CapitalSource, Inc. (CSE)

pytheian (44.60) Submitted: 5/05/08 11:46 PM : Start Price: $14.23 CSE Score: 8.00

So it's a REIT yielding +16%, can it maintain that or close to it?

- Secured $1b credit facility through banking syndicate 4/28
- Just bought all of FMT (Fremont Investment & Loan) assets & branches taking on $5.6b deposits (this is a good thing in this rate environment)
- Fitch has it at BBB- with stable outlook after it took its writedowns
- PEG of 1.2 one of lowest in industry
- Got 19% rev growth MRQ in midst of current debacle
- Holds about $200m cash
- Very low historic loss ratio

From latest investor communication:

"By any measure this is a terrific environment to lend money in, whether you look at pricing, whether you look at structure, whether you look at terms. It is the best market I've ever seen, and I've been in the lending business since 1993, to provide liquidity. Spreads are high and your opportunity to put money to work in new originations, obviously there's an enormous opportunity to put money to work in secondary paper, but your opportunity to put money to work in new originations is incredibly attractive right now."

"Recourse" means subject to a sort of margin call:

"And then the mortgage related receivables are very high quality whole loans that we've securitized and financed with non-recourse permanent term debt. And the underlying credit quality of those whole loans has been very good, very high FICO scores, low loan to value. I mean, really the best of the best of jumbo whole loans that could be found in the market."

"The first CLO we launched, we invested, we got the CLO permanent financing done around the transaction and we were
managing that vehicle for a management fee and had basically no capital at risk. So we got one CLO done. The second CLO filled up, this is 100% -- the way these things are structured is we have 100% advance rate against these assets, they're off our balance sheet, we're about to take that CLO to market in the summer. And based on what's happened in the market, we're not able to get that done. CapitalSource has very limited recourse in that CLO, it's up to about $10 million. And then the third CLO we're about to ramp up and then, based upon what happened in the market, we stopped ramping it up any further. So what we've decided to do is exit that business."

Risk free? No. Big Upside? Yes. Can't call the bottom but no further deterioration is obvious. Signs point up.

http://media.corporate-ir.net/media_files/irol/11/114643/030308.pdf

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