Chimera Investment (CIM) NEUTRAL [V] D. Harter
CP: US$ 3.73 TP: US$ 4 CAP: US$ 2.5b
Sizing the Financing Benefit, Raising Estimates and Target Price to $4.00 (from $3.50)
• We are increasing our 2009 and 2010 "core" EPS estimates to $0.48 (from $0.45) and $0.60 (from $0.50) to reflect the
benefits of the two re-securitization transactions completed in the third quarter.
• Management indicated on the call that the current yield on the non-Agency portfolio was around 11%. Included in this yield is
$756 million of new AAA-rated securities from the re-securitizations which are yielding 6-7%. Assuming the sale of these
securities Chimera could reinvest the proceeds at a low-teens return (unlevered). This would add 200-250 bps to the non-
Agency yield. The yield will also benefit from increased discount accretion as the senior securities pay down given the
structure of the securitizations (sequential pay for principal).
• Management also indicated that leverage opportunities for the non-Agency RMBS sector are increasing, in particular for the
new AAA-securities. The ability to lever these securities gives management the flexibility to weigh the attractiveness of
financing versus the sale of these bonds to maximize returns. We also see the opportunity for Chimera to increase leverage
on the Agency MBS portfolio as a way to maximize the return on the existing portfolio. Chimera currently has under 4x
leverage on the Agency MBS portfolio.
• We are increasing our target price to $4 (from $3.50) as a result of our higher earnings estimates. Our target represents a
15% yield on the 2010 dividend. Our target yield is 50 bps higher to reflect the increased risk given that Chimera is now
holding more bonds with subordinated cash flows.