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

[Mephistopheles]

Unconfirmed, but this (attached) is floating out there... GS saying FNMAS could trade at $32 with a payable 8.25% coupon.  Again, unconfirmed.

 

 

 

It says currently trade at the equivalent of $32. I think they mean that FNMAS is currently at 32% of par value, which it is.

[Luke 532]

Unconfirmed, but this (attached) is floating out there... GS saying FNMAS could trade at $32 with a payable 8.25% coupon.  Again, unconfirmed.

 

It says currently trade at the equivalent of $32. I think they mean that FNMAS is currently at 32% of par value, which it is.

 

 

Perhaps... that would be quite the typo!

 

 

[Mephistopheles]

Unconfirmed, but this (attached) is floating out there... GS saying FNMAS could trade at $32 with a payable 8.25% coupon.  Again, unconfirmed.

 

It says currently trade at the equivalent of $32. I think they mean that FNMAS is currently at 32% of par value, which it is.

 

 

Perhaps... that would be quite the typo!

 

 

 

I don't think it is a typo. I believe that $100 is a standard par value for prefs or bonds, but I may be wrong. When they state "equivalent of", they mean assuming it was a $100 par value. I agree they could have worded it better.

[Luke 532]

Unconfirmed, but this (attached) is floating out there... GS saying FNMAS could trade at $32 with a payable 8.25% coupon.  Again, unconfirmed.

 

It says currently trade at the equivalent of $32. I think they mean that FNMAS is currently at 32% of par value, which it is.

 

 

Perhaps... that would be quite the typo!

 

 

I don't think it is a typo. I believe that $100 is a standard par value for prefs or bonds, but I may be wrong. When they state "equivalent of", they mean assuming it was a $100 par value. I agree they could have worded it better.

 

Agreed.

[Guest cherzeca]

i disagree with premise.  i think common shareholders will most definitely be asked to invest without a dividend because profit retention will be necessary to build capital in order to be released from conservatorship.  for how long will be a question of how profitable the GSEs are, and the interplay of politics (think hensarling/crapo/corker). if so, then the junior pref will also not see dividends, which since noncumulative will vaporize when not declared.

 

at some point in future when GSEs are recapped and released, the common dividend will be an important part of the security, but until capital is built, GSEs will have to attract growth not yield investors.

[waynepolsonAtoZ]

"GSEs will have to attract growth not yield investors."

 

Tsy will want to maximize the value of the warrants, which means paying a small common dividend and paying the pref dividends.

 

My assumption is that Tsy will keep control, but will start selling off some of the warrants in the market.

 

FnF need $100 billion or more of book equity capital via new issues of common stock. Building book equity capital would take a long time (granted but for the 3rd Amendment, they'd have over a $100 billion of book equity capital by now).

[Mephistopheles]

i disagree with premise.  i think common shareholders will most definitely be asked to invest without a dividend because profit retention will be necessary to build capital in order to be released from conservatorship.  for how long will be a question of how profitable the GSEs are, and the interplay of politics (think hensarling/crapo/corker). if so, then the junior pref will also not see dividends, which since noncumulative will vaporize when not declared.

 

at some point in future when GSEs are recapped and released, the common dividend will be an important part of the security, but until capital is built, GSEs will have to attract growth not yield investors.

 

+1

 

More likely that the junior prefs will be converted to common as the dividend rate on some of them is way too high for current rates, and it also helps recap. Not only does this make the most sense, but it's also most beneficial for Mnuchin's buddies Berkowitz and Paulson.

 

I also think they'll reverse the NWS and assume all excess payments were for repayment of Sr. preferred. That will bring the 10% senior dividend to a small, manageable amount for which the principle they can pay off rather quickly. All this will be great for the value of the warrants and ultimately result in a quick solution as per Mnuchin's words.

[Flynnstone5]

"GSEs will have to attract growth not yield investors."

 

Tsy will want to maximize the value of the warrants, which means paying a small common dividend and paying the pref dividends.

 

My assumption is that Tsy will keep control, but will start selling off some of the warrants in the market.

 

FnF need $100 billion or more of book equity capital via new issues of common stock. Building book equity capital would take a long time (granted but for the 3rd Amendment, they'd have over a $100 billion of book equity capital by now).

 

If they choose to maximize value of the warrants, why would they issue so much common? Why not reinstate divs and issue new jr prf'd? There's enough cash flow and you wouldn't dilute the common. Recap easier with a higher pps and max their own position.

[Flynnstone5]

i disagree with premise.  i think common shareholders will most definitely be asked to invest without a dividend because profit retention will be necessary to build capital in order to be released from conservatorship.  for how long will be a question of how profitable the GSEs are, and the interplay of politics (think hensarling/crapo/corker). if so, then the junior pref will also not see dividends, which since noncumulative will vaporize when not declared.

 

at some point in future when GSEs are recapped and released, the common dividend will be an important part of the security, but until capital is built, GSEs will have to attract growth not yield investors.

 

+1

 

More likely that the junior prefs will be converted to common as the dividend rate on some of them is way too high for current rates, and it also helps recap. Not only does this make the most sense, but it's also most beneficial for Mnuchin's buddies Berkowitz and Paulson.

 

I also think they'll reverse the NWS and assume all excess payments were for repayment of Sr. preferred. That will bring the 10% senior dividend to a small, manageable amount for which the principle they can pay off rather quickly. All this will be great for the value of the warrants and ultimately result in a quick solution as per Mnuchin's words.

 

This is my personal utopian outcome as I'm 50/50 common/prf'd right now. Some have floated a conversion of 2:1 based on historical price ratio's, but to me that doesn't seem sweet enough for Berkowitz/Paulson. What do you see as likely?

[Guest cherzeca]

the only way the common gets a dividend is if treasury provides GSEs an equity line to draw on as a source of emergency capital, which i dont see as likely (or politically feasible).  remember, the junior pref (expensive dividend rates) cant be compelled to convert or exchange, but making holding them can be made unpalatable by providing no dividends until capital is restored. so this whole idea that junior holders will get their dividend restored and their pref will trade at premium is wildly unlikely imo given the practical realities of what will be a politically sensitive, massive scale workout.

[Flynnstone5]

the only way the common gets a dividend is if treasury provides GSEs an equity line to draw on as a source of emergency capital, which i dont see as likely (or politically feasible).  remember, the junior pref (expensive dividend rates) cant be compelled to convert or exchange, but making holding them can be made unpalatable by providing no dividends until capital is restored. so this whole idea that junior holders will get their dividend restored and their pref will trade at premium is wildly unlikely imo given the practical realities of what will be a politically sensitive, massive scale workout.

 

You must see a sweetened conversion as most likely settlement with divs maybe a couple years out? I think the major prfd litigants are going to demand a juicy conversion to not only agree to such a scenario, but also to basically be willing to wait until a div is restored for highest pps. This would certainly align well with gov increasing exercise price on warrants should they go that route.

[racemize]

I think offering conversion at par is plenty juicy enough.

[BeerBBQ]

In a 12/14/16 comment on his blog, Tim Howard suggests that "there is a limit to the percentage of its capital structure a financial institution can have in preferred stock" https://howardonmortgagefinance.com/2016/12/12/a-welcome-reset/#comments

 

Anyone know what these limits are?

 

 

 

[SnarkyPuppy]

Can we try to think through all of the downside scenarios for the preferreds?    I'll start but it might be a useful exercise for the much brighter people on this board to collaborate and try to think through likelihood of each?

 

Risk #1: Recapitalization via net income->retained earnings.  This likely will take 7-10 years (triangulating a few sources here). 

Likelihood+Rationale:  Low.  The risk of under capitalization is inconsistent with Mnuchin's public statement ("we'll be sure they are safe") and this would hurt the hedge funds he's close to.  This would mean a settlement didn't take place and the litigation would provide MOS. 

 

Risk #2: GSE's unwound; litigation losses. 

Likelihood+Rationale:  Seems very low at this point once again due to Mnuchin's involvement + would mean a settlement didn't occur and litigation would provide MOS. 

 

Is there any other possible downside scenario here that I'm missing that's in the remote realm of likelihood?  While the upside to the commons may in the end be more favorable, there just doesn't seem to be any "likely" downside for the preferreds making them a much stronger expected value position?

 

It seems very likely at this point that some combination of the following will occur:

a) eliminating govt preferreds (excess nws payments)

b) increasing govt warrant strike (done at current FNMA price of $4 would be about $20bn capital to FNMA)

c) converting preferreds at par ala citigroup (this would be $19bn for FNMA)

d) a phase in retained earnings recap period (say 3 years of net income at $10bn per year = $30bn)

e) some form of rights offering to account for any additional required capital (higher capital ratio agreed, lower govt warrant strike, some remaining senior pref stock that needs to be repaid) which would dilute the common to an unknown extent, but would not hurt the preferreds)

 

The above would give FNMA $69bn which would be 2.1% of assets.  Seems reasonable, rationale, win/win/win scenario and something that could be completed quickly. 

[SnarkyPuppy]

To be blunt, I have concerns about the commons because of the different unknown variables above, but I'm failing to recognize any situation which has a >20% of occurring where the preferreds can lose...?

[waynepolsonAtoZ]

"b) increasing govt warrant strike (done at current FNMA price of $4 would be about $20bn capital to FNMA)"

 

So, rather than Treasury selling warrants in the market at the market price and receiving the proceeds from doing so, they would donate the warrants to FnF and allow them to reap the proceeds?

 

I always assume that Tsy will keep 50% control and sell the other 29.9% in the market for the best possible price. Paying a common dividend would smooth the way.

 

Then, FnF will need to raise $100 b or more of common. Obviously, at $4 per share the earnings dilution would be massive. At $20 per share the earnings dilution will be a lot less bad (but still a lot of earnings dilution).

 

 

[SnarkyPuppy]

"b) increasing govt warrant strike (done at current FNMA price of $4 would be about $20bn capital to FNMA)"

 

So, rather than Treasury selling warrants in the market at the market price and receiving the proceeds from doing so, they would donate the warrants to FnF and allow them to reap the proceeds?

 

I always assume that Tsy will keep 50% control and sell the other 29.9% in the market for the best possible price. Paying a common dividend would smooth the way.

 

Then, FnF will need to raise $100 b or more of common. Obviously, at $4 per share the earnings dilution would be massive. At $20 per share the earnings dilution will be a lot less bad (but still a lot of earnings dilution).

 

When warrants are exercised, the strike price is effectively a payment to the company.  So $4 per share of government warrant would flow through to the GSE's which would contribute to their equity capital, and then the government can go ahead and do whatever they want with their now outstanding warrants which will be valued > $4 per share.

[Mephistopheles]

Can we try to think through all of the downside scenarios for the preferreds?    I'll start but it might be a useful exercise for the much brighter people on this board to collaborate and try to think through likelihood of each?

 

The risks at this point IMO are:

1. Congress does not confirm Mnuchin, and someone against us gets the job, like Corker or Hensarling.

2. Despite every intention to release the GSEs, the White House has its hands tied by Congress and it turns out that its better politically for Trump and his people to keep the NWS intact.

3. Trump gets impeached...Congress decides that the cost of letting him go is worth the benefit of having a true Conservative as President.

 

I think the likelihood of all are low.

[hardincap]

2) is something im worried about, and mclean thinks this is the most likely scenario

 

http://www.nationalmortgagenews.com/news/voices/why-gse-recapitalization-talk-is-premature-1093759-1.html

 

 

[Guest cherzeca]

2) is something im worried about, and mclean thinks this is the most likely scenario

 

http://www.nationalmortgagenews.com/news/voices/why-gse-recapitalization-talk-is-premature-1093759-1.html

 

stevens says this in linked article: "Similarly, Congress voted almost unanimously to limit the Treasury's ability to execute any transaction using the government-owned GSE preferred shares absent an explicit act of Congress."

 

this is patently untrue.  the guy is a shill. 

[rros]

2) is something im worried about, and mclean thinks this is the most likely scenario

 

http://www.nationalmortgagenews.com/news/voices/why-gse-recapitalization-talk-is-premature-1093759-1.html

 

stevens says this in linked article: "Similarly, Congress voted almost unanimously to limit the Treasury's ability to execute any transaction using the government-owned GSE preferred shares absent an explicit act of Congress."

 

this is patently untrue.  the guy is a shill.

Let me add granularity, if you don't mind...

 

This is somewhat correct.

 

"Similarly, 114th Congress voted almost unanimously to limit Obama's Treasury's ability to execute any specific transactions using...

 

And here comes the 115th Congress and Trump's Treasury with 1 year to go before Jumpstart is dead. We'll see what this new Congress delivers given the new Treasury crew. Noting that perhaps, just perhaps, Treasury delivers first.

 

Stevens et al. want to prolong a narrative that has become unsustainable.

[Guest cherzeca]

2) is something im worried about, and mclean thinks this is the most likely scenario

 

http://www.nationalmortgagenews.com/news/voices/why-gse-recapitalization-talk-is-premature-1093759-1.html

 

stevens says this in linked article: "Similarly, Congress voted almost unanimously to limit the Treasury's ability to execute any transaction using the government-owned GSE preferred shares absent an explicit act of Congress."

 

this is patently untrue.  the guy is a shill.

Let me add granularity, if you don't mind...

 

This is somewhat correct.

 

"Similarly, 114th Congress voted almost unanimously to limit Obama's Treasury's ability to execute any specific transactions using...

 

And here comes the 115th Congress and Trump's Treasury with 1 year to go before Jumpstart is dead. We'll see what this new Congress delivers given the new Treasury crew. Noting that perhaps, just perhaps, Treasury delivers first.

 

Stevens et al. want to prolong a narrative that has become unsustainable.

 

jumpstart= "Prohibits the Department of the Treasury from selling, transferring, relinquishing, liquidating, divesting, or otherwise disposing of any outstanding shares of senior preferred stock acquired pursuant to a specified Senior Preferred Stock Purchase Agreement between Treasury and an enterprise until Congress has passed and the President has signed into law legislation that includes a specific instruction to Treasury regarding the sale, transfer, relinquishment, liquidation, divestiture, or other disposition of the senior preferred stock so acquired."

 

you can drive a truck through this language.  a 4th A that retroactively amends a term (NWS) is not prohibited, and would have the effect of converting dividends into principal repayments.  beep beep

[waynepolsonAtoZ]

#2 would have been 100 percent likely under  BHO or HRC. Under The Donald it is somewhat less than 100 percent likely.

 

That's an improvement.

[Seahug]

Can we try to think through all of the downside scenarios for the preferreds? 

Is there any other possible downside scenario here that I'm missing that's in the remote realm of likelihood? 

 

Additional possible downside for jprefs-

 

Based on spref/warrant language warrants can be exercised AFTER conversion of the jprefs to equity. This totally screws up jpref and common returns. Technically possible but i dont think this is the likely approach.

[waynepolsonAtoZ]

Each series of the preferred requires a 2/3 vote for conversion. Why would anyone vote for conversion if it could lead to massive dilution ex post?