EQUITIES: Mortgage REIT tests blind pool

Provident Mortgage Capital Associates, a hybrid mortgage REIT formed by private mortgage lender Provident Funding, is looking to raise as much as US$124.5m in a blind pool IPO. UBS, Credit Suisse and Deutsche Bank launched marketing this morning of 8.3m at a fixed-offer price of US$15, resulting in total proceeds well shy of the US$300m the company had targeted in the original IPO documents.

Blind pool offerings, whereby companies without operations seek capital for initial investments, have been difficult to sell because of fee leakage associated with underwriting. Because the amount that can be invested is less than investors are putting in, the stocks almost always trade-off after pricing.

To offset the fee leakage, Provident Funding has agreed to pay a portion of the underwriting fees to defray costs, a common strategy. Provident will inject 4.5% of total proceeds at the offer price, less fees, in a concurrent private placement.

Provident Finance, the external manager of Provident Mortgage, was the ninth-largest mortgage loan originator in the US last year. The firms’ “no exceptions” policy mandates strict adherence to lending parameters with the goal that loans it originates are high quality. Only 2.4% of its US$14.9bn portfolio is currently delinquent, compared to 10.7% for the entire industry.

Provident Mortgage Capital plans to use proceeds from the offering to acquire a diversified portfolio of mortgage investments from the parent. Initially the company plans to purchase agency-backed residential mortgages and utilise leverage of eight-times, suggesting an initial size of its portfolio of US$890m.

Over time, the company will emphasise jumbo loans. The company hopes to participate in the recovery of jumbo loans from currently distressed prices.