Cypress Sharpridge Plans an IPO in a `Hail Mary' for Funding

By Elizabeth Hester and Caroline Salas

Oct. 5 (Bloomberg) -- Cypress Sharpridge Investments Inc., the joint venture between the Cypress Group and Sharpridge Capital Management LP, filed for an initial public offering because it can't get financing from its lenders.

The real estate investment trust plans to raise as much as $165.6 million, according to a filing today with the U.S. Securities and Exchange Commission. It will sell 18 million shares for $7 to $8 each.

Cypress Sharpridge, based in New York, said it filed for the IPO because its lenders have been hurt by a slump in mortgage bonds, increasing its own borrowing costs and reducing the value of its securities. The company warned it may be unable to pay some debts and may be forced to sell its assets.

``It's a Hail Mary,'' said Francis Gaskins, president of IPODesktop.com, a research service in Marina del Rey, California. ``This is an example of `go public or go bankrupt.' Some of their lenders aren't going to lend to them anymore and financing is the lifeblood of their business.''

Cypress Sharpridge plans to invest in two asset classes: Agency residential mortgage-backed securities and the subordinated pieces of asset-backed securities, such as collateralized debt obligations. It will use leverage and make money from the difference between the income earned on its portfolio and its borrowing costs, the filing said. The portfolio had a ratio of total liabilities to total equity of 14 to 1 as of June 30, according to the filing.

Subprime Effect

``The current dislocations in the subprime mortgage sector, and the current weakness in the broader mortgage market, has adversely affected some of our lenders, which has resulted in increases in our borrowing costs, reductions in our ability to finance our assets through repurchase agreements and reductions in the value of the securities in our portfolio,'' Cypress Sharpridge said in its filing.

The company also said it may be unable to meet some of its debt servicing obligations and could have to sell ``some or all of our assets.''

Cypress Sharpridge raised $78 million in February 2006 and $106 million in December through private stock sales, the filing said.

Underwriters have the option to sell an additional 2.7 million shares if demand warrants. The shares will trade on the New York Stock Exchange under the symbol CYS. The company would have a market value of $701.5 million based on the top IPO price and 39 million shares outstanding.

Government Guarantees

Agency mortgage bonds are those guaranteed by government- chartered companies Fannie Mae and Freddie Mac or federal agency Ginnie Mae. As of June 30, 98.4 percent of the financing vehicle's assets were in agency residential mortgage-backed securities and 1.2 percent was invested in subordinated tranches of asset-backed securities, the filing said.

Everquest Financial Ltd. withdrew its initial public offering in June after New York-based Bear Stearns Cos. had two of its hedge funds fail because of bad bets on mortgage-linked securities.

Ralph Cioffi, senior managing director at Bear Stearns, managed the funds and also served as Everquest's co-chief executive officer.

Highland Financial Partners LP, a holding company that primarily earned income through owning CDOs, canceled its initial public offering on Sept. 7, according to an SEC filing. Highland Financial Partners was set up last year by Dallas-based Highland Capital Management LP.

CDOs are created by packaging bonds, loans or derivatives and using their income to pay investors.

A REIT is a corporation or trust that owns, manages or leases commercial real estate properties or invests in real estate-related securities and pays out at least 90 percent of its taxable income in dividends.

Record Defaults

Subprime loans are made to borrowers with poor credit or high levels of debt. The default rate on subprime mortgages packaged into bonds hit a record 13.43 percent in June, according to Friedman Billings Ramsey Group Inc. The share of loans at least 90 days late, in foreclosure or already turned into seized property rose from 6.88 percent in June 2006, according to the Arlington, Virginia-based securities firm.

Bear Stearns, Friedman Billings Ramsey Group Inc. and UBS AG are underwriting the sale with assistance from Fox-Pitt Kelton Cochran Caronia Waller and Keefe Bruyette & Woods Inc.

Last Updated: October 5, 2007 16:48 EDT