American Capital Agency Corp. (AGNC), a leading real estate investment trust (REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), has recently announced a secondary offering of 28 million common shares totaling $780 million of gross proceeds. The company will also grant the underwriters a 30-days option to purchase an additional 4.2 million shares to cover any over-allotments.
BofA Merrill Lynch – the investment banking and wealth management division of Bank of America Corporation (BAC); Citigroup Global Markets Inc. – the brokerage and securities arm of Citigroup Inc. (C); Credit Suisse Securities (USA) LLC – the investment banking division of Credit Suisse Group (CS); and Deutsche Bank Securities Inc. – the U.S. investment banking and securities arm of Deutsche Bank AG (DB) are acting as joint book-running managers for the offering.
American Capital Agency intends to utilize the proceeds to purchase additional agency securities and for general corporate purposes. The company invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA), Freddie Mac (FMCC) and Ginnie Mae. Specifically, American Capital Agency invests in FMCC Gold certificates, FNMA certificates, and Ginnie Mae certificates.
We like the company’s focused investment approach, which is not distracted by originations, servicing, or credit risk from investments in mortgages that do not have the backing of the U.S. government. American Capital Agency is externally managed by American Capital Agency Management, a wholly-owned subsidiary of American Capital Ltd. (ACAS), a $23 billion publicly traded asset management company.
Agency residential lenders like American Capital are the only residential mortgage REITs left with a viable business model, more specifically, with access to capital to fund growth. With the government takeover of Freddie and Fannie, its securities now have an explicit government guarantee, which makes agency REITs a much more attractive prospect for investors. Additionally, the company’s portfolio of government-backed assets is relatively liquid and credit risk is limited.
However, the residential mortgage market in the U.S. has experienced defaults, credit losses and liquidity concerns in the recent past. These factors have impacted investor perception of the risk associated with real estate related assets, including Agency securities and other high-quality RMBS (residential mortgage-backed securities) assets.
As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance of American Capital Agency in the future.
We maintain our ‘Outperform’ rating on American Capital Agency, which currently has a Zacks #3 Rank that indicates a short-term ‘Hold’ rating.
AMER CAP LTD (ACAS): Free Stock Analysis Report
AMER CAP AGENCY (AGNC): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
FANNIE MAE (FNMA): Free Stock Analysis Report
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