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

[racemize]

The presentation only assumes half of the preferreds convert, so it is more like 2x par on the conversion.

[Desert_Rat]

Do you think market does not think much of the proposal? With $25 for pfd and $13 for common by 2020, at least they could have risen to 40% of value. That is like 4-5x gain over 4 years from today's prices, investors should be lining up.

 

The most liquid issue i own:

 

Watt declares withholding dividend in front of members of Congress: Up 7% on 2x volume

Another thinktank offers their opinion, and it's kinda favorable:  Up 1% on 3x lower volume

 

No one cares

[rros]

The presentation only assumes half of the preferreds convert, so it is more like 2x par on the conversion.

This plan makes the Jrs. whole.

 

1) 4th amendment to make outstanding Srs. balance to $6.3 billion.

 

This removes 97% of the Srs. balance (balance which later gets zeroed due to conversion into common). If this doesn't make the Jrs. trade at close to par nothing does.

 

I cannot find any indication of Jrs. being converted at any specific price. Not even in the notes of page 36. But I do see this. A portion of Jr. holders converts their X amount of shares for 2.1 billion common shares. Which end up being valued at $20 billion by 2020. (2.1 bill shares x $9.62). If I remember correctly, hedge funds own less than half of Jrs. (16/17 billion and the rest remains at banks approx $18-19). Perhaps this paper is considering conversion of all hedge fund holdings? If so, the Jrs. are being valued (converted or not) at their face. Whether instantly or by 2020. The added benefit of owning commons (converted at face value) is the voting power.

 

My view is that this plan assumes a ~3:1 ratio common/preferred ($25). So valuing common at $7.95 would value Jrs. at par.

[investorG]

I believe the analysis on pages 36-37, in conjunction with other assumptions like half get converted, simply assumes jr preferreds will get par value equivalent at the time of the IPO in the form of common shares.  hence, if the stock is issued at a lower price (ie page 36 rather than page 37), then the jr preferreds receive more common shares and a higher ownership %; and vice versa.

 

it's complicated but in the end this pits preferred shareholders against commoners and the govt in terms of pricing the IPO;  therefore I believe, if this plan gets adopted -- which is many steps away obviously, a fixed conversion ratio would likely be applied in advance of the IPO.  currently, the jr preferreds have little leverage due to the court outcomes thus far, and thus they would be more of a taker than maker of a deal.

 

it makes sense to me to have a healthy combination of common and preferred, fwiw.

[orthopa]

Like what I see so far. Looks like a new financial times article came out. Anyone able to post it for us that dont subscribe?

 

Thanks

[investorG]

Interesting slide...

 

Good discussion so far. I dialed in, but kept getting interrupted by work and missed this slide. Was there any mention made behind the though process of equitizing current junior preferred shareholders only to re-issue another 25B in preferreds? Is it simply the rate differential that can be achieved?

 

if you don't offer a conversion and also no dividends during capital building phase (which makes sense), then preferred stocks remain low-priced in the mean time, which is not the goal of moelis. they may have used the 25bn in preferreds on the back end to achieve selected capital targets while at the same time maximizing the headline figure of 75-100bn for taxpayer gains.

[Guest cherzeca]

@orthopa

 

Two powerful investment groups with ties to the White House are pitching a new plan that would free the mortgage giants Fannie Mae and Freddie Mac from US government control — and restore value to their investment in the companies.

 

Blackstone, the world’s biggest private equity group, and the hedge fund Paulson & Co have hired the investment bank Moelis to develop proposals to overhaul the two agencies.

 

Together, Fannie and Freddie guarantee the bulk of US home loans and underpin the country’s unique system of 30-year fixed rate mortgages.

 

Moelis published what it described as a detailed blueprint for reform on Thursday, pitching itself into the heated debate over the future of the agencies. A leading banking lobby immediately attacked the proposals as “self-serving”, and it remained far from clear that the plans would gain traction in Washington, despite the political connections of its proponents.

 

Paulson, whose manager John Paulson was an economic policy adviser to Donald Trump’s election campaign, and Blackstone, whose chairman and chief executive Stephen Schwarzman heads the president’s strategic and policy forum, own preference shares in the two agencies.

 

Fannie and Freddie have been in a limbo state of “conservatorship” — meaning they are neither fully public nor private — since the government rescued them at the height of the 2008 financial crisis.

 

Under the present financial structure, they pay all of their profits to the Treasury in the form a dividend, to compensate taxpayers for the risk they bear in providing a financial backstop.

 

Investors who own the shares claim the post-crisis set-up is unfair and untenable. Several have taken legal action against the Treasury.

 

Moelis claimed its recapitalisation plan would allow the government to realise between $75bn and $100bn in cash by exercising warrants, a structure it likened to the post-crisis resolution of the bailed-out insurer AIG.

 

Private investors would plough additional funds into the two groups as part of the proposed recapitalisation. With up to $180bn of new capital, there “should not be a realistic scenario” in which the government would be on the hook for losses even in a future financial crisis, Moelis claims. The government would nonetheless be paid a fee for providing a backstop against losses beyond that figure.

 

Details of the plan appear to be at odds with comments that Steven Mnuchin, Treasury secretary, has made about Fannie and Freddie. Last month he said he expected the pair to continue paying dividends to the government.

 

Related article

Fannie and Freddie shares plunge after court blow for investors

Hedge funds have been fighting for a greater slice of mortgage giants’ profits

 

The document Moelis published on Thursday said the plan was “a clear and pragmatic path to achieve important public policy goals in a manner that will both protect taxpayers for years to come and respects the property rights of shareholders”.

 

However, David Stevens, president and chief executive of the Mortgage Bankers Association, said it was “designed to confuse unsuspecting, innocent taxpayers into supporting a plan that is intended to line the pockets of hedge funds”.

 

He added: “The self-interests of stock speculators and profit seekers are not in the best interests of either the taxpayer or the housing system.”

 

Shares in Fannie Mae rallied 172 per cent after the US election, from $1.65 to a peak of $4.49 on November 30, on the hope that the Trump administration would be more amendable to recapitalising and privatising the company. Since then the stock has sunk back to $2.57.

 

Freddie Mac similarly rose sharply after the election before tumbling back down. Both stocks dropped in February after a court ruled against hedge funds that challenged the government’s hold on the agencies’ profits.

 

Paulson declined to comment. Blackstone did not respond to a request for comment.

 

 

 

[Flynnstone5]

This proposal seems to be very solid. I think one of the biggest keys is the capital buffer as Mnuchin has repeatedly made reference to the issue of safety. This plan provides an extraordinary level of safety, preserves the entities, makes the gov a handsome profit and benefits shareholders.

 

Question for all here is what is the downside with respect to the anti FnF crowd? Saying you're against it on the basis of HF making money isn't going to cut it although many will surely take that approach. If you're a Corker, Crapo, Warner, etc, etc, what if any could be construed as substantive arguments made to Mnuchin and co against this plan? I don't see any short of the HF stock speculator line or perhaps someone saying the gov should make even more.

[Guest cherzeca]

the biggest advantage for the blueprint is that it is achievable, subject to market conditions.  this is the AIG plan as applied to GSEs. all other proposals are ideas that are not fleshed out, and in fact cant be really fleshed out until put into practice.

 

here's what i am on the lookout for.  watt distinguished in his colloquy with corker between GSE reform and housing finance reform, essentially saying his job is GSE reform (and he said he has done alot already), and congress's job is housing finance reform.  if this distinction holds for mnuchin and watt, then it would be consistent for them to pursue administrative reform (blueprint) while still leaving for congress the bigger picture housing finance reform (which would include FHA/VA/GNMA as well as any overlay on the GSEs congress wants to pursue).

 

it is just one analytic step for watt to go from suspending NWS divs to pursuing something like the blueprint.

[Guest cherzeca]

non-MBA mortgage industry reaction to Blueprint:

 

"Ron Haynie, senior vice president with the Independent Community Bankers of America, said “it seems to fairly align with our thinking” on a number of points.

 

“Yes, its seems to be able to be done without Congress, but doesn’t prevent Congress from making any other reforms,” Haynie told Scotsman Guide News. “Given the current political climate, the more that can be done without legislation the better.”

 

Glen Corso, executive director for the Community Mortgage Lenders of America, said the plan doesn’t appear to bar big banks from owning significant amounts of stock in the GSEs. It also doesn't recast Fannie and Freddie as utilities, which would have regulated rates of return, as favored by small-lender trade groups. There also is no guarantee of equal pricing for all lenders with no volume discounts.

 

“We believe these items are absolutely essential in any proposal to reform the GSEs,” Corso said."

 

http://www.scotsmanguide.com/News/2017/06/Shareholders--GSE-reform-can-happen-quickly/

[investorG]

the biggest advantage for the blueprint is that it is achievable, subject to market conditions.  this is the AIG plan as applied to GSEs. all other proposals are ideas that are not fleshed out, and in fact cant be really fleshed out until put into practice.

 

here's what i am on the lookout for.  watt distinguished in his colloquy with corker between GSE reform and housing finance reform, essentially saying his job is GSE reform (and he said he has done alot already), and congress's job is housing finance reform.  if this distinction holds for mnuchin and watt, then it would be consistent for them to pursue administrative reform (blueprint) while still leaving for congress the bigger picture housing finance reform (which would include FHA/VA/GNMA as well as any overlay on the GSEs congress wants to pursue).

 

it is just one analytic step for watt to go from suspending NWS divs to pursuing something like the blueprint.

 

I'm confident that watt would not lead down the 'blueprint' path on his own without explicit support from congress (whenever) or mnuchin (in 7 months).

 

I agree with flynnstone that this blueprint is powerful because it's hard to argue against.  it should be a major player in the debate. the opponents will likely cite that it's still too much govt involvement (those who want full privatization) and also it's theoretically possible for another govt bailout.  but looking at it objectively, I like the proponents arguments better, hence my investment.

[racemize]

They fixed an error on the conversion of the JPs:

http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-2.pdf

 

Shares issued to JPs in 2018:

16,915-8,997-5,031=2,887

2,887*7.95=22.95 billion

 

Originally 33 billion of Jr. Preferred, assumes 17 billion does not get converted, which leaves 33-17=$16 billion getting converted

22.95/16 = 1.43 of par.

 

However, if you go at it from this point of view:

Value of converted JPs = 12%*16,915*7.95 = 16 billion = 1 of par

[rros]

They fixed an error on the conversion of the JPs:

http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-2.pdf

What error?

[racemize]

They fixed an error on the conversion of the JPs:

http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-2.pdf

What error?

 

It still isn't right as I showed above (two different values depending on method of calculating converted JP value), but pages 36 and 37 originally had the converting JPs at 27% for both scenarios, which was very high.  For example, 16 billion of JPs then had a 27%*7.95*16,915=36 billion in value= 2.3 of par.

 

In the updated one, the JPs have equity value of 12% and 10% respectively.  Math is:

0.12*7.95*16,915=16 billion = 1 of par; or

0.10*10.87*14,788=16 billion = 1 of par.

 

So the math used to have a big multiple of par (hence my previous comment), and now we are back to par, which is more reasonable.

 

 

[Guest cherzeca]

They fixed an error on the conversion of the JPs:

http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-2.pdf

What error?

 

if you look at p.36, moelis changed "equitized JPS" from 27% in 2018 to 12%

 

edit: @racemize, you think moelis is reading this thread? they should thank you....

[racemize]

They fixed an error on the conversion of the JPs:

http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-2.pdf

What error?

 

if you look at p.36, moelis changed "equitized JPS" from 27% in 2018 to 12%

 

edit: @racemize, you think moelis is reading this thread? they should thank you....

 

Well if they are, it still needs to get fixed.  The shares issued don't match the percentages.  I think the percentages are probably right, given that it gives you 1 of par. 

[racemize]

Actually, merkhet just pointed out that 0.8 billion shares are issued to the treasury at IPO per the footnote, so that makes up the difference.  No incongruity in the new version, JPs get par.

[rros]

Actually, merkhet just pointed out that 0.8 billion shares are issued to the treasury at IPO per the footnote, so that makes up the difference.  No incongruity in the new version, JPs get par.

I do not think they "get" par. I think they will naturally trade at par once the 2nd step takes place. That is, the 4th amendment. That seems to be their assumption. Either way, we do get there with this proposal. And thank you for pointing out that error. Good eye!

[Guest cherzeca]

Actually, merkhet just pointed out that 0.8 billion shares are issued to the treasury at IPO per the footnote, so that makes up the difference.  No incongruity in the new version, JPs get par.

I do not think they "get" par. I think they will naturally trade at par once the 2nd step takes place. That is, the 4th amendment. That seems to be their assumption. Either way, we do get there with this proposal.

 

to beat a dead horse, moelis's work assumes that the exchange ratio, based upon the assumed common stock price, will entitle a $25 liq pref junior pref to get $25 of common stock.  given that dividends will be announced to be omitted for 4 years, i think the junior pref will trade at less than par, but that the exchange offer will sweeten the consideration to result in par amount of common stock in the exchange

 

anyone think that the base case PE of 13.5 is out of line? (p. 34).  also remember as a full fed taxpayer, GSEs will be big winners if corp tax reform lowers the rate

[racemize]

I thought dividends could be paid by 2020, which would only be two years--is there a section indicating it wouldn't be until 2022 that I missed?

[Guest cherzeca]

I thought dividends could be paid by 2020, which would only be two years--is there a section indicating it wouldn't be until 2022 that I missed?

 

p.17 shows $62B of retained earnings contrib from omitting divs. not sure where i saw 4 years

 

edit.  p 17 makes clear that div suspension is 2 years

 

edit:  actually 2018-20 is 3 years

[waynepolsonAtoZ]

"Further, the Blueprint maintains a strong independent regulator, the FHFA,

and grants them the continued oversight of guarantee fees."

 

LOL. They might have said instead that the HERA of 2008 grants them the continued oversight of guarantee fees and that the "Blueprint" wouldn't alter HERA in any way shape or form.

[TonyG]

cherzeca, regarding the 13.5 multiple, if f&f were converted to utilities ( even though it doesn't say that in the Blueprint) don't utilities generally trade at high teens multiples? Or maybe 13.5 or lower is more acceptable given the politics with this thing.

[Guest cherzeca]

cherzeca, regarding the 13.5 multiple, if f&f were converted to utilities ( even though it doesn't say that in the Blueprint) don't utilities generally trade at high teens multiples? Or maybe 13.5 or lower is more acceptable given the politics with this thing.

 

i think this utility reform issue is something of a red herring.  While the Blueprint doesnt call for utility regulation, it appears to me that it does have fhfa approve g-fee pricing, capital ratios and underwriting quality.  beyond this, i dont know what utility regulation does for anybody.

 

which leads to my next point.  whether or not something stronger in terms of regulation is adopted, including some form of competition as per MBA proposal (i can see that being a part of anything congress approves that approaches what is in the Blueprint), the GSEs are still a nationwide duopoly in a huge part of the national finance industry.

 

that moat and the consistency of that income stream is hardly debatable, though one can debate reasonableness of PE assumptions.  having said that, 13.5 is well below the S&P500 average.

 

speaking of moats, if and when political risk is lifted from GSEs (big if i know), then i can see berkshire being a buyer of equity.  cant buy more american than GSEs, and i know he has said his major issue with GSEs is that it is hard to satisfy wall st and capitol hill at the same time. 

[HalfMeasure]

cherzeca, regarding the 13.5 multiple, if f&f were converted to utilities ( even though it doesn't say that in the Blueprint) don't utilities generally trade at high teens multiples? Or maybe 13.5 or lower is more acceptable given the politics with this thing.

 

You can't really compare conventional utilities with a utility-like model for Fannie & Freddie - at the end of the day they would still be leveraged financial institutes, essentially insurance companies, not a traditional electrical utility.