Annaly Capital Management, Inc. (NYSE: NLY) is perhaps one of the most closely watched mortgage REITs of them all, in part because of the $16 billion size and in part because the team is deemed to be one of the most astute entities when it comes to trading mortgage-backed securities products. Now the company has a relatively creative way of raising financing without immediately diluting the common stock holders.

The company has priced a public offering of $750.0 million of its 5.00% convertible senior notes due out in 2015. The gross proceeds to Annaly from this offering will be $750.0 million. Annaly expects to use the $750 million in gross proceeds to purchase mortgage-backed securities for its investment portfolio and for general corporate purposes.  This may also be used to retire other parts of the REIT’s long-term debt, and additional investments and to repay short term debt.

Terms of the 5.00% notes are maturity on May 15, 2015 unless earlier repurchased or converted. The notes will be convertible into Annaly common stock at an initial conversion rate of 52.7969 shares per $1,000 principal amount of notes.  The initial conversion price is equivalently $18.94 per share but that is subject to adjustment in certain circumstances.

Credit Suisse Securities and Morgan Stanley & Co. were the joint lead book-running managers for the offering. J.P. Morgan Securities and UBS Securities are acting as the joint book-running managers for the offering. Annaly has granted the underwriters of the notes a 30-day option to purchase up to an additional $112.5 million aggregate principal amount of the notes solely to cover over-allotments.

Today’s financing is important because that $18.94 conversion price is a 15% premium to the $16.47 close on Tuesday.  It also compares to a 52-week range of $14.05 to $18.79.  Keep in mind that this REIT is one of the double-digit yields out there in Mortgage-REITs.

Annaly accounts for close to 20% weighting in the iShares FTSE NAREIT Mortgage Plus Cp Index (AMEX: REM) and that ETF is weighted almost as high with American Capital Agency Corp. (NASDAQ: AGNC).

American Capital Agency Corp. (NASDAQ: AGNC) is down only $0.02 while Annaly Capital Management, Inc. (NYSE: NLY) is down 0.4% at $16.40.  If Annaly had sold the same amount of $750 million in common shares, this reaction would have likely been worse.  The iShares FTSE NAREIT Mort Plus Cp Index (AMEX: REM) is down 0.3% at $13.98.

JON C. OGG

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