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Newcastle Investment Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 6, 2011 04:26PM
Newcastle Investment Corp. (NCT) filed Quarterly Report for the period ended 2011-03-31.
Highlight of Business Operations:
We generally classify the broker and pricing service quotations we receive as level 3A inputs, except for certain liquid securities. They are quoted prices in generally inactive and illiquid markets for identical or similar securities. These quotations are generally received via email and contain disclaimers which state that they are indicative and not actionable meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price. These quotations are generally based on models prepared by the brokers and we have little visibility into the inputs they use. Based on quarterly procedures we have performed with respect to quotations received from these brokers, including comparison to the outputs generated from our internal pricing models and transactions we have completed with respect to these securities, as well as on our knowledge and experience of these markets, we have generally determined that these quotes represent a reasonable estimate of fair value. For the $1.8 billion carrying value of securities valued using quotations as of March 31, 2011, a 100 basis point change in credit spreads would impact estimated fair value by approximately $53.2 million.
As of March 31, 2011, we had 49 securities, with a carrying amount of $137.2 million, that had been downgraded during the three months ended March 31, 2011, and recorded a net other-than-temporary impairment charge of $2.4 million on these securities in 2011. However, we do not depend on credit ratings in underwriting our securities, either at acquisition or on an ongoing basis. As mentioned above, a credit rating downgrade is one factor that we monitor and consider in our analysis regarding other-than-temporary impairment, but it is not determinative. Our securities generally benefit from the support of one or more subordinate classes of securities or equity or other forms of credit support. Therefore, credit rating downgrades, even to the extent they relate to an expectation that a securitization we have invested in, on an overall basis, has credit issues, may not ultimately impact cash flow estimates for the class of securities in which we are invested.
Interest expense decreased by $7.4 million primarily due to (i) a $1.6 million decrease in interest expense as a result of the paydowns and repurchases of our CDO debt obligations, (ii) a $3.9 million decrease in derivative interest expense as a result of a decrease in swap notional amounts and changes in interest rates and (iii) a $2.3 million decrease in the amortization of deferred hedge losses. The decreases described in (i) to (iii) above were partially offset by a $0.4 million increase in interest expense on our junior subordinated notes due to the resumption of the original stated interest rate subsequent to the interest modification period.
The gain on extinguishment of debt decreased by $37.3 million primarily due to the significantly lower amounts of debt repurchased in the three months ended March 31, 2011 compared to the three months ended March 31, 2010. We repurchased $12.1 million face amount of CDO bonds at an average price of 8.9% of par during the three months ended March 31, 2011 compared to $56.3 million face amount of CDO bonds at an average price of 13.4% of par during the three months ended March 31, 2010.
General and administrative expense decreased by $1.5 million primarily due (i) a $1.2 million decrease in legal and professional fees which was incurred in connection with the preferred stock exchange and the restructuring of our junior subordinated notes during the three months ended March 31, 2010 and (ii) a $0.3 million decrease in directors and officers liability insurance expense.
In the first three months of 2011, we settled purchases of $80.6 million principal balance of FNMA/FHLMC securities (primarily one-year ARM) using $4.2 million of unrestricted cash and financed with $80.0 million of new repurchase agreements.
Stocks Discussed: NCT,