is completely reasonable, because for them AHR is a way to generate fees from managing the company _and_ the CDOs.

    2: I've looked at their CDOs. No defaults It's going to take a lot before any triggers get hit. I _haven't_ looked at Blackrock's fees; it's possible that these deals are structured so AHR only does OK while Blackrock makes out like a bandit.

    3: This is extremely complicated. Re-securitizations, taxes, REIT status ... given book to market value of the preferred, this should be close to a no-brainer, but in reality there are a lot of ways for preferred holders to get screwed. It's possible that things could go sour and Blackstone could jigger things so the common does better than the preferred.

    4: Obviously CRE default exposure is eminently hedgable. One might want to look at some of the equity REITs. As I suggested above, it's possible that a straight capital structure arb could underperform.

    5: Price targets -- assets are around BB, so assuming no blow-ups the common should be trading at 11-13%, and the preferred at 9%-11%. If things settle down, further appreciation might be possible.

    6: I don't know how things are going to work out going forward, but one could argue that AHR should be raising capital right now to take advantage of all the great opportunities that are going to be popping up.There's a real limited universe of qualified buyers for this stuff -- GMAC (I think?) LNR, Allied Capital used to have a unit but sold it -- of course lately there have been plenty of "unqualified" buyers, but I imagine they'll be exiting the market. The common could well be a buy too, but if things work out the preferred offers high equity returns, too.

    7: They're reporting earnings on Wednesday.

    8: You can access their June 20th presentation at the Jeffries conference here:

    http://www.wsw.com/webcast/jeff17/

    Summary:

    I don't think they're going to blow up over the next month. If CRE defaults stay at a reasonable level, this could trade back close to par over the next 5 years.


    Catalyst

    Earnings on Wednesday

    Messages


    SubjectQuestions
    Entry08/06/2007 11:47 AM
    Memberdavid101
    Bowd,

    Having recently earned my diploma in REIT liquidity from the school of hard knocks, let me pose some questions:

    1. Where did you get the $690 million of agency securities?

    2. Repo Agreement - It is really important to know what they have repo'ed because the agreements are subject to margin calls. Any way to get certainty on what the collateral is?

    3. With AHR below book value and the CDO/MBS market effectively closed, how much capacity do they have on the credit facilities and who are the lenders?

    4. Does Blackrock (not Blackstone) hold any of Anthracite's debt securities? Given that the preferreds are such a thin sliver of equity relative to the common, it seems that preferred and common are tied together. Either they both survive or they both are zeroes. If Blackrock is sitting on debt securities, they may do better by making sure the equity holders get nothing.

    5. Since a large portion of their assets are "held-for-sale," they will be subject to mark-to-market hits. How big a mark down to their book value can they absorb?

    David

    SubjectQuestions
    Entry08/06/2007 07:06 PM
    Memberbowd57

    Hi, David --

    Sorry for dragging your name into it, and thanks for the (as always good) questions.

    1:> Where did you get the $690 million of agency securities?

    Darned good question and I umm, don't know. I see $590MM from the latest 10Q and the Jeffries presentation. I assume $690 is a typo/thinko for $590MM.

    2:> Any way to get certainty on what the [$690MM of repo] collateral is?

    As above, I don't think I'm going to find the missing $100MM. AHR is not a natural holder of RMBS, so I imagine that they repo'd that $590MM. The other $100MM? I don't know exactly, "stuff that people will let you repo" is as close as I can come.

    3:> how much capacity do they have on the credit facilities and who are the lenders?

    Rrrmmm ... we're a bit at cross purposes here. Let me turn the question around. Why do they need any capacity, and who cares (other than another question we'll get to in a bit) who the lenders are? It's not like they have to issue a CDO by September or die.

    4:> 4. Does Blackrock (not Blackstone)

    Thanks, David, I guess that doesn't exactly help the credibility of the write-up ... at least I got it right the first couple of times!

    > hold any of Anthracite's debt securities?

    There's no mention of this under "related party dealings".

    > Given that the preferreds are such a thin sliver of equity relative to the common, [...] Either they both survive or they both are zeroes.

    I hear that, which is why doing a straight capital structure arb is maybe not such a great idea. On a going-concern basis, the preferred is appealing because -- look, the last common dividend was $0.30. Could the next one be $0.15? Sure. If that happens, I'd guess that the common goes down and the preferred stays where it is, maybe even goes up if people decide that this is not a zero.


    5:> Since a large portion of their assets are "held-for-sale," they will be subject to mark-to-market hits. How big a mark down to their book value can they absorb?

    At the moment there is no market for this stuff. Back in the old days, they used to value their securities by calling around and getting quotes. That's a darned conservative way of doing things, because nobody's going to give you a reasonable quote on something that,

    A: They can't sell to anybody else, and
    B: They sure as hell don't want to buy from AHR because AHR has all the informational advantages.

    Say they still follow the same practice and call around and get "no bid" and mark everything down to zero. Shucks, maybe they wind up losing $8/share (made up number). So? This stuff throws off cash or it doesn't. It's kind of like asking about the MTM value of mine. After you've dug the damned thing, it's all about cashflow and not about book or GAAP profits.

    Yours,
    Bowd













    SubjectWhoops
    Entry08/06/2007 08:02 PM
    Memberbowd57

    Hi, guys --

    I suddenly rembered that this is the "Value Investors Club", not the "Deranged Opinions Club". At least I didn't get off on one of my, "How Italy Could Have Won World War II" rants.

    1: I don't know what CRE defaults are going to be going forward -- OK, I do, higher than recently -- but the last few years have been extremely kind. These favorable trends have not been evidenced in AHR's financials or dividends. They might be bad operators, they might be reserving, they might be diversifying -- a combination of the last two makes the most sense.

    2: All I'm saying here is that, when they release their financials on Wednesday, they won't have blown up, and I expect some short term relief rally as a result.

    Yours,
    Bowd

    SubjectBe careful
    Entry08/06/2007 08:13 PM
    Memberissambres839
    Last week this company said everything was fine and that it didn't have to suspend divvies.

    http://www.reuters.com/article/marketsNews/idUKN0644835220070806?rpc=44

    SubjectCaution Is Advisable
    Entry08/06/2007 08:29 PM
    Memberbowd57

    Hi, Issambres --

    Totally.

    I know nothing about LUM and not as much as I'd like to about AHR, but my limited understanding is that one,

    - Was _hoping_ to sell stuff into a securitization

    , while the other

    - Had _already_ sold it's stuff.

    AHR might well slash or omit the common or preferred dividends. They might need to raise capital.

    I don't see how they go belly up due to margin calls.

    Yours,
    Bowd


    SubjectFollow-ups
    Entry08/06/2007 08:31 PM
    Memberdavid101
    Bowd,

    Thanks for the responses.

    I want to follow-up with the short-term borrowings because LUM seized up today in similar fashion to AHM. If AHR can survive this panic, I think this is a terrific idea but I have no feel for the "IF" part.

    The reason for asking about the repo collateral is to understand the impact to AHR. Repo financing is the weakest form of financing, and one where the lender is most likely to have requirements if the collateral's value goes down. If AHR had to post more margin, the likely source would be a credit line.

    So let's talk about the credit lines. These are the last sources of capital for AHR, as they can't raise equity or debt from the capital markets right now. If the credit lines get reduced or pulled, AHR is in a bind. Having lots of capacity on their credit facilities gives AHR a lot of flexibility to survive the storm.

    I hear you about vagaries of MTM, but it is an important issue. Most credit facilities have a minimum net worth covenant. As of 3/31/07, AHR had about $821 of investment grade (IG) CMBS and $793 million of non-investment grade suboridnated debt. If they took 5% MTM hit on the IG stuff and 10% on the non-IG stuff, that's a $120 million hit. All of a sudden, those minimum net worth covenants start looming.

    Here's how the AHM and LUM implosions occurred. First, their repo collateral got MTM'ed down, resulting in a margin call. They borrowed money from the credit facility to fund the margin call. The MTM's however lowered networth, causing a margin call from the credit facility lenders. The kindness of strangers can disappear quickly.

    If you had lost money on AHM, I'm sure you want to know the answers to these questions, too. So don't take my questions as an attack on your idea. I'm interested but a little gun-shy. I think there is panic in the markets that are causing irrational discounts to stocks, so looking through what everyone else is puking out is a good place to be looking. Someone is going to profit from all this dislocation, all they have to do is survive the near-term.

    David

    SubjectIssambres
    Entry08/06/2007 08:47 PM
    Memberdavid101
    Issambres,

    Almost half of LUM's debt was financed using repos, commercial paper and warehouse lines, compared to about 18% at AHR. That is an important distinction. I think 50% short-term financing for non-agency securities is too much, but am not sure where 18% fits into the picture.

    David

    SubjectRe: Follow ups
    Entry08/06/2007 09:12 PM
    Memberbowd57

    Hi, David --

    Gee, at some point I should really make myself some dinner instead of just sitting here knocking back Brooklyn Lagers and talking about stocks with strangers, but --

    > Repo financing is the weakest form of financing, and one where the lender is most likely to have requirements if the collateral's value goes down.

    Right.

    > AHR [...] can't raise equity or debt from the capital markets right now

    Huh? Why not? _Accretive_ equity issuance is out of the question right now, but "pay a mighty high price to save your ass" is not. If you own the preferred, you hope that (as seems likely) the mighty high price comes out the common's ass, and not yours.

    > Most credit facilities have a minimum net worth covenant. As of 3/31/07, AHR had about $821 of investment grade (IG) CMBS and $793 million of non-investment grade suboridnated debt. If they took 5% MTM hit on the IG stuff and 10% on the non-IG stuff, that's a $120 million hit. All of a sudden, those minimum net worth covenants start looming.

    Urrggghh .... this all starts off hard to follow and AHR's "diversification" efforts don't make it any easier for me. When you say, "$821 of IG CMBS", are you talking about the legal fiction that they own the senior classes and have issued debt to finance it?

    ----

    This is probably not helpful, but thanks to the Brooklyn Lagers and no dinner, maybe the best I can do right now:

    1: AHR owns a bunch of subordinated pieces of ABS CDOs. "Debt" associated with this is a fiction. "Leverage" is not, in the sense that they're going to take a much harder hit from a default than the senior calss, but they don't actually owe any money and as long as these things keep throwing off enough cash to pay the rent and the phone bill, there are no liquidity issues.

    2: AHR has two forms of what I'll call "non-core" debt:

    A: They've got some stuff out on repo. This just has to be the agency stuff because it more or less matches up and, you know, nobody's going to let them repo the "core" assets anyway.How much is it again? $600MM? Take a 10% hit against that. NB, a 10% hit against anything you can actually repo is huge.

    B: Real round numbers, there was something like $200MM on credit lines financing Lord knows what, take a 25% hit against that, which again is pretty, you know, big, for anything that people would let you finance that way.

    Ignore that they might have stuff they probably could sell but don't want to. Maybe there's a $100MM liquidity problem out there. I don't believe this to be the case but ... The difference here is that the liquidity problem is "non-core", whereas with AHM and for all I know LUM, the liquidity problem was "All there is".

    I've suggested that Blackboogers -- whatever their name is, I can never get it right -- could provide $100MM in liquidity at a net cost of less than the reputational hit should one of their managed funds blow up.

    Liquidity is a real tail risk here. Graphically,

    - CRE Defaults
    .
    .
    .
    .
    - Getting screwed because you bought the preferred
    .
    .
    .
    .
    .
    .
    .
    .
    .
    .
    .
    - Liquidity

    Yours,
    Bowd



    SubjectDinner Will Have To Wait
    Entry08/06/2007 09:39 PM
    Memberbowd57

    Hi, guys --

    Getting to the nub on liquidity:

    I sure _hope_ these things are trading where they are because of liquidity fears, and not because of deeply thought out and passionately held views about CRE defaults.

    The company has _very recently_ raised:

    $55MM equity
    $87.5MM long term unsecured debt
    -Too lazy to make sure, but I think there's also E50MM of long term debt too.

    -- like in the last 4 months. Now, maybe they said, "Geez, do you know how much AAA Alt-A mortgages you could control with this?" And went out and bought a bunch of 'em.

    I sure hope not.

    Like I said before, these guys came through '98. If this turns out to be a zero, I hope it's the old fashioned way -- "We lent money to people who didn't pay it back" -- instead of the new fashioned way -- "We borrowed money we couldn't pay back."


    Yours,
    Bowd

    SubjectBlind Pigs And Acorns
    Entry08/08/2007 06:16 PM
    Memberbowd57

    Hi, guys --

    Well, that one worked out, no doubt helped along a bit by today's buying panic in anything that -- oh so long ago! like Monday! -- seemed "risky".

    I'd be surprised if there isn't another chance to take a crack at this or the common. Longer term,

    1: Par is a dream without some help from the Fed,
    2: But in a non-sucking CRE market, this could drift up to $20-$22 over the next year, which is not a bad total return.
    3: I think the common has interesting speculative possibilities.

    Yours,
    Bowd



    SubjectCongrats
    Entry08/08/2007 11:57 PM
    Memberdavid101
    Good call, Bowd.

    David

    SubjectStuff I missed/didn't answer
    Entry08/11/2007 05:33 PM
    Memberbowd57

    Hi, guys --

    David101:> Most credit facilities have a minimum net worth covenant.

    $500MM for AHR, vs. current shareholders equity of $800MM. Since they're marking this stuff to market, I'd expect book to be down at least 10% by the end of September, unless things turn around.

    So there's some margin here, and I really think that, should it come to it, we'll see forbearance from the lenders 'cause it's not like they want to own this stuff.

    Duff:> what do you tink about some of the others?
    Me:> I don't really follow the space [...]I don't know if there's anything similar out there.

    Unsurprisingly there are tons of comps. NCT is one.

    Yours,
    Bowd





    SubjectSee?
    Entry08/14/2007 06:10 PM
    Memberbowd57

    Hi, guys --

    Me:> I'd be surprised if there isn't another chance to take a crack at this

    I think down 20% intra-day is a good opportunity for me to say, "Told you so."

    Yours,
    Bowd


    SubjectComps
    Entry08/19/2007 09:20 PM
    Memberbowd57

    Hi, Duff --

    > NCT also has prefs. so does tma if you're feeling game.

    There's tons of stuff to buy if the "Great Moderation" continues and recent financial dislocations don't feed back into the real economy.

    Brad DeLong explains the Great Moderation well, and says bad things about Bush to boot, so let's let Google do the heavy lifting for those new to the GM concept:

    http://www.google.com/search?as_q=&hl=en&rlz=1B2GGGL_enUS177&num=10&btnG=Google+Search&as_epq=great+moderation&as_oq=&as_eq=&lr=&as_ft=i&as_filetype=&as_qdr=all&as_nlo=&as_nhi=&as_occt=any&as_dt=i&as_sitesearch=http%3A%2F%2Fdelong.typepad.com%2Fsdj%2F&as_rights=&safe=images

    I like the AHR securities because they're playing things real conservative.They're not looking to find a bottom; they're not looking for great deals, and they're not talking about buying back stock (like NCT). "Liquidity, liquidity, liquidity". They sold tons of agency stuff to raise cash, bailed out on some of their equity partnerships and are looking to bail out on more. Maybe there are great opportunities out there, but no falling knives, you know?

    This is a virtue in a mortgage REIT (which they're not really, they've just "elected to be taxed as a REIT"), and to the extent that anyone's interested in the preferred, a double virtue.

    Yours,
    Bowd

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