MITT: Short

I have a small short position in AG Mortgage Investment (MITT)

Company Profile

• 12/31/19 Book Value per share was $17.61 and unlike peers the company did not provide any update showing the impact of the March market crash. 
• The company held a portfolio allocated 35% to Agency RMBS and 65% to credit sensitive RMBS and CMBS:

• The agency portfolio was almost all 30-year fixed rate securities:

• The non-Agency portfolio was heavily weighted towards non-investment grade tranches including sub-prime, non-performing, re-performing, and Credit Risk Transfer securities.

• The company primarily financed through repurchase agreements:

March Madness

• Agency RMBS prices fell sharply in a few days of heavy liquidation pressure

• Credit sensitive securities performed much worse as shown by this Credit Suisse chart of spreads on Credit Risk Transfer securities.

MITT Madness

• MITT disclosed on 3/23 that it was unable to meet $17.8mm in margin calls from 3/20 (LINK)
• MITT disclosed on 3/27 that it had sold all of its remaining Agency RMBS on 3/23 (at the market bottom).  At the close of business on 3/27 the company had $78mm of cash on hand.  The company received notices of default from financing counterparties.  An independent director resigned. (LINK)
• MITT disclosed on 4/7 that it had failed to meet $145mm of margin calls and that  $425mm of its assets had been seized by counterparties that provided $34mm of additional deficiency notices. (LINK)
• MITT disclosed on 4/13 that it signed forbearance agreements with counterparties to whom it owed $750mm.  The company borrowed $10mm from its manager and granted the financing counterparties a lien on all of its assets (including the $10mm). (LINK)

• MITT disclosed on 4/28 that the forbearance agreements had been extended to 6/1.  The company borrowed an additional $10mm from its manager.  An amendment to the forbearance agreement provides flexibility for asset sales if they do not generate losses in excess of 1% of related loan balances.  A sale that generated the permitted loss would obviously wipe out the company’s equity interest in those assets. (LINK).

Can MITT survive?

The Agency MBS market completely recovered from its March crash, but MITT closed out its positions at the bottom and undoubtedly realized a large loss.

The non-Agency market has partially recovered, but the terms of the forbearance agreements are functionally equivalent to bankruptcy.  The lenders haven’t asked for more because MITT has nothing left to give.

The willingness of the manager to extend $20mm of financing suggests that it sees a possibility for survival.  The company might get lucky and benefit from further market recovery during the forbearance period.  The company might find an investor willing to invest new equity in a recapitalization that would provide a much longer period to position for a recovery.  The abundance of distressed credit opportunities suggests that such an investor(s) could expect very attractive terms.  For comparison, Chimera was in much better financial condition when it issued convertible senior notes with a strike price at a 48% discount to 3/31 book value and a 20% discount to the stock price prior to the offering (LINK).

MITT shares are trading far below their 12/31/19 book value, but Invesco Mortgage (IVR) estimated an 80% ytd loss and it appears to be in much better shape than MITT.  IVR disclosed that as of 4/15 it was still in negotiations with financing counterparties and on that date it had $309mm of unencumbered investments, $233mm of unrestricted cash, and additional cash receivable from pending sales (LINK).

It’s possible that MITT’s book value per common share is negative right now, but the company could survive because it had $272mmm of preferred equity.

Disclosures

At the time of publication the author held a short position in MITT.  At the time of publication the author also held a short position in IVR based on a simpler thesis that it was trading at a premium to the midpoint of the book value range estimated by the company as of 4/15.  Investors are encouraged to check all of the key facts cited here from SEC filings and other sources prior to making any investment decisions.  The author’s positions in these securities could change at any time.