Chimera Investment Prices New Fixed-to-Floating–CORRECTED–FINAL

From the initial paperwork the initial coupon on this was lowered to 8%–FINRA which had the 8.125% obviously ‘misspoke’.  

The spread, which will be added to 3 month Libor starting 3/30/2024 is 5.379%–a reasonable spread we think.

In spite of the lower coupon we will have an interest in this issue.

The final pricing document is here.

As most investors probably know this issue will be unrated.  As with all mortgage REIT preferreds the dividends will be cumulative and non qualified for preferential tax treatment.

NOTE–PLEASE IGNORE DATA FOUND ON THE FINRA SITE AS I SEE IT IS STILL INCORRECT.

 

mREIT Chimera Investment (NYSE:CIM) has priced a new fixed-to-floating rate preferred at an initial coupon of 8.125%.  This is higher than we believed would be necessary, by .125%.

The issue will trade tomorrow on the Grey Market under the temporary ticker of CMIMP.  We have an interest in this offering depending on the spread which has not been released.

MORE TO COME.  FURTHER DETAILS NOT RELEASED, BUT WE WANTED TO GET THESE FEW DETAILS OUT.  SEC AND COMPANY PRESS RELEASES HAVE NOT BEEN COMPLETED.

 

23 thoughts on “Chimera Investment Prices New Fixed-to-Floating–CORRECTED–FINAL”

  1. I don’t get it. The new issue is the same % as CIM-B but with a lower Libor spread. No reason to buy unless you get a temporary price break in the grey market. Why would they do this?

    1. Ftom Morningstar : Chimera Investment Corporation is a real estate investment trust primarily engaged in investing in a portfolio of mortgage assets on a leveraged basis. These investments include a variety of government-sponsored agency residential mortgage-backed securities, or RMBS, non-agency RMBS, agency commercial mortgage-backed securities, residential mortgage loans, and other real estate-related securities. Agency mortgage-backed securities represent the largest share of this portfolio, while subprime residential mortgage loans and non-agency RMBS also make up substantial shares.

      Given that mortgage volumes are dropping due to rate hikes, what does it intend to do with the money? I will pass. Don’t like the business in a rising rate environment, although Fed may stop more rate hikes.

  2. Tim, are you sure this newissue is only 8%? If so, and if the Libor spread is correct, CIM-B is better! That doesn’t make much sense to me. . .

    1. Yes Wilson–on a buy and hold CIM-B is better–for a short term flip if the issue trades down to 24.50 or something one might get a 50 cent flip.

      FINRA originally had it at 8.125% which I though seemed high–then the final pricing document came out with it published at 8%.

  3. Glop-A is getting some selling pressure dispite strong oil😞 Not sure what’s up, no news I could find.

  4. CIM-B pays 8%, 1st call date is also 3/30/2024. Floating terms are better at three-month LIBOR plus a spread of 5.791% per annum. It is currently trading at $25.21 down $0.40 cents today.

    Given the superior float terms CIM-B may be the better buy.

    For the record, I am passing

    1. Hi SteveA–we will see when it begins to trade what kind of discount is available, but you may well be correct. Depending on the Grey Market discount it is probably just a flip with your data on the spread of the B issue.

  5. Tim, Not related to Chimera…though a question regarding Non-Cumul Pref Stock. Lacking absolute covenants to pay dividends on a scheduled basis, and aside from the effect on future capital raise efforts, what’s to prevent an activist board from simply deciding to focus on growth of retained earnings, debt-retirement or even their holiday fund etc in lieu of paying dividends? Not on the basis of a financial or credit issue – though simply because they decided they did not want too pay it anymore. I find myself balking at some otherwise-attractive banking pfds due to this unknown.

    1. Alpha, you have a bit too much “Gridbird paranoia”. I have read Moodys explanation in rating cumulative preferreds and non cumulative preferreds. And they said there is no material difference in dividend safety between to the two so they rate them exactly the same. If you deal with credible outfits I doubt there is a problem. There have been a few stressed banks in past few years such as Puerto Rico bank preferreds that got temporarily suspended, but got reinstated when their covenents and safety level of tier capital was restored.
      I think you see the stress of the AFSI preferreds largely because the trust level isnt there with those who control the company in conjunction with less than stellar financial metrics. But a neferous company can screw a cumulative preferred about as easily though….Suspend it, delist it, then offer below market prices for tenders, split a company off and throw the preferreds on the rag company that is a money loser, etc etc…Many things have been done….In fact the history of preferreds in US had preferreds created to screw the government out of money as corporations converted bonds into preferreds to avoid taxation…Back in the 1800s states would tax bond interest but not dividends. The origin of DMRRP came from this.
      Ya, this is all easy for me to say because I own 6 bank preferreds and only one is non cumulative (CBKPP). The other 5 are trust debt preferreds and cumulative bank preferreds (BANFP, ALLY-A, MTB-, MTB-C, and FIISO).

      1. Grid, Thank you for the follow-up and for the bonus scoop on the origin of preferreds. Yes call it paranoia for sure lol. At this point, I’d rather own a beach chair-inspiring low yielder then a nail-biter any day of the week. I also fully-read the info/article by Scott R. and yourself about the 20/50 safest banks and put a bow on some CBKPP at 101.50. It’s my only non-cumul pfd and will pick-up more if the opportunity presents itself closer to par. That one fell out “behind” the sock drawer.

      2. Thanks Tim and Gridbird,
        I still hold some AFSI C and D, after having sold the F (lower coupon with huge cap loss (offset some with dividends received). Actually the current price of AFSI-F is higher than what I sold. Here is why:
        https://seekingalpha.com/symbol/AFNL?s=afnl
        The private company is still trading, I suppose in the PINK SHEET as AFNL
        1 and 6 months chart clearly show the Company is doing well. While I trusted and actually still trust its founder, who died in October 2018. I cannot say the same for the son-in-law despite his decent education at NYU, School of Biz, Max Stein Institute named after the legendary founder of Mutual Series Funds some 50 years ago. The next dividend should be good unless they play the Worst of the Greek trick, Navio Maritime, in stark contrast to the SUPER HONEST Greek, CEO of Safe Bulkers, Inc., my largest position.
        On the new CIM-D, CMIMP, I first placed an order for 400 shares at $24.62 with Schwab.com, the bid price around 2 pm EST. At the same time, I placed a SELL limit order at Vanguard brokerage on CIM-C, at the bid price. Only 100 shares were executed. Went back to Schwab. Changed the order to 300 shares because I have 288 shares or so of CIM-A, following that Arbitrage trader, selling B’s and buying A’s taking profit. Before the market closes, the 10 (thousands of shares) bidders accepted my moderate price, with me taking the cap loss offset by 1 Q of dividends. So, I went back to Schwab to increase to 400 shares. Order not filled. So, I changed it now to $24.65.
        I do not find fantastic deals but holding all my shippers playing DRIP. I missed BPR (Brookfield common), first alerted by Rida Morwa plus one other SA writer and some positive feeling from Tim. Because this is a Rida, et. al., I worried. His SELL signal on the poor performing AINV was so bad that AINV gapped up after his Koolie drinkers all sold. I did buy some EWBC, grossly undervalued to average my cost down. Market thought that their income from China or Hong Kong. Not true, one of the two (CATY is the other one) Chinese banks with prominent presence in the LA San Gabriel area with solid balance sheet and Income Statement and Cash Flow. Unfortunately it does not have preferred shares at all. CATY pays a little higher pro forma dividend.

    2. Hi Alpha 8—it can happen. Technically every preferred–cumulative or non cumulative has to be ‘declared’ by the board of directors. AmTrust Financial is the most recent example of issues that investors simply don’t trust because of the history of the Karfunkels and Barry Ziskind–they remain paying preferreds, but shares are very undervalued because of the lack of trust.

      All I can say is that if dividends went undeclared (cumulative or non) by many companies (3 or 4) in a period of a couple years the ability of anyone to use that form of financing would soon dry up.

      1. Tim, preferred stock holders had stronger protections way back when. There is one old non callable cummulative preferred that is now a subsidiary of a holding company. In the prospectus it stated if they didnt pay a dividend within 4 quarters, the preferred stockholders got to directly vote in a new board of directors….Well only about 2000 shares exist tradeable anymore, and the rest were not retired. They were bought out through tenders over the years so the holding company holds majority voting control of the preferreds. No way would they allow someone like me to buy $100,000 of an old preferred and possibly be able to directly control a billion dollar value utility!

      2. Thank you Tim. Yes, can you imagine if 3 or 4 tried a stunt like that? The exits would be crowded. That it could happen does cause me pause. Have to confess an appreciation for as much certainty as possible through IG term-dated, BBs, TPs and a few select others. Speaking of risk aversion, S&P puts out an interesting default matrix every year with default probabilities at various Ratings v Years. Easy to use this intel to discount the premium on various risk levels to a constant. Not as an absolute of course, but a good guide. The comparison between a BBB or BBB+ to BB over time is compelling. See page 60. https://www.spratings.com/documents/20184/774196/2017+Annual+Global+Corporate+Default+Study/a4cffa07-e7ca-4054-9e5d-b52a627d8639

        1. Hey Alpha 8, thanks for that info on defaults vs. credit ratings. I have my own spreadsheet where I enter the results from studies like that one and what you linked has added lots of perspective.

          1. It’s been helpful to me as a reminder to avoid setting up self-loathing scenarios down the road. I tend to operate on the more boring conservative side (at least that’s what I tell myself) so whenever I feel myself sliding into the credit abyss I’ll take another glance. Keep in mind that’s the Global matrix, the U.S. version a page or two previous is even more sobering. To keep it simple I use the default probability as a straight line discount against the yield at various ratings and adjust for time.

  6. While CIM may be slightly less well known than many, it is a very solid firm and if you track it’s nav, you will see that unlike many firms in this area, it has held nav well. Worth giving serious consideration.

    1. sc4, Yes and like Tim’s reference to NLY, the Res RE issues are not your average mREITS. In an otherwise fairly high-risk space, I own NLY-F and NLY-G because their relative size, and that their underlying is 90%+ in agency re loans. Anyone who has financed a res property before and after 2010 knows of the high quality of agency-backed paper. Long gone is the EZ-qualifier loan era. These days you need to send in a blood sample with an application, and the new sourcing of funds rules under the Patriot act ensures the buyer has a vested interest in the property. The negative mREIT rep and flattening yield curve leaves these sporting a near 7% yield. My guess is we may see cap gains when the yield curve steepens again, restoring margin between the ST and LT rates. Wouldn’t go all-in, but worthy of a look at.

  7. I am kind of sorry to see this since their preferred held up so well during the little tantrum we just went through. We will have to see how solid the pricing is with more supply out there.

    1. You are right Scott–they held up well, but are off 40 cents, 40 cents and 17 cents today. I thought the new issue would come at 7.875% or 8%. Have to see if the spread is reasonable.

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