American Capital Agency Corp. (AGNC)

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American Capital Agency Corp (AGNC)

F2Q11 Earnings Call

July 27, 2011 08:00 a.m. ET


Katie Wisecarver – Director IR

Malon Wilkus – President & CEO

John Erickson – EVP & CFO

Gary Kain – President & CIO

Chris Kuehl, SVP of Mortgage Investments

Peter Federico – SVP & CRO

Bernie Bell – VP & Controller.


Bose George – KBW

Mike Taiano – Sandler O’Neill

Douglas Harter – Credit Suisse

Joel Houck – Wells Fargo

Mike Widner – Stifel Nicolaus

Jim Ballan – Lazard Capital Markets

Edward Friedman – MacLean & Partners

Daniel Furtado – Jefferies



Good morning. My name Ellis and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2011 AGNC Shareholders Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session (Operator instructions). Thank you.

I would now like to turn the call over to Ms. Katie Wisecarver, in Investor Relations, you may begin your conference.

Katie Wisecarver

Thanks Ellis. Thank you for joining American Capital Agency’s Second Quarter 2011 Earnings Call. Before we begin, I would like to review the Safe Harbor Statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast, due to the impact of many factors beyond the control of AGNC.

All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risks Factors section of AGNC’s 10-K, dated February 25th, 2011 and periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC’s website at We disclaim any obligation to update our forward-looking statements unless required by law.

An archive of this presentation will be available on our website and the telephone recording can be accessed through August 10th, by dialing 855-859-2056 and the conference ID number is 84890133.

To view the Q2 slide presentation, turn to our website and click on the Q2 2011 Earnings Presentation link in the upper right corner. Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call. If you have any trouble with the webcast during this presentation please hit F5 to refresh.

Participants on the call today include Malon Wilkus, Chairman and Chief Executive Officer; John Erickson, Chief Financial Officer and Executive Vice President; Gary Kain, President and Chief Investment Officer; Chris Kuehl, Senior Vice President of Mortgage Investments; Peter Federico, Senior Vice President and Chief Risk Officer; and Bernie Bell, Vice President and Controller.

With that I will turn the call over to Gary Kain.

Gary Kain

Thanks Katie. Good morning, everyone, and thanks for joining us. Deja vu is probably the best way to describe this quarter. The similarities to the second quarter of 2010 are striking and this only reinforces what we stressed last quarter. Our portfolio must be able to perform if rates move in the either direction. Therefore, we really do feel good about continuing to produce strong results this quarter, despite the unexpected rally in the bond market.

Now, before we discuss the quarter, we realized that many of you have questions around the debt ceiling, the risk of a downgrade of US government debt and the implications on agency MBS.

And, now while political wrangling clearly seems to dominate the thinking or lack thereof in Washington, we strongly believe that the debt ceiling will be raised at the last minute.

That being said, there is a risk of a downgrade of US debt below its historical AAA rating. However, we believe the impact on government and agency debt of a downgrade will be limited.

The markets are clearly aware of this risk and US Treasuries actually rallied with prices higher and yields dropping yesterday. Additionally, agency mortgages are also holding up reasonably well given the headlines and prices of all generic mortgages were higher yesterday.

Lastly, I want to address some misconceptions that seems to be floating around with respect to agency repo. First of all, the agency repo market is functioning normally and we have not seen pressure on haircuts. Agency repo is readily available and rates remain extremely attractive.

Furthermore, even in the unlikely event that at same point in the future we saw a 1% or 2% increase in haircuts to something like 5% to 6% on agency MBS from the current levels of near 4%, this would not impact our comfort level with our leverage.

To demonstrate why we are not concerned, remember in early 2009 when the equity market was at its lows, agency repo haircuts averaged around 7% to 8%. Why is that significant.? Because at that time the average leverage in the REIT space was very close to where our leverage currently is.

In other words, we would be comfortable running our current business and could fully fund our positions with ample cushions, even if haircuts increased two or more percent.

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