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Vranos IPO Raises $101 Million to Buy Subprime Bonds

Ellington Financial's Michael Vranos
Michael Vranos, president and chief executive officer of Ellington Financial MGMT LLC at the New York Stock Exchange. Photographer: Valerie Caviness/ NYSE Euronext via Bloomberg

Ellington Financial LLC, the mortgage-backed bond fund run by Michael Vranos, raised $101 million in its second attempt at an initial public offering after four U.S. IPOs this week were postponed or delayed.

The company sold 4.5 million shares for $22.50 each yesterday, after offering them at $22 to $24 apiece, according to Bloomberg data. Old Greenwich, Connecticut-based Ellington Financial intends to use the proceeds to buy the types of mortgage bonds that helped cause the biggest housing bust since the Great Depression.

Vranos, the former head of mortgage-securities trading at Kidder Peabody & Co., completed the sale 10 months after canceling Ellington Financial’s first IPO attempt, which had sought $208 million. This time, he offered the shares at a discount to the value of the fund’s net assets after seeking as much as $27 apiece in December. Before bankers began marketing the deal three days ago, they had lined up investors for at least half the shares, a person familiar with the sale said.

“If you’re going to ask them to buy into asset pools that will be buying more speculative assets, you have to give people enough of a discount where they’re willing to take a gamble,” said Michael Yoshikami, who oversees about $1 billion at YCMNet Advisors in Walnut Creek, California. “Risk appetite has increased, but people are still risk averse.”

Stock Market Debut

Ellington Financial’s shares retreated 3.3 percent to $21.75 in U.S. composite trading today.

Deutsche Bank AG of Frankfurt led 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.

Ellington Financial’s offering comes after the market for U.S. initial sales started to rebound last month, with eight 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At least 47 companies have postponed or withdrawn initial offerings in the U.S. this year amid speculation that the recovery from the longest recession since the Great Depression is deteriorating.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 on Oct. 6, according to Bloomberg data.

The initial offering was one of at least four scheduled for this week to be postponed or delayed, the data showed.

Chinese IPOs

Global Education & Technology Group Ltd., a Beijing-based language test preparation provider, climbed 16 percent to $12.20 after raising $67 million.

Chinese companies have recorded six of the 10 biggest advances among IPOs in the U.S. this year, according to data compiled by Bloomberg.

As much as 95 percent of the proceeds from Ellington Financial’s IPO 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 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 have been a 9.1 percent discount to the fund’s net assets, data compiled by Bloomberg show.

The average U.S. real estate investment trust that buys mortgages is valued at 0.98 times its shareholder equity, data compiled by Bloomberg show.

Relative Value

While the IPO gave buyers the opportunity to purchase a stake in Ellington Financial at a discount, institutional owners had assigned a lower value to Vranos’ fund.

Bill Miller, whose $1.9 billion Legg Mason Capital Management Opportunity Trust owned 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 owned 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.

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.

Past Performance

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.

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.

‘Captain Iron’

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.

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.

Vranos was unavailable for comment, according to Patrick Clifford, a spokesman for Ellington Financial.

At least three companies plan to raise a combined $409 million through U.S. IPOs next week, data compiled by Bloomberg show. All three offerings are scheduled for Oct. 14.

NetSpend Holdings Inc., the issuer of reloadable prepaid debit cards based in Austin, Texas, is selling $222 million of shares in what would be the biggest IPO of the three. Goldman Sachs Group Inc., Bank of America Corp. in Charlotte, North Carolina, and Chicago-based William Blair & Co. are leading the sale for NetSpend.

Tower International Inc., the automobile parts supplier owned by New York-based buyout firm Cerberus Capital Management LP, is seeking to raise $106 million in its offering. Goldman Sachs, Citigroup Inc. and JPMorgan Chase & Co. in New York are managing the Livonia, Michigan-based company’s sale.

Body Central Acquisition Corp., the clothing retailer based in Jacksonville, Florida, will attempt to raise $80 million. The IPO is being led by Piper Jaffray Cos. of Minneapolis and New York-based Jefferies Group Inc. The company will change its name to Body Central Corp. before the sale.

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