AGNC Preferred Shares

Quick Facts:

• AGNC lost around 27% of tangible BV (book value) per share since 6/30/2023.

• During Q3 2023, they increased common shares outstanding about 7.4%.

• The combination results in tangible BV declining about 21.6%.

Rising rates created a storm in the fixed-income sector. The chaos damaged book values throughout the sector.

Here’s the math:

• Math Equation 1: (1-.27)*(1+.074) = .78402

• Math Equation 2: 1 - .784 = .216

Losing 21.6% of tangible BV materially reduces AGNC’s preferred shares. Currently, AGNC’s tangible common BV is about 2.63x the preferred share liquidation value.

The Wrong Way

Some analysts would use total tangible BV. If we used total tangible BV, which includes the preferred equity, it would be 3.63x.

We don’t include preferred equity in preferred equity coverage because it would make high-risk shares appear less risky. If we included preferred equity within the coverage, then preferred equity would be impaired at a coverage ratio of .99.

Quick Example

To ensure there’s no confusion, this is the actual math:

• Estimated Tangible Common BV = $4,438.8 million.

• Preferred Equity at Call Value = $1,687.5 million.

• Coverage = $4,438.8 / $1,687.5 = 2.63.

The Issue

Coverage of 2.63x isn’t good enough to deserve a risk rating of 1.5.

Coverage ratios will often change at least a tiny bit from week to week due to a change in tangible estimated book value per share.

Here are some comparisons: