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

[Guest Covid-19_Survivor]

One fund is looking to raise $100,000,000 to buy junior prefs

https://www.hfalert.com/search.pl?ARTICLE=189387

 

As cherzeca said not sure why someone who was willing to contribute to 100 million dollar fund wouldn't just buy the preferred on their own and save the management fee. That being said 2/20 maybe a small price to pay if your unfamiliar with the story/possible outcomes and probabilities and don't want to put the time in to learn it all on your own.

 

If things go the way we think they will that an easy 2/20 for them.

 

I don't see a meaningful threshold in required learning between buying prefs oneself or investing in a fund that's going to buy them. Just a strange story all around. If it ends up lacking credibility it could actually be a pump-and-dump.

 

I assume that this fund will buy mostly if not all FNMAS and FMCKJ (maybe FNMAT) because the other series just don't have the liquidity to deploy $100M in any reasonable timeframe, and the other series stand to gain more than 200% if they hit par.

 

Even FNMAS and FMCKJ will make more than 200% in a return to par, but the 2/20 might account for it coming out at 200% in the end.

 

Monday was a good day for the prefs but nowhere close to $100M in volume. Only around $11M for FNMAS and $4M for FMCKJ. Either that's when this fund decided to deploy some of their money (a rumor I saw said that they had already raised $20M) or someone else decided to pile into FNMAS.

 

LOL, ya think?

 

I take that back. It could be that whoever wrote it is just sick and tired of seeing his holdings wallowing in 4-5x land. Whatever is the truth, that was definitely a pump report.

[beaufort]

Re Fannie Q1 earnings.

 

There is a significant difference in cash on the balance sheet that changed from December 31, 2019 to March 31, 2020.  The change in cash is from $21,184 to $80,463 (difference of $59,279) and total assets are up to $3,601,356 up from $3,503,319 (difference of $98,037).  There is a corresponding significant change in total liabilities from $3,587,411 up from $3,488,711 (difference of $98,700).

 

The net difference between total liabilities and total assets is nearly a wash, but why did Fannie raise so much cash?

 

Page 11:

 

https://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2020/q12020_release.pdf

 

On the conference call the CFO mentioned selling bonds to finance the P and I advancements after 4 months for the loans on forbearance? Did they raise cash for this?

 

I read the conference call transcript.  Your explanation is consistent with the documents and the call. 

[Guest Covid-19_Survivor]

Learn deep into this crisis, you must watch it

 

https://youtu.be/7B8qJbKwx_o?t=619

 

https://youtu.be/7B8qJbKwx_o?t=885

 

https://www.youtube.com/watch?v=7B8qJbKwx_o

 

It's been banned for good reason, Emily. https://www.bitchute.com/video/T6ByOc9NOgW9/

 

[investorG]

Another week goes by of Mnuchin and Calabria unnecessarily hurting their boss's re-election odds through artificially creating a tight mortgage market.  It's time for them to settle Collins (which would domino end the rest of the lawsuits) and at the same time co-ordinate a private equity injection into the companies so they can spread the wealth to homeowners with a strong balance sheet.  Waiting for 7 weeks for the Seila outcome is wasting valuable time.

[Guest cherzeca]

Another week goes by of Mnuchin and Calabria unnecessarily hurting their boss's re-election odds through artificially creating a tight mortgage market.  It's time for them to settle Collins (which would domino end the rest of the lawsuits) and at the same time co-ordinate a private equity injection into the companies so they can spread the wealth to homeowners with a strong balance sheet.  Waiting for 7 weeks for the Seila outcome is wasting valuable time.

 

some PE is already in the GSEs...owning the juniors looking for a settlement before even considering adding on.  most PE has no interest, looking to take control over companies, cut costs then monetize.  your oft-recurring PE refrain is apparently heartfelt on your part, but I would suggest a complete waste of time at this juncture.

[Guest Covid-19_Survivor]

On ASK there is now a $2.11 difference between FMCKN and FNMAS. Man, I don't know what people are thinking; Cheapest 4 are all Freddie, like it will matter in end. Spent morning flipping FNMAH for FMCKM and FNMAT for a gain of around 10%. Thanks!

 

[Luke 532]

On ASK there is now a $2.11 difference between FMCKN and FNMAS. Man, I don't know what people are thinking; Cheapest 4 are all Freddie, like it will matter in end. Spent morning flipping FNMAH for FMCKM and FNMAT for a gain of around 10%. Thanks!

 

I used to think the same thing, but I've changed my opinion.  I previously owned FMCCL but switched to the more expensive (based on percentage of par) FNMAH about 6 months ago.  Currently, I own FNMAH and FNMFN in roughly equal dollar amounts.  I'm not necessarily saying any of the following are going to happen, but the real possibility is enough to at least think twice (especially points 1 and 2 below). My reasons for changing my opinion are below...

 

(1) If nothing was done other than turning on the dividends for lower dividend prefs, like FMCCL with it's 1.54% coupon, where do you think they'd trade in relation to par?  Let's say the yield is 4%, that puts the price of FMCCL at $20 (40% of par).  That would be awful if an investor is expecting at or near par.

 

(2) There has been talk of converting at 60% of par plus back-interest paid for 6 years.  Yes, I'm aware they are non-cumulative but anything can happen in a negotiated settlement.

FMCCL (1.54%): ($50 * 60%) + (1.54% * $50 * 6 years) = $34.62/share... or 69.2% of par.

FNMAH (4.5%): ($25 * 60%) + (4.5% * $25 * 6 years) = $21.75/share... or 87% of par.

FNMFN (7%): ($50 * 60%) + (7% * $50 * 6 years) = $51.00/share... or 102% of par.

 

(3) Fannie is expected to exit conservatorship via consent decree up to 6 months before Freddie exits because they have more capital built up.  Therefore, people might be more willing to buy Fannie prefs.

 

(4) Some investors don't want to switch back and forth within the preferred issues due to long-term capital gains tax status.  It's a tough pill to swallow to start that year-long clock over again.

[Luke 532]

^^^ With that said, I fully expect all series to be converted at/near par regardless of dividend rate.  I just wanted to cover my backside in case any of the scenarios above play out.  Those buying prefs based solely on discount to par, in all likelihood, will do best.

[Midas79]

On ASK there is now a $2.11 difference between FMCKN and FNMAS. Man, I don't know what people are thinking; Cheapest 4 are all Freddie, like it will matter in end. Spent morning flipping FNMAH for FMCKM and FNMAT for a gain of around 10%. Thanks!

 

I used to think the same thing, but I've changed my opinion.  I previously owned FMCCL but switched to the more expensive (based on percentage of par) FNMAH about 6 months ago.  Currently, I own FNMAH and FNMFN in roughly equal dollar amounts.  I'm not necessarily saying any of the following are going to happen, but the real possibility is enough to at least think twice (especially points 1 and 2 below). My reasons for changing my opinion are below...

 

(1) If nothing was done other than turning on the dividends for lower dividend prefs, like FMCCL with it's 1.54% coupon, where do you think they'd trade in relation to par?  Let's say the yield is 4%, that puts the price of FMCCL at $20 (40% of par).  That would be awful if an investor is expecting at or near par.

 

(2) There has been talk of converting at 60% of par plus back-interest paid for 6 years.  Yes, I'm aware they are non-cumulative but anything can happen in a negotiated settlement.

FMCCL (1.54%): ($50 * 60%) + (1.54% * $50 * 6 years) = $34.62/share... or 69.2% of par.

FNMAH (4.5%): ($25 * 60%) + (4.5% * $25 * 6 years) = $21.75/share... or 87% of par.

FNMFN (7%): ($50 * 60%) + (7% * $50 * 6 years) = $51.00/share... or 102% of par.

 

(3) Fannie is expected to exit conservatorship via consent decree up to 6 months before Freddie exits because they have more capital built up.  Therefore, people might be more willing to buy Fannie prefs.

 

(4) Some investors don't want to switch back and forth within the preferred issues due to long-term capital gains tax status.  It's a tough pill to swallow to start that year-long clock over again.

 

Good points, particularly 2 and 4.

 

That said, why would you own FNMAH (variable div, 4.5% right now) over FNMAJ (7.675% fixed div) right now when you could trade the former for the latter at parity? I just checked: the bid on FNMAH and the ask on FNMAJ are both at $6.15.

[Luke 532]

Good points, particularly 2 and 4.

 

That said, why would you own FNMAH (variable div, 4.5% right now) over FNMAJ (7.675% fixed div) right now when you could trade the former for the latter at parity? I just checked: the bid on FNMAH and the ask on FNMAJ are both at $6.15.

 

Very interesting, thanks. Gonna run some numbers...

[beaufort]

I know this has come up before, but what would the rationale be for converting the low yielders in today's environment?  Reissuing new prefs will be more expensive to the companies. 

 

The only thing I can think of is to clear the capital structure completely to raise new common with nothing ahead of the new money.  For those more knowledgeable about this than me, please provide some colour on this.  For example, I have not looked at whether C had low yielders such as FMCCL and if something similar happened in that recap. 

 

Would clearing up the capital structure be such an advantage that it would prevail over keeping the payouts cheap?

[Guest cherzeca]

there is no really smart way to play this imo since we dont know how any transaction/settlement will play out.  I like liquidity, so I am in most liquid pref security I could find

[Midas79]

there is no really smart way to play this imo since we dont know how any transaction/settlement will play out.  I like liquidity, so I am in most liquid pref security I could find

 

Doesn't liquidity only matter if you want to get in or out quickly? If so, what event(s) would make you want to run to the exit?

[Guest Covid-19_Survivor]

On ASK there is now a $2.11 difference between FMCKN and FNMAS. Man, I don't know what people are thinking; Cheapest 4 are all Freddie, like it will matter in end. Spent morning flipping FNMAH for FMCKM and FNMAT for a gain of around 10%. Thanks!

 

I used to think the same thing, but I've changed my opinion.  I previously owned FMCCL but switched to the more expensive (based on percentage of par) FNMAH about 6 months ago.  Currently, I own FNMAH and FNMFN in roughly equal dollar amounts.  I'm not necessarily saying any of the following are going to happen, but the real possibility is enough to at least think twice (especially points 1 and 2 below). My reasons for changing my opinion are below...

 

(1) If nothing was done other than turning on the dividends for lower dividend prefs, like FMCCL with it's 1.54% coupon, where do you think they'd trade in relation to par?  Let's say the yield is 4%, that puts the price of FMCCL at $20 (40% of par).  That would be awful if an investor is expecting at or near par.

 

(2) There has been talk of converting at 60% of par plus back-interest paid for 6 years.  Yes, I'm aware they are non-cumulative but anything can happen in a negotiated settlement.

FMCCL (1.54%): ($50 * 60%) + (1.54% * $50 * 6 years) = $34.62/share... or 69.2% of par.

FNMAH (4.5%): ($25 * 60%) + (4.5% * $25 * 6 years) = $21.75/share... or 87% of par.

FNMFN (7%): ($50 * 60%) + (7% * $50 * 6 years) = $51.00/share... or 102% of par.

 

(3) Fannie is expected to exit conservatorship via consent decree up to 6 months before Freddie exits because they have more capital built up.  Therefore, people might be more willing to buy Fannie prefs.

 

(4) Some investors don't want to switch back and forth within the preferred issues due to long-term capital gains tax status.  It's a tough pill to swallow to start that year-long clock over again.

 

All good points that I've considered but your 2nd post weighs heavier in my mind. There's also a (5), though. I read it here and it makes as much sense as your (3) - Fannie having more value does have merit. But (5) is how it wouldn't be dumb for the low dividend issues to not be part of a settlement and just be set free (not sure who wrote that but I thought it smart). So, which would you rather own, FNMAS at $25, period, or FNMAH at $20 and a $20 yearly dividend?

 

Another consideration: today I traded FNMAH at 4x ($25) partially for FNMAP at 5.3x ($50). For those of us holding for settlement those 50's deserve more respect.

 

NM, (5) is (1)

 

[Guest cherzeca]

there is no really smart way to play this imo since we dont know how any transaction/settlement will play out.  I like liquidity, so I am in most liquid pref security I could find

 

Doesn't liquidity only matter if you want to get in or out quickly? If so, what event(s) would make you want to run to the exit?

 

maybe something good, maybe something bad

[Guest Covid-19_Survivor]

 

Good points, particularly 2 and 4.

 

That said, why would you own FNMAH (variable div, 4.5% right now) over FNMAJ (7.675% fixed div) right now when you could trade the former for the latter at parity? I just checked: the bid on FNMAH and the ask on FNMAJ are both at $6.15.

 

That's not true. FNMAH's dividend is the higher of 4.5% or LIBOR + .75%

 

Although, Luke's 2nd post..... it's unlikely any dividend is maintained.

[Luke 532]

From Peter A. Chapman...

Under seal this afternoon, Chief Judge Sweeney entered her opinion and order on the government's motion to dismiss the Fisher and Reid Plaintiffs' complaints.  The court docket indicates Judge Sweeney denied the government's motion to dismiss and denied the Fisher and Reid Plaintiffs' motion to lift the stay.  The court docket also indicates any motion to certify an interlocutory appeal to the Federal Circuit must be filed by May 118.

 

[Guest Covid-19_Survivor]

From Peter A. Chapman...

Under seal this afternoon, Chief Judge Sweeney entered her opinion and order on the government's motion to dismiss the Fisher and Reid Plaintiffs' complaints.  The court docket indicates Judge Sweeney denied the government's motion to dismiss and denied the Fisher and Reid Plaintiffs' motion to lift the stay.  The court docket also indicates any motion to certify an interlocutory appeal to the Federal Circuit must be filed by May 118.

 

What does the following mean: "denied the Fisher and Reid Plaintiffs' motion to lift the stay"? What motion would FnR be staying?

 

Answer: (more waiting) "Fisher/Reid claims are derivative (like Barrett's in Fairholme, et al). Judge Sweeney's order seems to force Fisher/Reid to (1) wait for Fairholme, et al decision from Court of Appeals or (2) make their own motion to certify interlocutory appeal."

 

[Guest Covid-19_Survivor]

Someone bought over 10 million common shares?

 

https://money.cnn.com/quote/shareholders/shareholders.html?symb=FNMA&subView=institutional

 

Someone did! Looks like their 200+ million shares of FnF were built since 4th qtr. They also own 144 million shares of various preferreds. Good catch, both are very substantial positions!

 

"Courage! We have been here before"

https://www.capitalgroup.com/

 

[investorG]

I wonder when we'll get the wsj / bloomberg / politico article talking about another delayed capital rule release.

[Guest Covid-19_Survivor]

Someone bought over 10 million common shares?

 

https://money.cnn.com/quote/shareholders/shareholders.html?symb=FNMA&subView=institutional

 

Someone did! Looks like their 200+ million shares of FnF were built since 4th qtr. They also own 144 million shares of various preferreds. Good catch, both are very substantial positions!

 

"Courage! We have been here before"

https://www.capitalgroup.com/

 

Accumulation occurring, and mostly with this firms favs. I suspect they're still building positions. Either that or others respect their opinion that we're going whole - one way or another. Expect a puff report in near future.

[Guest Covid-19_Survivor]

Best value of day: FREJP, bought at 10.20

 

LOL, 5 whole shares! So, not value of the day, just someone seeking attention. To sell.

[Wiggins]

The preferred shares have differing dividend rates and redemption terms and these differences may significantly affect the value of these securities as discussed below.

 

Once the NWS goes away, if the GSEs want to clean up the capital structure, they may want to redeem or exchange some of the preferred shares. If they want to exchange them for common at par,  or common or cash at some haircut to par, they will need consent from at least 2/3rd of the voters from each series. If they do not get consent, then for most of the series they will have the option to redeem for cash at par plus the quarterly dividend due in the quarter they are redeemed (regardless of whether the dividend is being paid or not).

 

Here's how I see that potentially playing out:

For the very-low variable-rate preferred securities (e.g. FMCCS, FMCCJ, FMCCM, FNMAO, FMCCL, FMCCG, FMCCI, FNMAP, FMCCN), there is no incentive to exchange or redeem, even at a haircut. Just turn on the dividends. The dividends are so low on these that they would be valued in the open market at perhaps 1/3rd of par.

 

For all the other securities (except FNMAS and FMCKJ), if they cannot get a vote of 2/3rds of holders, then just redeem at par plus the quarterly dividend. They could refinance at lower rates.

 

For FNMAS and FMCKJ, the GSEs can only redeem (without consent from shareholders) every five years. For FNMAS the next date is 12/31/2020 and for FMCKJ the next date is 12/31/2022. If the dividends are eventually turned back on, FNMAS and FMCKJ will hold more value because they can only be called on these dates.

 

I would bet that after 1/1/2021 FNMAS will go up in value because it will not be redeemable until 12/31/2025, and I expect the GSEs to be released from conservatorship by then. Likewise if FMCKJ is not redeemed by 12/31/2022 then the next date is 12/31/2027.

 

For the above reasons I believe FMCKJ and FNMAS are more valuable than the others. Thoughts?

 

Note: there are other factors such as liquidity and Fannie vs Freddie, etc., which come in to play. But I am just focusing on significance of dividend and redemption terms.

[Guest Covid-19_Survivor]

My opinion is if you're gonna clean up your capital structure, that includes: 1) Consolidating 37! preferred stocks into 2 or 6, or most likely none; 2) Or at least redeem 8 of the issues which have been rendered worthless by archaic payout terms. You don't want that stink and two of them may be illegal in that I'm not paying Fannie quarterly for my preferreds; 3) I'm no lawyer but I'd imagine there's a lot of other prospectus language has been violated in one manner or another, and not creating lawsuits is probably a goal here. They all need to be amended anyway, so..

 

They'll all be redeemed at par with common. 25, 50, 100,000

 

For the above reasons I believe FMCKJ and FNMAS are owned by dreamers and flippers, and if you want value today consider the par 50's.

 

FYI, FMCCS has a divi floor of 4%

[Wiggins]

Any other thoughts to my post from someone else?

Maybe Cherzeca; i believe you said you own FNMAS. Is that just for the liquidity?

thanks