RAIT Fails to Shed Light on Debt Deals

RAIT said in its earnings release late Wednesday that 18.1% of the trust preferred securities and other subordinated debt it has purchased are tied to the residential mortgage industry, and 12.4% is tied to homebuilders.

All of this exposure comes from Taberna Realty Finance, which RAIT purchased in 2006. Taberna Capital Management is now a RAIT subsidiary that makes money by purchasing trust preferred securities and repackaging them into collateralized debt obligations, or CDOs, it sells to other investors.

Included in RAIT's earnings release is a table that provides a breakdown of the company's investments in CDOs it has sold.

RAIT said it has $191.1 million of equity exposure and $86.9 million of BB note ownership in the CDOs it issued using trust preferred securities purchased by Taberna. Assume a worst-case scenario, and all of those securities become worthless, management said on the call.

Of course, the asterisk to this table is that these investments exclude investment-grade notes that RAIT holds. Bears on the stock say these notes might pose problems too.

In a typical CDO deal, Taberna purchases various pieces of debt issued by equity and mortgage REITs, lenders and homebuilders. It then includes all this debt and other types of fixed-income notes into a large CDO deal. The CDO is split into various tranches, ranging from AAA-rated pieces to BB. The best pieces are sold to investors, and Taberna keeps the lowest tranches.

« Previous Page

1 2 3 4

Next Page »