Financing Arrangements, Portfolio Investments

12 Months Ended

Dec. 31, 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 December 31, 2018, the Company had repurchase agreements with an outstanding balance of $1.5 billion and a weighted average interest rate of 3.41%. 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 December 31, 2018 and December 31, 2017 (dollar amounts in thousands):



	2018						2017
Assets Pledged as Collateral	Outstanding Borrowings		Fair Value of Collateral Pledged		Amortized Cost Of Collateral Pledged		Outstanding Borrowings		Fair Value of Collateral Pledged		Amortized Cost Of Collateral Pledged
Agency ARMs RMBS	$	67,648	$	70,747	$	73,290	$	86,349	$	90,343	$	92,586
Agency Fixed-rate RMBS	857,582		907,610		940,994		842,474		890,359		902,744
Non-Agency RMBS	88,730		117,958		118,414		38,160		51,841		50,693
CMBS ⁽¹⁾	529,617		687,876		539,788		309,935		421,156		322,092
Balance at end of the period	$	1,543,577	$	1,784,191	$	1,672,486	$	1,276,918	$	1,453,699	$	1,368,115


⁽¹⁾	Includes first loss PO and mezzanine CMBS securities with a fair value amounting to $319.2 million and $377.5 million included in the Consolidated K-Series as of December 31, 2018 and December 31, 2017, respectively.

As of December 31, 2018 and 2017, the average days to maturity for all financing arrangements were 62 days and 44 days, respectively. The Company’s accrued interest payable on outstanding financing arrangements at December 31, 2018 and 2017 amounts to $3.9 million and $2.5 million, respectively, and is included in accrued expenses and other liabilities on the Company’s consolidated balance sheets.

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



Contractual Maturity	December 31, 2018		December 31, 2017
Within 30 days	$	732,051	$	1,081,911
Over 30 days to 90 days	677,906		95,007
Over 90 days	133,620		100,000
Total	$	1,543,577	$	1,276,918

As of December 31, 2018, the outstanding balance under our financing arrangements was funded at a weighted average advance rate of 87.7% that implies an average “haircut” of 12.3%. As of December 31, 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 23%, 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 December 31, 2018 and December 31, 2017, the Company had financing arrangements with eleven and ten counterparties, respectively. At December 31, 2018 the Company's only exposure where the amount at risk was in excess of 5% of the Company's stockholders' equity was to Jefferies & Company, Inc. at 5.04%. 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 5.04%. 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 December 31, 2018, our available liquid assets include unrestricted cash and cash equivalents and unencumbered securities that we believe may be posted as margin. The Company had $103.7 million in cash and cash equivalents and $262.5 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 December 31, 2018 included $59.4 million of Agency RMBS, $107.0 million of CMBS and $96.1 million of non-Agency RMBS and other investment securities. The cash and unencumbered securities, which collectively represent 23.7% of our financing arrangements, are liquid and could be monetized to pay down or collateralize a liability immediately.

Financing Arrangements, Distressed and Other 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 the purchase of residential mortgage loans, expiring on June 8, 2019. The outstanding balance on this master repurchase agreement as of December 31, 2018 and December 31, 2017 amounts to approximately $120.7 million and $123.6 million, respectively, bearing interest at 4.91% and 4.05% at December 31, 2018 and December 31, 2017, respectively.

The Company also has a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch with a maximum aggregate principal amount of up to $50.0 million to fund the purchase of residential mortgage loans. On December 18, 2018, the Company amended the pricing side letter to the master repurchase agreement to extend the maturity date to February 19, 2019. On February 14, 2019, the Company amended and restated the pricing side letter to this master repurchase agreement. The pricing side letter increased the maximum aggregate principal amount from $50.0 million to $200.0 million, extended the maturity date to February 12, 2021 and will be used to fund the purchase of residential mortgage loans, including both first and second mortgages. At December 31, 2017, the master repurchase agreement provided for a maximum aggregate committed principal amount of $25.0 million and a maximum uncommitted principal amount of $25.0 million. The outstanding balance on this master repurchase agreement as of December 31, 2018 and December 31, 2017 amounts to approximately $33.9 million and $26.1 million, respectively, bearing interest at 6.01% and 5.05% at December 31, 2018 and December 31, 2017, respectively.

In November 2018, the Company entered into a master repurchase agreement with Credit Suisse AG, Cayman Islands Branch with a maximum aggregate principal amount of $750.0 million to fund the purchase of residential mortgage loans, expiring on November 28, 2019. The outstanding balance on this master repurchase agreement as of December 31, 2018 amounts to approximately $434.6 million, bearing interest at 4.50% at December 31, 2018.

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, market capitalization, and total stockholders' equity and leverage ratios. The Company is in compliance with such covenants as of February 25, 2019. The Company expects to roll outstanding borrowings under these master repurchase agreements into new repurchase agreements or other financings prior to or at maturity.