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

[TwoCitiesCapital]

Obviously details are up in the air - but if the restructuring takes place as Moelis assumes it will, then the current preferred/common value ratio is now 1:3 and 1:6 for $25 and $50 par respectively. 

 

 

Obviously there are assumptions made with their presentation - like the conversion at $7.95/share for the preferred shares - but preferred shares are trading cheap relative to common if $7.95 is roughly correct.

 

 

 

[Guest cherzeca]

twitter

 

Melvin Watt‏ @MelvinWatt_FHFA  31m31 minutes ago

 

There are a lot of things in this Blueprint that I believe work. I look forward to working with @stevenmnuchin1 -- http://www.gsesafetyandsoundness.com/blueprint/

[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.

 

8)

[no_free_lunch]

Are you sure that is Melvin Watt's real twitter feed?  Why are there only 5 tweets, with the oldest one being from yesterday?

[Guest cherzeca]

Are you sure that is Melvin Watt's real twitter feed?  Why are there only 5 tweets, with the oldest one being from yesterday?

 

who knows?

[Guest cherzeca]

moelis said on CC that they have been retained by certain non-litigating preferred shareholders.

 

perhaps that would include paulson, who mnuchin is familiar enough with to have been a repeat co-investor.

 

if so, you might think that mnuchin knew about this retention, and simply said to paulson, "hey get moelis to produce something good so that i have something to work with"

 

i think moelis did an outstanding job

[HalfMeasure]

moelis said on CC that they have been retained by certain non-litigating preferred shareholders.

 

perhaps that would include paulson, who mnuchin is familiar enough with to have been a repeat co-investor.

 

if so, you might think that mnuchin knew about this retention, and simply said to paulson, "hey get moelis to produce something good so that i have something to work with"

 

i think moelis did an outstanding job

 

https://www.bloomberg.com/news/articles/2017-06-01/paulson-blackstone-said-to-back-plan-for-freeing-fannie-freddie

[Guest cherzeca]

Blueprint (Moelis, p.22): 

 

"The Common Securitization Platform (“CSP”) should remain controlled and owned exclusively by Fannie Mae and Freddie Mac. The continued malaise in the private label MBS market has nothing to do with whether

or not large banks that have their own infrastructure

have access to the CSP. By eliminating Fannie Mae and Freddie Mac as secondary-market counterweights, these big banks could dominate the U.S. mortgage finance system. Nearly nine years after the financial crisis, big banks continue to pay unprecedented fines for servicing errors, mortgage origination fraud, and improper sales practices. Concentrating control of the $10 trillion U.S. mortgage market in the hands of these big banks would be a grave mistake."

 

MBA Stevens statement on Blueprint: 

 

"On the other hand, MBA President David Stevens said his group doesn’t believe Moelis’s proposal would sufficiently reform the market.

 

“This proposal is clearly self-serving and designed to confuse unsuspecting, innocent taxpayers into supporting a plan that is intended to line the pockets of hedge funds who invested in Fannie and Freddie,” Stevens said in a statement.

[TonyG]

https://www.mba.org/publications/insights/articles/current-issue/direct-from-dave-the-case-for-gse-reform?_zs=WqkwB1&_zl=Usvo3

 

This feels so desperate. he must be really feeling this slipping and trying to put on a brave face

[Midas79]

“This proposal is clearly self-serving and designed to confuse unsuspecting, innocent taxpayers into supporting a plan that is intended to line the pockets of hedge funds who invested in Fannie and Freddie,” Stevens said in a statement.

 

Makes me wonder how Stevens, Carney, Light, etc. would argue against this proposal if hedge funds didn't own any shares. It wouldn't really change anything of substance.

[Guest cherzeca]

Obviously details are up in the air - but if the restructuring takes place as Moelis assumes it will, then the current preferred/common value ratio is now 1:3 and 1:6 for $25 and $50 par respectively. 

 

 

Obviously there are assumptions made with their presentation - like the conversion at $7.95/share for the preferred shares - but preferred shares are trading cheap relative to common if $7.95 is roughly correct.

 

i am confused by the recap scenario on p. 36 of the blueprint.  it seems moelis is assuming $7.95 as the common stock value on the IPO date.  foortnote 1 then assumes that junior pref get 1.5B shares.  this implies that $11.9B of junior pref converts, but it doesnt make explicit what the conversion ratio is.  i assume a blueprint funded by junior pref holders are not expecting a discount from the $33B or so junior pref outstanding.  there seems to be an assumption that only a portion of the junior pref exchange, though that portion percentage is unstated.

 

so i am not sure you can draw any conclusions about common v junior pref from this presentation...though you conclude that moelis assumes the common will triple in one year

[TonyG]

also, the real tim howard said that 160-180B of capital is way too much for f&f to be able to price and compete effectively.so that number might change as well.

[Guest cherzeca]

also, the real tim howard said that 160-180B of capital is way too much for f&f to be able to price and compete effectively.so that number might change as well.

 

if you look at p. 36 moelis is calling for $155B in equity raises over 4 years.  my own view is that while howard is highly qualified on most GSE matters, moelis is fair to say that if AIG could do it, then the GSEs can do it.  ultimately, if the first primary raise goes well, then you are on the capital raising train for the next three

[TwoCitiesCapital]

Obviously details are up in the air - but if the restructuring takes place as Moelis assumes it will, then the current preferred/common value ratio is now 1:3 and 1:6 for $25 and $50 par respectively. 

 

 

Obviously there are assumptions made with their presentation - like the conversion at $7.95/share for the preferred shares - but preferred shares are trading cheap relative to common if $7.95 is roughly correct.

 

i am confused by the recap scenario on p. 36 of the blueprint.  it seems moelis is assuming $7.95 as the common stock value on the IPO date.  foortnote 1 then assumes that junior pref get 1.5B shares.  this implies that $11.9B of junior pref converts, but it doesnt make explicit what the conversion ratio is.  i assume a blueprint funded by junior pref holders are not expecting a discount from the $33B or so junior pref outstanding.  there seems to be an assumption that only a portion of the junior pref exchange, though that portion percentage is unstated.

 

so i am not sure you can draw any conclusions about common v junior pref from this presentation...though you conclude that moelis assumes the common will triple in one year

 

Not looking at the current presentation, but the numbers I recall was the preferred owning 27% of the company after the first issuance with 16.1bn shares outstanding...so closer to 4.3bn common shares for the preferred which makes sense.

 

$35bn/$7.95 = ~4.4bn shares so the numbers seem to be in agreement.

[Guest cherzeca]

Obviously details are up in the air - but if the restructuring takes place as Moelis assumes it will, then the current preferred/common value ratio is now 1:3 and 1:6 for $25 and $50 par respectively. 

 

 

Obviously there are assumptions made with their presentation - like the conversion at $7.95/share for the preferred shares - but preferred shares are trading cheap relative to common if $7.95 is roughly correct.

 

i am confused by the recap scenario on p. 36 of the blueprint.  it seems moelis is assuming $7.95 as the common stock value on the IPO date.  foortnote 1 then assumes that junior pref get 1.5B shares.  this implies that $11.9B of junior pref converts, but it doesnt make explicit what the conversion ratio is.  i assume a blueprint funded by junior pref holders are not expecting a discount from the $33B or so junior pref outstanding.  there seems to be an assumption that only a portion of the junior pref exchange, though that portion percentage is unstated.

 

so i am not sure you can draw any conclusions about common v junior pref from this presentation...though you conclude that moelis assumes the common will triple in one year

 

Not looking at the current presentation, but the numbers I recall was the preferred owning 27% of the company after the first issuance with 16.1bn shares outstanding...so closer to 4.3bn common shares for the preferred which makes sense.

 

$35bn/$7.95 = ~4.4bn shares so the numbers seem to be in agreement.

 

ok, so if these numbers are right, i guess then moelis assumes all juniors convert at par at $7.95 common price. 

[TwoCitiesCapital]

Obviously details are up in the air - but if the restructuring takes place as Moelis assumes it will, then the current preferred/common value ratio is now 1:3 and 1:6 for $25 and $50 par respectively. 

 

 

Obviously there are assumptions made with their presentation - like the conversion at $7.95/share for the preferred shares - but preferred shares are trading cheap relative to common if $7.95 is roughly correct.

 

i am confused by the recap scenario on p. 36 of the blueprint.  it seems moelis is assuming $7.95 as the common stock value on the IPO date.  foortnote 1 then assumes that junior pref get 1.5B shares.  this implies that $11.9B of junior pref converts, but it doesnt make explicit what the conversion ratio is.  i assume a blueprint funded by junior pref holders are not expecting a discount from the $33B or so junior pref outstanding.  there seems to be an assumption that only a portion of the junior pref exchange, though that portion percentage is unstated.

 

so i am not sure you can draw any conclusions about common v junior pref from this presentation...though you conclude that moelis assumes the common will triple in one year

 

Not looking at the current presentation, but the numbers I recall was the preferred owning 27% of the company after the first issuance with 16.1bn shares outstanding...so closer to 4.3bn common shares for the preferred which makes sense.

 

$35bn/$7.95 = ~4.4bn shares so the numbers seem to be in agreement.

 

ok, so if these numbers are right, i guess then moelis assumes all juniors convert at par at $7.95 common price.

 

That's what I took from looking at it and how I got the 1:3 and 1:6 ratios. Would be instructive to know how Moelis came up with the $7.95/per share conversion & issuance price though.

[TonyG]

I agree. I wonder why not just convert at the than price instead of pre determined? the common was 5 at the hint the trump admin might do something. If we know they're going to recap, i think it would be higher therefore less dilution, and no need for as much as  21B shares outstanding

[Guest cherzeca]

I agree. I wonder why not just convert at the than price instead of pre determined? the common was 5 at the hint the trump admin might do something. If we know they're going to recap, i think it would be higher therefore less dilution, and no need for as much as  21B shares outstanding

 

i think that $7.95 is simply moelis's assumption at what the common price is, both for common issuance proceeds and pref exchange purposes.  i have done some back of envelope analyses and think that this is a reasonably conservative estimate, assuming the NWS is eliminated through a 4th amendment 

[hardincap]

according to cnbc, ben carson recently said in an interview he wouldnt be opposed to investors getting paid

 

timing of moelis is a clue that things are heating up

[asterisk]

according to cnbc, ben carson recently said in an interview he wouldnt be opposed to investors getting paid

 

timing of moelis is a clue that things are heating up

 

Do you have a link?

[muscleman]

moelis is just another proposal, though we agree that it is more feasible than the blackrock or MBA proposal.

Is there any specific significance in this proposal than other proposals?

[Desert_Rat]

$7.95, huh. Right.

 

4 pages that haven't anything to do with the preferreds except another thinktank's opinion, which means as much to Congress as yours does. This board has gone to crap lately  ;D

[Desert_Rat]

according to cnbc, ben carson recently said in an interview he wouldnt be opposed to investors getting paid

 

timing of moelis is a clue that things are heating up

 

Do you have a link?

 

it's not much..  http://video.cnbc.com/gallery/?video=3000623709

[Guest cherzeca]

moelis is just another proposal, though we agree that it is more feasible than the blackrock or MBA proposal.

Is there any specific significance in this proposal than other proposals?

 

moelis put out a real world, solve the problem, financial restructuring analysis.  everything else is think tank whitepaper BS.  there is no comparison.

[rros]

moelis is just another proposal, though we agree that it is more feasible than the blackrock or MBA proposal.

Is there any specific significance in this proposal than other proposals?

 

moelis put out a real world, solve the problem, financial restructuring analysis.  everything else is think tank whitepaper BS.  there is no comparison.

I would not assume from this plan that there is a forced conversion of Jr. at 1/3 their face value. There is a chance this is a rights offering available ONLY to Jr. holders and for new common equity. If so, Jr. holders will be adding about 12 billion of fresh capital in common equity. I assume ALL hedge funds holding Jrs. will take it. It is also possible this rights offering is slightly valued below what they believe will be the price of common shares at the time. This would make sense as there is a comment somewhere that Jr. holders will help raise additonal fresh capital.

In my view, the Jrs. will not be part of ANY conversation and will be left alone. So, full value. Down the road, 2 to 3 years may be called and switch for newer Jrs. at lower yields.

 

There is already an endorsement by someone at ICBA as in 'the proposal is somewhat aligned to our thinking'.

 

The best indicator we could ask for that this doesn't get derailed would be no attack from Treasury. Had this been an Obama era proposal, we would be hearing shortly from Antonio Weiss, Stegman and FHFA. As soon as tomorrow morning before market opens. With Joe Light's and Carney's articles by mid morning. We'll see what the new actors in this movie do. Or not do.

 

And to note, Blackstone and Blackrock are almost opposites. Blackstone (Schwartzman) has always been friendlier to shareholders. The guy from Blackstone that was part of a list to counsel Treasury, withdrew. Blackrock (Larry Fink) instead, has been our archenemy for a long time and it is a Blackrock guy that is assisting Mnuchin in housing. Someone correct me.