Financing Arrangements, Portfolio Investments

6 Months Ended

Jun. 30, 2018

Financing Arrangements, Portfolio Investments

The Company has entered into repurchase agreements with third party financial institutions to finance its investment portfolio. These financing arrangements are short-term borrowings that bear interest rates typically based on a spread to LIBOR, and are secured by the securities which they finance. At June 30, 2018, the Company had repurchase agreements with an outstanding balance of $1.2 billion and a weighted average interest rate of 2.76%. At December 31, 2017, the Company had repurchase agreements with an outstanding balance of $1.3 billion and a weighted average interest rate of 2.18%.

The following table presents detailed information about the Company’s borrowings under financing arrangements and associated assets pledged as collateral at June 30, 2018 and December 31, 2017 (dollar amounts in thousands):



	June 30, 2018						December 31, 2017
	Outstanding Financing Arrangements		Fair Value of Collateral Pledged		Amortized Cost of Collateral Pledged		Outstanding Financing Arrangements		Fair Value of Collateral Pledged		Amortized Cost of Collateral Pledged
Agency ARMs RMBS	$	65,173	$	67,923	$	70,385	$	86,349	$	90,343	$	92,586
Agency Fixed-rate RMBS	809,744		856,397		892,262		842,474		890,359		902,744
Non-Agency RMBS	9,750		11,885		11,751		38,160		51,841		50,693
CMBS ⁽¹⁾	295,294		425,527		303,056		309,935		421,156		322,092
Balance at end of the period	$	1,179,961	$	1,361,732	$	1,277,454	$	1,276,918	$	1,453,699	$	1,368,115


⁽¹⁾	Includes first loss PO and mezzanine CMBS securities with a fair value amounting to $385.6 million and $377.5 million included in the Consolidated K-Series as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018 and December 31, 2017, the average days to maturity for financing arrangements were 57 days and 44 days, respectively. The Company’s accrued interest payable on outstanding financing arrangements at June 30, 2018 and December 31, 2017 amounts to $4.2 million and $2.5 million, respectively, and is included in accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets.

The following table presents contractual maturity information about the Company’s outstanding financing arrangements, at June 30, 2018 and December 31, 2017 (dollar amounts in thousands):



Contractual Maturity	June 30, 2018		December 31, 2017
Within 30 days	$	441,200	$	1,081,911
Over 30 days to 90 days	638,761		95,007
Over 90 days	100,000		100,000
Total	$	1,179,961	$	1,276,918

As of June 30, 2018, the outstanding balance under our financing arrangements was funded at a weighted average advance rate of 90.2% that implies an average haircut of 9.8%. As of June 30, 2018, the weighted average “haircut” related to our repurchase agreement financing for our Agency RMBS, non-Agency RMBS, and CMBS was approximately 5%, 25%, and 25%, respectively.

In the event we are unable to obtain sufficient short-term financing through existing financings arrangements, or our lenders start to require additional collateral, we may have to liquidate our investment securities at a disadvantageous time, which could result in losses. Any losses resulting from the disposition of our investment securities in this manner could have a material adverse effect on our operating results and net profitability. At June 30, 2018 and December 31, 2017, the Company had financing arrangements with nine and ten counterparties, respectively. As of June 30, 2018, the Company's only exposures where the amount at risk was in excess of 5% of the Company's stockholders’ equity was to Deutsche Bank AG, London Branch and Jefferies & Company, Inc. at 6.8% and 5.2%, respectively. At December 31, 2017, the Company's only exposure where the amount at risk was in excess of 5% of the Company's stockholders’ equity was to Deutsche Bank AG, London Branch at 5.0%. The amount at risk is defined as the fair value of securities pledged as collateral to the financing arrangement in excess of the financing arrangement liability.

As of June 30, 2018, our available liquid assets included unrestricted cash and cash equivalents and unencumbered securities that we believe may be posted as margin. The Company had $84.7 million in cash and cash equivalents and $318.0 million in unencumbered investment securities to meet additional haircuts or market valuation requirements. The unencumbered securities that we believe may be posted as margin as of June 30, 2018 included $177.0 million of Agency RMBS, $98.8 million of CMBS and $42.2 million of non-Agency RMBS and other investment securities. The cash and unencumbered securities, which collectively represent 34.1% of our financing arrangements, are liquid and could be monetized to pay down or collateralize a liability immediately.

Financing Arrangements, Residential Mortgage Loans

The Company has a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch with a maximum aggregate committed principal amount of $100.0 million and a maximum uncommitted principal amount of $150.0 million to fund distressed residential mortgage loans, expiring on June 8, 2019. The outstanding balance on this master repurchase agreement as of June 30, 2018 and December 31, 2017 amounts to approximately $154.6 million and $123.6 million, respectively, bearing interest at one-month LIBOR plus 2.40% and 2.50%, respectively (4.49% and 4.05% at June 30, 2018 and December 31, 2017, respectively). The Company expects to roll outstanding borrowings under this master repurchase agreement into a new repurchase agreement or other financing prior to or at maturity.

The Company also has a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch with a maximum aggregate committed principal amount of $25.0 million and a maximum uncommitted principal amount of $25.0 million to fund the purchase of residential mortgage loans, expiring on November 24, 2018. The outstanding balance on this master repurchase agreement as of June 30, 2018 and December 31, 2017 amounts to approximately $37.9 million and $26.1 million, respectively, bearing interest at one-month LIBOR plus 3.50% (5.59% and 5.05% at June 30, 2018 and December 31, 2017, respectively). The Company expects to roll outstanding borrowings under this master repurchase agreement into a new repurchase agreement or other financing prior to or at maturity.

During the terms of the master repurchase agreements, proceeds from the residential mortgage loans, including the Company's distressed residential mortgage loans, will be applied to pay any price differential and to reduce the aggregate repurchase price of the collateral. The financings under the master repurchase agreements are subject to margin calls to the extent the market value of the residential mortgage loans falls below specified levels and repurchase may be accelerated upon an event of default under the master repurchase agreements. The master repurchase agreements contain various covenants, including among other things, the maintenance of certain amounts of net worth, liquidity and leverage ratios. The Company is in compliance with such covenants as of August 6, 2018.