Capstead Mortgage Corp. (NYSE:CMO) Q3 2019 Earnings Conference Call - Final Transcript
Oct 24, 2019 • 09:00 am ET
if you were to use common to buy back preferred. But I'm just curious how you guys thought about the option to reduce leverage at the overall business level versus just delevering the common investor?
Lance J. Phillips
So when you look at that preferred that we have outstanding and the $100 million of unsecured borrowings that has about almost 20 years to run, the overall cost of that capital is pretty reasonable, around 7.75% so a little bit under that. And that's pretty tough to replace in this environment, even the perpetual preferred market today is a five-year fixed and floating environment, which from a permanent capital perspective, is -- we don't view it as nearly as attractive as a perpetually fixed coupon preferred. And at the levels that are getting done out there, you wouldn't refinance that preferred with the new preferred.
In terms of using common equity to reduce our preferred equity through a redemption of some sort, you could do that but then you're giving up the option of having at mezzanine capital out there when your overall returns exceed that preferred cost of capital. And on the margin, deploying that capital in -- from runoff or from the equity raise into new securities are rather [Phonetic] considerably higher ROE than that preferred cost of capital, such that over time, we'll be earning in excess of the preferred cost. That's the plan. And that preferred will once again be accretive to our common returns.
[Operator Instructions] Our next question comes from Steve Delaney with JMP Securities. Please go ahead.
Thanks,and appreciate you guys taking my questions. Robert, I was wondering, we look at Fed funds today at 180, the GCF RMBS rate at 193 or so, where does that put your 30-day repo rate to you from the dealers?
Robert R. Spears Jr.
What we're seeing right now is around 207.
Robert R. Spears Jr.
And -- as Phil alluded to in his message, if you look at what we're paying for repo rates versus various short-term money market rates, it's elevated. If you go back over the last three years or four years and look at what we paid in repo over the last three months or four months versus either Fed funds or one-month LIBOR, we're paying, on a spread basis 10 basis points to 20 basis points more than you would have expected if those spread would have just remained constant. So having said that, if the Fed cuts like people expect at the end of October, we would expect that repo rate to drop to say 185, which is obviously a positive, but on a spread basis versus where funds and one-month LIBOR be is still at an elevated spread.
Okay. And with -- given what we saw in September, and I know the Feds responded aggressively, but anything different this year as you approach year-end in terms of -- you got the, yes, it would be nice to lock in now, but you also want to wait for a rate