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We seek to actively manage these and other risks and to acquire and hold assets that we believe justify bearing those risks, and to maintain capital levels consistent with those risks.
−Removed: We are subject to credit risk in connection with certain of our assets, especially our non-Agency RMBS and our corporate CLOs.
−Removed: Credit losses on real estate loans underlying our non-Agency RMBS can occur for many reasons, including, but not limited to, poor origination practices, fraud, faulty appraisals, documentation errors, poor underwriting, legal errors, poor servicing practices, weak economic conditions, decline in the value of homes, special hazards, earthquakes and other natural events, over-leveraging of the borrower on the property, reduction in market rents and occupancy rates and poor property management services in the case of rented homes, changes in legal protections for lenders, reduction in personal income, job loss, and personal events such as divorce or health problems.
−Removed: Property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional, and local economic conditions (which may be adversely affected by industry slowdowns and other factors), local real estate conditions (such as an oversupply of housing), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, and retroactive changes to building or similar codes.
+Added: We are subject to credit risk in connection with certain of our assets, especially our corporate CLOs.
Credit losses can occur on our CLO investments.
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These underlying assets will generally be floating rate in nature, and as a result, can suffer from weaker abilities to service debt costs in higher interest rate environments, increasing credit risks on the CLO investments.
−Removed: While most of the assets underlying our CLO investments are expected to be senior secured and first lien in nature, CLOs
−Removed: also invest, in some cases, in subordinated obligations that do not have first priority claims in the event of a default by their related obligors.
+Added: While most of the assets underlying our CLO investments are expected to be senior secured and first lien in nature, CLOs also invest, in some cases, in subordinated obligations that do not have first priority claims in the event of a default by their related obligors.
Our CLO investments will typically be in subordinated positions within the CLO capital structure with respect to realized losses, and the leveraged nature of the CLO vehicle amplifies the negative impact of any collateral losses.
−Removed: For our non-Agency RMBS and other mortgage-related instruments with credit risk, the two primary components of such credit risk are default risk and severity risk.
−Removed: Default risk is the risk that borrowers will fail to make principal and interest payments on a mortgage loan or other debt obligation.
−Removed: Subject to maintaining our exclusion from registration under the 1940 Act, we may selectively attempt to mitigate our default risk by, among other things, opportunistically entering into credit default swaps.
−Removed: These instruments can reference various MBS indices, corporate bond indices, or corporate entities, such as publicly traded REITs.
−Removed: We also rely on third-party servicers to mitigate our default risk, but such third-party servicers may have little or no economic incentive to mitigate loan default rates.
+Added: For our CLO credit risk, the two primary components of such credit risk are default risk and severity risk.
+Added: Default risk for a CLO is the risk that the corporate borrowers of the underlying debt obligations fail to make principal and interest payments.
+Added: We may selectively attempt to mitigate our default risk by, among other things, opportunistically entering into credit hedging transactions, utilizing instruments such as credit default swaps.
+Added: These instruments can reference various corporate bond indices or corporate entities, and they may also be derivative contracts such as options or tranches on said indices or entities.
Severity Risk
−Removed: Severity risk is the risk of loss upon a borrower default on a mortgage loan underlying our RMBS or other secured or unsecured debt obligation.
−Removed: Severity risk includes the risk of loss of value of the property or other asset, if any, securing the mortgage loan or debt obligation, as well as the risk of loss associated with taking over the property or other asset, if any, including foreclosure costs.
−Removed: We rely on third-party servicers to mitigate our severity risk, but such third-party servicers may have little or no economic incentive to mitigate loan loss severities.
−Removed: Such mitigation efforts may include loan modification programs and prompt foreclosure and property liquidation following a default.
+Added: Severity risk for a CLO is the risk of loss upon a default on an underlying debt obligation.
+Added: Severity risk includes the risk of loss of value of the asset, if any, securing the debt obligation, as well as the risk of loss associated with taking over the asset, if any.
+Added: With corporate debt, if a company declares bankruptcy, the bankruptcy process has a number of significant inherent risks.
+Added: Many events in a bankruptcy proceeding are the product of contested matters and adversarial proceedings and are beyond the control of the creditors.
+Added: A bankruptcy filing by a company whose debt we have purchased may adversely and permanently affect such company.
+Added: If the proceeding results in liquidation, the liquidation value of the company may have deteriorated significantly from what we believed to be the case at the time of our initial investment.
+Added: The duration of a bankruptcy proceeding is also difficult to predict, and our return on investment can be adversely affected by delays until a plan of reorganization or liquidation ultimately becomes effective.
+Added: A bankruptcy court may also re-characterize our debt investment as equity, and subordinate all or a portion of our claim to that of other creditors.
+Added: This could occur even if our investment had initially been structured as senior debt.
Interest Rate Risk
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We are subject to interest rate risk in connection with most of our assets and liabilities.
−Removed: For some securities in our portfolio, the coupon interest rates on, and therefore also the values of, such securities are highly sensitive to interest rate movements, such as inverse floating rate RMBS, which benefit from falling interest rates.
+Added: For some securities in our portfolio, the coupon interest rates on such securities are sensitive to interest rate movements, such as floating rate CLO debt tranches.
Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such SOFR for those same periods.
Whenever one of our fixed-rate repo borrowings matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates prevailing at such time.
−Removed: Subject to maintaining our exclusion from registration under the 1940 Act, we opportunistically hedge our interest rate risk by entering into interest rate swaps, TBAs, U.S.
−Removed: Treasury securities, Eurodollar and U.S.
+Added: We opportunistically hedge our interest rate risk by entering into interest rate swaps, TBAs, U.S.
+Added: Treasury securities, U.S.
Treasury futures, and other instruments.
−Removed: In general, such hedging instruments are used to mitigate the interest rate risk arising from the mismatch between the duration of our financed Agency RMBS and the duration of the liabilities used to finance such assets.
In addition to measuring and mitigating the risk related to changes in interest rates with respect to the generally shorter-term liabilities we incur to acquire and hold generally longer-lived RMBS and CLOs, we also monitor the effect of changes in interest rates on the discounted present value of our portfolio of assets and liabilities.
−Removed: The following sensitivity analysis table shows the estimated impact on the fair value of our portfolio segregated by certain identified categories as of December 31, 2024, assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below.
+Added: The following sensitivity analysis table shows the estimated impact on the fair value of our portfolio segregated by certain identified categories as of March 31, 2025, assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below.
($ In thousands) Estimated Change for a Decrease in Interest Rates by Estimated Change for an Increase in Interest Rates by
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Agency RMBS, and CMBS excluding TBAs $ 9,849 4.31 % $ 18,020 7.89 % $ (11,526) (5.04) % $ (24,729) (10.82) %
−Removed: Long TBAs 1,825 0.94 % 3,646 1.88 % (1,830) (0.94) % (3,664) (1.89) %
Short TBAs (10,181) (4.46) % (18,688) (8.18) % 11,853 5.19 % 25,378 11.11 %
CLOs 413 0.18 % 826 0.37 % (414) (0.18) % (828) (0.37) %
−Removed: Treasury Securities, Interest Rate Swaps, Options, and Futures (12,337) (6.37) % (25,197) (13.01) % 11,815 6.10 % 23,108 11.93 %
Corporate Securities and Derivatives on Corporate Securities (6) — % (12) (0.01) % 6 — % 12 0.01 %
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in fact, different models can produce different results for the same instruments.
−Removed: While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we actively trade many of the instruments in our portfolio, and therefore our current or future portfolios may have risks that differ significantly from those of our December 31, 2024 portfolio estimated above.
+Added: While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we actively trade many of the instruments in our portfolio, and therefore our current or future portfolios may have risks that differ significantly from those of our March 31, 2025 portfolio estimated above.
Moreover, the impact of changing interest rates on fair value can change significantly when interest rates change by a greater amount than the hypothetical shifts assumed above.
−Removed: For all of the foregoing reasons and others, the table above is for illustrative purposes only and actual changes in interest rates would likely cause changes in the actual fair value of our portfolio that would differ from those presented above, and such differences might be significant and adverse.
+Added: For all of the foregoing reasons and others, the table above is for illustrative purposes only and actual changes in interest
+Added: rates would likely cause changes in the actual fair value of our portfolio that would differ from those presented above, and such differences might be significant and adverse.
See "—Special Note Regarding Forward-Looking Statements."
Prepayment Risk
−Removed: Prepayment risk is the risk of change, whether an increase or a decrease, in the rate at which principal is returned in
−Removed: respect of our RMBS and CLOs, including both through voluntary prepayments by the underlying mortgage or corporate borrowers, through liquidations or other accelerations due to defaults and foreclosures, or through the optional redemptions of such securities by the issuers.
+Added: Prepayment risk is the risk of change, whether an increase or a decrease, in the rate at which principal is returned in respect of our RMBS and CLOs, including both through voluntary prepayments by the underlying mortgage or corporate borrowers, through liquidations or other accelerations due to defaults and foreclosures, or through the optional redemptions of such securities by the issuers.
Most significantly, our RMBS portfolio is exposed to the risk of changes in prepayment rates of the mortgage loans underlying our RMBS, and our CLO portfolio is exposed to the changes in prepayment rates of the underlying corporate loans.
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.