It is a very unusual deal, particularly because the founders are giving up all of their shares. The warrant holders will have to approve the change in the strike price, which by the way, will be $11.00, not $13.00. The initial reaction from the warrant holders has been positive; the price of the warrants has doubled to $.44 since the deal was announced.
Some context from the WSJ:
Bond Investors Gear Up To Invest In Distressed Home Loans
By Aparajita Saha-Bubna and Joseph Checkler
Of DOW JONES NEWSWIRES
JUNE 12, 2009, 4:27 P.M. ET
BOSTON (Dow Jones)--The dust is yet to settle on the U.S. residential real estate wreckage, but investors are starting to sift through the rubble.
The momentum has been rising, with a number of bond investors signaling their intentions to enter the very corner of the mortgage market responsible for its downfall: home loans to borrowers with patchy credit.
Less than two years after the U.S. housing market collapsed, these investors are seeking to make money off distressed home loans and the ongoing devastation in the broader mortgage market. Their interest suggests that the epicenter of the financial crisis, while still in ruins, is beginning to show signs of stability.
This is "the greatest opportunity ever to invest in this market," says Steve Kuhn, co-chief investment officer of a newly formed real estate investment trust, Two Harbors Investment Corp. The creation of this REIT was announced Thursday.
"We believe there are a number of securities available in the residential mortgage market with prices that are under their true value," says Kuhn. "This doesn't mean the worst is over in the housing market. It means there are undervalued securities, and that's what we get excited about."
The REIT's investment strategy is to garner returns from distressed and discounted mortgage securities that have fallen out of favor in the current credit bust. Management of Two Harbors also hopes to get a boost from its investments in mortgage securities if a federal program aimed at thawing debt markets is extended to home loans that aren't covered by the umbrella of Fannie Mae (FNM) and Freddie Mac (FRE), the two government-controlled mortgage finance giants.
A REIT is an investment structure, which enjoys special tax breaks, set up to buy property or mortgage securities.
If this strategy, echoed by others, sounds like a recipe for disaster, consider this: These home loans are priced at historically low levels, with significant discounts to their unpaid principal.
Pacific Investment Management Co., which runs the world's largest bond fund, is mulling the creation of publicly traded entities to buy problem loans, according to a news report Friday. Pimco is looking to establish a structure similar to a REIT that would sell shares to the public and use the proceeds to buy debt, including troubled residential mortgages, as well as commercial real estate. A Pimco official didn't respond to a request for comment.
Paulson & Co., John Paulson's hedge fund that made more money than any of its peers last year by betting against subprime mortgages, reaffirmed Friday its commitment to buy distressed debt and securities made up of pools of mortgage loans. Paulson launched in October a fund called the Paulson Recovery Fund, whose investments include the subprime-backed debt that he bet against in the first place.
"We've been adding pretty steadily to our long distressed positions," Sandra Lee, a senior vice president at the New York-based fund, said at a Euromoney conference in Hong Kong on Thursday, according to a news report. "Where we shorted the lower-quality subprime securitizations, we're now going long the better-quality jumbo, prime securitizations." Paulson & Co. declined to comment for this article.
Invesco Mortgage Capital Inc., a REIT, on Friday said it plans to use proceeds from its initial public offering and a private placement of shares to acquire assets, with a focus on agency and nonagency residential mortgage-backed securities, commercial mortgage-backed securities and certain mortgage loans.
Ryan Sheftel, a portfolio manager for New York-based Malbec Partners, said his fund is one that is seeing more opportunities in the agency mortgage markets now that liquidity has improved.
"There are interesting opportunities, and those opportunities are not highly correlated with other markets," said Sheftel, a former head of systematic trading at Ken Griffin's Citadel Investment Group.
Another new company, PennyMac Mortgage Investment Trust, is also a REIT that filed plans last month for an initial public offering of its stock. The money raised will be used to buy distressed residential mortgage loans. PennyMac expects to focus a "substantial" amount of its buying in subperforming and nonperforming mortgages; it may also invest in mortgage-related securities that aren't covered by any ratings agency.
-By Aparajita Saha-Bubna and Joseph Checkler, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com
(Chad Clinton and Lynn Cowan contributed to this report.)
Wall Street Journal story link |
