Ellington Said to Attract Demand for All IPO Shares

Ellington Financial LLC, the mortgage-backed bond fund run by Michael Vranos, secured enough demand from buyers for all the shares being sold in its initial public offering, according to a person familiar with the sale.

Ellington Financial’s underwriters began canvassing buyers for the 4.5 million-share offering two days ago, said the person, who declined to be identified because the information isn’t public. Before bankers started marketing the sale, the company already had commitments for at least half the shares being offered, the person said. Ellington Financial is trying to raise $108 million selling shares at $22 to $24 each today, data compiled by Bloomberg show.

Vranos, the former head of mortgage-securities trading at Kidder Peabody & Co., is trying to raise money for a fund that would invest in the types of mortgage bonds that spurred the biggest housing bust since the Great Depression. The sale comes 10 months after the Old Greenwich, Connecticut-based company canceled its first IPO attempt, which sought $208 million.

“It seems like it might be almost pre-sold,” said Nick Einhorn, an analyst at Greenwich, Connecticut-based Renaissance Capital LLC, which has studied IPOs since 1991. “If you believe in the management team, it probably means they’d have the ability to drive higher returns if they can execute their strategy.”

December Deal

Deutsche Bank AG of Frankfurt and Cantor Fitzgerald LP in New York are managing the sale. Zurich-based Credit Suisse Group AG, Ellington Financial’s lead underwriter in December, was dropped from the deal, according to the company’s filings with the Securities and Exchange Commission.

Patrick Clifford, a spokesman for Ellington Financial, didn’t immediately respond to telephone calls seeking comment. Scott Helfman at Deutsche Bank didn’t immediately respond to an e-mail or telephone calls for comment. Cantor Fitzgerald’s Sandra Lee declined to comment.

As much as 95 percent of the proceeds will be used to buy securities tied to subprime, Alt-A, or prime home loans that lack guarantees from government agencies such as Fannie Mae. The purchases would add to the $246 million that the fund held in such securities at the end of June.

Ellington Financial had a so-called book value, or its assets minus liabilities, of $25.31 per share as of Aug. 31, according to the filing. The midpoint offer price of $23 a share would be a 9.1 percent discount to the fund’s net assets, data compiled by Bloomberg show.

Relative Value

The average U.S. real estate investment trust that buys mortgages is valued at 0.99 times its shareholder equity, data compiled by Bloomberg show.

While the IPO may give buyers the opportunity to purchase a stake in Ellington Financial at a discount, institutional owners may assign a lower value to Vranos’ fund.

Bill Miller, whose $1.9 billion Legg Mason Capital Management Opportunity Trust owns a 21 percent stake in Ellington Financial, valued his 2.5 million-share holding at $49.375 million, or $19.75 each, as of June 30, Baltimore-based Legg Mason Inc.’s filing with the SEC showed.

That’s 20 percent less than Ellington Financial’s valuation of $24.56 a share on the same day, according to its filing.

FBR Capital Markets Corp. of Arlington, Virginia, which owns a 12 percent stake as Ellington Financial’s second-largest outside investor, valued its 1.44 million-share stake at $15 each at the end of June, its SEC filing showed.

Credit Crisis

Ellington Financial was established in August 2007, the month that the credit crisis began, after raising $239.7 million in a private sale to institutional buyers.

From its inception through the end of 2008, the fund returned 0.52 percent, before a 43 percent gain last year. Ellington Financial has returned 7.3 percent this year through August, compared with the 7.4 percent gain, including dividends, for the BBREIT Mortgage Index, data compiled by Bloomberg show.

“Performance over the past two years will be critical to gauging a mortgage manager’s ability to perform over the next two years,” said Michael Youngblood, a mortgage-bond analyst for more than two decades before co-founding Bethesda, Maryland- based hedge fund firm Five Bridges Advisors LLC in 2008.

Ellington Financial acts like a hedge fund by using borrowed money to magnify bets and increase returns, charging fees based on performance. The fund had borrowed $1.45 for every dollar of capital at the end of June, the filing showed.

Hedge funds are largely unregulated investment vehicles whose managers can trade any asset, aim to make money regardless of whether markets rise or fall and participate substantially in profits from money invested.

Harvard Degree

Vranos, 49, came to Wall Street more than two decades ago after winning the 1981 teenage Mr. Connecticut title as a bodybuilder and weightlifter and graduating with a magna cum laude degree in mathematics from Cambridge, Massachusetts-based Harvard University in 1983.

He made Kidder one of the biggest underwriters of mortgage bonds in the early 1990s after being put in charge of the mortgage desk. The unit earned hundreds of millions of dollars under Vranos, in some years bringing in as much as half of the firm’s profit.

Vranos, who earned the nickname “Captain Iron” at Harvard for the long hours he spent in the gym, once stripped to the waist and performed muscle poses to catcalls from the trading floor at Kidder, according to a Wall Street Journal story from Dec. 29, 1994.

Connecticut Hometown

He left Kidder in 1994 to start Ellington Management Group LLC, named after the Connecticut town where he grew up, helped by $100 million from Ziff Brothers Investments.

“He’s respected and he’s thought to be an expert in the area and would bring something to the table that perhaps others don’t know,” said Barry James, who oversees $2 billion as president of James Investment Research Inc. in Xenia, Ohio. “Wall Street always likes to follow folks who have success and who are well respected, so I would think that from that perspective, that’s a plus in his category.”

Ellington Financial’s offering comes after the market for U.S. initial sales started to rebound last month, with nine of 10 IPOs posting gains, according to data compiled by Bloomberg.

At least 47 companies have postponed or withdrawn initial offerings in the U.S. this year amid speculation that the recovery from the longest recession since the Great Depression is deteriorating. Linc Logistics Co., the Warren, Michigan-based logistics company, delayed its $147 million IPO yesterday, according to Bloomberg data.

Daqo New Energy Corp. raised $76 million selling 8 million American depositary receipts at $9.50 each, according to a statement today. The Chongqing, China-based maker of polysilicon materials for solar panels had offered the shares for $10.50 to $12.50 each, an SEC filing showed. Daqo gained 7.9 percent to $10.25 in New York Stock Exchange trading today.

To contact the reporter on this story: Lee Spears in New York at lspears3@bloomberg.net.

To contact the editor responsible for this story: Daniel Hauck at dhauck1@bloomberg.net.

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