MFA Financial completes capital raise after losing $914M in 1Q20

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MFA Financial lost $914.2 million in the first quarter, a result of its investment portfolio being impacted by margin calls in the wake of the Federal Reserve's purchase of mortgage-backed securities early in the coronavirus crisis.

Because of the margin calls, MFA sold $2.1 billion of assets, for which it recorded a loss of $238.4 million during the quarter. Then there was an impairment of $496.9 million related to a decline in asset values. Finally, as the company looked at the short- and medium-term impacts of COVID-19, it took impairment charges of $65.3 million on other items, including investments in certain loan originators.

In comparison, for the first quarter of 2019, MFA had net earnings of $85.1 million.

To shore up its financial position, MFA will receive $500 million in new capital through a senior secured loan from affiliates of Apollo Global Management and Athene Holding (an entity that Apollo provides asset management and advisory services to), the company said in its earnings announcement issued before the market opened Tuesday morning.

In addition, Apollo and Athene have committed to purchase the lesser of 4.9% or $50 million of MFA's common stock in the open market over a 12-month period. And they will receive warrants to purchase more common stock at varying price points over a five-year period.

Athene also committed to purchase a portion of MFA's first securitization of non-qualified mortgage loans, subject to certain pricing conditions.

In addition to the capital raise, MFA got a $1.65 billion term facility from Barclays and Athene.

"In addition to bolstering our balance sheet and providing MFA with additional flexibility, we view the capital raise as very much a strategic alliance," Craig Knutson, CEO and president, said in a press release. "We believe that Apollo's deep institutional relationships, together with Athene, will provide synergies that will assist us in our business. With approximately $1.65 billion of committed term non-mark-to-market financing for our whole loan portfolio, we can allow asset prices to continue to recover as we look to securitizations to further term out a portion of our financing."

A Keefe, Bruyette & Woods report issued in late February noted that MFA was preparing to do a non-QM securitization, but offering did not take place.

"We think completing a securitization may generate the most positive incremental impact for MFA," said a second report from KBW analysts Eric Hagen and Bose George on May 28.

There have been a number of non-QM MBS offerings since the pandemic started.

On June 1, MFA entered into a third forbearance period with its lenders that will expire on June 26. Between the capital raise and term facility, the company should be able to exit forbearance and have enough funds to pay accumulated dividends on its Series B and Series C preferred stock, MFA's press release said.

The KBW analysts in that May 28 report said they "think the potential commitment to securitize some portion of its loan portfolio could help ease the pressure surrounding potential future forbearance discussions. With the stock trading around 0.45 times our estimated book value of $3.90 [on May 28, MFA closed at $1.77 per share; on June 15, it closed at $2.87 per share], we think a lot of the downside is factored in assuming the company can successfully rotate its funding away from repo."

As of May 31, 2020, MFA's $6.6 billion residential mortgage asset portfolio was comprised of $6.2 billion of whole loans and real estate owned; approximately $235 million of mortgage servicing rights-related assets; and $136 million of residential mortgage securities. Those are financed by approximately $3.8 billion of repurchase agreements.

At the time it entered into the initial forbearance agreement on April 10, MFA had reduced its reliance on repo financing to $5.8 billion from $9.5 billion on March 20, the date that MBS investors started to sell a large amount of assets because of the margin calls.

"The forbearance agreements have enabled MFA to continue to reduce exposure to mark-to-market financing and build liquidity," Knutson said. "Asset prices, while still depressed from February levels, continue to recover as liquidity has improved. While in forbearance, we are engaged with our lending counterparties to negotiate and structure more durable financing arrangements that we expect to put in place post-forbearance."

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