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

[Guest cherzeca]

there are two likely dynamics that will operate to depress common share prices:

 

i) the capital markets will demand price concession if the companies want to raise tens of billions of dollars through common stock issuance, and ii) settling the shareholder litigation, which is likely going to require a favorable junior pref conversion rate.

 

a dynamic counter to this is the possibility that treasury will take a haircut on its warrant position in connection with both above.

 

so it is hard to predict

[investorG]

expectations seem too high for the plan, if it's released.  this is not the forum where our goals - 4th amendment, Collins, or IPO discussion/timing - are likely to be addressed.  good luck, everyone. 

[Jcmeg35]

@investorG I don't completely disagree with you. In my view, it is less the plan, and more what the plan signifies in terms of getting the ball moving on all those pieces. This is hard because there has been so much talk (aka noise) to date, but not much in terms of concrete action. In my view, I am thinking/hoping that the plan enables some of the real actions to happen quickly, but I think you are right to urge caution.

 

expectations seem too high for the plan, if it's released.  this is not the forum where our goals - 4th amendment, Collins, or IPO discussion/timing - are likely to be addressed.  good luck, everyone.

[Luke 532]

https://twitter.com/IanMcKendry13/status/1169628731620638720

FDIC's McWilliams says the FDIC has been involved in GSE reform discussions with FHFA, Treasury and FSOC. "We will participate... making sure that our institutions are positioned the way it makes sense for them from the safety and soundness perspective"

[Guest cherzeca]

@investorG I don't completely disagree with you. In my view, it is less the plan, and more what the plan signifies in terms of getting the ball moving on all those pieces. This is hard because there has been so much talk (aka noise) to date, but not much in terms of concrete action. In my view, I am thinking/hoping that the plan enables some of the real actions to happen quickly, but I think you are right to urge caution.

 

expectations seem too high for the plan, if it's released.  this is not the forum where our goals - 4th amendment, Collins, or IPO discussion/timing - are likely to be addressed.  good luck, everyone.

 

agreed.  the plan may be something of a substantive dud. I expect it to be short on details. but it is the first real actual action taken after Mnuchin said "relatively quickly" just after trump election. so its significance may be the real substance

[Midas79]

I read boves common share analysis on junior preferred conversion. I feel like people think the treasury or fhfa will turn round and tell the GSEs to convert preferred at silly common prices. I don't see this at all. It'll be left to the companies to raise capital as they see fit, which was indicated by calabria.

 

Treasury and fhfa controlling private company recap leads to more lawsuits imo. Unless that would be within fhfa remit and not ultra vires (see, I do listen to the court hearings).

 

I don't see anything silly about converting at $2.50 at a slight discount to par. Citi did the same thing with its publicly traded prefs, converting them at $3.25 at 85-95% of par.

 

https://www.citigroup.com/citi/news/2009/090227a.pdf?ieNocache=262

 

The $3.25 was calculated as a 20-day average, though I can't find where I read that. The closest a 20-day average gets to $3.25 in the run-up to 2/27/09 is the 20 days up to and including 2/17/09 (average of $3.24). It seems a crazy coincidence that the numbers 3.24 and 3.25 show up, the same as the capital standards suggested by Moelis and Watt!

 

The 20-day average for FNMA up to and including yesterday is.....wait for it.....$2.494. Maybe there are no coincidences after all! Bove is right on point.

 

It appears that the publicly traded prefs got 85-95% of par, with the lower dividend series getting less and the higher divs getting more. The privately held prefs got full par in the conversion. Also, by what I can tell every individual shareholder got to choose whether or not they converted, presumably an individual could convert none, some, or all of their shares.

 

It is also interesting to note that the common share price cratered upon announcement of the conversion offer, going from $2.29 on the day before the announcement to $0.95 the next week. The commons got back to the conversion price of $3.25 two months after the conversion, though they had trouble keeping that level likely due to many of the converted shares being sold.

 

If I got my own conversion offer I would have to think for a while before deciding what proportion of my shares to convert. I would probably settle on converting 40-50% and keeping the other 50-60% as-is.

 

I also don't see anything illegal about a conversion offer. What law does it break?

[Midas79]

I just don't see the point of needless shareholder value destruction by raising capital at depressed common prices that would be much lower than projected by moelis. I'm not saying moelis is gospel but I just don't see the need. It feels like projections are all based on current share prices rather than what the business are actually worth.

 

Conversion and an offering at a low price isn't shareholder value destruction, it's shareholder value transfer. FnF will have the same market cap no matter how they get there. Moelis is also a poor reference point, it makes many assumptions that are unreasonably rosy for the commons.

 

The bottom line is that the commons are highly unlikely to be the get-rich-quick multi-bagger. They could even lose money if Bove's $2.50 ends up being too optimistic. In the end, life is not fair.

 

As for the last sentence, unfortunately that's just how these things work. Trying to rely on some future less-dilution valuation doesn't work because there can't be universal agreement on what that is. Current prices, though, are incontrovertible fact.

 

Re lawsuits for common shareholders, I see lawsuits raised all the time against management when the price falls. Largely these are frivolous imo and I'm no legal expert (how did you know?) But If I'm bill Ackman I'd throw everything at it if they diluted me unnecessarily.

 

Ackman not only bought prefs, he bought them (in part) specifically because he thinks a resolution might favor the preferred shares at the expense of the commons. If the prefs make enough money, and the commons don't lose too much, Ackman will be okay. He was around 40% prefs at the end of 2018 if I remember right. Cap Research, another large common holder, is around 75% prefs. Counting on them and Ackman to come to the rescue of the common shareholder is not realistic.

 

I wonder if boves capital raise price changes when the commons hit 5?

 

I should know this already but I wonder whether they can leave conservatorship and turn dividends back on, once they aren't critically under capitalized? That would be a game changer imo.

 

"When" the commons hit 5? That should definitely be "if". If his methodology is the same 20-day average as Citi used, sure he would update his model as the prices change. Remember that it could go down just as easily!

 

The last point is moot, there is no way that Calabria or Mnuchin will allow FnF to be released until they fully meet all capital standards. At that point there would be no reason not to turn dividends on.

[DRValue]

Conversion and an offering at a low price isn't shareholder value destruction, it's shareholder value transfer. FnF will have the same market cap no matter how they get there. Moelis is also a poor reference point, it makes many assumptions that are unreasonably rosy for the commons.

 

Shareholder value transfer IS value destruction. Why would the FnF boards offer a low conversion price to Pref and dilute the Gov? The thing for the board to do is... wait. They could have til 2024 to raise capital. It makes no sense to me for the boards to go begging to the market when Fannie is sitting on c.$25b of capital and Calabria leaves it to them.

 

"When" the commons hit 5? That should definitely be "if". If his methodology is the same 20-day average as Citi used, sure he would update his model as the prices change. Remember that it could go down just as easily!

 

Point being they're basing conversion prices on current prices. They could be anything by the time they actually raise capital.

 

The last point is moot, there is no way that Calabria or Mnuchin will allow FnF to be released until they fully meet all capital standards. At that point there would be no reason not to turn dividends on.

 

There could be a capital standard that isn't fully recapitalized but allows them to be released from conservatorship, for example capital above critically undrcapitalised. Assuming being critically under capitalized is the trigger for conservatorship (if they can't recover), would not being critically under capitalized be the trigger to leave consrvatorship?

[Luke 532]

Sources: @WhiteHouse pushing release @FannieMae @FreddieMac reform plan this week. details remain in flux could delay formal release. expected to explain why the govt should reduce its role in housing mkt. unclear how far plan will go in privatizing GSEs more now @FoxBusiness

[orthopa]

Conversion and an offering at a low price isn't shareholder value destruction, it's shareholder value transfer. FnF will have the same market cap no matter how they get there. Moelis is also a poor reference point, it makes many assumptions that are unreasonably rosy for the commons.

 

Shareholder value transfer IS value destruction. Why would the FnF boards offer a low conversion price to Pref and dilute the Gov? The thing for the board to do is... wait. They could have til 2024 to raise capital. It makes no sense to me for the boards to go begging to the market when Fannie is sitting on c.$25b of capital and Calabria leaves it to them.

 

"When" the commons hit 5? That should definitely be "if". If his methodology is the same 20-day average as Citi used, sure he would update his model as the prices change. Remember that it could go down just as easily!

 

Point being they're basing conversion prices on current prices. They could be anything by the time they actually raise capital.

 

The last point is moot, there is no way that Calabria or Mnuchin will allow FnF to be released until they fully meet all capital standards. At that point there would be no reason not to turn dividends on.

 

There could be a capital standard that isn't fully recapitalized but allows them to be released from conservatorship, for example capital above critically undrcapitalised. Assuming being critically under capitalized is the trigger for conservatorship (if they can't recover), would not being critically under capitalized be the trigger to leave consrvatorship?

 

I think your looking through the lens of what would offer the best return for common holders instead of being objective about likely outcomes, precedent, capital structure and reorganizations in general.

 

Preferred holders are not necessarily the enemy of common (could be in conversion) and no doubt preferred holders have contemplated the common as an investment but I feel those who hold the common made the investment hoping for a windfall initially, and now rationalize ways to make that come true instead of the other way around.

 

I contemplated at first when considering buying some common with the fact that treasury was in fact aligned with the common via the warrants,and as you say why would they sell at a low price? My best explanation now is bc common holders didnt pay .00001 for the shares. At $2-3-4-$5 dollars a share treasury makes a killing, BC they paid nothing. When you pay nothing and hold 80% of a 100B+ company your incentive is to get out. Treasury already made their money. Their main concern will to get out IMO and if getting out means attractive terms for new $$$$ even better.

 

 

[DRValue]

I think your looking through the lens of what would offer the best return for common holders instead of being objective about likely outcomes, precedent, capital structure and reorganizations in general.

 

i think this is fair, it must be at least partly true or i wouldn't own common. But like I've said before , on balance, i think the reward outweighed the risk.

[Midas79]

Shareholder value transfer IS value destruction. Why would the FnF boards offer a low conversion price to Pref and dilute the Gov? The thing for the board to do is... wait. They could have til 2024 to raise capital. It makes no sense to me for the boards to go begging to the market when Fannie is sitting on c.$25b of capital and Calabria leaves it to them.

 

It's only value destruction from your point of view. I think you're asking the wrong question here. Instead of wondering what's in it for the government to destroy shareholder value, you should ask what's in it for them to try and avoid it. Especially if Treasury ends up selling the warrants instead of exercising them. That would seem like good news on the surface for the commons, but it removes the floor on the offering price.

 

Treasury would not get diluted if the conversion happens first.

 

The boards do not have until 2024 to raise capital. They have just over a year. There is no way Treasury will approve any plan that lasts beyond this presidential term because that's the only time they have guaranteed, and Treasury has enough power here to get what it wants. $25B in capital is nowhere near enough, by the way.

 

Point being they're basing conversion prices on current prices. They could be anything by the time they actually raise capital.

 

Sure, but there's no reason to think that $5 is any more of a reasonable near-term possibility than $2. $5 just seems to be pulled out of thin air. I remember reading predictions somewhere that the commons would hit $5 upon announcement of the end of the NWS, but with both Calabria and Mnuchin talking about FnF retaining capital, the NWS is essentially already over. And yet the commons never spiked. It is very easy to overestimate the impact of future good news, and $5 looks like a good example of that.

 

There could be a capital standard that isn't fully recapitalized but allows them to be released from conservatorship, for example capital above critically undrcapitalised. Assuming being critically under capitalized is the trigger for conservatorship (if they can't recover), would not being critically under capitalized be the trigger to leave consrvatorship?

 

Nope. Glen had some good links in his most recent SA post, and one of them has these words from Calabria.

 

Calabria said the GSEs would exit conservatorship when they have “an excess of capital.” To gain that capital requires a suspension of the net worth sweep, which Calabria said is “step one.” But building capital through retained earnings alone would be too slow, and Calabria suggested that the GSEs could raise capital through initial public offerings.

 

Every time I hear about a slow capital build or release before full and complete capitalization, I go back to what Calabria has said and realize that those two things are just fantasization. There is no reason whatsoever to believe that Calabria or Mnuchin will allow release before the recap is 100% complete, and going faster has many benefits, the biggest of which is taxpayer protection. If a big downturn hits in the next year or two, the government is going to want private capital to be in the first loss position. That means plenty of capital ASAP.

 

Circling back, this taxpayer safety cushion is what the government gets out of doing a common stock offering at a low price. That price would attract enough capital to meet Calabria's requirements, allowing for release before a new president can direct his or her Treasury secretary to scuttle the whole thing.

[Midas79]

Not sure if anyone else has noticed, but the correlation between the pref prices and dividend yields is collapsing. The R^2 value on the ask side sits at 0.44, the third-lowest value I have seen over the last three years. I wonder if Bove's newsletter is the culprit?

 

I believe this reflects the market's view of the probability that the juniors will get converted based only on par value. I thought that a conversion that takes dividend rates into account, like Citi's, was a possibility, especially because the big name litigants hold mostly high-div series. But it appears the market disagrees.

 

The most amusing trade today so far has been 100 shares at $23.98 on the 4.5% FNMAL. I think it was just a badly-timed market order. And no, it wasn't me! But 8070 shares of FNMAL traded at $22.55, higher than the intraday high of any other fixed-div pref series except FMCCT at $22.80. FNMAL has the lowest fixed dividend of any pref that I track, so someone being willing to pay a premium for it makes little sense unless they truly expect a conversion based only on par value.

 

The outlier is FMCKL, which keeps trading around $12. This is higher than all the fixed-div prefs, above the 8.25% FNMAT, and not much below FNMAS/FMCKJ. I truly don't understand it.

[DRValue]

It's only value destruction from your point of view.

 

Funnily enough, that's the only view I care about when I decide if my shareholder value has been destroyed.

 

Treasury would not get diluted if the conversion happens first.

 

Would an offer to convert be accepted if the warrants weren't exercised first?

 

The boards do not have until 2024 to raise capital.

 

Well Calabria has said they could be in conservatorship until 2024, so...

 

$25B in capital is nowhere near enough, by the way.

 

Agreed. The point I was making is that they don't have no capital.

 

Nope. Glen had some good links in his most recent SA post, and one of them has these words from Calabria.

 

Which references an excess of capital. I don't necessarily disagree here, but it may not mean an excess above the capital rule as they wouldn't hold more than they need, unless they have a management buffer. i'm inclined to think this is Calabria using the wrong words and could mean fully capitalized.

 

[DRValue]

Not sure if anyone else has noticed, but the correlation between the pref prices and dividend yields is collapsing. The R^2 value on the ask side sits at 0.44, the third-lowest value I have seen over the last three years. I wonder if Bove's newsletter is the culprit?

 

I'd have to say this is Bove, yes. Would certainly fit his writings.

[Guest cherzeca]

@midas

 

I've been thinking about what effect div rate should affect conversion ratio for each series. part of me wants to say none at all because these prefs haven't seen a dividend in a decade.  so each series expectation set "should" be more influenced by capital structure, and they are all parri passu. so the illiquid cheaper ones may be the smart buy here.  in Citi's case, the prefs were paying dividends much more recently

[Midas79]

(1) Funnily enough, that's the only view I care about when I decide if my shareholder value has been destroyed.

(2) Would an offer to convert be accepted if the warrants weren't exercised first?

(3) Well Calabria has said they could be in conservatorship until 2024, so...

(4) Agreed. The point I was making is that they don't have no capital.

(5) Which references an excess of capital. I don't necessarily disagree here, but it may not mean an excess above the capital rule as they wouldn't hold more than they need, unless they have a management buffer. i'm inclined to think this is Calabria using the wrong words and could mean fully capitalized.

 

(1) Your post had asked why the government would do something to destroy shareholder value. From their point of view, it is transfer and not destruction. That was my point.

(2) Only if it was very generous and the prefs have pretty good certainty about how the capital raise and release will go, i.e. how much their new commons will be worth. I always assumed that the conversion would happen first, but if that is unacceptable and Treasury is willing to let itself get diluted, the warrants could be exercised first. I expect all of this to happen before any equity raise.

(3) Yes, he has. However, I read his comments about "if they are still in conservatorship in 2024 I won't push them out" to mean that if they still aren't capitalized to his satisfaction at that point he won't release them. I didn't see that statement as being supportive at all of a drawn-out recap.

(4) I think I misunderstood what you said. But I do think that FnF will go "begging to the market" because that is the only source of core capital that's available to them. New common shares and new non-cumulative prefs are their only options to raise core capital quickly, and too many of the latter poses far more problems than it's worth.

(5) Fully capitalized is a fair reading of that. My point was that I don't think Calabria will release FnF if they are not fully capitalized to his satisfaction.

[Ahab]

I won't believe today is the today until I see the headline. Good luck folks  8)

[muscleman]

My TA readings are neutral to marginally positive. I wouldn’t initiate a position here until it is more positive.

My FA agrees with you guys here that this should be very bullish. However, when I look at Glen Broadford’s twits, I cant help but ask myself, do I really want to be in the same camp with this guy? This clown lost a big amount in 2011 buying Chinese frauds. Last year he was touting FTR and touting that no one knows about valuation of stocks better than him, and that he is eager to move forward from the GSEs once it is all settled, so he can start doing what his is best at. What a joke. FTR was $2 last year, and now 8 cents.

 

Interesting that we’ll soon see what’s going on in less than one hour, if ACG analytics isn’t a fraud.

[Guest cherzeca]

My TA readings are neutral to marginally positive. I wouldn’t initiate a position here until it is more positive.

My FA agrees with you guys here that this should be very bullish. However, when I look at Glen Broadford’s twits, I cant help but ask myself, do I really want to be in the same camp with this guy? This clown lost a big amount in 2011 buying Chinese frauds. Last year he was touting FTR and touting that no one knows about valuation of stocks better than him, and that he is eager to move forward from the GSEs once it is all settled, so he can start doing what his is best at. What a joke. FTR was $2 last year, and now 8 cents.

 

Interesting that we’ll soon see what’s going on in less than one hour, if ACG analytics isn’t a fraud.

 

you don't have to be in the same boat as Bradford.  you can be in the same boat as Paulson.

[orthopa]

per gasbag tweet plan releasing after closing bell (we knew this already it seems.) Buckle up!!

[orthopa]

My TA readings are neutral to marginally positive. I wouldn’t initiate a position here until it is more positive.

My FA agrees with you guys here that this should be very bullish. However, when I look at Glen Broadford’s twits, I cant help but ask myself, do I really want to be in the same camp with this guy? This clown lost a big amount in 2011 buying Chinese frauds. Last year he was touting FTR and touting that no one knows about valuation of stocks better than him, and that he is eager to move forward from the GSEs once it is all settled, so he can start doing what his is best at. What a joke. FTR was $2 last year, and now 8 cents.

 

Interesting that we’ll soon see what’s going on in less than one hour, if ACG analytics isn’t a fraud.

 

you don't have to be in the same boat as Bradford.  you can be in the same boat as Paulson.

 

;D ;D ;D ;D ;D

[muscleman]

My TA readings are neutral to marginally positive. I wouldn’t initiate a position here until it is more positive.

My FA agrees with you guys here that this should be very bullish. However, when I look at Glen Broadford’s twits, I cant help but ask myself, do I really want to be in the same camp with this guy? This clown lost a big amount in 2011 buying Chinese frauds. Last year he was touting FTR and touting that no one knows about valuation of stocks better than him, and that he is eager to move forward from the GSEs once it is all settled, so he can start doing what his is best at. What a joke. FTR was $2 last year, and now 8 cents.

 

Interesting that we’ll soon see what’s going on in less than one hour, if ACG analytics isn’t a fraud.

 

you don't have to be in the same boat as Bradford.  you can be in the same boat as Paulson.

 

I don’t want to be in the same boat as Paulson either. His ten year track record is horrendous, so are Fairholme, Pershing. David Tepper is really the only GSE holder that has a strong record but he is actively trading in and out of all of his positions instead of investing, so who knows if he still has it.

[Midas79]

I don’t want to be in the same boat as Paulson either. His ten year track record is horrendous, so are Fairholme, Pershing. David Tepper is really the only GSE holder that has a strong record but he is actively trading in and out of all of his positions instead of investing, so who knows if he still has it.

 

The point of being aligned with John Paulson has nothing to do with his track record, and everything to do with the idea that Trump takes care of his friends.

[Luke 532]

im reading it now--and its embargoed till 5 so i cant provide details--but unless im missing something this aint the greatest plan for holders of the common in $FNMA