1423689--2/17/2009--American_Capital_Agency

related topics

{investment, property, distribution}

{tax, income, asset}

{stock, price, share}

{loss, insurance, financial}

{provision, law, control}

{debt, indebtedness, cash}

{loan, real, estate}

{stock, price, operating}

{personnel, key, retain}

{product, liability, claim}

{control, financial, internal}

{system, service, information}

The management agreement was not negotiated on an arm s-length basis and the terms, including fees payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party. We have no dedicated employees and our Manager is responsible for making all of our investment decisions. None of our or our Manager s officers are required to devote any specific amount of time to our business and each of them may provide their services to American Capital, its affiliates and sponsored investment vehicles or other entities not affiliated with American Capital, which could result in conflicts of interest. Our Manager and American Capital do not have extensive institutional experience in acquiring or financing agency securities. We are completely dependent upon our Manager and certain key personnel of American Capital who provide services to us through the management agreement and the administrative services agreement and we may not find suitable replacements for our Manager and these personnel if the management agreement and the administrative services agreement are terminated or such key personnel are no longer available to us. We have no recourse to American Capital if it does not fulfill its obligations under the administrative services agreement. If we elect to not renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly. Our Manager s management fee is payable regardless of our performance. The fee structure of our management agreement may limit our Manager s ability to retain access to key personnel of American Capital. Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us. We are exposed to potential risks from legislation requiring companies to evaluate their internal control over financial reporting. We are highly dependent on information and communications systems. Any systems failures could significantly disrupt our business, which may, in turn, negatively affect our operations and the market price of our common stock and our ability to pay dividends to our stockholders. The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government, may adversely affect our business. There can be no assurance that the actions of the U.S. Treasury, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market response to those actions, will achieve the intended effect, our business may not benefit from these actions and further government or market developments could adversely impact us. To the extent that we invest in agency securities that are guaranteed by Fannie Mae and Freddie Mac, we are subject to the risk that these U.S. Government-sponsored entities may not be able to fully satisfy their guarantee obligations or that these guarantee obligations may be repudiated, which may adversely affect the value of our investment portfolio and our ability to sell or finance these securities. New laws may be passed affecting the relationship between Fannie Mae and/or Freddie Mac, on the one hand, and the U.S. Government, on the other, which could adversely affect the availability and pricing of agency securities. Market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our investment portfolio. Mortgage loan modification programs, future legislative action and changes in the requirements necessary to qualify for refinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae may adversely affect the value of, and the returns, on the agency securities in which we invest. Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest. Failure to procure adequate repurchase agreement financing, or to renew (roll) or replace existing repurchase agreement financing as it matures, would adversely affect our results of operations and may, in turn, negatively affect the market value of our common stock and our ability to make distributions to our stockholders. Pursuant to the terms of borrowings under our master repurchase agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure. If our lenders pursuant to our repurchase transactions default on their obligations to resell the underlying agency security back to us at the end of the transaction term, or if the value of the underlying agency security has declined by the end of the term or if we default on our obligations under the transaction, we will lose money on these transactions. Differences in timing of interest rate adjustments on adjustable-rate agency securities we may acquire and our borrowings may adversely affect our profitability and our ability to make distributions to our stockholders. Interest rate caps on our adjustable-rate agency securities may adversely affect our profitability. An increase in interest rates may cause a decrease in the volume of newly issued, or investor demand for, agency securities, which could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and pay dividends. Because we acquire fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value. Changes in prepayment rates may adversely affect our profitability. A decrease in prepayment rates may adversely affect our profitability. Our hedging strategies may not be successful in mitigating the risks associated with interest rates. Accounting for Derivative Instruments and Hedging Activities Our use of certain hedging techniques may expose us to counterparty risks. We may fail to qualify for hedge accounting treatment. Our strategy involves significant leverage, which may cause substantial losses. Our rights under our repurchase agreements will be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements. Broad market fluctuations could negatively impact the market price of our common stock. Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock. Future sales of shares of our common stock may depress the price of our shares. We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future. An increase in market interest rates may cause a material decrease in the market price of our common stock. American Capital owns a significant percentage of our common stock, which could result in significant influence over the outcome of matters submitted to the vote of our stockholders. The stock ownership limit imposed by the Code for REITs and our amended and restated certificate of incorporation may restrict our business combination opportunities. The stock ownership limitation contained in our amended and restated certificate of incorporation generally does not permit ownership in excess of 9.8% of our common or capital stock, and attempts to acquire our common or capital stock in excess of these limits will be ineffective unless an exemption is granted by our Board of Directors. Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock. If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders. Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. REIT distribution requirements could adversely affect our ability to execute our business plan. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. Complying with REIT requirements may cause us to forgo otherwise attractive opportunities. Complying with REIT requirements may force us to liquidate otherwise attractive investments. The failure of agency securities subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT. Liquidation of assets may jeopardize our REIT qualification. Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities. Qualifying as a REIT involves highly technical and complex provisions of the Code.

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1423689--2/17/2009--American_Capital_Agency_Corp