| ANTHRACITE CAPITAL INC Item 1A Risk Factors |
| 20 ITEM 1A RISK FACTORS Risks Risk is an inherent part of investing in high yielding commercial real estate debt and equity |
| Risk management is considered to be of paramount importance to the Companyapstas day-to-day operations |
| Consequently, the Company devotes significant resources across all its operations to the identification, measurement, monitoring, management and analysis of risk |
| Risks related to the Manager Conflicts of interest of the Manager may result in decisions that do not fully reflect stockholders &apos best interests |
| The Company and the Manager have common officers and directors, which may present conflicts of interest in the Companyapstas dealings with the Manager and its affiliates, including the Companyapstas purchase of assets originated by such affiliates |
| For example, the Company may purchase certain mortgage assets from PNC Bank, an affiliate of PNC Bancorp, Inc |
| which owned approximately 70prca of the outstanding capital stock of the Managerapstas parent company, BlackRock, Inc |
| at December 31, 2005 |
| The Manager and its employees may engage in other business activities that could reduce the time and effort spent on the management of the Company |
| The Manager also provides services to REITs not affiliated with the Company |
| As a result, there may be a conflict of interest between the operations of the Manager and its affiliates in the acquisition and disposition of mortgage assets |
| In addition, the Manager and its affiliates may from time to time purchase mortgage assets for their own account and may purchase or sell assets from or to the Company |
| For example, BlackRock Realty Advisors, Inc, a subsidiary of the Manager, provides real estate equity and other real estate related products and services in a variety of strategies to its institutional investor client base |
| In doing so, it purchases real estate on behalf of its clients that may underlie the real estate loans and securities the Company acquires, and consequently depending on the factual circumstances involved, there may be conflicts between the Company and those clients |
| Such conflicts may result in decisions and allocations of mortgage assets by the Manager, or decisions by the Managerapstas affiliates, that are not in the Companyapstas best interests |
| Although the Company has adopted investment guidelines, these guidelines give the Manager significant discretion in investing |
| The Companyapstas investment and operating policies and the strategies that the Manager uses to implement those policies may be changed at any time without the consent of stockholders |
| The Company is dependent on the Manager, and the termination by the Company of its Management Agreement with the Manager could result in a termination fee |
| The Companyapstas success is dependent on the Managerapstas ability to attract and retain quality personnel |
| The market for portfolio managers, investment analysts, financial advisers and other professionals is extremely competitive |
| The management agreement between the Company and the Manager provides for base management fees payable to the Manager without consideration of the performance of the Companyapstas portfolio and also provides for incentive fees based on certain performance criteria, which could result in the Manager recommending riskier or more speculative investments |
| Termination of the Management 20 Agreement between the Company and the Manager by the Company would result in the payment of a substantial termination fee, which could adversely affect the Companyapstas financial condition |
| Termination of the Management Agreement by the Company could also adversely affect the Company if the Company were unable to find a suitable replacement |
| There is a limitation on the liability of the Manager |
| Pursuant to the Management Agreement, the Manager will not assume any responsibility other than to render the services called for under the Management Agreement and will not be responsible for any action of the Companyapstas Board of Directors in following or declining to follow its advice or recommendations |
| The Manager and its directors and officers will not be liable to the Company, any of its subsidiaries, its unaffiliated directors, its stockholders or any subsidiaryapstas stockholders for acts performed in accordance with and pursuant to the Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the management agreement |
| The Company has agreed to indemnify the Manager and its directors and officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of the Manager not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement |
| Risks related to the Companyapstas business Interest rate fluctuations will affect the value of the Companyapstas mortgage assets, net income and common stock |
| Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors |
| Interest rate fluctuations can adversely affect the income and value of the Companyapstas common stock in many ways and present a variety of risks, including the risk of a mismatch between asset yields and borrowing rates, variances in the yield curve, changing prepayment rates and margin calls |
| The Companyapstas operating results depend in large part on differences between the income from its assets (net of credit losses) and borrowing costs |
| The Company funds a substantial portion of its assets with borrowings that have interest rates that reset relatively rapidly, such as monthly or quarterly |
| The Company anticipates that, in most cases, the income from its floating-rate assets will respond more slowly to interest rate fluctuations than the cost of borrowings, creating a potential mismatch between asset yields and borrowing rates |
| Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence the Companyapstas net income |
| Increases in these rates tend to decrease the Companyapstas net income and estimated fair value of the Companyapstas net assets |
| Interest rate fluctuations that result in the Companyapstas interest expense exceeding interest income would result in the Company incurring operating losses |
| The Company also invests in fixed-rate mortgage-backed securities |
| In a period of rising interest rates, the Companyapstas interest payments could increase while the interest the Company earns on its fixed-rate mortgage-backed securities would not change |
| This would adversely affect the Companyapstas profitability |
| The relationship between short-term and long-term interest rates often is referred to as the "e yield curve "e |
| Ordinarily, short-term interest rates are lower than long-term interest rates |
| If short-term interest rates rise disproportionately relative to long-term interest rates (a flattening of the yield 21 curve), the Companyapstas borrowing costs may increase more rapidly than the interest income earned on the Companyapstas assets |
| Because the Companyapstas borrowings primarily will bear interest at short-term rates and the Companyapstas assets primarily will bear interest at medium-term to long-term rates, a flattening of the yield curve tends to decrease the Companyapstas net income and estimated fair value of the Companyapstas net assets |
| Additionally, to the extent cash flows from long-term assets that return scheduled and unscheduled principal are reinvested, the spread between the yields of the new assets and available borrowing rates may decline and also may tend to decrease the net income and estimated fair value of the Companyapstas net assets |
| It is also possible that short-term interest rates may adjust relative to long-term interest rates such that the level of short-term rates exceeds the level of long-term rates (a yield curve inversion) |
| In this case, the Companyapstas borrowing costs may exceed the Companyapstas interest income and operating losses could be incurred |
| A portion of the Companyapstas mortgage assets are financed under 30-day repurchase agreements and committed borrowing facilities which are subject to mark-to-market risk |
| Such secured financing arrangements provide for an advance rate based upon a percentage of the estimated fair value of the asset being financed |
| Market movements that cause asset values to decline would require a margin call or a cash payment to maintain the relationship between asset value and amount borrowed |
| Interest rate caps on the Companyapstas RMBS may adversely affect the Companyapstas profitability |
| The Companyapstas adjustable-rate RMBS typically are subject to periodic and lifetime interest rate caps |
| Periodic interest rate caps limit the amount an interest rate can increase during any given period |
| Lifetime interest rate caps limit the amount an interest rate can increase through maturity of a mortgage-backed security |
| The Companyapstas borrowings are not subject to similar restrictions |
| Accordingly, in a period of rapidly increasing interest rates, the Company could experience a decrease in net income or a net loss because the interest rates on its borrowings could increase without limitation while the interest rates on its adjustable-rate mortgage-backed securities would be limited by caps |
| The Companyapstas assets include subordinated CMBS which are subordinate in right of payment to more senior securities |
| The Companyapstas assets include a significant amount of subordinated CMBS, which are the most subordinate class of securities in a structure of securities secured by a pool of loans and accordingly are the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal |
| The Company may not recover the full amount or, in extreme cases, any of its initial investment in such subordinated interests |
| Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions than more senior interests |
| As a result, such subordinated interests generally are not actively traded and may not provide holders thereof with liquidity of investment |
| The Companyapstas assets include mezzanine loans which have greater risks of loss than more senior loans |
| The Companyapstas assets include a significant amount of mezzanine loans that involve a higher degree of risk than long-term senior mortgage loans |
| In particular, a foreclosure by the holder of the senior loan could result in the mezzanine loan becoming unsecured |
| Accordingly, the Company may not recover some or all of its investment in such a mezzanine loan |
| Additionally, the Company may permit higher loan to value ratios on mezzanine loans than it would on conventional mortgage loans when the Company is entitled to share in the appreciation in value of the property securing the loan |
| Prepayment rates can increase which would adversely affect yields on the Companyapstas investments |
| 22 The yield on investments in mortgage loans and mortgage-backed securities and thus the value of the Companyapstas common stock is sensitive to changes in prevailing interest rates and changes in prepayment rates, which results in a divergence between the Companyapstas borrowing rates and asset yields, consequently reducing income derived from the Companyapstas investments |
| The Companyapstas ownership of non-investment grade commercial mortgage assets subjects the Company to an increased risk of loss which could adversely affect yields on the Companyapstas investments |
| The Company acquires mortgage loans and non-investment grade mortgage-backed securities, which are subject to greater risk of credit loss on principal and non-payment of interest in contrast to investments in senior investment grade securities |
| The Companyapstas commercial mortgage assets are subject to certain risks |
| The Company acquires, accumulates and securitizes mortgage assets as part of its investment strategy |
| While exposed to such mortgage assets, either as collateral for a real estate security or directly, the Company is subject to risks of borrower defaults, bankruptcies, fraud and special hazard losses that are not covered by standard hazard insurance |
| Insurance on owned real estate, mortgage loans and real estate securities collateral may not cover all losses |
| The Companyapstas commercial mortgage loans are subject to certain risks |
| The costs of financing and hedging the mortgage loans can exceed the interest income on the mortgage loans |
| In the event of any default under mortgage loans held by the Company, the Company will bear the risk of loss of principal to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan |
| In addition, delinquency and loss ratios on the Companyapstas mortgage loans are affected by the performance of third-party servicers and special servicers |
| The Company invests in multifamily and commercial loans which involve a greater risk of loss than single family loans |
| The Companyapstas investments include multifamily and commercial real estate loans which are considered to involve a higher degree of risk than single family residential lending because of a variety of factors, including generally larger loan balances, dependency for repayment on successful operation of the mortgaged property and tenant businesses operating therein, and loan terms that include amortization schedules longer than the stated maturity which provide for balloon payments at stated maturity rather than periodic principal payments |
| In addition, the value of multifamily and commercial real estate can be affected significantly by the supply and demand in the market for that type of property |
| Limited recourse loans limit the Companyapstas recovery to the value of the mortgaged property |
| A substantial portion of the mortgage loans the Company acquires may contain limitations on the mortgageeapstas recourse against the borrower |
| In other cases, the mortgageeapstas recourse against the borrower is limited by applicable provisions of the laws of the jurisdictions in which the mortgaged properties are located or by the mortgageeapstas selection of remedies and the impact of those laws on that selection |
| In those cases, in the event of a borrower default, recourse may be limited to only the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan |
| As to those mortgage loans that provide for recourse against the borrower and their assets generally, 23 such recourse may not provide a recovery in respect of a defaulted mortgage loan equal to the liquidation value of the mortgaged property securing that mortgage loan |
| The volatility of certain mortgaged property values may adversely affect the Companyapstas mortgage loans |
| Commercial and multifamily property values and net operating income derived therefrom are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by plant closings, industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; perceptions by prospective tenants, retailers and shoppers of the safety, convenience, services and attractiveness of the property; the willingness and ability of the propertyapstas owner to provide capable management and adequate maintenance; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs) |
| Leveraging the Companyapstas investments may increase the Companyapstas exposure to loss |
| The Company leverages its investments and thereby increases the volatility of its income and net asset value that may result in operating or capital losses |
| If borrowing costs increase, or if the cash flow generated by the Companyapstas assets decreases, the Companyapstas use of leverage will increase the likelihood that the Company will experience reduced or negative cash flow and reduced liquidity |
| The Companyapstas investments may be illiquid and their value may decrease |
| Many of the Companyapstas assets are relatively illiquid |
| In addition, certain of the mortgage-backed securities that the Company has acquired or will acquire will include interests that have not been registered under the relevant securities laws, resulting in a prohibition against transfer, sale, pledge or other disposition of those mortgage-backed securities except in a transaction that is exempt from the registration requirements of, or otherwise in accordance with, those laws |
| The Companyapstas ability to vary its portfolio in response to changes in economic and other conditions may be relatively limited |
| The estimated fair value of any of the Companyapstas assets could decrease in the future |
| The Companyapstas hedging transactions can limit the Companyapstas gains and increase the Companyapstas exposure to losses |
| The Company uses hedging strategies that involve risk and that may not be successful in insulating the Company from exposure to changing interest and prepayment rates |
| A liquid secondary market may not exist for hedging instruments purchased or sold, and the Company may be required to maintain a position until exercise or expiration, which could result in losses |
| The Companyapstas non-US investments are subject to currency rate exposure and the uncertainty of foreign laws and markets which could adversely affect the Companyapstas income |
| Failure to maintain REIT status would have adverse tax consequences |
| To continue to qualify as a REIT, the Company must comply with requirements regarding the nature of its assets and its sources of income |
| If the Company is compelled to liquidate its mortgage-backed securities, the Company may be unable to comply with these requirements, ultimately jeopardizing its status as a REIT 24 If in any taxable year the Company fails to qualify as a REIT: o the Company would be subject to Federal and state income tax on its taxable income at regular corporate rates; o the Company would not be allowed to deduct distributions to stockholders in computing its taxable income; and o unless the Company were entitled to relief under the Code, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which the Company lost qualification |
| If the Company fails to qualify as a REIT, the Company might need to borrow funds or liquidate some investments in order to pay the additional tax liability |
| Accordingly, funds available for investment or distribution to the Companyapstas stockholders would be reduced for each of the years involved |
| Qualification as a REIT involves the application of highly technical and complex provisions of the Code to the Companyapstas operations and the determination of various factual matters and circumstances not entirely within the Companyapstas control |
| There are only limited judicial or administrative interpretations of these provisions |
| Although the Company operates in a manner consistent with the REIT qualification rules, the Company may not remain so qualified |
| In addition, the rules dealing with Federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the United States Department of the Treasury |
| Changes to the tax law could adversely affect the Companyapstas stockholders |
| Increased competition in the marketplace may adversely affect the Companyapstas ability to acquire assets |
| Because of increased competition in the marketplace, the Company may not be able to acquire mortgage-backed securities at favorable yields |
| Failure to maintain an exemption from the Investment Company Act would restrict the Companyapstas operating flexibility |
| The Company conducts its business so as not to become regulated as an investment company under the Investment Company Act |
| Accordingly, the Company does not expect to be subject to the restrictive provisions of the Investment Company Act |
| Failure to maintain an exemption from the Investment Company Act would adversely affect the Companyapstas ability to operate |
| The Company may become subject to environmental liabilities |
| The Company may become subject to environmental risks when it acquires interests in properties with material environmental problems |
| Such environmental risks include the risk that operating costs and values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation |
| Such laws often impose liability regardless of whether the owner or operator knows of, or was responsible for, the presence of such hazardous or toxic substances |
| The costs of investigation, remediation or removal of hazardous substances could exceed the value of the property |
| The Companyapstas income and ability to make distributions to stockholders could be 25 affected adversely by the existence of an environmental liability with respect to the Companyapstas properties |