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

[Luke 532]

I would also add any settlement will reflect highly on the preference of the big preferred holders, Paulson et al. We are going to ride their coat tails who are we kidding?

 

There is still a lot of post ruling euphoria in the air affecting a lot peoples judgement. I'm going to refrain from un realistic expectations or calculations in the mean time. Seems like only a let down can come with that thinking.

 

I hear ya. I'm not in the euphoric camp, but pleased with Friday's ruling. I'm merely turning over every stone, hence the questions about plaintiffs expecting 150% of par.

[Midas79]

This is likely accomplished as discussed by just voiding the SPS liquidation preference since it's considered paid down and then returns over-payment past the 10% moment, at least. The other alternative, return ALL funds paid over the 10% dividend and keep the SPS liquidation preference intact isn't likely logistically. But, either way, there is no conversion of SPS into commons causing dilution.

 

The last part of this is incorrect in your "other alternative" scenario. In that case, Treasury would send FnF something on the order of $120B, but that still would not get FnF fully capitalized because the seniors represent a negative $187B drag on core capital. If you go look at FnF's 10-K forms, they report a combined core capital of negative $181B as of the end of 2018. Adding $120B to that doesn't even make it positive, let alone get FnF all the way to fully capitalized ($103.5-139.5B of core capital by Watt's proposed rule).

 

What it would take to finish the recap is either canceling the seniors (adding that amount to retained earnings) or converting them to a form of equity that counts as core capital, of which there are only two, non-cumulative pref shares or common shares.

 

Canceling the seniors costs Treasury 12 figures. Not happening.

Converting the seniors into non-cumulative prefs isn't really workable. The seniors are 10% cumulative with $200B in liquidation preference. They would want a higher rate to convert them to non-cumulative. $200B of prefs at 12% eats up all of FnF's earnings forever. Existing equity holders end up with worthless paper.

Converting the seniors into commons is the best course for Treasury because they can recoup the $120B they send out and then some, and quickly too.

 

In the end, FnF have very little capital now and will have to build it very quickly to get recap and release done by the end of Trump's term. The Fifth Circuit's ruling that the FHFA director can be fired at will by the president only makes things more urgent because a new president could replace both Calabria and Watt, and if FnF are still in conservatorship at that point the new president would have the power to blow up the entire recap and release effort.

 

Building capital quickly means issuing lots and lots of new common shares. It's really the only way. Some prefs could be used but there are issues with having too many of those in the capital structure.

 

There is no magic anti-dilution bullet. I hadn't even mentioned the warrants!

[Gregmal]

Already looking super perky, with the commons again looking like the better performer.

 

Personally I think at this point the preferred's should be trading at a minimum at 65-70% of par. This has all but been derisked.

[orthopa]

Mnuchin said FnF will start to retain captial in near term. Hoping to do in September have to negotiate with FHFA. NWS ending soon as expected, finally.

 

[orthopa]

Already looking super perky, with the commons again looking like the better performer.

 

Personally I think at this point the preferred's should be trading at a minimum at 65-70% of par. This has all but been derisked.

 

Agree. Mnuchin just said NWS ending and Treasury going to negotiate per plan. Sounds like more then 40% of par of me.

[orthopa]

Have to watch again but it seems like there is finally some urgency and Housing Reform is front and center. Mnuchin all for stopping NWS and building capital through retained earnings. Thats great coming straight from the Secretary of the Treasury.

[Luke 532]

Massive. I view "3-6 months" as more significant than the 5th Circuit ruling (as someone who trusted @MarkCalabria comments to end NWS and @USTreasury

saying they want to rebuild capital). 70% of par is no longer the short term floor. $FNMA $FMCC

[Luke 532]

Thoughts?  Does the timeline below look accurate based on the plan, Mnuchin's comments, etc.? 

 

GSE timeline is set. @FHFA capital rule and SPSPA amendment by end of Q4'19. Congress gets until end of Q1'20 to legislate reform as GSEs get approval for capital restoration plans. Quick recapitalization to ensure end of conservatorship by January 2021. $FNMA $FMCC

 

As an aside, gotta hand it to Maria, she brought the heat: "investors really were screwed (sounds like Kudlow's tweet from a few years ago)," "the director and structure of FHFA is unconstitutional," etc.  It's been said that in previous interviews Mnuchin/Treasury has told her what she is/isn't allowed to ask about, so if true, allowing her to get these talking points out in the open "screwed," "unconstitutional" is pretty interesting (could be a way to get Obama to take a lot of heat). 

[Gregmal]

Thoughts?  Does the timeline below look accurate based on the plan, Mnuchin's comments, etc.? 

 

GSE timeline is set. @FHFA capital rule and SPSPA amendment by end of Q4'19. Congress gets until end of Q1'20 to legislate reform as GSEs get approval for capital restoration plans. Quick recapitalization to ensure end of conservatorship by January 2021. $FNMA $FMCC

 

As an aside, gotta hand it to Maria, she brought the heat: "investors really were screwed (sounds like Kudlow's tweet from a few years ago)," "the director and structure of FHFA is unconstitutional," etc.  It's been said that in previous interviews Mnuchin/Treasury has told her what she is/isn't allowed to ask about, so if true, allowing her to get these talking points out in the open "screwed," "unconstitutional" is pretty interesting (could be a way to get Obama to take a lot of heat).

 

Yup. Ive said before that the easiest way to spin this is to throw it all on Obama. Something I dont think any of us would argue about whether or not this option is appealing to Trump.

 

 

[Guest cherzeca]

Who is Holden walker?

[Luke 532]

I know you all know, but if anybody is still looking to initiate a position or add and you want to avoid all the action of the high volume series, then take a look at FMCCL (50-par) and FNMAH (25-par).  The everyday Joe is going to be looking at FNMAS first so the others may lag a bit giving you a better entry.  Yes, talking my book as those are my two largest concentrations in this name, but what I said still holds true.  Wish you well!

[Luke 532]

Who is Holden walker?

 

No idea, just an investor as far as I know that is following the situation. I wasn't saying his tweet contained non-public information if anybody got that impression, just wanted to share it since it seems to align with recent events like Mnuchin's comments this morning as well as the plan released this past week.

[Guest cherzeca]

Speculation about timeline is premature. When C and M have announced a deal then we can timeline

[orthopa]

Who is Holden walker?

 

I follow him on twitter. Pretty with it from the GSE standpoint. Not unrealistic, pretty bright it seems. Worth a follow.

 

I agree what Mnuchin said was huge. NWS ending soon and he wants to giddy up on this. No more messing around it seems. No more dicking around.

 

I still find it interesting that he is still waiting on congress or perceives they will in regard to recap (maybe I have to re listen to interview) since congress isn't needed for what FHFA and Treasury can do on their own.

[WB_fan82]

Thinking about the statements Mnuchin made on FBN this morning re: currently negotiations to amend NWS with FHFA, one obvious way to do this is to increase the liquidation preference of the sr. pfd.

 

As Midas noted, this doesn't actually increase capital (until the sr. pfd are converted to capital... either being non-cum or converting to equity).

 

But there is an alternative.  Instead of increasing liquidation preference, why not just issue common equity equal to the amount of dividend foregone?  Either through actual shares or warrants.

 

My question for the board is, does anyone know the triggers for the 80% accounting consolidation rule that would put the GSEs on the books of the govt?  Is it actual share ownership, or "beneficial ownership" (meaning the % of shares out the govt could have tomorrow if it wanted to)?

[Luke 532]

I still find it interesting that he is still waiting on congress or perceives they will in regard to recap (maybe I have to re listen to interview) since congress isn't needed for what FHFA and Treasury can do on their own.

 

Me too.  It's possible he said that so the meeting with the Finance Committee goes smoother tomorrow. But that's anybody's guess.

[Luke 532]

Here's the interview: https://video.foxbusiness.com/v/6084640350001/#sp=show-clips

[TwoCitiesCapital]

There it is! FMCCJ up 26% so far

[Guest cherzeca]

Here's the interview: https://video.foxbusiness.com/v/6084640350001/#sp=show-clips

 

Great interview!

[Midas79]

For some reason I wasn't drinking the Kool-Aid after the Fifth Circuit ruling, but today's Mnuchin interview got me to make a glass and chug it down. I think Mnuchin knows that he is on a tight timeline now that Calabria will likely be removable at will by a new president if Trump is not re-elected.

 

He also emphasized third-party and private capital. Unless Calabria has had a change of heart on the correct sizing to capital standards, retained earnings are only going to play a small part of the recap due to the timeline.

 

I think the list cherzeca made on Twitter about the recap steps is spot on. I'll paste it here for reference.

 

some possible, somewhat reasonable operating assumptions for the #GSE recap:

1. there will be a global settlement in connection with recap.

2. junior prefs agree by class to a exchange into common at or close to par. 1/

3. some kind of private offering for common is first step before a large public offering.

4. this private offering will "set price" for the common.  expect this price will be low, to entice private investor(s) to buy.  junior pref holders like low common price as well.

5. once common private placement is done and some retained earnings build up, large common offering(s).

6. junior pref holders who hold their exchanged for common could see future price appreciation

[DRValue]

Gotta say the easiest way to clear all lawsuits is to give back all pspa dividends above repaying principal, recap with dividend payback, then exercise warrants to make the govt money.

 

That doesn't sit with raising 3rd party capital though...

[Cox022]

Building off what WBfan said earlier...

 

Is it logical to think the 80% ownership threshold will prevent Treasury from converting its Senior Preferred into common stock since they already have warrants for 79.9%?

 

Can we evaluate the future based on these 2 near-certainties?

1)  The senior pref cannot remain in its current place, and

2)  the government will not go over 80% ownership

 

Where does that leave us...an increased likelihood the Senior Pref gets cancelled?

 

[Midas, does this line of thinking change your thinking from what you said earlier today?]

 

 

[orthopa]

Building off what WBfan said earlier...

 

Is it logical to think the 80% ownership threshold will prevent Treasury from converting its Senior Preferred into common stock since they already have warrants for 79.9%?

 

Can we evaluate the future based on these 2 near-certainties?

1)  The senior pref cannot remain in its current place, and

2)  the government will not go over 80% ownership

 

Where does that leave us...an increased likelihood the Senior Pref gets cancelled?

 

[Midas, does this line of thinking change your thinking from what you said earlier today?]

 

Wasnt the Sr Preferred "always" going to get cancelled and NWS going to end to move forward with recap? Treasury plan laid these options out pretty clearly. If one bought assuming par value for preferred at some value for common this was always pretty much assumed IMO.

 

I would also add what ever private capital offering occured would effectively lower the level of treasury ownership if it happened according to cherzeca's layout before public offering.

[Midas79]

Is it logical to think the 80% ownership threshold will prevent Treasury from converting its Senior Preferred into common stock since they already have warrants for 79.9%?

 

No. The warrants can be exercised in pieces or all at once, there is no reason to believe a senior conversion couldn't be structured the same way. In the scenario we're talking about (Treasury sends FnF $120B and converts the seniors to commons), there shouldn't be a need for an SPO, Treasury would just sell its shares directly. They could sell the shares piecemeal, for example they convert $1B of seniors to X commons and sell them, rinse and repeat 193 times. The chunks just have to be sized so that Treasury's ownership never hits 80%.

 

Actually, on further thought, the warrants allow Treasury to assign the shares rather than ever taking possession of them. A senior conversion could easily be structured the same way. Check section 7 on page 7 of the warrant document.

 

https://www.treasury.gov/press-center/press-releases/Documents/warrantfnm3.pdf

 

As long as the final share count is set in stone the investors will flock in, and they represent the private and third-party capital that Mnuchin mentioned.

 

Where does that leave us...an increased likelihood the Senior Pref gets cancelled?

 

If the seniors are canceled then Treasury will be sending $25B back to FnF at the most. That is the amount past the 10% moment. This leaves a $70-100B shortfall under Watt's two proposed minimum capital requirements. The private and third-party capital would then come in via the SPO.

[orthopa]

I dont have all of the preferred tickers in front of me but looks like the previous gap implied by dividend is closing.