wolfhounds (29.20)

Mortgage REITs and RICs rolling over - are small businesses next

June 24, 2008 – Comments (0) | RELATED TICKERS: CSE , ACAS , ALD

It struck me as peculiar that MDP would add CSE to their intent to buy list last week because the price had fallen further. This portfolio, which uses TMF real money, likes to double down or take advantage of falling prices on good companies. Haven't they noticed the severe price drops of this whole sector.

The rational for the purchase was, among other things, good management that would carry the business in tough times and the ability to maintain the dividend with the purchase of the FRMT retail assets. Although this acqusition would provide a cheaper source of funding loans from customer deposits, CSE didn't count on floating 30m shares @11, or about $120m less than where the stock was a couple of weeks ago. In addition, the company sold $1.5B from their loan portfolio at a small loss. Indeed, coming with all the other announcements it appeared the sale was necessary to raise capital. This may pale in comparison this to investment banks write-offs, but until now the sales were still generating gains. Taken together we have a quickly changing scenario in which CSE announced yesterday that problems in obtaining financing at favorable terms (that $120m could have helped) will force the company to "evaluate it's dividend policy for the next quarter" and may force it to forego REIT status in 2009. 

So this is the best of breed that MDP decided to buy. What then of ACAS, ALD, MVC etc. These are the companies that small and medium size businesses turn to for loans usually not available through traditional channels. The REITs sometimes take an equity investment in these same companies which enable successful investments to translate into future capital. If this slice of the economy begins to falter due to lack of borrowing, what does it portend for an economic rebound? It translates into higher unemployment when inflation is growing. 

What is truly dejecting about these events is a government and candidates that don't have a clue.