Switch from wireless poses risks, experts say

Rising interest rates could squeeze Aether

July 22, 2004|By Bill Atkinson | Bill Atkinson,SUN STAFF

Aether Systems Inc., the troubled wireless technology company that is transforming its operations, is entering a business that could pay off handsomely but has risks in a world based on interest rate swings and hedging strategies, industry experts said yesterday.

The Owings Mills-based company plans to use $75 million of its cash to buy residential mortgage-backed securities from Freddie Mac, Fannie Mae and the Government National Mortgage Association as it shifts focus. It intends to borrow against its investment to build a portfolio of up to $675 million.

The company said yesterday that it had moved a step closer to jettisoning its technology operations by agreeing to sell its transportation division for $25 million in cash.

The residential mortgage business is booming in the hot housing market, and Aether executives are confident that tapping into the $3.5 trillion trade can generate cash quickly.

But others say the strategy has risks.

"It would be safe to say that any time you have a highly leveraged portfolio in an environment where interest rates might be rising and you are not well- hedged, there is a possibility for a whoops," said Robert A. Frank, director of real estate capital markets at Ferris, Baker Watts Inc. in Baltimore.

Martin Mitchell, head of mortgage-backed and government securities trading at Baltimore-based Legg Mason Wood Walker Inc., said that if Aether does not understand the complexity of the securities it buys, it "could be taking on undue risk."

Jay Brinkmann, an economist at the Mortgage Bankers Association in Washington, said buyers of mortgage securities could face an array of problems.

"There is no sort of typical problem that you run into," he said. "But there is a whole series of problems that people have run into in the past."

Examples, he said, include getting caught in an interest rate squeeze or having too many mortgage holders pay off loans early - a danger that increases in a period of falling rates when many homeowners refinance.

Aether acknowledged in a regulatory filing that rising interest rates could present a risk. Since the company has to borrow money to buy the securities, it could incur "substantial losses" if the interest it has to pay increases faster than the returns on its investments.

But David C. Reymann, Aether's chief financial officer, said the company would minimize risks by buying only "top-grade" securities and hiring an outside firm to manage the investment.

"The credit-worthiness issue is virtually nonexistent, because the securities are backed or sponsored by the federal government," he said. "If you manage this strategy right, it is very risk-manageable. We are not getting into this strategy to generate the maximum possible return that we can in any one year."

Aether has retained FBR Investment Management Inc., an affiliate of Arlington, Va.-based investment banker Friedman, Billings, Ramsey Group Inc., to manage the portfolio.

Once Aether starts generating taxable income from its mortgage-backed investments, the company will be able to use its roughly $700 million in accumulated net operating losses, allowing it to save millions of dollars in taxes over several years, Reymann said.

"That is significant value to shareholders," he said.

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