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

[Luke 532]

Taking the last couple of days unless you think preferred gets less then 50%ish in a conversion it makes sense to keep adding or even lever up if you have the balls.  8)

 

These things are still so insanely cheap.  Heck, some at 41% of par (FMCCL)!

 

Are they liquid enough to buy though? Is that the ask?

 

20.50/21.00 - highly illiquid

[DRValue]

Taking the last couple of days unless you think preferred gets less then 50%ish in a conversion it makes sense to keep adding or even lever up if you have the balls.  8)

 

These things are still so insanely cheap.  Heck, some at 41% of par (FMCCL)!

 

Are they liquid enough to buy though? Is that the ask?

 

20.50/21.00 - highly illiquid

 

Tight spread, will take a look. Cheers.

[Luke 532]

Tight spread, will take a look. Cheers.

 

Never much inventory on the ask though.  Took me a long time to build up a good sized position.

 

Most likely priced so cheap due to illiquidity... can't get out of them if you need to.  If in for the long-haul then they are a great bet.

[Guest cherzeca]

given the big collins APA win and Crapo's exhortation to mnuchin to start up administrative reform (and Kennedy's exhortation to calabria to "saddle up"), the last few days have been most excellent. 

[muscleman]

given the big collins APA win and Crapo's exhortation to mnuchin to start up administrative reform (and Kennedy's exhortation to calabria to "saddle up"), the last few days have been most excellent.

 

Yeah I agree. However the news is not powerful enough to disrupt the TA patterns. I am turning bullish though and looking for an entry when TA sets up.

 

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=2ahUKEwja1IOV7sbkAhWqIjQIHc6kCEsQFjAEegQIABAG&url=https%3A%2F%2Fwww.cbsnews.com%2Fnews%2Fmike-pompeo-steven-mnuchin-speak-news-conference-live-stream-today-2019-09-10%2F&usg=AOvVaw2Pp2jJq1PaUeveneFNLoJt

I wonder if the rumors about Mnuchin and Pompeo resignation last month is real. It seems to me that all these rumors are.

[Guest cherzeca]

we can expect the NWS to be stopped (and no 2Q dividend distribution) and a commitment fee for the treasury line sometime before end of month.  I wouldn't be surprised if nothing much happens and trading prices trend downward in the interim, though I think stopping the NWS should be taken as a formal kickoff for admin reform and should start an uptrend in prices thereafter.

[Luke 532]

we can expect the NWS to be stopped (and no 2Q dividend distribution) and a commitment fee for the treasury line sometime before end of month.

 

Music to my ears.

[Guest cherzeca]

two yyuuuge things in SBC testimony today. 1. Crapo blessed the administrative plan and exhorted mnuchin to go forward.  2. mnuchin said he would go to FSOC and make sure that if GSEs raise the amount of capital set forth in fhfa final rule, then FSOC would not deem GSEs SIFIs.

 

GSEs should have been up again today

[orthopa]

we can expect the NWS to be stopped (and no 2Q dividend distribution) and a commitment fee for the treasury line sometime before end of month.  I wouldn't be surprised if nothing much happens and trading prices trend downward in the interim, though I think stopping the NWS should be taken as a formal kickoff for admin reform and should start an uptrend in prices thereafter.

 

I agree, will likely give another opportunity to add if so inclined. Estimating roughly that the lions share of reform/recap done by next fall its very likely that still at these prices there is nearly a double for some of the preferred in 12 months time. Is there another option to lever this up outside of margin? Even at the most egregious margin rates alot of money can be made in 1 year here it seems.

 

Buffett, Munger, Druck, Soros talk about that fat pitch and swinging for the fences. This seems like a pretty juicy one over the middle with a planned negotiation on paper from the counterparty regarding the security, a favorable court ruling, a motivated administration who just got the blessing of congress and pretty good chance captialization is kicked off by the end of the month with the NWS ending.

[Mephistopheles]

we can expect the NWS to be stopped (and no 2Q dividend distribution) and a commitment fee for the treasury line sometime before end of month.  I wouldn't be surprised if nothing much happens and trading prices trend downward in the interim, though I think stopping the NWS should be taken as a formal kickoff for admin reform and should start an uptrend in prices thereafter.

 

I agree, will likely give another opportunity to add if so inclined. Estimating roughly that the lions share of reform/recap done by next fall its very likely that still at these prices there is nearly a double for some of the preferred in 12 months time. Is there another option to lever this up outside of margin? Even at the most egregious margin rates alot of money can be made in 1 year here it seems.

 

Buffett, Munger, Druck, Soros talk about that fat pitch and swinging for the fences. This seems like a pretty juicy one over the middle with a planned negotiation on paper from the counterparty regarding the security, a favorable court ruling, a motivated administration who just got the blessing of congress and pretty good chance captialization is kicked off by the end of the month with the NWS ending.

 

But of course, everyone knows this and yet the market prices some of these as low as 40% of par today. And we have the government in plain English saying they are going to stop the NWS and recapitalize. So what is the market missing? Or what are we all missing?

 

Is the major risk that this gets delayed past the election and Trump loses? Say Biden wins, he will probably bring back most of Obama's people (fellow traveler's) to the job. And this whole thing is dead and back to status quo. Is that the only major risk here? I'm sure Mnuchin is well aware of this. So why wouldn't he rush to get this done within a year? Is it even possible to raise $100 billion from start to finish that quickly?

 

Either the market or we are very very wrong here.

[SnarkyPuppy]

we can expect the NWS to be stopped (and no 2Q dividend distribution) and a commitment fee for the treasury line sometime before end of month.  I wouldn't be surprised if nothing much happens and trading prices trend downward in the interim, though I think stopping the NWS should be taken as a formal kickoff for admin reform and should start an uptrend in prices thereafter.

 

I agree, will likely give another opportunity to add if so inclined. Estimating roughly that the lions share of reform/recap done by next fall its very likely that still at these prices there is nearly a double for some of the preferred in 12 months time. Is there another option to lever this up outside of margin? Even at the most egregious margin rates alot of money can be made in 1 year here it seems.

 

Buffett, Munger, Druck, Soros talk about that fat pitch and swinging for the fences. This seems like a pretty juicy one over the middle with a planned negotiation on paper from the counterparty regarding the security, a favorable court ruling, a motivated administration who just got the blessing of congress and pretty good chance captialization is kicked off by the end of the month with the NWS ending.

 

But of course, everyone knows this and yet the market prices some of these as low as 40% of par today. And we have the government in plain English saying they are going to stop the NWS and recapitalize. So what is the market missing? Or what are we all missing?

 

Is the major risk that this gets delayed past the election and Trump loses? Say Biden wins, he will probably bring back most of Obama's people (fellow traveler's) to the job. And this whole thing is dead and back to status quo. Is that the only major risk here? I'm sure Mnuchin is well aware of this. So why wouldn't he rush to get this done within a year? Is it even possible to raise $100 billion from start to finish that quickly?

 

Either the market or we are very very wrong here.

 

Can we literally list out all potential downside scenarios here?  I share similar sentiments - this at the top of highest conviction trades I've come across.

 

- Trump + Mnuchin and or Calabria are removed from office unexpectedly

- Entirely private recap with Berkshire etc where the litigation risk is accepted as a liability as part of the deal

- Status quo maintained - Calabria/Mnuchin do not do anything.  Trump loses election and obama-esque admin takes over

- Near term acute drop in housing, economy, and/or stock market causing GSE Incone losses and inability to recap

- Appeal and loss at Supreme Court + status quo argument

- Recapitalize with Junior pref and conv debt senior to existing junior preferred.  Plus government decides it doesn't care about $100bn warrant value

 

What else?

 

[muscleman]

two yyuuuge things in SBC testimony today. 1. Crapo blessed the administrative plan and exhorted mnuchin to go forward.  2. mnuchin said he would go to FSOC and make sure that if GSEs raise the amount of capital set forth in fhfa final rule, then FSOC would not deem GSEs SIFIs.

 

GSEs should have been up again today

 

john Bolton was fired today. I wonder if the market is predicting that Mnuchin is next?

 

If you look at all these rumors around White House officials, Tilson, John Kelly etc got rumored about their tense relationship with Trump and later they got fired one by one. I think the prior rumor about Mnuchin could be true, and we do see how messy this China trade war has been.

[Guest cherzeca]

"Is it even possible to raise $100 billion from start to finish that quickly?"

 

fnma is due to make a $3.4B dividend distribution for 2019 Q2 at end of month.  assuming treasury and fhfa agree to stop sweep before end of month, and fnma is able to generate $3.4B in net income for the following 4 quarters, fnma will have $20B of net worth by election 2020.  while no-one knows the capital target, this could be as much as $100B for fnma.  so it would be hard to raise $80B certainly, it may be feasible to raise $20B...getting to some 40% of target.

[rros]

"Is it even possible to raise $100 billion from start to finish that quickly?"

 

fnma is due to make a $3.4B dividend distribution for 2019 Q2 at end of month.  assuming treasury and fhfa agree to stop sweep before end of month, and fnma is able to generate $3.4B in net income for the following 4 quarters, fnma will have $20B of net worth by election 2020.  while no-one knows the capital target, this could be as much as $100B for fnma.  so it would be hard to raise $80B certainly, it may be feasible to raise $20B...getting to some 40% of target.

That would be assuming a symbolic fixed rate for the Srs. set at 0.1% and a minimal commitment fee for the 240+ bill not drawn.

[Cardboard]

FMCCI is trading at $20.50 or 41% of par. Seems to be among the cheapest ones.

 

There is a liquidity issue vs FMCKJ but, is there something else? I notice that they are variable dividend and not perpetual so could it be it?

 

 

[Guest cherzeca]

"Is it even possible to raise $100 billion from start to finish that quickly?"

 

fnma is due to make a $3.4B dividend distribution for 2019 Q2 at end of month.  assuming treasury and fhfa agree to stop sweep before end of month, and fnma is able to generate $3.4B in net income for the following 4 quarters, fnma will have $20B of net worth by election 2020.  while no-one knows the capital target, this could be as much as $100B for fnma.  so it would be hard to raise $80B certainly, it may be feasible to raise $20B...getting to some 40% of target.

That would be assuming a symbolic fixed rate for the Srs. set at 0.1% and a minimal commitment fee for the 240+ bill not drawn.

 

this assumes that the senior preferred are deemed paid in full.  There can be no capital raise without that.  fnma has a line of credit of $114B from treasury.

[Mephistopheles]

"Is it even possible to raise $100 billion from start to finish that quickly?"

 

fnma is due to make a $3.4B dividend distribution for 2019 Q2 at end of month.  assuming treasury and fhfa agree to stop sweep before end of month, and fnma is able to generate $3.4B in net income for the following 4 quarters, fnma will have $20B of net worth by election 2020.  while no-one knows the capital target, this could be as much as $100B for fnma.  so it would be hard to raise $80B certainly, it may be feasible to raise $20B...getting to some 40% of target.

That would be assuming a symbolic fixed rate for the Srs. set at 0.1% and a minimal commitment fee for the 240+ bill not drawn.

 

this assumes that the senior preferred are deemed paid in full.  There can be no capital raise without that.  fnma has a line of credit of $114B from treasury.

 

So in the hearing today, Mnuchin said that the tax payer needs to be compensated going forward and that he doesn't want to wipe out the liquidation preference when ending the sweep. He even suggested increasing it in exchange for stopping the dividend. What are your thoughts?

[SnarkyPuppy]

"Is it even possible to raise $100 billion from start to finish that quickly?"

 

fnma is due to make a $3.4B dividend distribution for 2019 Q2 at end of month.  assuming treasury and fhfa agree to stop sweep before end of month, and fnma is able to generate $3.4B in net income for the following 4 quarters, fnma will have $20B of net worth by election 2020.  while no-one knows the capital target, this could be as much as $100B for fnma.  so it would be hard to raise $80B certainly, it may be feasible to raise $20B...getting to some 40% of target.

That would be assuming a symbolic fixed rate for the Srs. set at 0.1% and a minimal commitment fee for the 240+ bill not drawn.

 

this assumes that the senior preferred are deemed paid in full.  There can be no capital raise without that.  fnma has a line of credit of $114B from treasury.

 

So in the hearing today, Mnuchin said that the tax payer needs to be compensated going forward and that he doesn't want to wipe out the liquidation preference when ending the sweep. He even suggested increasing it in exchange for stopping the dividend. What are your thoughts?

 

Mnuchin continues to play poker - stating things in a factually correct way without telling the entire story. 

 

It's likely that we are about to see an agreement between FHFA and Treasury to allow for an increase in the current $6bn buffer - this increase will also result in a 1 for 1 increase in the senior preferred stock liquidation preference (same approach as December 2017 - https://www.fhfa.gov/Media/PublicAffairs/Documents/GSEletteragreementfnm12-21-2017.pdf)

 

Separately, and subsequently (looking like Q4), FHFA and Treasury will formally amend the SPSPA which will end the net worth sweep and restructure the senior preferred stock to allow for 3rd party capital to be raised.  This might result in removing some or all of the senior pref (deeming repaid) or it might result in keeping the senior preferred liquidation preference and converting it to common stock in conjunction w/ a settlement of the lawsuits.

 

Consistent w/ Mnuchin's testimony.

[Luke 532]

Calabria tweet yesterday of WSJ...

[onyx1]

FMCCI is trading at $20.50 or 41% of par. Seems to be among the cheapest ones.

 

There is a liquidity issue vs FMCKJ but, is there something else? I notice that they are variable dividend and not perpetual so could it be it?

 

FMCCI is a LIBOR+1% based floating rate coupon with a 9% cap. The coupon would currently be set at a relatively low rate of 2.25%.  Similar low coupon floaters are FMCCJ, FMCCL, FMCCM, FMCCG.  These are cheaper to par, IMO, because of the possibility the Jr. Pref coupon rates come into play in refi/convert negotiations.  Maybe they will. Or maybe all Jrs get taken out at par.  It's impossible to say at the moment. 

 

I've been adding Jrs. with fixed coupons in the 5%-7% range at slightly higher prices than the low coupon floaters, and avoiding the higher priced liquid high coupons for this reason.  Examples:  FREJP, FMCCH, FMCKK, FMCCO, FMCCK FMCCP.

 

In the end, I believe all are good.  It's like entering a room with change all over the floor having to choose which coins to pick up first.

[Luke 532]

We already knew Trump liked the Treasury plan, but it doesn't hurt that he re-tweeted this...

[SnarkyPuppy]

we can expect the NWS to be stopped (and no 2Q dividend distribution) and a commitment fee for the treasury line sometime before end of month.  I wouldn't be surprised if nothing much happens and trading prices trend downward in the interim, though I think stopping the NWS should be taken as a formal kickoff for admin reform and should start an uptrend in prices thereafter.

 

I agree, will likely give another opportunity to add if so inclined. Estimating roughly that the lions share of reform/recap done by next fall its very likely that still at these prices there is nearly a double for some of the preferred in 12 months time. Is there another option to lever this up outside of margin? Even at the most egregious margin rates alot of money can be made in 1 year here it seems.

 

Buffett, Munger, Druck, Soros talk about that fat pitch and swinging for the fences. This seems like a pretty juicy one over the middle with a planned negotiation on paper from the counterparty regarding the security, a favorable court ruling, a motivated administration who just got the blessing of congress and pretty good chance captialization is kicked off by the end of the month with the NWS ending.

 

But of course, everyone knows this and yet the market prices some of these as low as 40% of par today. And we have the government in plain English saying they are going to stop the NWS and recapitalize. So what is the market missing? Or what are we all missing?

 

Is the major risk that this gets delayed past the election and Trump loses? Say Biden wins, he will probably bring back most of Obama's people (fellow traveler's) to the job. And this whole thing is dead and back to status quo. Is that the only major risk here? I'm sure Mnuchin is well aware of this. So why wouldn't he rush to get this done within a year? Is it even possible to raise $100 billion from start to finish that quickly?

 

Either the market or we are very very wrong here.

 

Can we literally list out all potential downside scenarios here?  I share similar sentiments - this at the top of highest conviction trades I've come across.

 

- Trump + Mnuchin and or Calabria are removed from office unexpectedly

- Entirely private recap with Berkshire etc where the litigation risk is accepted as a liability as part of the deal

- Status quo maintained - Calabria/Mnuchin do not do anything.  Trump loses election and obama-esque admin takes over

- Near term acute drop in housing, economy, and/or stock market causing GSE Incone losses and inability to recap

- Appeal and loss at Supreme Court + status quo argument

- Recapitalize with Junior pref and conv debt senior to existing junior preferred.  Plus government decides it doesn't care about $100bn warrant value

 

What else?

 

Going to be annoying but I'd like to crowdsource this more w/ the collective board who provides consistently stronger analysis than myself. 

 

How do we lose here?

[Guest cherzeca]

"Is it even possible to raise $100 billion from start to finish that quickly?"

 

fnma is due to make a $3.4B dividend distribution for 2019 Q2 at end of month.  assuming treasury and fhfa agree to stop sweep before end of month, and fnma is able to generate $3.4B in net income for the following 4 quarters, fnma will have $20B of net worth by election 2020.  while no-one knows the capital target, this could be as much as $100B for fnma.  so it would be hard to raise $80B certainly, it may be feasible to raise $20B...getting to some 40% of target.

That would be assuming a symbolic fixed rate for the Srs. set at 0.1% and a minimal commitment fee for the 240+ bill not drawn.

 

this assumes that the senior preferred are deemed paid in full.  There can be no capital raise without that.  fnma has a line of credit of $114B from treasury.

 

So in the hearing today, Mnuchin said that the tax payer needs to be compensated going forward and that he doesn't want to wipe out the liquidation preference when ending the sweep. He even suggested increasing it in exchange for stopping the dividend. What are your thoughts?

 

"he doesn't want to wipe out the liquidation preference when ending the sweep."

 

I agree though he didn't specifically say that.  he was inexact and no senator asked for clarity, but yes I expect very soon the dividend sweep will end and there will be a commitment fee.

 

I expect the senior pref will be extinguished in connection with a global litigation settlement.  collins en banc was very helpful, but there are also two other pesky damages cases in front of Lamberth and Sweeney. 

 

mnuchin realizes there can be no recap without nuking the senior preferred.  he is staging the process, preserve optionality in the Goldman Sachs way.

[Guest cherzeca]

FMCCI is trading at $20.50 or 41% of par. Seems to be among the cheapest ones.

 

There is a liquidity issue vs FMCKJ but, is there something else? I notice that they are variable dividend and not perpetual so could it be it?

 

FMCCI is a LIBOR+1% based floating rate coupon with a 9% cap. The coupon would currently be set at a relatively low rate of 2.25%.  Similar low coupon floaters are FMCCJ, FMCCL, FMCCM, FMCCG.  These are cheaper to par, IMO, because of the possibility the Jr. Pref coupon rates come into play in refi/convert negotiations.  Maybe they will. Or maybe all Jrs get taken out at par.  It's impossible to say at the moment. 

 

I've been adding Jrs. with fixed coupons in the 5%-7% range at slightly higher prices than the low coupon floaters, and avoiding the higher priced liquid high coupons for this reason.  Examples:  FREJP, FMCCH, FMCKK, FMCCO, FMCCK FMCCP.

 

In the end, I believe all are good.  It's like entering a room with change all over the floor having to choose which coins to pick up first.

 

the market believes that there will be some discrepancy in exchange rates that will be offered the various junior preferred classes.  I am not sure. but liquidity may be driving this more than anticipated exchange rates

[Luke 532]

I expect the senior pref will be extinguished in connection with a global litigation settlement.

 

Chris, I know it's largely guesswork but when do you think that settlement would take place?  This month, October, November, December, next year?  Thanks.