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Seahug

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    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    thanks chris

     

    i own a little bit of FMCCL, maybe 10+% of my position. thought about switching. but i bought at a discount to other series. to swap with the bid/offer spreads i thought it's not worth it, even if reinstated and ends up at a large discount to other series.

     

    there's something similar for BIII for insu cos, i believe treatment of T1 is similar

     

    anyway i hope this investment works out. i need a good year next year...

     

    appreciate the very intelligent ongoing commentary you provide

     

    cheers!

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    what does the fed have to do with the fhfa director?

     

    Nothing direct and I am no expert...but the Fed funded the GSE initial bailout immediately prior to FHFA, had a consultative regulatory role and after provided some financial support.

     

    Basel III is voluntary but the member central banks (fed is a member) push compliance to what's practicable. I have seen many tenders for noncompliant prefs - leading to some capital gain for holders, and reissuance of T1 compliant ones.

     

    So in short it's a guess  :)

     

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    As I understand it US fed supports Basel III.

     

    US implementation

    The US Federal Reserve announced in December 2011 that it would implement substantially all of the Basel III rules.[24] It summarized them as follows, and made clear they would apply not only to banks but also to all institutions with more than US$50 billion in assets:

    "Risk-based capital and leverage requirements" including first annual capital plans, conduct stress tests, and capital adequacy "including a tier one common risk-based capital ratio greater than 5 percent, under both expected and stressed conditions" – see scenario analysis on this. A risk-based capital surcharge...

     

    ....As of January 2014, the United States has been on track to implement many of the Basel III rules, despite differences in ratio requirements and calculations.[26]

     

    Source: https://en.wikipedia.org/wiki/Basel_III

     

    If you are going to have sub debt/prefs in your capital structure, you may as well make it count towards Tier 1 capital.  They can decide not to call/convert the low coupon prefs, but if you are doing it for most of the prefs, you may as well clean up the whole thing.

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    It's quite possible FMCCL even at a low interest rate of 5 year CMT will still need to be converted to equity or called together with the other prefs. (All the prefs have call features though like FNMAS it's every 5 years.)

     

    Even if reinstated, it does not qualify as Tier 1 capital under Basel III (came out in 2010 whereas FMCCL was issued in 1999).

     

    https://www.bis.org/publ/bcbs189.pdf

     

    11. Instruments classified as liabilities for accounting purposes must have principal loss

    absorption through either (i) conversion to common shares at an objective pre-specified

    trigger point or (ii) a write-down mechanism which allocates losses to the instrument at

    a pre-specified trigger point. The write-down will have the following effects:

    a. Reduce the claim of the instrument in liquidation;

    b. Reduce the amount re-paid when a call is exercised; and

    c. Partially or fully reduce coupon/dividend payments on the instrument.

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    I don't believe the cancellation of the senior pref and the exercise of the USG warrants add to equity.

     

    The cancellation of the senior pref is effectively a transfer of rights to take 100% profits to existing jpprefs and common - there is no benefit to the co. But in the event the co's choose not to pay out divs, then it allows the build up of equity over time

     

    it is not like the cancellation/forgiveness of a debt obligation of a company which becomes profit of the company (i.e. a transfer of value to the co).

     

    The exercise of warrants also adds no capital

     

     

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

     

    , picking personal fights with widely-followed reporters isn't helpful.

     

    Actually I have a lot of respect and appreciation for Glen Bradford's speed on reporting, diligence in covering legal proceedings and overall effort on this and I've posted that before.

     

    My comments were paraphrasing his recent tweets:

     

    https://twitter.com/DoNotLose/status/1096325667015270401

     

    "Hurry up already. It's hard to sit still anymore. Like what... ~2.5-3x upside on the preferred to par? Waited years and I'm losing my mind. Watching life pass me by shifts to just looking away into outer space"

     

    He's also been quite open with having to borrow to fund his position and the accumulated interest adding materially to his cost/pref.

     

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

     

    Pref prices are truly unbelievable...

     

    Resolving this requires actions/events totally outside our control and outside the cold but certain logic of a bankruptcy court. Having been here a while through the ups and downs, with - in reality - almost zero leverage, I imagine 2/3+ would take a 50% payout on jpf's. I would. In which case pricing of around 30% of par is not out of whack.

     

    But of course we hope and talk our book and think we should get par.

     

    Just keeping it real lest we all run out and get even deeper into this. Even our most prolific GSE cheerleader Glen Bradford is running out steam and looking at stuff like shldq and ctl. After Glen sells, that's probably when there will be a deal.

     

    You're just messin' with us, so please say something useful or move on. If Bradford is considering shldq (i.e., the common), then he is not running out of steam; rather he has lost his mind and any value investing credentials he might claim.

     

    Messin' is not my intention. It's a note of caution that there's significant risk. This is much less predictable and has taken much longer than buying run of the mill chap 11 or near chap 11 bonds (done a number of times - ukraine, worldcom, conseco, etc).  It's also my guess than many would take significantly less than par for the jprefs given these factors which suggests a price ceiling if one were to add. If I recall the Citi pref conversion was at 60%.

     

    Prudence and price information ... I dunno - doesn't seem useless to me but maybe everyone knows everything already. Glen (100% and margined) and Berkowitz (35% concentration and forced to liquidate half) may have lacked prudence. But it's not over as long as we survive.

     

    Cheers!

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

     

    Pref prices are truly unbelievable...

     

    Resolving this requires actions/events totally outside our control and outside the cold but certain logic of a bankruptcy court. Having been here a while through the ups and downs, with - in reality - almost zero leverage, I imagine 2/3+ would take a 50% payout on jpf's. I would. In which case pricing of around 30% of par is not out of whack.

     

    But of course we hope and talk our book and think we should get par.

     

    Just keeping it real lest we all run out and get even deeper into this. Even our most prolific GSE cheerleader Glen Bradford is running out steam and looking at stuff like shldq and ctl. After Glen sells, that's probably when there will be a deal.

     

     

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    From my calc's the only way prefs can generate significant value is SP's deemed repaid. Not sure how this can be done without congress. From an accounting perspective, payments were considered revenue by the govt and spent, while the SP is a loan from Treasury. 

     

    Why specifically would this require Congress?  Treasury and FHFA (in its capacity as conservator on behalf of FNMA Board) can modify the terms of the existing contract.  Only these two parties are needed.  If both agree that the original terms have been paid off and negate the 2012 terms, and there is no actual exchange of money but rather a simple agreement that the loan has been deemed paid, why then would Congress need to be involved?

     

    I understand FHFA can modify the terms of the contract but there are some technicalities. (Maybe just my imagination). But, isn't govt spending (revenue and expense) and borrowing authorized by congress? From a strict accounting perspective, the money paid back by FNMA has been recognized as revenue and has been spent. If the SP is considered repaid then that will require a write off of the loan/SP from treasury or a reversal of revenue. Can admin do that without congress?

     

    But hey I'd be happy if FHFA can do it on his own.

     

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    But yes I agree the warrants would be exercised before capital raise. But warrants can be exercised after conversion of JP s which would be much more dilutive to common and JP's. I hold JP's

     

    JP's need to vote on the conversion. They wouldn't vote for conversion if a post conversion warrant exercise went against them. However as long as they got par I guess they wouldn't care. Depends if they own common as well I guess.

     

    Warrants can convert at anytime for 80% on fully diluted basis so likely senior to the JP's. We (JP) can be deemed to object to a conversion prior to warrant conversion but we may not have a choice.. In reality a lot depends on some goodwill from administration absent some kind of court victory. The terms of the SP, even without the NWS is quite severe.

     

    Am just trying to be realistic here. I'd love to get par or par +.  Am not a lawyer so these are guesses. But have bought defaulted securities and have gone through the Chap 11 process several times.

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    From my calc's the only way prefs can generate significant value is SP's deemed repaid. Not sure how this can be done without congress. From an accounting perspective, payments were considered revenue by the govt and spent, while the SP is a loan from Treasury.  If deemed repaid there will be a writeoff at Treasury. Having said that USG has never seemed averse to funny accounting.

     

    If deemed repaid, the main question is when do USG warrants convert to equity - before or after the JP's are converted. If they convert before and the JP's are converted at par at about market (19bn par value fnma pref 17bn fnma mkt cap), then JP's will own 50%+ of FNMA. Does that pass the newspaper test? I think not.

     

    However, if FNMA is allowed to earn 50% of the 3% required capital over time (47bn/94bn) the present value of this accrues to JP, common, USG. Depending on sharing there is a reasonable range where JP's can get close to par or even in excess of par. There are too many moving parts to get more precise.

     

    If the NWS is suspended (this is almost effectively where we are) - I'd say 50% of par, 20% higher than current prices.

     

    If there's a solid indication that the SP is deemed repaid, then I'd agree with 75-80%.

     

    Since the JP's are a single class, I can't see them being treated differently (i.e. some converted to equity and some reinstated). This seems to be the case as prices seem to be converging and liquidity may be the main determinant for a price premium.

     

    There seems to be much more skepticism now (which is good)/prices are much lower vs when ackman did his pitch. Normally hype has been more a signal to sell...

     

    A surefire indication is if lawmakers start buying common and jp's (which they are allowed to do, nice if u can get it).

     

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    I saw it on bloomberg. BBG makes mistakes once in a while and I didn't check the actual filing. I think he sold another series by a similar amount.

     

    Maybe they needed to pay for management fees.

     

    Fairholme had a 31 Mar 2017 filing showing a sale of 3mn FNMAS out of a 62mn position, so down to 59 mn - all numbers approximate.

     

    I just checked the annual & mid-annual 2016 reports, and the Series S position was unchanged amongst all three of the funds, and, as far as I know, Fairholme doesn't report the preferred shares on their 13-F filings anymore.

     

    Do you happen to have a link to the filing or remember where you saw it?

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