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

[Guest cherzeca]

I tend to agree, but the reason I'm asking these questions is that a reliable source told me that the plaintiffs expect 150% of par and that par in their minds doesn't represent any compensation for the 7 years they've missed out on dividends due to the "potentially" illegal NWS.

 

Discussion from Todd Sullivan on plaintiffs seeking 150% of par.  Listen to minute marker 26:20 at the following link: https://valueplays.podbean.com/e/7-jun-14-2019/

 

The following quote is at 29:50...

"Based on the things I've heard and the people I've spoken to, they are really confident that 100% is their ground floor. And they're going to get damages.  Damages are going to be another 50-60% on top of their par.  That's not something they're looking at as a hopeful scenario, they're looking at it like this is what we'll be owed.  The government will argue differently but this is what we're going to get."

 

Note: this is from June, so long before the positive news from En Banc that we heard this past Friday.

 

I think this is unrealistic.  I am rooting for them.

[orthopa]

Im all preferred so I would love 150% of par too but unless there is some other form or relief that is not widely known then again I don't see how this is realistic. Dont forget there is another side in the negotiation too. Treasury is still right this second lined up to sweep Q3 profits unless something changes so it isnt like your dealing with the most kind hearted party who is still actively defending the law suits.

 

Unless forced by a court to settle/pay damages at some point I can see Treasury/FHFA say fuck you guys and your unrealistic expectations and drag this shit out and put the entire recap at risk if trump loses in 2020. Thats a pretty good come back to an unrealistic negotiation stance. Shit it took treasury 6 months to come up with a plan. Treasury and FHFA could slow play the capital rules and recap and we could still be without a settlement or any means of recap next fall. Unrealistic I know but it isnt like the other party in the negotiation is completely in a corner. We are more or less playing by their rules remember?

 

cherzeca a question for you. Can Ps in Collins request a different form or relief then what was? If not any settlement terms such as more then par would have to come out of the goodness of treasuries heart right? I think any extra compensation treasury gives in any fashion to preferred will be in a conversion to common. I would like to think treasury would be much more likely to keep compensation in form of a security/warrant/tax break then a cash or similar payment as some have been discussing in the fannie world.

[orthopa]

I would also add any settlement will reflect highly on the preference of the big preferred holders, Paulson et al. We are going to ride their coat tails who are we kidding?

 

There is still a lot of post ruling euphoria in the air affecting a lot peoples judgement. I'm going to refrain from un realistic expectations or calculations in the mean time. Seems like only a let down can come with that thinking.

[Guest cherzeca]

Im all preferred so I would love 150% of par too but unless there is some other form or relief that is not widely known then again I don't see how this is realistic. Dont forget there is another side in the negotiation too. Treasury is still right this second lined up to sweep Q3 profits unless something changes so it isnt like your dealing with the most kind hearted party who is still actively defending the law suits.

 

Unless forced by a court to settle/pay damages at some point I can see Treasury/FHFA say fuck you guys and your unrealistic expectations and drag this shit out and put the entire recap at risk if trump loses in 2020. Thats a pretty good come back to an unrealistic negotiation stance. Shit it took treasury 6 months to come up with a plan. Treasury and FHFA could slow play the capital rules and recap and we could still be without a settlement or any means of recap next fall. Unrealistic I know but it isnt like the other party in the negotiation is completely in a corner. We are more or less playing by their rules remember?

 

cherzeca a question for you. Can Ps in Collins request a different form or relief then what was? If not any settlement terms such as more then par would have to come out of the goodness of treasuries heart right? I think any extra compensation treasury gives in any fashion to preferred will be in a conversion to common. I would like to think treasury would be much more likely to keep compensation in form of a security/warrant/tax break then a cash or similar payment as some have been discussing in the fannie world.

 

Ps are not beholden to their remedy prior requests.  they can always ask district court for what they want in the future and settle for whatever they are agreeable with if the other sides is also agreeable

[Luke 532]

I would also add any settlement will reflect highly on the preference of the big preferred holders, Paulson et al. We are going to ride their coat tails who are we kidding?

 

There is still a lot of post ruling euphoria in the air affecting a lot peoples judgement. I'm going to refrain from un realistic expectations or calculations in the mean time. Seems like only a let down can come with that thinking.

 

I hear ya. I'm not in the euphoric camp, but pleased with Friday's ruling. I'm merely turning over every stone, hence the questions about plaintiffs expecting 150% of par.

[Midas79]

This is likely accomplished as discussed by just voiding the SPS liquidation preference since it's considered paid down and then returns over-payment past the 10% moment, at least. The other alternative, return ALL funds paid over the 10% dividend and keep the SPS liquidation preference intact isn't likely logistically. But, either way, there is no conversion of SPS into commons causing dilution.

 

The last part of this is incorrect in your "other alternative" scenario. In that case, Treasury would send FnF something on the order of $120B, but that still would not get FnF fully capitalized because the seniors represent a negative $187B drag on core capital. If you go look at FnF's 10-K forms, they report a combined core capital of negative $181B as of the end of 2018. Adding $120B to that doesn't even make it positive, let alone get FnF all the way to fully capitalized ($103.5-139.5B of core capital by Watt's proposed rule).

 

What it would take to finish the recap is either canceling the seniors (adding that amount to retained earnings) or converting them to a form of equity that counts as core capital, of which there are only two, non-cumulative pref shares or common shares.

 

Canceling the seniors costs Treasury 12 figures. Not happening.

Converting the seniors into non-cumulative prefs isn't really workable. The seniors are 10% cumulative with $200B in liquidation preference. They would want a higher rate to convert them to non-cumulative. $200B of prefs at 12% eats up all of FnF's earnings forever. Existing equity holders end up with worthless paper.

Converting the seniors into commons is the best course for Treasury because they can recoup the $120B they send out and then some, and quickly too.

 

In the end, FnF have very little capital now and will have to build it very quickly to get recap and release done by the end of Trump's term. The Fifth Circuit's ruling that the FHFA director can be fired at will by the president only makes things more urgent because a new president could replace both Calabria and Watt, and if FnF are still in conservatorship at that point the new president would have the power to blow up the entire recap and release effort.

 

Building capital quickly means issuing lots and lots of new common shares. It's really the only way. Some prefs could be used but there are issues with having too many of those in the capital structure.

 

There is no magic anti-dilution bullet. I hadn't even mentioned the warrants!

[Gregmal]

Already looking super perky, with the commons again looking like the better performer.

 

Personally I think at this point the preferred's should be trading at a minimum at 65-70% of par. This has all but been derisked.

[orthopa]

Mnuchin said FnF will start to retain captial in near term. Hoping to do in September have to negotiate with FHFA. NWS ending soon as expected, finally.

 

[orthopa]

Already looking super perky, with the commons again looking like the better performer.

 

Personally I think at this point the preferred's should be trading at a minimum at 65-70% of par. This has all but been derisked.

 

Agree. Mnuchin just said NWS ending and Treasury going to negotiate per plan. Sounds like more then 40% of par of me.

[orthopa]

Have to watch again but it seems like there is finally some urgency and Housing Reform is front and center. Mnuchin all for stopping NWS and building capital through retained earnings. Thats great coming straight from the Secretary of the Treasury.

[Luke 532]

Massive. I view "3-6 months" as more significant than the 5th Circuit ruling (as someone who trusted @MarkCalabria comments to end NWS and @USTreasury

saying they want to rebuild capital). 70% of par is no longer the short term floor. $FNMA $FMCC

[Luke 532]

Thoughts?  Does the timeline below look accurate based on the plan, Mnuchin's comments, etc.? 

 

GSE timeline is set. @FHFA capital rule and SPSPA amendment by end of Q4'19. Congress gets until end of Q1'20 to legislate reform as GSEs get approval for capital restoration plans. Quick recapitalization to ensure end of conservatorship by January 2021. $FNMA $FMCC

 

As an aside, gotta hand it to Maria, she brought the heat: "investors really were screwed (sounds like Kudlow's tweet from a few years ago)," "the director and structure of FHFA is unconstitutional," etc.  It's been said that in previous interviews Mnuchin/Treasury has told her what she is/isn't allowed to ask about, so if true, allowing her to get these talking points out in the open "screwed," "unconstitutional" is pretty interesting (could be a way to get Obama to take a lot of heat). 

[Gregmal]

Thoughts?  Does the timeline below look accurate based on the plan, Mnuchin's comments, etc.? 

 

GSE timeline is set. @FHFA capital rule and SPSPA amendment by end of Q4'19. Congress gets until end of Q1'20 to legislate reform as GSEs get approval for capital restoration plans. Quick recapitalization to ensure end of conservatorship by January 2021. $FNMA $FMCC

 

As an aside, gotta hand it to Maria, she brought the heat: "investors really were screwed (sounds like Kudlow's tweet from a few years ago)," "the director and structure of FHFA is unconstitutional," etc.  It's been said that in previous interviews Mnuchin/Treasury has told her what she is/isn't allowed to ask about, so if true, allowing her to get these talking points out in the open "screwed," "unconstitutional" is pretty interesting (could be a way to get Obama to take a lot of heat).

 

Yup. Ive said before that the easiest way to spin this is to throw it all on Obama. Something I dont think any of us would argue about whether or not this option is appealing to Trump.

 

 

[Guest cherzeca]

Who is Holden walker?

[Luke 532]

I know you all know, but if anybody is still looking to initiate a position or add and you want to avoid all the action of the high volume series, then take a look at FMCCL (50-par) and FNMAH (25-par).  The everyday Joe is going to be looking at FNMAS first so the others may lag a bit giving you a better entry.  Yes, talking my book as those are my two largest concentrations in this name, but what I said still holds true.  Wish you well!

[Luke 532]

Who is Holden walker?

 

No idea, just an investor as far as I know that is following the situation. I wasn't saying his tweet contained non-public information if anybody got that impression, just wanted to share it since it seems to align with recent events like Mnuchin's comments this morning as well as the plan released this past week.

[Guest cherzeca]

Speculation about timeline is premature. When C and M have announced a deal then we can timeline

[orthopa]

Who is Holden walker?

 

I follow him on twitter. Pretty with it from the GSE standpoint. Not unrealistic, pretty bright it seems. Worth a follow.

 

I agree what Mnuchin said was huge. NWS ending soon and he wants to giddy up on this. No more messing around it seems. No more dicking around.

 

I still find it interesting that he is still waiting on congress or perceives they will in regard to recap (maybe I have to re listen to interview) since congress isn't needed for what FHFA and Treasury can do on their own.

[WB_fan82]

Thinking about the statements Mnuchin made on FBN this morning re: currently negotiations to amend NWS with FHFA, one obvious way to do this is to increase the liquidation preference of the sr. pfd.

 

As Midas noted, this doesn't actually increase capital (until the sr. pfd are converted to capital... either being non-cum or converting to equity).

 

But there is an alternative.  Instead of increasing liquidation preference, why not just issue common equity equal to the amount of dividend foregone?  Either through actual shares or warrants.

 

My question for the board is, does anyone know the triggers for the 80% accounting consolidation rule that would put the GSEs on the books of the govt?  Is it actual share ownership, or "beneficial ownership" (meaning the % of shares out the govt could have tomorrow if it wanted to)?

[Luke 532]

I still find it interesting that he is still waiting on congress or perceives they will in regard to recap (maybe I have to re listen to interview) since congress isn't needed for what FHFA and Treasury can do on their own.

 

Me too.  It's possible he said that so the meeting with the Finance Committee goes smoother tomorrow. But that's anybody's guess.

[Luke 532]

Here's the interview: https://video.foxbusiness.com/v/6084640350001/#sp=show-clips

[TwoCitiesCapital]

There it is! FMCCJ up 26% so far

[Guest cherzeca]

Here's the interview: https://video.foxbusiness.com/v/6084640350001/#sp=show-clips

 

Great interview!

[Midas79]

For some reason I wasn't drinking the Kool-Aid after the Fifth Circuit ruling, but today's Mnuchin interview got me to make a glass and chug it down. I think Mnuchin knows that he is on a tight timeline now that Calabria will likely be removable at will by a new president if Trump is not re-elected.

 

He also emphasized third-party and private capital. Unless Calabria has had a change of heart on the correct sizing to capital standards, retained earnings are only going to play a small part of the recap due to the timeline.

 

I think the list cherzeca made on Twitter about the recap steps is spot on. I'll paste it here for reference.

 

some possible, somewhat reasonable operating assumptions for the #GSE recap:

1. there will be a global settlement in connection with recap.

2. junior prefs agree by class to a exchange into common at or close to par. 1/

3. some kind of private offering for common is first step before a large public offering.

4. this private offering will "set price" for the common.  expect this price will be low, to entice private investor(s) to buy.  junior pref holders like low common price as well.

5. once common private placement is done and some retained earnings build up, large common offering(s).

6. junior pref holders who hold their exchanged for common could see future price appreciation

[DRValue]

Gotta say the easiest way to clear all lawsuits is to give back all pspa dividends above repaying principal, recap with dividend payback, then exercise warrants to make the govt money.

 

That doesn't sit with raising 3rd party capital though...