American Capital Prices Shares - Analyst Blog

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 priced the secondary offering of 23.4 million common shares at $28.00 each. The company has also granted the underwriters an option to purchase an additional 3.5 million shares to cover any over-allotments.

American Capital Agency expects to raise approximately $625 million in net proceeds from the offer, excluding the over-allotment options. The company intends to utilize the proceeds to purchase additional agency securities and for general corporate purposes.

American Capital Agency 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 risks from investment 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), an $18 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 during recession. With the government takeover of Freddie and Fannie, American Capital Agency's 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, which have reduced financial industry capital, leading to loss of liquidity for some institutions. 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
 
FREDDIE MAC (FMCC): Free Stock Analysis Report
 
FANNIE MAE (FNMA): Free Stock Analysis Report
 
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