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

[orthopa]

If (big IF) the capital requirement lines up w/ FHFA's recent proposal pre-Calabria. I have common value at IPO of ~$9 if they win the Collins case (and they receive a $20-25b tax credit), and ~$7 without. This factors in 90-92% dilution (full warrant monetization, 50% of jr pfd converting to new common, and new capital via ipo), 2 years of retained earnings adjusted for commitment fee, and discounting the IPO valuation to 7.5x p/e to entice new investors.

 

Risk is Calabria wants more capital than the original proposal, common could get smoked with 95-98% dilution. But that would go against best interest of a) raising new private capital (# might be too large, I have it now at ~$60-$80b required via IPO) and b) maximizing treasury's warrant value.

 

Common isnt a horrible bet here if you believe common sense will prevail.

 

What conversion ratio to common from preferred are you using in your assessment of the 50% converting? Ive let my feelings about the common known and you hash some of this out. If all it takes is 5-6% more dilution for the common to get "smoked" as you put it, its still enough for me to stay away.

[allnatural]

Full disclosure i'm still >95% in pfds. I just think the common MAY be interesting here. I'm assuming jr pfds convert at whatever the IPO price ends up being. So in a 50/50 conversion where you get half in new pfds and half in new common, the math works out that you get .5 new shares of a new $25 pfd share w/ market rate coupon, and in the case of a ~$7 IPO, ~1.78x shares of new common, for a total package of $25/shr (PAR).

[Luke 532]

SCOOP: Trump Admin creates timetable to release @FannieMae @FreddieMac from government control; @MarkCalabria seeking reform agreement w Treasury summer's end cease “net-worth sweep” by year's end, poss recap thru massive public offering in 2020 more NOW @FoxBusiness $FNMA $FMCC

[Jcmeg35]

SCOOP: Trump Admin creates timetable to release @FannieMae @FreddieMac from government control; @MarkCalabria seeking reform agreement w Treasury summer's end cease “net-worth sweep” by year's end, poss recap thru massive public offering in 2020 more NOW @FoxBusiness $FNMA $FMCC

 

How is this a "SCOOP"?  This has all previously been publicly stated by Calabria.

[Luke 532]

SCOOP: Trump Admin creates timetable to release @FannieMae @FreddieMac from government control; @MarkCalabria seeking reform agreement w Treasury summer's end cease “net-worth sweep” by year's end, poss recap thru massive public offering in 2020 more NOW @FoxBusiness $FNMA $FMCC

 

How is this a "SCOOP"?  This has all previously been publicly stated by Calabria.

 

Agreed, it's not a "scoop" but Gasparino has a need to feel like he is the first to discover stuff.  I posted simply as further confirmation that a plan is coming along.  Now, if the timetable is indeed cemented then that would be a scoop.

[allnatural]

Someone must have sent him Calabrias transcripts from the last 2 weeks and he is repeating it as a scoop

[rros]

So I think we are still in the phase of announcing the announcements anticipating when the real announcement will come. So a sell off.

 

Does this mean sweeping till December? Anybody feels they too are moving the goalpost? What if the market breaks? 2020 recession for the largest IPO? No rush, friends. But not a problem either... Fannie and Freddie (and the sweep) are going nowhere.

[Guest cherzeca]

fnmas fell out of bed late today on light volume.  wonder what's up?

 

edit:  maybe someone read gaspo's SCOOPS and didn't like timing.  seems slow, and seems to me that we are all waiting for calabria to come up with a capital rule

[Midas79]

well, the recap will be VERY hard to execute due to its sheer size.  especially if treasury doesn't want to do a laydown on some of its warrants.

 

I've been thinking that there may be a pricing game that will go on with the common.  seems to me the common will appreciate first because i) the treasury plan is announced without numbers, and common likes what it sees, and/or ii) Collin en banc is favorable.  this within next 4 weeks.

 

then eventually the bankers get involved and flesh out what the offering will look like, and the common doesn't like what it sees.  and common goes down, which is fine with bankers since as @IG has mentioned, bankers will want a low selling price target.

 

of course if things get accelerated then this window for the common to have gone up before it goes down can become quite small, but I dont know how the bankers can do their thing before fhfa finalizes the capital rule, and that should take awhile because calabria is too busy giving interviews.

 

so the common for a trade...no?

 

To me buying commons now for this reason feels like an attempt to time the market. I avoid that whenever possible because I have no reason to believe I have an edge there. The premise seems to be that you are predicting a dip in the pref-to-common ratio and then a rebound. I think I'd be willing to try this with ~5% of my GSE allocation, but no more. It could very well go the other way: we get Calabria's capital rule before the en banc decision.

[orthopa]

fnmas fell out of bed late today on light volume.  wonder what's up?

 

edit:  maybe someone read gaspo's SCOOPS and didn't like timing.  seems slow, and seems to me that we are all waiting for calabria to come up with a capital rule

 

thats my immediate thought. You have those in it for a quick surprise and hearing 6 months may have turned the fast money off. After his tweet we know no more then we did beforehand. Sounds like he just caught up! ::)

[beaufort]

@cherzeca

Dang, I think South Carolina is my spiritual home.  The manifestation is I had chicken and bbq ribs for lunch today.  Incidentally, beaufort is also an excellent cheese in the gruyere style, but from the French alps. 

 

5th circuit Appeal

 

Does anybody have a memory on how fast common/prefs started to move before Lamberth/DC appellate decisions?  Was it days or hours before the decisions were released?

 

 

 

 

 

 

 

 

[Guest cherzeca]

hot off the wsj press:

 

WASHINGTON—Trump administration officials are putting the finishing touches on a plan to return mortgage-finance giants Fannie Mae and Freddie Mac to private-shareholder ownership, people familiar with the matter said.

 

The proposal, coming more than a decade after the government seized the firms to save them from collapse, would seek to put the companies on sounder financial footing and then release them from government control, if Congress doesn’t enact a more fundamental overhaul, these people said.

 

The plan is being developed by the Treasury Department in consultation with a regulator of the companies, the Federal Housing Finance Agency. It could change as it advances through the Trump administration, works its way through the White House and ultimately is submitted to the president for his approval as early as June, the people said.

 

The proposal is expected to include a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump and thus avoid needing another taxpayer-backed bailout.

 

If carried out, the companies could return to a status similar to how they operated prior to the financial crisis. Administration officials would like Congress to act on a more sweeping remake of housing finance.

 

Former officials of the companies and housing experts say the moves could be daunting. Shoring up Fannie and Freddie’s finances could entail raising more than $125 billion for the firms, the companies’ regulator has estimated—in part by selling new shares in an initial public offering. In comparison, the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014.

 

Fannie and Freddie are central players in the mortgage market, buying mortgages from lenders and packaging them for issuance as securities.

 

The companies got into trouble before the crisis by taking on more risk without having to hold more capital. They amassed huge investment portfolios to profit from the difference between their lower cost of capital—a benefit of an implied federal guarantee because Congress created the firms—and the rates they could earn on mortgages.

 

The government seized the companies through a process known as conservatorship in 2008, during the George W. Bush administration, and agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.

 

As part of the draft plan to return the companies to private hands, an existing Treasury backstop for the companies could remain in place. But the firms could begin paying a periodic “commitment” fee for the federal guarantee, the people said.

 

***

 

of course it isn't a guarantee, but rather a line of credit, but these WSJ guys are just above gaspo on the idiot chart

[Guest cherzeca]

@beaufort

 

love gruyere, raclette and fondue.  will look for the name next time

 

if I recall correctly, trading on Lamberth began a few days before opinion released

[Jcmeg35]

hot off the wsj press:

 

WASHINGTON—Trump administration officials are putting the finishing touches on a plan to return mortgage-finance giants Fannie Mae and Freddie Mac to private-shareholder ownership, people familiar with the matter said.

 

The proposal, coming more than a decade after the government seized the firms to save them from collapse, would seek to put the companies on sounder financial footing and then release them from government control, if Congress doesn’t enact a more fundamental overhaul, these people said.

 

The plan is being developed by the Treasury Department in consultation with a regulator of the companies, the Federal Housing Finance Agency. It could change as it advances through the Trump administration, works its way through the White House and ultimately is submitted to the president for his approval as early as June, the people said.

 

The proposal is expected to include a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump and thus avoid needing another taxpayer-backed bailout.

 

If carried out, the companies could return to a status similar to how they operated prior to the financial crisis. Administration officials would like Congress to act on a more sweeping remake of housing finance.

 

Former officials of the companies and housing experts say the moves could be daunting. Shoring up Fannie and Freddie’s finances could entail raising more than $125 billion for the firms, the companies’ regulator has estimated—in part by selling new shares in an initial public offering. In comparison, the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014.

 

Fannie and Freddie are central players in the mortgage market, buying mortgages from lenders and packaging them for issuance as securities.

 

The companies got into trouble before the crisis by taking on more risk without having to hold more capital. They amassed huge investment portfolios to profit from the difference between their lower cost of capital—a benefit of an implied federal guarantee because Congress created the firms—and the rates they could earn on mortgages.

 

The government seized the companies through a process known as conservatorship in 2008, during the George W. Bush administration, and agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.

 

As part of the draft plan to return the companies to private hands, an existing Treasury backstop for the companies could remain in place. But the firms could begin paying a periodic “commitment” fee for the federal guarantee, the people said.

 

@chereza - was just about to post myself.

 

While most of this is regurgitating what we already know. I found the "entail raising more than $125 Million" & "As part of the draft plan to return the companies to private hands, an existing Treasury backstop for the companies could remain in place. But the firms could begin paying a periodic “commitment” fee for the federal guarantee, the people said." very interesting new tidbits that I am sure are intentionally being floated by Admin now.

 

[Guest cherzeca]

@jc

 

the continued backstop is a hugely important transition mechanism...moelis called for it, paid for...Moelis Blueprint is too good not to follow by bankers who dont like to reinvent wheels

[orthopa]

hot off the wsj press:

 

WASHINGTON—Trump administration officials are putting the finishing touches on a plan to return mortgage-finance giants Fannie Mae and Freddie Mac to private-shareholder ownership, people familiar with the matter said.

 

The proposal, coming more than a decade after the government seized the firms to save them from collapse, would seek to put the companies on sounder financial footing and then release them from government control, if Congress doesn’t enact a more fundamental overhaul, these people said.

 

The plan is being developed by the Treasury Department in consultation with a regulator of the companies, the Federal Housing Finance Agency. It could change as it advances through the Trump administration, works its way through the White House and ultimately is submitted to the president for his approval as early as June, the people said.

 

The proposal is expected to include a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump and thus avoid needing another taxpayer-backed bailout.

 

If carried out, the companies could return to a status similar to how they operated prior to the financial crisis. Administration officials would like Congress to act on a more sweeping remake of housing finance.

 

Former officials of the companies and housing experts say the moves could be daunting. Shoring up Fannie and Freddie’s finances could entail raising more than $125 billion for the firms, the companies’ regulator has estimated—in part by selling new shares in an initial public offering. In comparison, the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014.

 

Fannie and Freddie are central players in the mortgage market, buying mortgages from lenders and packaging them for issuance as securities.

 

The companies got into trouble before the crisis by taking on more risk without having to hold more capital. They amassed huge investment portfolios to profit from the difference between their lower cost of capital—a benefit of an implied federal guarantee because Congress created the firms—and the rates they could earn on mortgages.

 

The government seized the companies through a process known as conservatorship in 2008, during the George W. Bush administration, and agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.

 

As part of the draft plan to return the companies to private hands, an existing Treasury backstop for the companies could remain in place. But the firms could begin paying a periodic “commitment” fee for the federal guarantee, the people said.

 

***

 

of course it isn't a guarantee, but rather a line of credit, but these WSJ guys are just above gaspo on the idiot chart

 

Looks like the promised road map is due in ~30 days. We know that Calabria is already working with Mnuchin and they have " a very good relationship" per the Diana Olick interview in which he mentioned the possibility of par and conversion to common. Both seem to be firmly on the table still and no doubt being discussed. Only barrier to trading immediately at par would be a stepped timeline of recapitalization which delays a conversion process or their getting redeemed in some fashion.

[Jcmeg35]

Looks like the WSJ article was updated with more content...

 

Excerpt:

 

“People familiar with the Treasury document cautioned it would likely include substantial changes to the business models of the companies, including steps to reduce over time their footprints in housing finance.

 

Those steps, which could include limits on the types of loans Fannie and Freddie may purchase, could reduce their capital needs and avoid a return to the pre-crisis landscape. But such constraints could turn off potential investors in their shares.”

[Cox022]

I think the reporting we will see on this imminent plan from Tsy will likely conflate Administrative action and legislative recommendations.

 

At first read, the WSJ article's mention of 'substantial changes to the business models of the companies, including steps to reduce their footprint over time' worried me, but the article elsewhere also says:

 

'If carried out, the companies could return to a status similar to how they operated before the financial crisis. Still, administration officials would prefer that Congress act on a more sweeping remake of housing finance, and their plan would also make a series of recommendations for lawmakers to consider.'

[Guest cherzeca]

I can't believe reference at this point to preference for congressional action is anything other than eyewash, showing comity to congress with understanding that it wil do nothing.  at some point the train will have left station.  that point is coming soon enough

[Ahab]

In regards to the GSEs, they haven't done anything in 10 years and they won't do anything substantive now. But Congress will whine if they feel not included like the do-nothing bunch they are.

[Guest cherzeca]

In regards to the GSEs, they haven't done anything in 10 years and they won't do anything substantive now. But Congress will whine if they feel not included like the do-nothing bunch they are.

 

ironically enough, the more trump admin asks congress to act the less likely congress will act

[Guest cherzeca]

stepping back for a moment, I think it is remarkable that the whole conversation has changed from, will the administration propose a recap/release (recall mnuchin thinking out loud in early 2017), to what will be the terms of the recap/release plan that will soon be on offer. 

 

there is still a huge amount of execution risk, but my sense is that once the ball starts rolling formally with the publication of the treasury plan, two salutary things will occur: i) congress will further comfort itself with grumbling as opposed to any real opposition, and ii) treasury will  become increasingly pliant once the capital raise begins because when the market pushes back, who is the real party with the most to give up?  what is going to provide more bang for the buck, tinkering with the juniors' conversion rate or treasury eating some warrants?

 

this may seem like wishful thinking but I submit it is my take on the financial reality of the situation.

[cdogstu99]

I'm trying to think of this as simply as possible, because when I focus on the minutae I get completely sidetracked. But with that said, if this deal follows the Moelis plan even 75% of the way, then I think the common shareholders do just fine.  Please let me know if there is anything OFF about this simplistic way of viewing this.

 

Right now Fannie is generating on average about $10 Billion in Profits per Year. 

 

Ignoring any ownership details, and assuming a 10x multiple on profits, this is an enterprise that SHOULD be worth on average about $100 Billion.

 

We know that they need probably around $100 Billion in Capital. Take the Moelis 3% requirement times the credit exposure and that's what you get.

 

The way I see it playing out assuming a close resemblance of Moelis plan and AIG recap is something like this:

 

June 2019: Announce Exit From Conservatorship June 2019 + Turn off NWS with a Two Year Plan to Release FNMA and FMCC

 

Sept 2019: Treasury Agrees to Equitize their Junior Preferreds, Hopefully at a Discount Similar to AIG

 

Jan 2020 - Raise $25 Billion via IPO (this timing is representative of comments made by Calabria)

 

June 2020 - Follow on Offering Raise another $25 Billion

 

Sept 2020 - New Junior Preferred Issue $30 Billion

 

June 2021 - By this point you have retained earnings of around $20 Billion + $80 Billion in Raised Capital.  Done.

 

Assume over the course of two years Treasury is also liquidating stake - note AIG did this in six various offerings so could take some time.

 

But Simplistically Speaking.... If I have a company that absent the sweep is worth $100 Billion, if they raise an additional $100 Billion, as a standing shareholder, I am diluted by 50%. 

 

Thus a $3 Share in FNMA today SHOULD be worth around $20 (assuming roughly 5 Billion Shares at $2 EPS (10 Billion in Profits) assuming that the net worth sweep is abolished.

 

Dilute by 50% and you get to $10 a share. 

 

Thoughts?

 

 

[allnatural]

Your starting point should be 80% dilution (assuming gov exercises its warrants).. then work from there. There are ~5.6b FNMA shares before IPO. I get to 90-95% dilution with IPO raise depending on cap requirements.

[cdogstu99]

Yeah but my initial starting point of $2 in EPS already accounts for that Treasury Stake.